MIMEDX GROUP, INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)

Insight

MIMEDX is a transformational placental biologics company, developing and
distributing placental tissue allografts with patent-protected, proprietary
processes for multiple sectors of healthcare. As a pioneer in placental
biologics, we are focused on addressing unmet clinical needs in areas of
advanced wound care, surgical recovery applications and musculoskeletal
conditions. We derive our products from human placental tissues and process
these tissues using our proprietary methods, including the PURION® process. We
apply Current Good Tissue Practice ("CGTP") and Current Good Manufacturing
Practice ("CGMP") standards in addition to terminal sterilization to produce our
allografts. MIMEDX provides products primarily in the wound care, burn, and
surgical recovery sectors of healthcare. All of our products are regulated by
the United States Food and Drug Administration ("FDA").

MIMEDX is a leading supplier of human placental allografts, which are human
tissues that are derived from one person (the donor) and used to produce
products that treat another person (the recipient). MIMEDX has supplied over two
million allografts, through both direct and consignment shipments. Our platform
technologies include tissue allografts derived from the amnion and chorion
layers of human placental membrane (EPIFIX® and AMNIOFIX®) and tissue allografts
derived from human umbilical cord (EPICORD® and AMNIOCORD®).

EPIFIX and EPICORD products are marketed for external use, such as in advanced
wound care applications, while our AMNIOFIX and AMNIOCORD products are
positioned for use in surgical recovery applications, including lower extremity
repair, plastic surgery, vascular surgery and multiple orthopedic repairs and
reconstructions.

AMNIOFIX Injectable, or mdHACM, is a micronized configuration of AMNIOFIX and is
not currently marketed in the United States. mdHACM is our lead product
candidate for our late-stage pipeline targeted at achieving FDA approval for
specific clinical indications, including degenerative musculoskeletal
conditions.

We have two classes of products: (1) Advanced Wound Care products, or Section
361 products, consisting of our tissue and cord sheet allograft products, and
(2) Section 351 Products, consisting of our micronized and particulate products,
which, prior to May 31, 2021, the date the FDA's period of enforcement
discretion ended, were used to treat a variety of clinical conditions, including
both advanced wound care and musculoskeletal applications. Our Advanced Wound
Care business includes two product categories, Tissue/Other and Cord products.
We sell product through two distribution channels: (1) direct to customers
(healthcare professionals and/or facilities); and (2) sales through
distributors.

In November 2017, the FDA published a series of guidances that established an
updated framework for the regulation of cellular and tissue-based products.
These guidances clarified the FDA's views about the criteria that differentiate
those products subject to regulation under Section 361 of the Public Health
Service Act from those considered to be drugs, devices, and/or biological
products subject to licensure under Section 351 of the Public Health Service Act
and related regulations. The FDA exercised an enforcement discretion period
under limited conditions with respect to Investigational New Drug ("IND")
applications and pre-market approval requirements, which ended on May 31, 2021
("Enforcement Discretion"). We are not currently marketing our micronized and
particulate products affected by the guidance in the United States.

Effect of the Covid-19 pandemic

The outbreak of a novel strain of coronavirus ("Covid-19" or the "Covid-19
Pandemic") is still ongoing, though the effects on our operations, such as
access restrictions to hospitals and difficulties obtaining donor materials,
have largely ameliorated and did not have a material effect on our operations
during the three months ended March 31, 2022. We are continuously monitoring for
any developments that may impact our operations, including novel variants of the
virus and government and societal responses to mitigate the spread.

We continue to exercise an abundance of caution with respect to the health and
well-being of our employees. We are allowing our non-essential employees to work
from home and advising all employees to receive a Covid-19 vaccine as soon as
reasonably possible.

None of these efforts had a material impact on the Company’s business for the three months ended March 31, 2022.

                                       23

--------------------------------------------------------------------------------

Operating results

Three Months Ended March 31, 2022 Compared to the Three Months Ended March 31,
2021

                                                         Three Months Ended March 31,
                                                                (in thousands)
                                                2022            2021        $ Change      % Change
   Net sales                                $    58,894      $ 59,967      $ (1,073)        (1.8) %
   Cost of sales                                  9,936           9,641         295          3.1  %
   Gross profit                                  48,958        50,326        (1,368)        (2.7) %
   Selling, general and administrative           49,570        45,404       

4,166 9.2%

   Research and development                       5,964         4,339       

1,625 37.5%

Survey, reprocessing and similar 2,552 7,196

(4,644) (64.5)%

   Amortization of intangible assets                172           239           (67)       (28.0) %

   Interest expense, net                         (1,126)       (1,472)          346        (23.5) %

   Income tax provision expense                     (63)          (58)           (5)         8.6  %
   Net loss                                 $   (10,489)     $ (8,382)     

 (2,107)        25.1  %


Net Sales

We recorded net sales for the three months ended March 31, 2022 of $58.9
million, a $1.1 million, or 1.8%, decrease compared to the three months ended
March 31, 2021, in which we recognized revenue of $60.0 million. Our sales by
product were as follows (amounts in thousands):

                                     Three Months Ended March 31,                    Change
                                          2022                    2021           $             %
  Advanced Wound Care
     Tissue/Other             $        52,852                  $ 46,569      $  6,283        13.5  %
     Cord                               5,597                     4,960           637        12.8  %
  Total Advanced Wound Care            58,449                    51,529         6,920        13.4  %
  Section 351                             377                     8,140        (7,763)      (95.4) %
  Other                                    68                       298          (230)      (77.2) %
  Net sales                   $        58,894                  $ 59,967      $ (1,073)       (1.8) %


The decrease reflects our inability to sell our Section 351 Products in the
United States during the three months ended March 31, 2022, following the end of
Enforcement Discretion on May 31, 2021. Sales of our Section 351 Products were
$0.4 million for the three months ended March 31, 2022 compared to $8.1 million
for the three months ended March 31, 2021, a decrease of $7.8 million.

This effect was partially offset by sales growth in our Advanced Wound Care
products, which grew $6.9 million, or 13.4%, year-over-year. Our sales growth in
this area was a result of our focus in the application of these products into
areas of surgical recovery, as well as the results of our prior initiatives to
expand and realign our sales team.

Cost of sales and gross profit margin

Cost of sales for the three months ended March 31, 2022 and 2021 was $9.9
million and $9.6 million, respectively, an increase of $0.3 million, or 3.1%.
Gross profit margin for the three months ended March 31, 2022 was 83.1% compared
to 83.9% for the three months ended March 31, 2021.

Gross profit margin and cost of sales were negatively impacted by inflationary
pressures during the three months ended March 31, 2022, increasing materials and
labor costs. These effects were offset by higher yield and lower inventory
write-downs, year-over-year.

                                       24

--------------------------------------------------------------------------------

Selling, general and administrative expenses

Selling, general and administrative expense for the three months ended March 31,
2022 was $49.6 million, compared to $45.4 million for the for the for the three
months ended March 31, 2021, an increase of $4.2 million, or 9.2%. The increase
in these expenses reflects increases in personnel costs, sales commissions and
travel expenses. Increases in personnel costs and sales commissions were the
result of sales force realignment and expansion; additionally, our focus on
sales of products into areas of Surgical Recovery resulted in a proportional
increase in sales through sales agents. The increase in travel expenses reflects
the removal of travel restrictions that we had in place during the three months
ended March 31, 2021 due to the Covid-19 Pandemic.

After the end of Enforcement Discretion, we made the strategic decision to
maintain our staffing levels, including our sales force, in support of our
commercial growth objectives. As a result, the level of selling, general and
administrative expense as a percentage of net sales is higher in the first
quarter of 2022 compared to the prior year quarter and to our historical trends.
In addition, due primarily to the annual reset of insurance deductibles at the
beginning of each calendar year, net sales in the first quarter are typically
lower than other quarters within a single year. We therefore expect the level of
selling, general and administrative expenses as a percentage of net sales to
decline over the remainder of 2022.

Research and development costs

Our research and development expense increased approximately $1.6 million, or
37.5%, to $6.0 million for the three months ended March 31, 2022, compared to
approximately $4.3 million for the three months ended March 31, 2021. The
increase reflects higher personnel costs, driven by increases in headcount to
support clinical research efforts connected to our commercial and late-stage
pipelines.

Investigation, restatement and related costs

Investigation, restatement and related expense for the three months ended March
31, 2022 were $2.6 million compared to $7.2 million for the three months ended
March 31, 2021, a decrease of $4.6 million, or 64.5%. The decrease was primarily
the result of a decline in legal fees advanced on behalf of certain former
officers and directors of the Company, net of recoveries. In addition, we
incurred lower litigation and settlement costs during the three months ended
March 31, 2022 compared to the same period in the prior year.

We remain subject to indemnification agreements with certain former officers and
directors of the Company (other than Messrs. Petit and Taylor, our former Chief
Executive Officer and Chief Operating Officer) for whom legal proceedings are
still ongoing. In addition, we expect to continue to incur some litigation costs
relating to legal matters in which we are defendants. Overall, we expect
investigation, restatement, and related expenses to decrease over time.

Amortization of intangible assets

The amortization charge related to intangible assets has been $0.2 million for each of the three months ended March 31, 2022 and 2021.

Interest expense, net

Interest expense, net was $1.1 million for the three months ended March 31, 2022
compared to $1.5 million for the three months ended March 31, 2021, a decrease
of $0.4 million, or 23.5%. The difference was the result of the amortization of
deferred financing costs and original issue discount associated with the DD TL
under the Hayfin Loan Agreement (described below under "Liquidity and Capital
Resources"). The DD TL commitment period expired on June 30, 2021.

Income tax provision charge

The effective tax rates for the Company were (0.6)% and (0.7)% for the three
months ended March 31, 2022 and March 31, 2021, respectively. There were no
material discrete items affecting the effective tax rate in either period. Net
operating losses incurred during both periods were offset by a valuation
allowance.

                                       25

--------------------------------------------------------------------------------

Non-GAAP Financial Measures

In addition to our GAAP results, we provide certain Non-GAAP measures including
Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA"), and
Adjusted EBITDA. We believe that the presentation of these measures provides
important supplemental information to management and investors regarding our
performance. These measurements are not a substitute for GAAP measurements, and
the manner in which we calculate such metrics may not be identical to the manner
in which other companies calculate and present similar metrics. Company
management uses these Non-GAAP measurements as aids in monitoring our ongoing
financial performance from quarter-to-quarter and year-to-year on a regular
basis and for benchmarking against comparable companies.

EBITDA and Adjusted EBITDA

EBITDA is intended to provide a measure of the operational performance of the Company as it removes the effects of financing and capital expenditures. EBITDA consists of GAAP net loss excluding:

(i) amortization, (ii) amortization of intangible assets, (iii) interest expense, net, and (iv) provision for income taxes.

Adjusted EBITDA is intended to provide an enduring, normalized view of EBITDA
and our broader business operations that we expect to experience on an ongoing
basis by removing certain non-cash items and items which may be irregular,
one-time, or non-recurring from EBITDA; most significantly those expenses
related to the Audit Committee Investigation and Restatement. This also includes
share-based compensation, which is predominantly settled in shares. This enables
us to identify underlying trends in our business that could otherwise be masked
by such items.

Adjusted EBITDA consists of GAAP net loss excluding:

(i) amortization, (ii) amortization of intangible assets, (iii) interest expense, (iv) provision for income taxes, (v) costs incurred in connection with the investigation and restatement of the audit committee, and (vi) stock-based compensation.

Management also assesses EBITDA margin and Adjusted EBITDA margin to provide an
additional layer of context to the Company's profitability; indicating our
ability to convert our sales into sustainable operating results. EBITDA margin
is calculated as EBITDA divided by GAAP net sales. Similarly, Adjusted EBITDA
margin is calculated as Adjusted EBITDA divided by GAAP net sales.

A reconciliation of GAAP net loss to EBITDA and Adjusted EBITDA appears in the
table below (in thousands):

                                                                   Three Months Ended March 31,
                                                                  2022                       2021
Net loss                                                  $         (10,489)          $         (8,382)
Net margin                                                            (17.8)  %                  (14.0) %
Non-GAAP Adjustments:
Depreciation expense                                                    860                      1,161
Amortization of intangible assets                                       172                        239
Interest expense, net                                                 1,126                      1,472

Income tax provision expense                                             63                         58
EBITDA                                                               (8,268)                    (5,452)

EBITDA margin                                                         (14.0)  %                   (9.1) %
Additional Non-GAAP Adjustments
Costs incurred in connection with Audit Committee
Investigation and Restatement                                         2,552                      7,196

Share-based compensation                                              3,998                      3,244
Adjusted EBITDA                                           $          (1,718)          $          4,988
Adjusted EBITDA margin                                                 (2.9)  %                    8.3  %


                                       26

--------------------------------------------------------------------------------

Cash flow discussion

Operational activities

Net cash used in operating activities during the three months ended March 31,
2022 was $10.2 million, compared to $6.7 million of cash used for the three
months ended March 31, 2021. The increase was the result of payments of accrued
compensation during the three months ended March 31, 2022, which included
greater internal commissions due to a restructuring of our internal commission
arrangements during 2021. In addition, we paid payroll taxes which were deferred
under the Coronavirus Aid, Relief, and Economic Security Act during the three
months ended March 31, 2022. Decreases in investigation, restatement and related
expenses were largely offset by increases in other operating expenses.

Investing activities

Net cash used for investing activities during the three months ended March 31,
2022 was $0.1 million, compared to $2.1 million for the three months ended
March 31, 2021. This decrease was the result of a $1.8 million year-over-year
decrease in capital expenditures. In addition, patent application costs
decreased $0.1 million, year-over-year.

Fundraising activities

Net cash used in financing activities was $1.0 million during the three months
ended March 31, 2022 compared to $2.3 million during the three months ended
March 31, 2021. The decrease was the result of $2.0 million less cash paid for
tax withholdings related to the vesting of restricted stock awards during the
three months ended March 31, 2022 compared to the three months ended March 31,
2021. This was offset by a $0.8 million decrease in cash proceeds from the
exercise of stock options, year-over-year.

Cash and capital resources

Our business requires capital for our operating activities, including costs
associated with the sale of product through direct and indirect sales channels,
the conduct of research and development activities, compliance costs, and legal
and consulting fees in connection with ongoing litigation and other matters.

From March 31, 2022we have had $75.7 million cash and cash equivalents. We reported total current assets of $135.9 million and the total current liabilities of
$36.6 million to March 31, 2022a current ratio of 3.7 at March 31, 2022.

We are currently paying our obligations in the normal course of business.

We anticipate cash needs related to the following within one year from the date of filing of this quarterly report:

•the investments and other expenses necessary to advance our IND and BLA and other potential investments in R&D;

•expenditures required to achieve necessary regulatory approval and establish
operations in new markets deemed strategically important toward the enhancement
of our global footprint;

•investments in manufacturing capacity to advance and expand our existing product portfolio; and

•indemnification agreements involving certain former members of our management team.

We have analyzed our ability to address the aforementioned commitments and
potential liabilities for the 12 months extending from the date of the filing of
this Quarterly Report. After completing this analysis, which included a review
of expectations of revenue, margins, and expenses, we believe that our existing
cash and cash from operations will be sufficient to meet our obligations as they
come due.

Term Loan

The Hayfin Loan Agreement was funded on July 2, 2020 and provided us with a
senior secured term loan of $50 million (the "Term Loan"). The Term Loan matures
on June 30, 2025 (the "Maturity Date"). On February 28, 2022 (the "Amendment
Date"), we executed an Amendment to the Hayfin Loan Agreement (the "Amendment").

No principal repayments are due on the Term Loan prior to the Maturity Date.

Interest is payable on the Term Loan for principal outstanding quarterly through
the Maturity Date. The interest rate applicable to any borrowings under the Term
Loan is equal to LIBOR (subject to a floor of 1.5%) plus a margin of 6.75%. If
LIBOR is

                                       27

--------------------------------------------------------------------------------

unavailable, the loan will bear interest at the greater of the prime rate, the federal funds rate plus 0.5% per annum, and 2.5% plus the margin of 6.75%.

An additional margin of 3.0% would be applied to the interest rate in the event of the occurrence of an event of default as defined in the Hayfin Loan Agreement, as amended. On issue, and from March 31, 2022the term loan bore interest at 8.3%.

If an event of default (as defined by the Hayfin Loan Agreement, as amended)
occurs, an additional 3.0% margin is applied to the interest rate until such
event of default is cured.

The Hayfin Loan Agreement, as amended, contains financial covenants requiring the company, on a consolidated basis, to maintain the following:

• Maximum consolidated total Net sales (as defined in the Hayfin Loan Agreement, as amended) variable amounts, to be calculated on a quarterly basis,

• Minimum Liquidity (as defined in the Hayfin Term Loan Agreement, as amended) of
$20 milliona permanent financial covenant, tested monthly.

From March 31, 2022we are meeting all financial covenants required under the Hayfin loan agreement.

The Hayfin Loan Agreement, as amended, specifies that any prepayment of the Term
Loan, voluntary or mandatory, as defined in the Hayfin Loan Agreement, would
subject us to a prepayment premium applicable as of the date of the prepayment,
as follows:

• On or before July 2, 2023: 2% of principal balance refunded.

•After July 2, 2023 but on or before July 2, 2024: 1% of principal balance refunded.

•After July 2, 2024: no bonus.

The Hayfin Loan Agreement also includes certain negative covenants and events of
default customary for facilities of this type, and upon the occurrence of such
events of default, subject to customary cure rights, all outstanding loans under
the Hayfin Loan Agreement may be accelerated or the lenders' commitments
terminated. Mandatory prepayments are also required in the event of a change in
control, incurring other indebtedness, certain proceeds from disposal of assets
and insured casualty event (as defined in the Hayfin Loan Agreement).

Beginning with the fiscal year ending December 31, 2021, we are required to
prepay the outstanding loans based on the percentage of the Company's Excess
Cash Flow (as defined in the Hayfin Loan Agreement), if such is generated. To
date, we have not been required to make any prepayments under this provision.

Series B Preferred Shares

We have 100,000 Series B Preferred Shares outstanding at March 31, 2022.

The Series B Preferred Stock pays a 6.0% cumulative dividend per annum.
Dividends are declared at the sole discretion of our board of directors.
Dividends, if declared, are paid in cash at the end of each quarter based on
dividend amounts that accumulate beginning on the last payment date through the
day prior to the end of each quarter. In lieu of paying a dividend in cash, we
may elect to accrue the dividend owed to shareholders. Dividend balances
accumulate at the prevailing dividend rate for each dividend period for which
they are outstanding.

Each share of Series B Preferred Stock, including any accrued and unpaid
dividends, is convertible into our common stock at any time at the option of the
holder at a conversion price of $3.85 per common share, or 259.74 common shares
for each share of Series B Preferred Stock prior to any accrued and unpaid
dividends. The Series B Preferred Stock, including any accrued and unpaid
dividends, automatically converts into common stock at any time after July 2,
2023, provided that the common stock has traded at $7.70 or higher (i) for 20
out of 30 consecutive trading days and (ii) on such date of conversion.

If we undergo a change of control, we will have the option to repurchase some or
all of the then-outstanding shares of Series B Preferred Stock for cash in an
amount equal to the liquidation preference and any accumulated and unpaid
dividends, subject to the rights of the holders of the Series B Preferred Stock
in connection with such change in control. If we do not exercise such repurchase
right, holders of the Series B Preferred Stock will have the option to (1)
require us to repurchase any or all of our then-outstanding shares of Series B
Preferred Stock for cash in an amount equal to the liquidation preference or (2)
convert the Series B Preferred Stock, including accrued and unpaid dividends
into common stock and receive its pro rata consideration thereunder.

                                       28

--------------------------------------------------------------------------------

We have not declared or paid any cash dividends on our Series B Convertible Preferred Shares since their issuance. Dividends accrued but not paid
March 31, 2022 have been $8.8 million.

Share buybacks

During the three months ended March 31, 2022, we repurchased 249,778 shares
surrendered by employees to satisfy tax withholding obligations upon vesting of
restricted stock awards. Other than these transactions, we did not repurchase
any shares of our common stock for the three months ended March 31, 2022. The
timing and amount of future repurchases, if any, will depend upon our stock
price, economic and market conditions, regulatory requirements, and other
corporate considerations. We may initiate, suspend or discontinue purchases at
any time.

Contractual Obligations

For the three months ended March 31, 2022, there were no significant changes to
the contractual obligations from those disclosed in the section Item 7,
"Management's Discussion and Analysis of Financial Condition and Results from
Operations", in our 2021 Form 10-K.

Critical accounting estimates

In preparing financial statements, we follow accounting principles generally
accepted in the United States, which require us to make certain estimates and
apply judgments that affect its financial position and results of operations.
Management regularly reviews our accounting policies and financial information
disclosures. A summary of critical accounting estimates in preparing the
financial statements was provided in our 2021 Form 10-K. During the quarter
covered by this report, there were no material changes to the accounting
policies and assumptions previously disclosed.

Recent accounting pronouncements

For the effect of recent accounting pronouncements, see Note 2 to the unaudited condensed consolidated financial statements contained herein.

© Edgar Online, source Previews