Mimedx Group, Inc.: Form 10-Q for the period ended Mar 31, 2024

Overview

Executive Summary

During the first quarter of 2024, the Company continued its trend of strong commercial performance, delivering 18.2% growth in net sales year-over-year. This growth was driven by execution across all care settings.

Operating and financial highlights during the quarter included:

• Net sales of $84.7 million, reflecting 18.2% growth over the prior year period.
• GAAP net income from continuing operations and net margin for the first quarter of 2024 of $9.1 million and 10.7%, respectively.
• Improved capital structure with new senior secured credit facilities and debt refinancing.
• Announced surgical portfolio expansion through a distribution agreement with Regenity Biosciences for a 510(k)-cleared collagen particulate xenograft product.
• Appointed two new independent directors to the Company’s Board of Directors.
• Introduced an online product ordering and account management platform for our customers.

Overview

MIMEDX is a pioneer and leader in placental biologics focused on delivering innovative solutions to patients and the healthcare professionals who treat them. With more than a decade of experience helping clinicians manage acute and chronic wounds, MIMEDX has been dedicated to providing a leading portfolio of products for applications in the wound care, burn, and surgical sectors of healthcare. All of our products sold in the United States are regulated by the U.S. Food & Drug Administration (“FDA”). We apply Current Good Tissue Practices (“CGTP”) and other applicable quality standards in addition to terminal sterilization to produce our allografts.

This discussion, which presents our results for the three months ended March 31, 2024 and 2023, should be read in conjunction with the financial statements and accompanying notes included in this Form 10-Q and the financial statements and accompanying notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023.

Results of Operations

Three Months Ended March 31, 2024 Compared to the Three Months Ended March 31, 2023

(in thousands)

Changes noted as “nm” in the table above indicate that the percentage change is not meaningful.

Net Sales

We recorded net sales for the three months ended March 31, 2024 of $84.7 million, a $13.0 million, or 18.2%, increase compared to the three months ended March 31, 2023, in which we recognized net sales of $71.7 million.

Our sales by product line were as follows (amounts in thousands):

Net sales of our Wound product portfolio were $57.0 million for the three months ended March 31, 2024, a $11.8 million or 26.2% increase compared to $45.2 million for the three months ended March 31, 2023. The increase was driven by strong sales, particularly in the private office subsegment of the market.

Net sales of our Surgical products totaled $27.7 million, reflecting growth of $1.2 million, or 4.5% compared to the three months ended March 31, 2023. The increase was primarily driven by, growing contributions from AMNIOEFFECT® and, to a lesser degree, AXIOFILL®. In addition, Surgical sales for the three months ended March 31, 2023 reflects approximately $1 million of sales of our dental product which we have since discontinued.

Cost of Sales and Gross Profit Margin

Cost of sales for the three months ended March 31, 2024 and 2023 was $13.0 million and $12.4 million, respectively, an increase of $0.6 million, or 4.6%, year-over-year. Gross profit margin for the three months ended March 31, 2024 was 84.7% compared to 82.7% for the three months ended March 31, 2023. The year-over-year improvement in gross margin was driven by favorable product mix and our continued execution on yield improvement projects. Increases in cost of sales were driven by increases in sales volume noted above.

Selling, General and Administrative Expense

Selling, general and administrative (“SG&A”) expense for the three months ended March 31, 2024 was $55.1 million, compared to $52.3 million for the three months ended March 31, 2023, an increase of $2.9 million, or 5.5%, year-over-year. The increase in SG&A was driven by year-over-year increases in commissions due to greater sales volume, as well as a larger proportion of sales through sales agents during the three months ended March 31, 2024.

Research and Development Expense

Our research and development (“R&D”) expense decreased $0.6 million, or 18.5%, to $2.8 million for the three months ended March 31, 2024, compared to $3.5 million for the three months ended March 31, 2023. The decrease was driven primarily by lower headcount and the timing of R&D activities compared to the prior year.

Investigation, Restatement and Related Expense

Investigation, restatement and related expense for the three months ended March 31, 2024 was $0.3 million compared to $3.7 million for the three months ended March 31, 2023. The decrease was related to expenses under our last proceeding entailing material obligations under an indemnification agreement, which substantially ceased in 2023.

Amortization of Intangible Assets

Amortization expense related to intangible assets was $0.2 million for each of the three months ended March 31, 2024 and 2023.

Interest Expense, Net

Interest expense, net was $1.7 million for the three months ended March 31, 2024 compared to $1.6 million for the three months ended March 31, 2023, an increase of $0.1 million, or 8.8%, year-over-year. The increase was the result of the loss on extinguishment of debt due to repaying and terminating our Hayfin Loan Agreement during the first quarter of 2024 ($1.4 million), offset by decreases in outstanding debt and lower interest rates under the Citizens Credit Facilities as well as improvement in our treasury management.

Income Tax Provision Expense

The effective tax rates for the Company were 20.6% and (2.7)% for the three months ended March 31, 2024 and March 31, 2023, respectively. The effective tax rate for the three months ended March 31, 2024 was favorably impacted by vestings of restricted stock units. Net operating losses generated for the three months ended March 31, 2023 were offset by a valuation allowance.

Discussion of Cash Flows

Operating Activities

Net cash provided by operating activities from continuing operations during the three months ended March 31, 2024 was $6.8 million, compared to cash provided by operating activities from continuing operations of $0.6 million for the three months ended March 31, 2023. The change was primarily the result of year-over-year increases in net sales, which drove increases in collections from customers. These increases were partially offset by year-over-year increases in operating expenses.

Investing Activities

Net cash used for investing activities during the three months ended March 31, 2024 was $6.0 million, compared to $0.7 million for the three months ended March 31, 2023. This increase was largely the result of our investment to expand our product portfolio through the TELA and Regenity agreements as described below in “Liquidity and Capital Resources”.

Financing Activities

Net cash used for financing activities during the three months ended March 31, 2024 was $33.5 million. Cash used in financing activities was immaterial during the three months ended March 31, 2023. The increase during the three months ended March 31, 2024 was due to the Company repaying the initial $30.0 million drawing under the Revolving Credit Facility, as described below in “Liquidity and Capital Resources,” deferred financing costs incurred under the Citizens Credit Agreement, and stock repurchases for tax witholdings upon vesting of employee restricted share units.

Liquidity and Capital Resources

We require capital for our operating activities, including costs associated with the sale of product through direct and indirect sales channels, research and development activities, compliance costs, costs to sell and market our products, regulatory fees, and legal and consulting fees in connection with ongoing litigation and other matters. We generally fund our operating capital requirements through our operating activities and cash reserves. We expect to use capital to invest in the broadening of our product portfolio, including through potential acquisitions, licensing agreements or other arrangements, the international expansion of our business and certain capital projects.

As of March 31, 2024, we had $48.5 million of cash and cash equivalents, total current assets of $138.9 million and total current liabilities of $42.2 million, reflecting a current ratio of 3.3, and we had no borrowings outstanding and $75 million of availability under our Revolving Credit Facility (as defined below).

The Company is currently paying its obligations in the ordinary course of business. We believe that our cash from operating activities, existing cash and cash equivalents, and available credit under the Citizens Credit Agreement, as defined below, will enable us to meet our operational liquidity needs for the twelve months following the filing date of this Quarterly Report.

Citizens Credit Facilities

On January 19, 2024, we entered into a Credit Agreement (the “Citizens Credit Agreement”) with a syndicate of banks comprised of Citizens Bank, N.A. as administrative agent (the “Agent”), and Bank of America, N.A. The Citizens Credit Agreement was designed to simultaneously improve our capital structure, providing the ability to refinance our prior $50 million senior secured term loan under the Hayfin Loan Agreement (as defined below) at lower interest rates and have access to additional borrowing capacity that could be deployed in the future in support of our organic and potential inorganic growth objectives.

The Citizens Credit Agreement provides for senior secured credit facilities in an aggregate principal amount of up to $95.0 million consisting of: (i) a $75.0 million senior secured revolving credit facility (the “Revolving Credit Facility”) with a $10.0 million letter of credit sublimit and a $10.0 million swingline loan sublimit, and (ii) a $20.0 million senior secured term loan facility (the “Term Loan Facility” and, together with the Revolving Credit Facility, the “Credit Facilities”). All obligations are required to be paid in full on January 19, 2029 (the “Maturity Date”), and are guaranteed by certain of the our subsidiaries, and secured by substantially all of the assets of the Company and the guarantors pursuant to a customary security agreement. Subject to the terms of the Citizens Credit Agreement, we have the option to obtain one or more incremental term loan facilities and/or increase the commitments under the Revolving Credit Facility in an aggregate principal amount equal to the greater of (i) $50.0 million and (ii) 1.00 times our Consolidated EBITDA as defined therein, each subject to the existing or any new lenders’ election to extend additional term loans or revolving commitments.

At our option, borrowings under the Citizens Credit Agreement (other than any swingline loan) will bear interest at a rate per annum equal to (i) the Alternate Base Rate, as defined therein, or (ii) a Term SOFR as defined therein, in each case plus an applicable margin ranging from 1.25% and 2.50% with respect to Alternate Base Rate borrowings and 2.25% and 3.50% for Term SOFR borrowings. Swingline loans will bear interest at a rate per annum equal to one-month Term SOFR plus the applicable margin. The applicable margin will be determined based on the Company’s consolidated total net leverage ratio.

We are required to pay a quarterly commitment fee on any unused portion of the Revolving Credit Facility, letter of credit fees, and other customary fees to the Agent and the Lenders. The Term Loan Facility will amortize on a quarterly basis at 1.25% (for year one and two), 1.875% (for year three and four), and 2.5% (for year five) based on the aggregate principal amount outstanding under the Term Loan Facility, with the remainder due on the Maturity Date. We must make mandatory prepayments in connection with certain asset dispositions and casualty events, subject in each case to customary reinvestment rights. We may prepay borrowings under the Credit Facilities at any time, without premium or penalty, and may, at its option, reduce the aggregate unused commitments under the Revolving Credit Facility in whole or in part, in each case subject to the terms of the Credit Agreement. We must also comply with certain financial covenants, including a maximum total net leverage ratio and a minimum consolidated fixed charge coverage ratio, as well as other customary restrictive covenants.

On January 19, 2024, we borrowed $30.0 million under the Revolving Credit Facility and $20.0 million under the Term Loan Facility. Proceeds from the initial drawings under the Credit Facilities, together with cash on hand, were used to repay in full the $50.0 million principal amount and other obligations under that certain Loan Agreement, dated as of June 30, 2020 (as amended from time to time), by and among the Company, the guarantors party thereto, the lenders party thereto and Hayfin Services LLP, as administrative and collateral agent (as amended from time to time, the “Hayfin Loan Agreement”) and to pay related fees, premiums, costs and expenses (collectively with the entry into the Citizens Credit Agreement and the initial borrowings thereunder, the “Debt Refinancing Transactions”).

On February 27, 2024, we repaid the initial $30.0 million drawing under the Revolving Credit Facility.

Hayfin Term Loan

In June 2020, we entered into the Hayfin Loan Agreement, pursuant to which Hayfin provided us with a senior secured term loan of $50 million (the “Hayfin Term Loan”). The Hayfin Term Loan was to mature on June 30, 2025. Interest on any borrowings was based on SOFR, plus a fallback provision of 0.15%, subject to a floor of 1.5%, plus a margin of 6.75%.

As noted above, in January 2024, we repaid the Hayfin Term Loan in full and terminated the Hayfin Loan Agreement.

Contractual Obligations

Except as described below, there were no significant changes to our contractual obligations during the three months ended March 31, 2024 from those disclosed in the section Item 7, “Management’s Discussion and Analysis of Financial Condition and Results from Operations”, in our 2023 Form 10-K.

TELA and Regenity Agreements

On March 15, 2024, the Company entered into an Asset Purchase Agreement (the “TELA APA”) with TELA Bio, Inc. (“TELA”) and a manufacturing and supply agreement (the “Supply Agreement”) with Regenity Biosciences, Inc. (“Regenity”), adding to the Company’s product portfolio a 510(k)-cleared collagen particulate xenograft product (the “Xenograft Product”) indicated for the management of moderately to heavily exudating wounds and to control minor bleeding. Under the terms of the TELA APA, the Company made an initial $5.0 million payment to TELA and will be required to make additional future payments aggregating between a minimum of $3.0 million and a maximum of $7.0 million based on net sales of the Xenograft Product over the next two years.

The Supply Agreement maintains MIMEDX’s exclusive right to sell and market the Xenograft Product in the United States and requires MIMEDX to purchase a minimum amount of the Xenograft Product from Regenity annually through December 31, 2033. Should MIMEDX fail to meet a purchasing minimum in any one period, it has the option (among others) to amend its distribution rights under the Supply Agreement to be non-exclusive.

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 our financial position and results of operations. We regularly review our accounting policies and financial information disclosures. A summary of critical accounting estimates in preparing the financial statements was provided in our 2023 Form 10-K.

Recent Accounting Pronouncements

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

We are exposed to risks associated with changes in interest rates that could adversely affect our results of operations and financial condition. We do not hedge against interest rate risk.

The interest rate on our Term Loan Facility is determined quarterly based on the 1-month term SOFR. As of March 31, 2024, the interest rate on our Term Loan Facility was 7.9%. A 100 basis point change in SOFR would change our interest expense by $0.2 million on an annualized basis.

During the three months ended March 31, 2024, we incurred an immaterial decrease in incremental interest expense compared to the equivalent period in the prior year resulting from lower interest rates in our new term loan facility during the intervening period.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended, or the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, our Chief

Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were effective at a reasonable assurance level in ensuring that information required to be disclosed by us in reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely discussions regarding required disclosure. We believe that a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the control system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during the fiscal quarter ended March 31, 2024 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.