MiMedx(US:MDXG)2021-08-02 16:00Part I Item 1. Financial Statements (Unaudited) The unaudited financial statements for Q2 2021 show decreased total assets, improved net sales, and a reduced net loss, impacted by a $1.0 million inventory write-down Condensed Consolidated Balance Sheets As of June 30, 2021, total assets decreased to $187.1 million, driven by lower cash, while total liabilities also decreased, resulting in an increased stockholders' deficit Condensed Consolidated Balance Sheet Highlights | Account | June 30, 2021 ($ thousands) | December 31, 2020 ($ thousands) | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $85,007 | $95,812 | | Total current assets | $147,691 | $160,617 | | Total assets | $187,147 | $202,032 | | Liabilities & Equity | | | | Total current liabilities | $50,571 | $59,162 | | Long term debt, net | $47,905 | $47,697 | | Total liabilities | $101,790 | $110,614 | | Total stockholders' deficit | $(7,137) | $(150) | Condensed Consolidated Statements of Operations For Q2 2021, net sales increased 27.1% to $68.2 million, and net loss significantly narrowed to $1.8 million, primarily due to reduced investigation-related expenses Q2 and H1 2021 vs 2020 Performance | Metric | Q2 2021 ($ thousands) | Q2 2020 ($ thousands) | Six Months 2021 ($ thousands) | Six Months 2020 ($ thousands) | | :--- | :--- | :--- | :--- | :--- | | Net sales | $68,165 | $53,647 | $128,132 | $115,383 | | Gross profit | $55,405 | $45,449 | $105,731 | $97,160 | | Operating loss | $(410) | $(5,856) | $(7,262) | $(19,600) | | Investigation, restatement and related | $(2,062) | $11,446 | $5,134 | $27,038 | | Net loss | $(1,779) | $(8,466) | $(10,161) | $(13,287) | | Net loss per share - basic/diluted | $(0.03) | $(0.08) | $(0.12) | $(0.12) | Condensed Consolidated Statements of Cash Flows For H1 2021, net cash used in operating activities significantly improved to $5.1 million, with overall cash and equivalents decreasing by $10.8 million to $85.0 million Six Months Ended June 30 Cash Flow Summary | Activity | 2021 ($ thousands) | 2020 ($ thousands) | | :--- | :--- | :--- | | Net cash flows used in operating activities | $(5,080) | $(15,378) | | Net cash flows used in investing activities | $(2,501) | $(1,572) | | Net cash flows used in financing activities | $(3,224) | $(3,930) | | Net change in cash | $(10,805) | $(20,880) | | Cash and cash equivalents, end of period | $85,007 | $48,189 | Notes to the Condensed Consolidated Financial Statements The notes detail the cessation of Section 351 product marketing, a $1.0 million inventory write-down, significant debt and preferred stock obligations, and legal accruals - The FDA's period of enforcement discretion for Section 351 products ended on May 31, 2021. The company stopped marketing these products, which accounted for $8.6 million in sales for Q2 2021 and $16.7 million for H1 202127 - The company fully reserved $1.0 million of its Section 351 product inventory during Q2 2021 due to the end of the FDA's enforcement discretion65 - The company has a $50 million senior secured term loan with Hayfin, maturing in 2025, with an interest rate of 8.3% as of June 30, 20217072 - The company has $100 million of Series B Convertible Preferred Stock outstanding, which pays a cumulative dividend (6.0% per annum after June 30, 2021) and is convertible at $3.85 per common share. As of June 30, 2021, accumulated but unpaid dividends were $4.1 million929399 - As of June 30, 2021, the company has accrued $4.5 million related to legal proceedings and paid $6.5 million toward legal matters in the first six months of 2021111 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q2 2021 net sales growth driven by volume and Advanced Wound Care, the impact of Section 351 product cessation, increased operating expenses, and sufficient liquidity for the next 12 months Results of Operations Q2 2021 net sales increased 27.1%, but gross margin declined due to an inventory write-down, while SG&A and R&D expenses rose significantly Q2 2021 vs Q2 2020 Results of Operations | Line Item | Q2 2021 ($ thousands) | Q2 2020 ($ thousands) | $ Change ($ thousands) | % Change | | :--- | :--- | :--- | :--- | :--- | | Net sales | $68,165 | $53,647 | $14,518 | 27.1% | | Gross profit | $55,405 | $45,449 | $9,956 | 21.9% | | Selling, general and administrative | $53,599 | $37,329 | $16,270 | 43.6% | | Investigation, restatement and related | $(2,062) | $11,446 | $(13,508) | (118.0)% | | Research and development | $4,063 | $2,259 | $1,804 | 79.9% | | Net loss | $(1,779) | $(8,466) | $6,687 | (79.0)% | - Adjusted Net Sales (excluding revenue from 'Remaining Contracts') increased 30.6% in Q2 2021 year-over-year, driven by 29.5% growth in Advanced Wound Care products144145 - The increase in SG&A for Q2 2021 was driven by the restoration of full salaries, reduced travel costs in the prior period due to COVID-19, $3.8 million in proxy contest costs, and higher sales commissions148149 Non-GAAP Financial Measures Non-GAAP measures show Q2 2021 Adjusted Net Sales increased to $67.9 million, while Adjusted EBITDA decreased to $2.8 million due to higher operating expenses Reconciliation of GAAP Net Loss to Adjusted EBITDA | Metric | Q2 2021 ($ thousands) | Q2 2020 ($ thousands) | Six Months 2021 ($ thousands) | Six Months 2020 ($ thousands) | | :--- | :--- | :--- | :--- | :--- | | Net loss | $(1,779) | $(8,466) | $(10,161) | $(13,287) | | EBITDA | $1,108 | $(4,172) | $(4,343) | $(16,133) | | Adjusted EBITDA | $2,837 | $10,241 | $7,570 | $13,355 | | Adjusted EBITDA margin | 4.2% | 19.1% | 5.9% | 11.6% | Reconciliation of GAAP Net Sales to Adjusted Net Sales | Metric | Q2 2021 ($ thousands) | Q2 2020 ($ thousands) | Six Months 2021 ($ thousands) | Six Months 2020 ($ thousands) | | :--- | :--- | :--- | :--- | :--- | | Net sales | $68,165 | $53,647 | $128,132 | $115,383 | | Effect of change in revenue recognition | $(313) | $(1,706) | $(611) | $(6,201) | | Adjusted net sales | $67,852 | $51,941 | $127,521 | $109,182 | Liquidity and Capital Resources As of June 30, 2021, the company had $85.0 million in cash, deemed sufficient for 12 months, and was in compliance with its $50 million term loan covenants, while preferred stock dividends accumulated - The company had $85.0 million of cash and cash equivalents as of June 30, 2021, and believes this is sufficient to meet operational needs for the next 12 months191192 - The Hayfin Term Loan has financial covenants requiring a Maximum Total Net Leverage Ratio (4.5x through Q2 2021, 4.0x thereafter) and Minimum Liquidity of $10 million. The company was in compliance as of June 30, 2021198 - The Series B Preferred Stock dividend rate increased from 4.0% to 6.0% per annum after June 30, 2021. As of June 30, 2021, accumulated but unpaid dividends were approximately $4.1 million202205 Item 3. Quantitative and Qualitative Disclosures About Market Risk As of June 30, 2021, the company reported no material market risk exposure due to the absence of market risk sensitive instruments - The company states it had no material market risk exposure as of June 30, 2021211 Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were not effective as of June 30, 2021, due to unremediated material weaknesses in internal control over financial reporting - The CEO and CFO concluded that disclosure controls and procedures were not effective as of June 30, 2021, due to previously identified and unremediated material weaknesses in internal control over financial reporting213214 Part II Item 1. Legal Proceedings The company is involved in numerous legal proceedings, including a securities class action, ongoing government investigations, and litigation with former executives - The company is party to numerous claims and lawsuits arising from its business activities. For detailed information, refer to Note 12 of the financial statements218110 Item 1A. Risk Factors The company has amended and added several risk factors, including challenges in international expansion, potential FDA reclassification of products, and risks associated with clinical trials and manufacturing capacity - New Risk: Clinical trials are lengthy, expensive, and have uncertain outcomes. Delays or failures could prevent commercialization of new products236 - New Risk: The ability to consistently manufacture biologic products is critical. Current facilities may be inadequate if the planned BLA for knee osteoarthritis is approved, requiring significant capital investment and expertise239241 - Amended Risk: The company's umbilical cord-derived products (EPICORD, AMNIOCORD) could be determined by the FDA to not meet the requirements for regulation solely under Section 361, which would require pre-market approval and adversely impact revenue229 - Amended Risk: International expansion, such as the recent EPIFIX approval in Japan, faces risks including difficulty in obtaining acceptable reimbursement pricing from government bodies like the JMHLW220223 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During Q2 2021, the company repurchased 127,046 common shares at an average price of $10.59, solely for tax withholding obligations on restricted stock vesting Q2 2021 Share Repurchases | Period | Total Shares Purchased | Average Price Paid per Share ($) | | :--- | :--- | :--- | | April 2021 | 121,613 | $10.63 | | May 2021 | 5,433 | $9.70 | | June 2021 | 0 | $— | | Total for Quarter | 127,046 | $10.59 | Item 3. Defaults Upon Senior Securities As of June 30, 2021, the company had accumulated $4,054,921 in unpaid dividends on its Series B Preferred Stock, electing accumulation over cash payment - As of June 30, 2021, the company had accumulated unpaid dividends of $4,054,921 on its Series B Preferred Stock245 Item 5. Other Information On May 27, 2021, shareholders approved a bylaw amendment to implement proxy access, allowing eligible shareholders to nominate directors under specific conditions - The company amended its bylaws to provide for proxy access, allowing eligible shareholders (owning at least 3% for 3 years) to nominate directors247 Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including corporate documents, agreements, and certifications