MIMEDXis 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. MIMEDXprovides 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"). MIMEDXis 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). MIMEDXhas 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'speriod 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'sviews 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
Three Months Ended
March 31, 2022Compared to the Three Months Ended March 31, 2021Three 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
Research and development 5,964 4,339
Survey, reprocessing and similar 2,552 7,196
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, 2022of $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 $ 6,28313.5 % 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 Statesduring 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 millionfor the three months ended March 31, 2022compared to $8.1 millionfor 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, 2022and 2021 was $9.9 millionand $9.6 million, respectively, an increase of $0.3 million, or 3.1%. Gross profit margin for the three months ended March 31, 2022was 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, 2022was $49.6 million, compared to $45.4 millionfor 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, 2021due 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 millionfor the three months ended March 31, 2022, compared to approximately $4.3 millionfor 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, 2022were $2.6 millioncompared to $7.2 millionfor 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, 2022compared 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
Interest expense, net
Interest expense, net was
$1.1 millionfor the three months ended March 31, 2022compared to $1.5 millionfor 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, 2022and 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
Net cash used in operating activities during the three months ended
March 31, 2022was $10.2 million, compared to $6.7 millionof 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.
Net cash used for investing activities during the three months ended
March 31, 2022was $0.1 million, compared to $2.1 millionfor the three months ended March 31, 2021. This decrease was the result of a $1.8 millionyear-over-year decrease in capital expenditures. In addition, patent application costs decreased $0.1 million, year-over-year.
Net cash used in financing activities was
$1.0 millionduring the three months ended March 31, 2022compared to $2.3 millionduring the three months ended March 31, 2021. The decrease was the result of $2.0 millionless cash paid for tax withholdings related to the vesting of restricted stock awards during the three months ended March 31, 2022compared to the three months ended March 31, 2021. This was offset by a $0.8 milliondecrease 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.
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, 2020and 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
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
• Minimum Liquidity (as defined in the Hayfin Term Loan Agreement, as amended) of
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
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
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
$3.85per 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 $7.70or 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
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. Duringthe 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.
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