MiMedx(MDXG) - 2020 Q4 - Annual Report

Part I Business MiMedx specializes in placental tissue allografts for wound care and musculoskeletal conditions, navigating FDA reclassification of key products to Section 351 biologics requiring BLA approval - MiMedx is a leader in placental biologics, with a core business in advanced wound care and a late-stage pipeline for degenerative musculoskeletal conditions[21][43] - The company's products are derived from human placental tissues using the proprietary PURION® process, and include platform technologies like AmnioFix®, EpiFix®, and EpiCord®[21][23] - A 2017 FDA guidance reclassified certain products, such as micronized AmnioFix Injectable, as Section 351 biologics requiring BLA approval, moving away from the less stringent Section 361 HCT/P regulation[24][25] - The FDA has granted an enforcement discretion period until May 31, 2021, allowing MiMedx to continue marketing these products while pursuing the necessary BLA approvals[26][28] Revenue from Products Potentially Affected by End of FDA Enforcement Discretion | Product Category | 2020 Revenue | Percentage of Total Revenue | | :--- | :--- | :--- | | Micronized Products & AmnioFill | $32.8 million | ~13% | | Umbilical Cord-Derived Products | $16.6 million | N/A | - The company is actively conducting late-stage clinical trials for AmnioFix Injectable under three Investigational New Drug (IND) applications for plantar fasciitis (Phase 3), Achilles tendonitis (Phase 3), and knee osteoarthritis (Phase 2B)[29][52][70] Risk Factors The company faces significant risks including regulatory reclassification of products, material weaknesses in financial controls, ongoing litigation, and intense market competition - A primary regulatory risk is that products like micronized and umbilical cord-derived tissues may not qualify for regulation solely under Section 361, potentially requiring their removal from the market after the FDA's enforcement discretion period expires, which would materially impact revenue[192][195][196] - The company has identified and is remediating material weaknesses in its internal control over financial reporting, which could lead to misstatements and affect investor confidence[243][244] - MiMedx faces substantial litigation and investigation risks related to a prior Audit Committee investigation and financial restatement, which could result in significant legal expenses and harm to the business[248][249] - The business is highly competitive, faces risks from rapid technological change, and depends on the availability of human donor tissue, which could be disrupted[150][151][154] - The company's substantial indebtedness under the Hayfin Loan Agreement includes restrictive covenants that limit operational and financial flexibility[251][252] - Holders of Series B Preferred Stock have preferential rights to dividends and liquidation distributions, voting rights, and conversion features that could dilute the value of common stock[257][259][266] Unresolved Staff Comments The company reports no unresolved comments from the SEC Staff regarding its filings - As of the filing date, MiMedx has no unresolved staff comments from the Securities and Exchange Commission (SEC)[274] Properties The company's primary operations are in leased facilities in Georgia, with ongoing investments to enhance manufacturing capacity and CGMP compliance - The company's corporate headquarters and primary operations are located in leased facilities in Marietta and Kennesaw, Georgia[275] - MiMedx is investing in its manufacturing capacity to enhance compliance with CGMP standards for its products[276] Legal Proceedings Details on legal proceedings, regulatory matters, and contingencies are incorporated by reference from Note 14 of the financial statements - For details on legal proceedings, the company refers to Note 14, "Commitments and Contingencies," in its financial statements[277] Mine Safety Disclosures This item is not applicable to the company's business operations - The company has no mine safety disclosures to report[278] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on Nasdaq, has not paid dividends, and repurchased shares in Q4 2020 primarily for tax withholding obligations - The company's common stock is traded on the Nasdaq under the symbol "MDXG"[280] - MiMedx has never paid cash dividends on its common stock and does not plan to in the foreseeable future[280] Q4 2020 Equity Repurchases | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | Oct 2020 | 15,031 | $6.04 | | Nov 2020 | 56,543 | $5.78 | | Dec 2020 | 36,833 | $7.68 | | Total Q4 | 108,407 | $6.46 | Selected Financial Data Selected consolidated financial data shows declining net sales and recurring net losses over the past three years, alongside growth in total assets and a shift to a stockholders' deficit Selected Statement of Operations Data (in thousands, except per share data) | Year | Net Sales | Gross Profit | Operating (Loss) Income | Net (Loss) Income | Diluted EPS | | :--- | :--- | :--- | :--- | :--- | :--- | | 2020 | $248,234 | $208,904 | $(45,398) | $(49,284) | $(0.77) | | 2019 | $299,255 | $256,174 | $(21,160) | $(25,580) | $(0.24) | | 2018 | $359,111 | $322,725 | $(3,924) | $(29,979) | $(0.28) | | 2017 | $321,139 | $285,920 | $46,223 | $64,727 | $0.56 | | 2016 | $221,712 | $190,774 | $884 | $390 | $0.00 | Selected Balance Sheet Data (in thousands) | As of Dec 31 | Total Assets | Total Liabilities | Total Stockholders' (Deficit) Equity | | :--- | :--- | :--- | :--- | | 2020 | $202,032 | $110,614 | $(150) | | 2019 | $167,166 | $132,768 | $34,398 | | 2018 | $122,844 | $73,189 | $49,655 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses a 17.0% decrease in 2020 net sales due to revenue recognition changes and COVID-19, a $49.3 million net loss, significant legal expenses, and improved liquidity from recent financing Results of Operations Comparison (2020 vs. 2019, in thousands) | Metric | 2020 | 2019 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $248,234 | $299,255 | $(51,021) | (17.0)% | | Gross Profit | $208,904 | $256,174 | $(47,270) | (18.5)% | | Operating Loss | $(45,398) | $(21,160) | $(24,238) | 114.5% | | Net Loss | $(49,284) | $(25,580) | $(23,704) | 92.7% | - The decrease in 2020 net sales was primarily due to a change in revenue recognition policy and the impacts of the COVID-19 pandemic, which restricted facility access and reduced elective procedures[379] - The company changed its revenue recognition pattern effective October 1, 2019, moving from recognizing revenue upon cash receipt (due to control environment weaknesses) to recognizing it upon shipment or implantation for new contracts[333][343] - In July 2020, the company completed major financing transactions, including a $50 million term loan and a $100 million issuance of Series B Preferred Stock, which significantly improved its liquidity and was used to refinance existing debt[309][320] - Investigation, restatement, and related expenses were significant, totaling $59.5 million in 2020 and $66.5 million in 2019, primarily for legal fees and indemnification costs for former management[384] - The company expects adjusted net sales to increase by at least 10% in 2021, contingent on the ability to continue selling its micronized, particulate, and umbilical cord products for the full year[381] Quantitative and Qualitative Disclosures About Market Risk The company reported no material market risk exposure as of December 31, 2020, due to the absence of market risk sensitive instruments - The company determined it had no material market risk exposure as of December 31, 2020[447] Financial Statements and Supplementary Data This section presents audited consolidated financial statements for 2018-2020, with the auditor issuing an unqualified opinion on financials but an adverse opinion on internal control over financial reporting - The independent auditor, BDO USA, LLP, issued an unqualified opinion on the consolidated financial statements[451] - The independent auditor issued an adverse opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2020, citing identified material weaknesses[452][462] Key Financial Statement Data (as of Dec 31, 2020, in thousands) | Metric | Amount | | :--- | :--- | | Assets | | | Cash and cash equivalents | $95,812 | | Total Assets | $202,032 | | Liabilities & Equity | | | Total Liabilities | $110,614 | | Convertible preferred stock | $91,568 | | Total Stockholders' (Deficit) | $(150) | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reported no changes in or disagreements with its accountants regarding accounting principles, financial disclosure, or auditing scope - The company reported no disagreements with its accountants on accounting and financial disclosure[690] Controls and Procedures Management concluded that disclosure controls and procedures were ineffective as of December 31, 2020, due to ongoing material weaknesses in internal control over financial reporting, particularly in Control Activities - Management concluded that disclosure controls and procedures were not effective as of December 31, 2020, due to material weaknesses in internal control over financial reporting[692][695] - Material weaknesses were identified in the Control Activities component of the COSO framework, affecting processes such as revenue recognition, inventory, income taxes, segregation of duties, and financial forecasting[698][699] - The company has remediated the previously disclosed material weaknesses related to the Control Environment by restructuring the board, enhancing compliance training, and improving accountability[701] - Remediation plans for the remaining material weaknesses are underway, including enhancing the financial close process, improving controls over income tax accounting, and strengthening oversight of sales activities[700][710][711] Other Information The Board of Directors appointed a new Class II director and adopted restated articles of incorporation in early March 2021 - Dr. Phyllis Gardner was appointed to the Board of Directors, effective immediately following the filing of this annual report[721] - The company adopted restated articles of incorporation, effective March 5, 2021[725] Part III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2021 proxy statement - Information regarding directors, executive officers, and corporate governance will be provided in the forthcoming 2021 proxy statement[728] Executive Compensation Details on executive compensation are incorporated by reference from the 2021 proxy statement - Details on executive compensation will be provided in the forthcoming 2021 proxy statement[729] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership and related stockholder matters is incorporated by reference from the 2021 proxy statement - Information on security ownership and related matters will be provided in the forthcoming 2021 proxy statement[730] Certain Relationships and Related Transactions, and Director Independence Details on certain relationships, related transactions, and director independence are incorporated by reference from the 2021 proxy statement - Details on certain relationships, related transactions, and director independence will be provided in the forthcoming 2021 proxy statement[731] Principal Accounting Fees and Services Information on principal accounting fees and services is incorporated by reference from the 2021 proxy statement - Information on principal accounting fees and services will be provided in the forthcoming 2021 proxy statement[732] Part IV Exhibits, Financial Statement Schedules This section lists all financial statement schedules and exhibits filed with the Form 10-K, including corporate governance documents, material contracts, and required certifications - This section contains a comprehensive list of all exhibits filed with the Form 10-K, including corporate governance documents, material contracts, and required certifications[735][736] Form 10-K Summary A Form 10-K summary is not provided as it is not applicable - A Form 10-K summary is not provided as it is not applicable[742]