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Goodwill Activity (Details)
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Intangible Assets, Net (Details)
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Expected Future Amortization of Intangible Assets
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Related to the Term Loan (Details)
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Payments due on Term Loan (Details)
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Basic Net Income (Loss) Per Common Share (Details)
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Diluted Net Income (Loss) Per Common Share
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(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title
of each class
Trading Symbol(s)
Name of each exchange on which registered
iCommon Stock, par value $0.001 per share
iMDXG
iThe
Nasdaq Stock Market
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
iYes
x No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
iYes x No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer ¨
iAccelerated filerx
Non-accelerated filer ¨
Smaller reporting company i☐
Emerging
growth company i☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ix
There were i116,376,583 shares of the
registrant’s common stock, par value $0.001 per share, outstanding as of October 26, 2023.
Explanatory
Note and Important Cautionary Statement Regarding Forward-Looking Statements
As used herein, the terms “MIMEDX,” the “Company,” “we,” “our” and “us” refer to MiMedx Group, Inc., a Florida corporation, and its consolidated subsidiaries as a combined entity, except where it is clear that the terms mean only MiMedx Group, Inc.
Certain statements made in this Quarterly Report on Form 10-Q (this “Quarterly Report”) are “forward-looking statements” within the meaning of Section 27A of the Securities
Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended. All statements relating to events or results that may occur in the future are forward-looking statements, including, without limitation, statements regarding the following:
•our strategic focus and current business priorities, and our ability to implement these priorities, including as a result of our no longer being able to market our micronized products and certain other products;
•our expectations regarding future revenue growth, margins, and cash flows;
•the advantages of our products and development of new products;
•our expectations
regarding the size of potential markets for our products and any growth in such markets;
•our expectations regarding the regulatory pathway for our products;
•our expectations regarding ongoing regulatory obligations and oversight and the changing nature thereof impacting our products, research and clinical programs, and business, including those relating to patient privacy;
•our expectations regarding costs relating to compliance with regulatory requirements, including those arising from maintaining current Good Tissue Practice compliance;
•the likelihood, timing, and scope of possible regulatory approval and commercial launch of new products;
•our
expectations regarding government and other third-party coverage and reimbursement for our existing and new products;
•our belief in the sufficiency of our intellectual property rights in our technology;
•our expectations regarding our ability to procure sufficient supplies of human tissue to manufacture and process our products;
•our expectations regarding our ability to fund our ongoing operations and future operating costs and the sufficiency of our liquidity and existing capital resources to implement our current business priorities;
•our expectations regarding future income tax liability;
•our expectations regarding the outcome
of pending litigation and investigations;
•demographic and market trends; and
•our ability to compete effectively.
Forward-looking statements generally can be identified by words such as “expect,”“will,”“change,”“intend,”“seek,”“target,”“future,”“plan,”“continue,”“potential,”“possible,”“could,”“estimate,”“may,”“anticipate,”“to be” and similar expressions. These statements are based on numerous assumptions and involve known and unknown risks, uncertainties and other factors that could significantly affect the Company’s operations and may cause the
Company’s actual actions, results, financial condition, performance or achievements to differ materially from any future actions, results, financial condition, performance or achievements expressed or implied by any such forward-looking statements. Factors that may cause such a difference include, without limitation, those discussed under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022 (our “2022 Form 10-K”), filed with the Securities and Exchange Commission (“SEC”) on February 28, 2023 and those discussed in Part II, Item 1A, Risk Factors, if any.
Unless required by law, the
Company does not intend, and undertakes no obligation, to update or publicly release any revision to any forward-looking statements, whether as a result of the receipt of new information, the occurrence of subsequent events, a change in circumstances or otherwise. Each forward-looking statement contained in this Quarterly Report is specifically qualified in its entirety by the aforementioned factors. Readers are advised to carefully read this Quarterly Report in conjunction
4
with the important disclaimers set forth above prior to reaching any conclusions or making any investment decisions and not to place undue reliance on forward-looking statements, which speak only as of the date of the filing of this Quarterly Report with the SEC.
Estimates
and Projections
This Quarterly Report includes certain estimates, projections and other statistical data. These estimates and projections reflect management’s best estimates based upon currently available information and certain assumptions we believe to be reasonable as of the date of this Quarterly Report. These estimates are inherently uncertain, subject to risks and uncertainties, many of which are not within our control, have not been reviewed by our independent auditors and may be revised as a result of management’s further review. In addition, these estimates and projections are not a comprehensive statement of our financial results, and our actual results may differ materially from these estimates and projections due to developments that may arise between now and the time the results are final. There can be no assurance that the estimates will be realized, and our results may vary significantly from the estimates,
including as a result of unexpected issues in our business and operations. Accordingly, you should not place undue reliance on such information. Projections, assumptions and estimates of our future performance and the future performance of the markets in which we operate are necessarily subject to a high degree of uncertainty and risk.
LIABILITIES,
CONVERTIBLE PREFERRED STOCK, AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Accounts payable
$
i9,170
$
i8,847
Accrued
compensation
i23,159
i21,852
Accrued
expenses
i9,444
i11,024
Other
current liabilities
i1,854
i1,834
Total
current liabilities
i43,627
i43,557
Long term debt, net
i48,966
i48,594
Other
liabilities
i2,605
i4,773
Total
liabilities
$
i95,198
$
i96,924
Commitments
and contingencies (Note 13)
i
i
Convertible preferred stock Series B; $ii0.001/
par value; iiiiii100,000/////
shares authorized, issued and outstanding at September 30, 2023 and December 31, 2022
$
i92,494
$
i92,494
Stockholders'
equity (deficit)
Preferred stock Series A; $ii0.001/
par value; ii5,000,000/ shares authorized, iiii0///
issued and outstanding at September 30, 2023 and December 31, 2022
$
i—
$
i—
Common
stock; $ii0.001/ par value; i250,000,000
shares authorized, ii116,359,748/ issued and outstanding at September 30, 2023
and i187,500,000 shares authorized, ii113,705,447/
issued and outstanding at December 31, 2022
i116
i114
Additional paid-in capital
i188,369
i173,804
Accumulated
deficit
(i187,155)
(i191,906)
Total
stockholders' equity (deficit)
i1,330
(i17,988)
Total
liabilities, convertible preferred stock, and stockholders’ equity (deficit)
$
i189,022
$
i171,430
See
notes to unaudited condensed consolidated financial statements
MiMedx Group, Inc. (together with its subsidiaries, except where the context otherwise requires, “MIMEDX,” or the “Company”) is a pioneer and leader in placental biologics focused on delivering innovative solutions to patients and the healthcare professionals who treat them. All of the Company’s products sold in the United States are regulated by the United States Food & Drug Administration (“FDA”). The Company’s business is focused primarily on the United States of America but the
Company is pursuing opportunities for international expansion, with specific focus on the sale of its placental tissue products in Japan.
During the three and nine months ended September 30, 2023, the Company operated as iitwo/
defined, internal business units: Wound & Surgical and Regenerative Medicine. On June 20, 2023, the Company announced that it would disband its Regenerative Medicine business unit and suspended its associated Knee Osteoarthritis clinical trial program. All activities in Regenerative Medicine during the three months ended September 30, 2023 were part of the wind-down of the unit, primarily related to regulatory obligations associated with its clinical trial, and it is expected that these activities will materially conclude during the fourth quarter of 2023.
2.iSignificant
Accounting Policies
Please see Note 2, Significant Accounting Policies, to the Company’s Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Form 10-K”), filed with the Securities and Exchange Commission (“SEC”) on February 28, 2023 for a description of all significant accounting policies.
i
Basis
of Presentation
These unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation of the results of operations for the periods presented have been included. The operating results for the three and nine months ended September 30, 2023 and 2022 are not necessarily indicative of the results that may be expected for the full fiscal year. The balance sheet as
of December 31, 2022 was derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by GAAP for complete financial statements.
These unaudited condensed consolidated financial statements should be read in conjunction with the historical consolidated financial statements of the Company included in the 2022 Form 10-K.
i
Principles
of Consolidation
The consolidated financial statements include the accounts of MiMedx Group, Inc. and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated upon consolidation.
i
Use of Estimates
GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the consolidated financial statements and the reported consolidated statements of operations during the reporting period. Actual results could differ from those estimates. Significant estimates include estimated useful lives and potential impairment of property and equipment, estimates of impairment for goodwill and intangible assets, estimates of loss for contingent liabilities, estimate of allowance for doubtful accounts, management’s assessment of the Company’s ability to continue as a going concern, estimate of fair value and the probable achievement of share-based payments, estimates of returns and allowances, and valuation of deferred tax assets.
i
Share-Based
Compensation
The Company grants share-based awards to employees and members of the Company’s Board of Directors (the “Board”). Awards to employees and the Board are generally made annually. Grants are issued outside of the annual cadence for certain new hires, promotions, and other events.
11
The amount of expense to be recognized is determined by the fair value of the award using inputs available as of the grant date. The fair value of non-option share awards that are not subject to a market condition
is the value of the common stock on the grant date. For non-option share awards that are subject to a market condition, the fair value of the common stock on the grant date is adjusted to reflect the value of the market condition, generally using a path-dependent pricing model, such as a Monte Carlo simulation.
The fair value of stock option grants is estimated using an option pricing model, as appropriate based on the terms of the grant. Use of a valuation model requires management to make certain assumptions with respect to selected model inputs, which generally follows the inputs to a Black-Scholes option pricing model. Absent the availability of an option market with similar terms to the awarded options, the Company infers an expectation for volatility using the historical volatility of daily price changes in its share price for a period
equal to the contractual or expected term of the option, as applicable, subject to adjustment for price activity associated with certain events which are not expected to recur during the relevant term. The expected term is derived based on the Company’s expectations for option exercise by the recipients. The Company uses U.S. Treasury yields with a maturity similar to the expected or contractual term, as applicable, as the basis for its risk-free interest rate assumption. The Company has never declared a dividend on its common stock and, therefore, assumes a dividend yield of i0%.
Expense
is recognized over the requisite service period to achieve a vesting condition associated with an award, which can either be explicitly defined by the award, implied by its terms, or derived from potential market movements. In situations where multiple vesting conditions must be achieved, the longest service period is used as a basis for expense recognition. Derived service periods associated with market conditions are accelerated if such market conditions are met prior to the initially-assessed derived service period, but are not deferred if the market conditions are not met prior to the end of the initially-assessed derived service period.
For awards with only service-based vesting conditions, the Company recognizes share-based compensation expense on a straight-line basis through the vesting date of the last tranche of the award. For awards
which vest based on more than service conditions, the Company recognizes share-based compensation expense using a graded-vesting method, treating each tranche as if it were a separately-granted award and recognizing expense through the vesting date of each individual tranche. In each scenario, the Company recognizes share-based compensation expense to the extent that the associated service and performance conditions are considered probable to occur. Determinations of probability are made each reporting period and the Company uses available evidence considered relevant for evaluating the performance conditions. The Company recognizes
the cumulative effect of changes in the probability of occurrence in the period of re-evaluation. The probability of occurrence and ultimate resolution of a market condition is not considered in expense recognition. Consequently, the Company could recognize expense for awards that do not ultimately vest.
i
Basic and Diluted Net Income (Loss) Per Common Share
Basic net income
(loss) per common share is calculated as net income (loss) available to common stockholders divided by weighted average common shares outstanding for the applicable period. Net income (loss) available to common stockholders is calculated by adjusting net income (loss) for periodic accumulated dividends on the Company’s Series B Convertible Preferred Stock (“Series B Preferred Stock”). This amount is divided by the weighted average common shares outstanding during the period.
Weighted average common shares outstanding is calculated as shares of the Company outstanding adjusted for the portion of the period for which they are outstanding. Unvested non-option share awards are excluded from the calculation of
weighted average common shares outstanding until they have vested. Unexercised stock options are excluded from the calculation of weighted average common shares outstanding until they are exercised. Shares issuable pursuant to the Company’s Employee Stock Purchase Plan (“ESPP”) are included for the minimum number of shares issuable beginning at the point in time that all contingencies for share issuance are resolved.
Diluted net income (loss) per common share adjusts basic net income (loss) per common share for convertible securities, options, equity incentive awards, and other share-based payment awards which have yet to vest and vest only on the satisfaction of a service condition. Equity incentive awards and options that are subject to a performance or market condition are included only if
the performance or market condition would be satisfied if the end of the applicable period were the end of the performance period. In any case, these adjustments are reflected in the calculation of diluted net income (loss) per common share to the extent that they reduce basic net income (loss) per common share.
The Company uses the if-converted method to calculate the dilutive effect of the Series B Preferred Stock and other convertible securities to the extent they are outstanding. The if-converted method assumes that convertible securities are converted at the later of the issuance date and the beginning of the period. If the hypothetical conversion of convertible securities, and the consequential avoidance of any accumulated preferred dividends, would decrease basic net income (loss) per common share,
12
these
effects are incorporated in the calculation of diluted net income (loss) per common share, adjusted for the portion of the period the securities were outstanding.
The Company uses the treasury stock method to calculate the dilutive effect of options, non-option share awards, and certain other share-based payments. The treasury stock method assumes that the proceeds from exercise are used to repurchase common shares at the weighted average market price during the period, increasing the denominator for the net effect of shares issued upon exercise less hypothetical shares repurchased.
Shares issuable pursuant to the ESPP are included in the calculation of diluted net loss per common share to the extent that such shares would be issued based on the share price at the conclusion of the period, to the
extent such shares are not already included in the calculation of weighted average common shares outstanding.
i
Recently Adopted Accounting Pronouncements
In March 2020, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.”
ASU 2020-04 provides temporary expedients to accounting guidance for certain contract modifications and hedging arrangements to ease financial reporting burdens as a result of market transitions from certain reference rates, including the London Interbank Offered Rate (“LIBOR”). The updates are effective immediately and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2024.
In June 2023, the Company entered into Amendment No. 2 (the “Second Amendment”)
to the loan agreement, dated as of June 30, 2020, by and among the Company, Hayfin Services, LLP (“Hayfin”), an affiliate of Hayfin Capital Management LLP, and certain other parties, (as amended, the “Hayfin Loan Agreement”), pursuant to which the reference rate used to determine the interest rate was changed from the London Interbank Offered Rate (“LIBOR”) to the Secured Overnight Financing Rate (“SOFR”). Because the only terms of the Second Amendment that affected the Company’s contractual cash flows were related to the changes in the reference rate, the
Company adopted the optional guidance prescribed by Topic 848 to this transaction. The adoption of ASU 2020-04 and its application to the Second Amendment did not materially impact the Company’s unaudited condensed consolidated financial statements as of or for the three or nine months ended September 30, 2023.
Recently Issued Accounting Pronouncements Not Yet Adopted
All ASUs issued and not yet effective for the three and nine months ended September 30, 2023, and through the date of this report, were assessed and determined to be either not applicable or are expected to have minimal impact on the Company’s
financial position and results of operations.
13
3. iAccounts Receivable, Net
i
Accounts
receivable, net, consisted of the following (in thousands):
Activity
related to the Company’s allowance for doubtful accounts for the three months ended September 30, 2023 and 2022 were as follows (in thousands):
2023
2022
Balance at July 1
$
i2,196
$
i3,471
Bad
debt expense
i447
i426
Write-offs
(i69)
(i67)
Balance
at September 30
$
i2,574
$
i3,830
Activity
related to the Company’s allowance for doubtful accounts for the nine months ended September 30, 2023 and 2022 were as follows (in thousands):
2023
2022
Balance at January 1
$
i3,783
$
i1,187
Bad
debt expense
i737
i2,817
Write-offs
(i1,946)
(i174)
Balance
at September 30
$
i2,574
$
i3,830
/
4.
iInventory
iInventory consisted of the following (in thousands):
Depreciation
expense is allocated amongst cost of sales, research and development expense, and selling, general, and administrative expense on the unaudited condensed consolidated statements of operations.
6. iGoodwill and Intangible Assets, Net
Goodwill
i
The
following table provides a summary of goodwill activity for the nine months ended September 30, 2023 (in thousands):
There
was iiino//
goodwill activity during the three months ended September 30, 2023 or during the three or nine months ended September 30, 2022.
Impairment of Regenerative Medicine Business Unit
On June 20, 2023, the Company announced the disbanding of its Regenerative Medicine business unit and the suspension of its Knee Osteoarthritis clinical trial program. As a result of this event, the Company evaluated goodwill associated with the Regenerative Medicine reporting unit for potential impairment. The
Company estimated fair value for the reporting unit using the income approach; specifically, a discounted cash flow method. As a result of this assessment, management concluded that the carrying value of the reporting unit exceeded its carrying value by an amount that exceeded its goodwill balance. Accordingly, the Company recognized an impairment loss for the full amount of the goodwill ascribed to the Regenerative Medicine reporting unit. The impairment loss is included as a component of restructuring expense in the unaudited condensed statement of operations for the nine months ended September 30, 2023.
Intangible Assets, Net
i
Intangible
assets, net, are summarized as follows (in thousands):
On June 30, 2020, the Company entered into the Hayfin Loan Agreement, which provided the Company with a $i50 million senior secured term loan (the “Term
Loan”). The Term Loan matures on June 30, 2025 (the “Maturity Date”). Interest on any borrowings is based on SOFR, plus a fallback provision of i0.15%, subject a floor of i1.5%
(the “Floor”), plus a Margin of i6.75% (the “Margin”). The Term Loan carried an interest rate of i12.3% as of September 30,
2023.
As of September 30, 2023, the Company was in compliance with all applicable financial covenants under the Hayfin Loan Agreement.
iInterest
expense related to the Term Loan, included in interest expense, net in the unaudited condensed consolidated statements of operations, was as follows (in thousands):
As of September 30, 2023, the fair value of the Term Loan was $i47.7 million.
This valuation was calculated based on a series of Level 2 and Level 3 inputs, including a discount rate based on the credit risk spread of debt instruments of similar risk character in reference to U.S. Treasury instruments with similar maturities, with an incremental risk premium for risk factors specific to the Company. Fair value was calculated by discounting the remaining cash flows associated with the Term Loan to September 30, 2023 using this discount rate.
9. iNet
Income (Loss) Per Common Share
Net income (loss) per common share is calculated using two methods: basic and diluted.
Basic Net Income (Loss) Per Common Share
i
The following table provides a reconciliation of net loss to net loss available to common stockholders and calculation of basic net loss per common share for each of the three and nine months ended September 30,
2023 and 2022 (in thousands, except share and per share amounts):
Net income (loss) available to common stockholders
$
i6,761
$
(i10,096)
$
(i433)
$
(i34,667)
Adjustments:
Accumulated
dividends on Series B Convertible Preferred Stock
i1,773
i1,670
i5,184
i4,884
Less:
antidilutive adjustments
(i1,773)
(i1,670)
(i5,184)
(i4,884)
Total
adjustments
i—
i—
i—
i—
Numerator
$
i6,761
$
(i10,096)
$
(i433)
$
(i34,667)
Weighted
average shares outstanding
i116,298,146
i113,448,251
i115,528,067
i112,650,713
Adjustments:
Potential
common shares (a)
Restricted stock unit awards
i1,845,832
i—
i—
i—
Outstanding
stock options
i1,131,410
i—
i—
i—
Performance
stock unit awards
i35,441
i—
i—
i—
Restricted
stock awards
i15,767
i—
i—
i—
Employee
stock purchase plan
i1,113
i—
i—
i—
Total
adjustments
i3,029,563
i—
i—
i—
Weighted
average shares outstanding adjusted for potential common shares
i119,327,709
i113,448,251
i115,528,067
i112,650,713
Diluted
net income (loss) per common share
$
i0.06
$
(i0.09)
$
(i0.00)
$
(i0.31)
(a)
Weighted average common shares outstanding for the calculation of diluted net income (loss) per common share does not include the following adjustments for potential common shares below because their effects were determined to be antidilutive for the periods presented.
The Company has not declared or paid any dividends on the Series B Preferred Stock since issuance. Dividends accumulated but not paid as of September 30, 2023 were $i19.0 million. As this amount has not been declared, the Company has not recorded this amount on its unaudited condensed consolidated balance sheet as of September 30,
2023.
Based on accumulated dividends as of September 30, 2023, the Series B Preferred Stock was convertible into an aggregate of i30,906,441 shares of the Company’s common stock as of that date.
Equity Incentive Awards
The
Company has issued restricted stock awards (“RSAs”), restricted stock unit awards (“RSUs”), and performance stock unit awards (“PSUs”, together with RSAs and RSUs, collectively, the “Equity Incentive Awards”) to its employees. The following is summary information for Equity Incentive Awards for the nine months ended September 30, 2023.
18
As of September 30, 2023, there was $i24.1 million
of unrecognized share-based compensation expense related to the Equity Incentive Awards. This expense is expected to be recognized over a weighted-average period of i2.33 years, which approximates the remaining vesting period of these grants. iThe
table below summarizes activity of unvested Equity Incentive Awards by award type from January 1, 2023 through September 30, 2023.
As
of September 30, 2023, there was $i5.5 million of unrecognized share-based compensation expense related to Stock Options. This expense is expected to be recognized over a weighted-average period of i2.22
years.
CEO Performance Grant
On January 27, 2023, the Company’s Board of Directors appointed Joseph H. Capper to serve as Chief Executive Officer. The Company entered into a Letter Agreement with Mr. Capper that included, among other things, a grant of i3,300,000
PSUs (the “CEO Performance PSUs”) and a non-qualified stock option (the “CEO Performance Option”, collectively with the CEO Performance PSUs, the “CEO Performance Grant”) for i3,600,000 shares of the Company’s common stock. In addition to continued employment
with the Company, the occurrence and extent of vesting of each component of the CEO Performance Grant is dependent upon the Company’s operating and share price performance: the CEO Performance PSUs vest on the basis of achieved revenue growth, while the CEO Performance Option vests on the basis of share price appreciation.
CEO Performance PSUs
The CEO Performance PSUs vest in a single tranche on the earlier of the filing date of the Company’s 2026 Annual Report on Form 10-K and March
15, 2027. The occurrence and extent of vesting depends on the Company’s compound annual growth rate (“CAGR”) achieved with respect to its revenue growth between the year ended December 31, 2022 and the year ending December 31, 2026. The PSUs may vest with respect to i50%
to i200% of the granted number of PSUs, depending on the extent of CAGR achievement. Failure to achieve the CAGR associated with i50%
of achievement would result in no vesting.
Management determined the probable level of vesting using internally-developed forecasts for the relevant period representing the Company’s best estimate for revenue, with a factor applied to calculate the highest level of CAGR evaluated to be probable of occurrence based on that estimate. The Company recognized $i0.4 million and
$i1.1 million of expense related to the CEO Performance PSUs during the three and nine months ended September 30, 2023, respectively.
19
CEO Performance Option
The CEO
Performance Option grants Mr. Capper the right to purchase up to i3,600,000 shares of common stock for $i3.70
per share. The CEO Performance Option vests based on the satisfaction of service and market conditions. Mr. Capper may vest in iiii25///%
of the CEO Performance Option on each of the first four anniversary dates of the date of grant provided that he remains employed by the Company and provided that specified share price goals are achieved at any point between the date of grant and January 31, 2027. There are ithree separate share price goals associated with the CEO Performance
Option. If specified share price goals are met at one level, one-third of the option may vest, at a second level, a further one-third may vest, and at a third level, the full amount of the option may vest. Satisfaction of the share price goals is based on the average of the closing price of the Company’s common stock during any i20 consecutive trading days through January
31, 2027 exceeding the stipulated share price goal. The CEO Performance Option expires on February 1, 2030.
i
The Company estimated the fair value of the awards using a Monte Carlo simulation using the following assumptions:
Assumption
Stock
price on grant date
$
i3.70
Exercise price
$
i3.70
Risk-free
interest rate
i3.58
%
Expected volatility (annualized)
i75.00
%
Dividend
yield
i—
%
Weighted average grant date fair value
$
i1.93
/
The
risk-free interest rate was derived based on the U.S. Treasury Yield curve in effect at the date of grant for maturities of similar periods to the contractual term. The expected volatility was estimated principally based on the Company’s historical daily stock price movements for a term similar in length to the contractual term. The dividend yield was based on the Company’s history of dividends on its common stock. The fair value was determined using an expected term which reflects the anticipated holding and post-vesting behavior pattern, calculated for each individual simulation.
The total grant date fair value of the CEO Performance Option was $i7.0
million. The fair value associated with each tranche of the award will be recognized, straight-line, over the associated requisite service period for that tranche, subject to acceleration if the market condition is met prior to the end of the derived service period. Failure to meet the market condition for an award does not result in reversal of previously-recognized expense, so long as the service is provided for the duration of the required service period. The Company recognized $i0.7 million and $i2.0
million of expense related to the CEO Performance Option during the three and nine months ended September 30, 2023, respectively.
CFO Inducement Grant
On July 5, 2023, the Company announced that Doug Rice was appointed to serve as Chief Financial Officer of the Company, effective that day. Mr. Rice’s compensation included, among other things, a grant of i162,000
PSUs, i97,200 RSUs, and i94,000
stock options (the “CFO Options”), as a material inducement to his hiring.
The PSUs vest based on a ithree-year performance period ending on December 31, 2025 based upon the achievement of specified performance conditions, subject to Mr. Rice’s continued employment, except in the case of Mr. Rice’s death or disability. The awards can vest between i50%
and i150% of the original number of PSUs, depending on actual performance. Vesting is limited to i100%
of the award in the event that certain share price conditions are not achieved. The total grant date fair value of the PSUs was $i1.5 million.
The RSUs vest in three equal tranches on each of the first three anniversary dates of the grant date, provided Mr. Rice remains in continuous service with the Company. The total grant date fair value of
the RSUs was $i0.6 million.
The CFO Options vest in four equal tranches on each of the first four anniversary dates of the grant date, subject to Mr. Rice’s continued employment. The CFO Options expire on July 5, 2030. The total grant date fair value of the CFO Options was $i0.4 million.
20
11. iIncome
Taxes
The effective tax rates for the Company were i6.5% and (i0.6)% for the three months ended September 30,
2023 and 2022, respectively. The effective tax rates for the Company were i10.7% and (i0.6)% for the
nine months ended September 30, 2023 and 2022, respectively. The effective tax rates for 2023 reflect the utilization of net operating losses and certain tax credits. The effective tax rates for 2022 reflect net operating losses offset by a valuation allowance.
12. iSupplemental Disclosure of Cash Flow and Non-cash Investing and Financing Activities
i
Selected
cash payments, receipts, and non-cash activities are as follows (in thousands):
Issuance
of shares pursuant to employee stock purchase plan
i1,368
i—
Purchases
of equipment in accounts payable
i126
i353
Right
of use assets arising from operating lease liabilities
i—
(i37)
/
13. iCommitments
and Contingencies
Nordic Agreement
In June 2022, the Company entered into a collaboration agreement (the “Nordic Agreement”) with Nordic Bioscience Clinical Development A/S (“NBCD”) to provide full operational support for the Company’s KOA clinical trial program. Under the terms of the Nordic Agreement, the Company was obligated to pay $i10.2
million upon the achievement of specified milestones over the course of the clinical trial. In July 2023, the Company terminated the Nordic Agreement, in accordance with which the Company is obligated to reimburse NBCD for services performed through the effective termination date and for non-cancelable obligations reasonably incurred prior to that date. In addition, the Company and NBCD have certain regulatory obligations for all trial participants enrolled in the study prior to the suspension of clinical trial activities. Refer to Note 16, “Restructuring,” for additional discussion.
Litigation
and Regulatory Matters
In the ordinary course of business, the Company and its subsidiaries may be a party to pending and threatened legal, regulatory, and governmental actions and proceedings (including those described below). In view of the inherent difficulty of predicting the outcome of such matters, particularly where the plaintiffs or claimants seek very large or indeterminate damages or where the matters present novel legal theories or involve a large number of parties, the Company generally cannot predict what the eventual outcome of the pending matters will be, what the timing of the ultimate resolution of these matters will be, or what the eventual recovery,
loss, fines or penalties related to each pending matter may be. The Company’s unaudited condensed consolidated balance sheet as of September 30, 2023 reflects the Company’s current best estimate of probable losses associated with these matters, including costs to comply with various settlement agreements, where applicable. For more information regarding the Company’s legal proceedings, refer to Note 16, “Commitments and Contingencies” in the 2022 Form 10-K.
The following is a description of certain litigation and regulatory matters to which the Company is a party:
Securities Class Action
On January 16, 2019, the United States District Court for the Northern District of Georgia entered an order consolidating itwo
purported securities class actions (MacPhee v. MiMedx Group, Inc., et al. filed February 23, 2018 and Kline v. MiMedx Group, Inc., et al. filed February 26, 2018). The order also appointed Carpenters Pension Fund of Illinois (“CPFI”) as lead plaintiff. On May 1, 2019, CPFI filed a consolidated amended complaint, naming as defendants the Company, Michael J. Senken, Parker H. “Pete” Petit, William C. Taylor, Christopher M. Cashman and Cherry Bekaert & Holland LLP. The amended complaint (the “Securities Class Action Complaint”) alleged violations of Section 10(b) of the Securities Exchange Act of 1934, as amended (the “Exchange
Act”), Rule 10b-5 promulgated thereunder, and Section 20(a) of the Exchange Act. It asserted a class period of March 7, 2013 through June 29, 2018. Following the filing of motions to dismiss by the various defendants, CPFI was granted
21
leave to file an amended complaint. CPFI filed its amended complaint against the Company, Michael J. Senken, Parker H. Petit, William C. Taylor, and Cherry Bekaert & Holland (Christopher Cashman was dropped as a defendant) on March 30, 2020. The defendants filed motions
to dismiss on May 29, 2020. On March 25, 2021, the Court granted defendants’ respective motions to dismiss, finding that CPFI lacked standing to bring the underlying claims and also could not establish loss causation because it sold all of its shares in the Company prior to any corrective disclosures, and dismissed the case. On April 22, 2021, CPFI filed a motion for reconsideration of the dismissal and for leave to amend to add a new plaintiff to attempt to cure the standing and loss causation issues. On January 28, 2022, the Court denied CPFI’s motion to reconsider and motion to substitute class representative. On February 25, 2022, CPFI
filed a Notice of Appeal in the 11th Circuit Court of Appeals. On July 10, 2023, the Court of Appeals affirmed the District Court’s dismissal of the case and the denial of the motion for leave to amend. On July 31, 2023, CPFI filed a petition for rehearing en banc, which was denied on September 6, 2023.
Welker v. MiMedx, et. al.
On November 4, 2022, Troy Welker and Min Turner, former option holders of the Company, brought a lawsuit in
Fulton County State Court against the Company, former directors Terry Dewberry and Charles Evans, and former officers Parker H. “Pete” Petit, William C. Taylor, and Michael Senken alleging violations of the Georgia Racketeer Influenced and Corrupt Organizations (“RICO”) Act against all defendants, and conspiracy to violate the Georgia RICO Act and breach of fiduciary duty against the individual defendants. The Company is defending against the allegations and removed the case to the United States District Court for the Northern District of Georgia. Plaintiffs filed a motion to remand back to state court, which was granted. The Company has filed its answer and
a motion to dismiss, which is currently pending.
Former Employee Litigation and Related Matters
On January 12, 2021, the Company filed suit in the Circuit Court of the Eleventh Judicial District in and for Miami-Dade County, Florida (MiMedx Group, Inc. v. Petit, et. al.) against its former CEO, Parker H. “Pete” Petit, and its former COO, William C. Taylor, seeking a determination of its rights and obligations under indemnification agreements with Petit and Taylor following a federal jury’s guilty verdict against Petit for securities fraud and Taylor for conspiracy to commit securities fraud. The
Company is seeking a declaratory judgment that it is not obligated to indemnify or advance expenses to Petit and Taylor in connection with certain cases to which Petit and Taylor are parties and also seeking to recoup amounts previously paid on behalf of Petit and Taylor in connection with such cases. On April 22, 2021, Petit and Taylor filed an answer and asserted counterclaims against the Company alleging breach of their indemnification agreements, breach of the covenant of good faith and fair dealing with respect to their indemnification agreements, and seeking a declaration that the Company remains obligated to indemnify and advance fees in connection with certain cases. Petit and Taylor simultaneously also filed a motion seeking to compel
the Company to advance and reinstate its payments of Petit and Taylor’s legal expenses. The Company opposed Petit and Taylor’s motion and a hearing was set for June 23, 2021. At the joint request of the parties, the hearing was cancelled to allow the parties to attend a mediation to attempt a resolution of this matter; such mediation was held on August 11, 2021.
Following the mediation, the Company and Mr. Taylor reached an agreement to settle the matter between them. Negotiations with Mr. Petit are ongoing.
Other
Matters
Under the Florida Business Corporation Act and agreements with its current and former officers and directors, the Company is obligated to indemnify its current and former officers and directors who are made party to a proceeding, including a proceeding brought by or in the right of the corporation, with certain exceptions, and to advance expenses to defend such matters. The Company has previously borne substantial costs to satisfy these indemnification and expense advance obligations and may continue to incur such costs in the future. Costs incurred pursuant to these agreements are included in investigation, restatement and related expense in the unaudited condensed consolidated statements of operations.
In
addition to the matters described above, the Company is a party to a variety of other legal matters that arise in the ordinary course of the Company’s business, none of which are deemed to be individually material at this time. Due to the inherent uncertainty of litigation, there can be no assurance that the resolution of any particular claim or proceeding would not have a material adverse effect on the Company’s business, results of operations, financial position or liquidity.
14. iRevenue
Net
Sales by Site of Service
The Company has ithree sites of service for its products (1) Hospital settings and wound care clinics, which are stable reimbursement settings in which products are used for surgical applications, (2) Private offices, which generally represents
22
doctors
and practitioners with independent operations, and (3) Other, which includes federal facilities, international sales, and other sites of service.
i
Below is a summary of net sales by site of service (in thousands):
The
Company did not have significant foreign operations or a single external customer from which 10% or more of revenues were derived during the three or nine months ended September 30, 2023 or 2022.
Net Sales by Product
The Company has itwo primary classes of products: (1) Advanced Wound Care, or
Section 361, products, consisting of its tissue and cord sheet allograft products as well as certain particulate products subject to regulation under Section 361 of the Public Health Service Act and related regulations (“Section 361”), and (2) Section 351 products, consisting of the Company’s micronized and certain other particulate products subject to regulation under Section 351 of the Public Health Service Act and related regulations (“Section 351”). Advanced Wound Care is further disaggregated between the Company’s Tissue/Other and Cord products.
Below is a summary of net sales by class of product (in thousands):
(1)
Revenue recognized from collections relating to revenue transactions for which performance obligations were fulfilled prior to October 1, 2019, the date at which the Company changed its pattern of revenue recognition, for the three and nine months ended September 30, 2022 of $i0.1 million and $i0.2 million,
respectively, which were separately presented in previously-issued financial statements, are presented as part of Section 351 in the table above.
15. iSegment Information
The Company had iitwo/
reportable segments during the three and nine months ended September 30, 2023: Wound & Surgical and Regenerative Medicine.
•Wound & Surgical focused on the Advanced Wound Care and Surgical Recovery markets through the sale of the Company’s portfolio of products and product development to serve these primary end markets. Its platform technologies include tissue allografts derived from human placental membrane (EPIFIX®, AMNIOFIX®, and AMNIOEFFECT®), tissue allografts derived from human umbilical cord (EPICORD® and AMNIOCORD®), and a particulate extracellular matrix derived from human placental disc (AXIOFILL®). This segment is also responsible for international sales of the
Company’s Section 351 products.
•Prior to June 20, 2023, Regenerative Medicine focused solely on Regenerative Medicine technologies, specifically progressing the Company’s placental biologics platform towards registration as an FDA-approved biological drug. On June 20, 2023, the Company announced a plan to disband the Regenerative Medicine business unit and suspended its Knee Osteoarthritis clinical trial program. The Company is actively managing wind-down activities for its Regenerative Medicine
business unit, primarily related to regulatory obligations associated with its clinical trial. The Company expects that these activities will materially conclude in the fourth quarter of 2023.
23
i
The accounting policies of the segments were the same as the Company’s accounting policies. See Note 2, “Significant
Accounting Policies,” included in the 2022 Form 10-K.
The Company evaluated the performance of its segments and allocated resources based on segment contribution, defined as net sales less (i) cost of sales, (ii) selling, general and administrative expense, (iii) research and development expense, (iv) amortization of intangible assets, and (v) restructuring. The only components which comprised income (loss) before income tax provision that were not included in operating income (loss) were interest expense, net and other expense, net.
The Company did not allocate any assets to the reportable segments. No asset information was reported or disclosed to the chief operating decision maker in the financial
information for each segment.
i
Net sales and segment contribution by each reportable segment for the three months ended September 30, 2023 were as follows (in thousands):
Wound
& Surgical
Regenerative Medicine
Corporate & Other
Consolidated
Net sales
$
i80,376
$
i—
$
i1,336
$
i81,712
Cost
of sales
i13,305
i—
i1,485
i14,790
Selling,
general and administrative expense
i38,687
i—
i13,884
i52,571
Research
and development expense
i3,175
i—
i—
i3,175
Restructuring
i—
i208
i—
i208
Amortization
of intangible assets
i—
i—
i190
i190
Segment
contribution
$
i25,209
$
(i208)
Investigation,
restatement and related expense
(i38)
Operating
income
$
i10,816
Supplemental information
Depreciation
expense
$
i423
$
i—
$
i230
$
i653
Share-based
compensation
$
i1,902
$
i—
$
i2,486
$
i4,388
/
Net
sales and segment contribution by each reportable segment for the three months ended September 30, 2022 were as follows (in thousands):
Wound & Surgical
Regenerative Medicine
Corporate
& Other
Consolidated
Net sales
$
i66,873
$
i—
$
i816
$
i67,689
Cost
of sales
i11,159
i—
i1,029
i12,188
Selling,
general and administrative expense
i35,530
i—
i17,945
i53,475
Research
and development expense
i1,680
i4,273
i—
i5,953
Amortization
of intangible assets
i—
i—
i175
i175
Segment
contribution
$
i18,504
$
(i4,273)
Investigation,
restatement and related expense
i3,001
Operating loss
$
(i7,103)
Supplemental
information
Depreciation expense
$
i451
$
i36
$
i344
$
i831
Share-based
compensation
$
i1,945
$
i347
$
i80
$
i2,372
24
Net
sales and segment contribution by each reportable segment for the nine months ended September 30, 2023 were as follows (in thousands):
Wound & Surgical
Regenerative Medicine
Corporate
& Other
Consolidated
Net sales
$
i231,466
$
i—
$
i3,179
$
i234,645
Cost
of sales
i37,373
i—
i3,419
i40,792
Selling,
general and administrative expense
i114,853
i—
i41,920
i156,773
Research
and development expense
i6,330
i11,838
i—
i18,168
Restructuring
i—
i3,464
i—
i3,464
Amortization
of intangible assets
i—
i—
i570
i570
Segment
contribution
$
i72,910
$
(i15,302)
Investigation,
restatement and related expense
i4,652
Operating
income
$
i10,226
Supplemental information
Depreciation
expense
$
i1,208
$
i135
$
i711
$
i2,054
Share-based
compensation
$
i5,130
$
i259
$
i7,404
$
i12,793
Net
sales and segment contribution by each reportable segment for the nine months ended September 30, 2022 were as follows (in thousands):
Wound & Surgical
Regenerative Medicine
Corporate
& Other
Consolidated
Net sales
$
i191,297
$
i—
$
i2,169
$
i193,466
Cost
of sales
i31,126
i—
i2,821
i33,947
Selling,
general and administrative expense
i108,256
i—
i50,582
i158,838
Research
and development expense
i6,068
i11,361
i—
i17,429
Amortization
of intangible assets
i—
i—
i519
i519
Segment
contribution
$
i45,847
$
(i11,361)
Investigation,
restatement and related expense
i8,771
Operating loss
$
(i26,038)
Supplemental
information
Depreciation expense
$
i1,364
$
i120
$
i1,065
$
i2,549
Share-based
compensation
$
i5,609
$
i910
$
i4,279
$
i10,798
16.
iRestructuring
On June 20, 2023, the Company announced that it was suspending all activities associated with its knee osteoarthritis clinical trial program and disbanding its Regenerative Medicine business unit (the “Restructuring”). This was the result of the Company’s decision to focus on its Wound
& Surgical business to drive profitability and cash flows. The Company anticipates that activities related to the Restructuring will materially conclude in the fourth quarter of 2023. Expenses associated with the Restructuring are recognized as the associated liabilities are incurred in an amount equal to the fair value to settle the liability.
Severance
As part of the Restructuring, the Company separated from certain employees whose primary responsibilities were toward the advancement of the Company’s knee osteoarthritis clinical trial program. The
Company offered an aggregate of severance arrangements of $i2.1 million to separated employees during the nine months ended September 30, 2023. This amount was recognized as part of research and development expense on the unaudited condensed consolidated statements of operations for the nine months ended September 30, 2023, as these arrangements were determined not to qualify for accounting as a one-time separation benefit under ASC 420. Of the total severance amount, $i1.8 million
was paid out during the three months ended September 30, 2023. The remaining $i0.3 million is reflected in accrued compensation on the unaudited condensed consolidated balance sheet as of September 30, 2023.
Impairments
25
On June 23,
2023, the Company provided notice to NBCD of the termination of the Nordic Agreement. As part of the Restructuring, the Company no longer anticipated that it would receive any benefits pursuant to the clinical trial program. Accordingly, it recognized an impairment of clinical trial assets related to the Nordic Agreement and all pass-through vendors of $i2.1 million during the nine months ended months ended September 30,
2023, respectively. This amount is reflected as part of restructuring expense on the unaudited condensed consolidated statements of operations for the nine months ended months September 30, 2023.
In addition, the Company recorded goodwill impairment for $i0.5 million, reflecting all goodwill assigned to the Regenerative Medicine reporting unit. This amount is reflected as part of restructuring expense on the unaudited condensed consolidated
statements of operations for the nine months ended September 30, 2023. See Note 6,“Goodwill and Intangible Assets, Net,” for further information regarding the impairment of goodwill due to the disbanding of the Company’s Regenerative Medicine business unit.
The Company incurred $i0.2 million
and $i0.8 million in expenses to wind-down certain contracts related to the knee osteoarthritis clinical trial program for the three and nine months ended September 30, 2023, respectively. This amount generally reflects the Company’s expectation both for its obligation to carry out the protocol for the patients enrolled in the trial prior to the suspension of activities and close-out costs related to the
trial. During the three months ended September 30, 2023, the Company incurred additional charges $i0.2 million under certain contracts that was offset by a decrease in the number of visits required to wind-down the study and payments totaling $i0.2 million.
Contract termination costs are reflected as part of accrued expenses on the unaudited condensed consolidated balance sheet as of September 30, 2023 and as part of restructuring expense on the unaudited condensed consolidated statements of operations for the three and nine months ended September 30, 2023.
17. iSubsequent
Events
Hayfin Preferred Share Repurchase
On October 27, 2023, the Company executed a Securities Purchase Agreement with certain entities managed by or affiliated with Hayfin Capital Management LLP (the “Hayfin Shareholders”) to repurchase i5,000
shares of the Company’s Series B Preferred Stock for $i9.5 million (the “Repurchase”). As part of the Repurchase, the Hayfin Shareholders entered into customary lock-up provisions requiring them to retain the balance of their equity positions for a period of at least one year.
26
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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”)standards in addition to terminal sterilization to produce our allografts.
During the three and nine months ended September 30, 2023, we operated under two defined internal business units: Wound & Surgical and Regenerative Medicine.
The Wound & Surgical business focuses on the Advanced Wound Care and Surgical Recovery markets through sales of our existing product portfolio and product development to serve these primary end markets. This business unit is responsible for substantially all sales of our Advanced Wound Care products, as well as the sale outside the United States of America of our micronized and certain other particulate products subject to regulation under Section
351 of the Public Health Service Act and related regulations (“Section 351”).
On June 20, 2023, we announced a plan to disband our Regenerative Medicine business unit and the suspension of our knee osteoarthritis (“KOA”) clinical trial program (the “Restructuring”) given the substantial uncertainties surrounding clinical trial costs and outcomes, as well as regulatory pathways and timing. The Company anticipates that Restructuring-related activities will materially conclude in the fourth quarter of 2023.
This discussion, which presents our results for the three and nine months
ended September 30, 2023 and 2022, should be read in conjunction with our financial statements and accompanying notes in this Form 10-Q and the financial statements and accompanying notes thereto 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, 2022.
Executive Summary
During the third quarter ended September 30, 2023, the Company experienced broad-based growth
in net sales, with contributions from each of its site-of-service categories. Much of this momentum was driven by strong commercial execution, including the acquisition of new customers and continued uptake in new products we launched in the second half of 2022, despite uncertainty in reimbursement policy for Medicare billings in the Private Office care setting. Recent operating and financial highlights include:
•Third quarter 2023 net sales of $81.7 million, an increase of 20.7% over third quarter 2022.
•GAAP net income of $8.5 million for third quarter 2023.
•Launched EPIEFFECT™, the latest addition to MIMEDX’s portfolio of Advanced Wound Care products.
•Announced $9.5 million repurchase of 5,000
shares of Series B Preferred Stock held by Hayfin Services, LLP (“Hayfin”) and its affiliates.
We recorded net sales for the three months ended September 30, 2023 of $81.7 million, a $14.0 million, or 20.7%, increase compared to the three months ended September 30, 2022, in which we recognized net
sales of $67.7 million. Net sales in all care settings had one fewer shipping day during the three months ended September 30, 2023 compared to the same period in 2022.
Our sales by care setting were as follows (in thousands):
Three
Months Ended September 30,
Change
2023
2022
$
%
Hospital
$
47,350
$
40,174
$
7,176
17.9
%
Private
Office
22,951
19,572
3,379
17.3
%
Other
11,411
7,943
3,468
43.7
%
Total
$
81,712
$
67,689
$
14,023
20.7
%
Net
sales in the Hospital care setting were $47.4 million for the three months ended September 30, 2023, a $7.2 million or 17.9% increase compared to $40.2 million for the three months ended September 30, 2022. The increase was primarily driven by sales of our new products introduced during the third quarter of 2022.
Net sales in the Private Office care setting grew by $3.4 million, or 17.3%, to $23.0 million for the three months ended September 30, 2023, compared to $19.6 million for the three months ended September 30, 2022. The increase reflects general increases in sales volume, driven by strong commercial execution.
Net sales in Other care settings increased by $3.5 million, or 43.7%,
to $11.4 million for the three months ended September 30, 2023, compared to $7.9 million for the three months ended September 30, 2022. The increase was the result of the addition of new customers and general increases in sales volume, driven by strong commercial execution.
Cost of Sales and Gross Profit Margin
Cost of sales for the three months ended September 30, 2023 and 2022 were $14.8 million and $12.2 million, respectively, an increase of $2.6 million, or 21.3%. Increases in cost of sales were driven by increases in sales volume as noted above.
Gross profit margin for the three months ended September
30, 2023 was 81.9% compared to 82.0% for the three months ended September 30, 2022. Gross profit margin was roughly flat versus the prior year period due to improvements in yield, partially offset by production variances.
1 nm=not meaningful
28
Selling, General and Administrative Expense
Selling, general and administrative (“SG&A”) expense for the three months ended September 30, 2023 was $52.6 million, compared to $53.5 million for the three months ended September
30, 2022, a decrease of $0.9 million, or 1.7%. The decrease in SG&A expense was due to decreases in professional service costs and personnel costs. Lower professional services expense resulted from a decline in fees paid to third party advisers during the three months ended September 30, 2022. The decrease in personnel costs reflects the results of our continued cost reduction efforts which began during the third quarter of 2022, together with the impact of higher comparative severance expense associated with the departure of our former CEO in the third quarter of 2022, as well as lower stock-based compensation. These decreases were offset by increases in commissions due to higher sales volumes for three months ended September 30, 2023.
Research and Development Expense
Our
research and development expense decreased by $2.8 million, or 46.7%, to $3.2 million for the three months ended September 30, 2023, compared to $6.0 million for the three months ended September 30, 2022. The decline resulted from the disbanding of our Regenerative Medicine business unit lowering personnel and clinical trial expenses for three months ended September 30, 2023 and from decreases in expenses associated with the testing and development of new products launched during the three months ended September 30, 2022.
Restructuring Expense
Restructuring expense of $0.2 million for the three months ended September 30, 2023 reflects
certain charges related to our Regenerative Medicine business unit wind-down activities, primarily associated with clinical trial regulatory obligations.
Investigation, Restatement and Related Expense
Investigation, restatement and related expense for the three months ended September 30, 2023 was immaterial compared to $3.0 million for the three months ended September 30, 2022. The decrease was primarily related to negotiated reductions in legal fees previously incurred under indemnification agreements with certain former members of management year-over-year. In addition, following the end of a legal proceeding, expenses under our last material indemnification agreement with our former chief financial officer substantially ceased during the third quarter of 2023.
Amortization
of Intangible Assets
Amortization expense related to intangible assets was $0.2 million for each of the three months ended September 30, 2023 and 2022.
Interest Expense, Net
Interest expense, net was $1.7 million for the three months ended September 30, 2023 compared to $1.3 million for the three months ended September 30, 2022, an increase of $0.4 million, or 32.3%. The increase was the result of year-over-year increases in the reference market interest rates on our outstanding debt.
Income Tax Provision Benefit (Expense)
The effective tax rates for the
Company were 6.5% and (0.6)% for the three months ended September 30, 2023 and September 30, 2022, respectively. The Company's net income is partially offset by net operating losses and research and development tax credits, in accordance with the 2018 Tax & Jobs Act legislation.
We recorded net sales for the nine months ended September 30, 2023 of $234.6 million, a $41.2 million, or 21.3%, increase compared to the nine months ended September 30, 2022, for which we recorded net sales of $193.5 million. Net sales for the nine months ended September 30, 2023 in all sites of service benefited from the alleviation of the Omicron wave of the Covid-19 Pandemic, which adversely impacted sales during the nine months ended September 30, 2022. There was one fewer shipping day during the nine months ended September 30, 2023 compared to the same period in 2022.
Our sales by care setting were as follows (in thousands):
Nine
Months Ended September 30,
Change
2023
2022
$
%
Hospital
$
136,108
$
116,081
$
20,027
17.3
%
Private
Office
68,188
54,768
13,420
24.5
%
Other
30,349
22,617
7,732
34.2
%
Total
$
234,645
$
193,466
$
41,179
21.3
%
Net
sales in the Hospital care setting were $136.1 million for the nine months ended September 30, 2023, a $20.0 million or 17.3% increase compared to $116.1 million for the nine months ended September 30, 2022. The increase was primarily driven by sales of our new products introduced during the third quarter of 2022.
Net sales in the Private Office care setting grew by $13.4 million, or 24.5%, to $68.2 million for the nine months ended September 30, 2023, compared to $54.8 million for the nine months ended September 30, 2022. The increase reflects general increases in sales volume, driven by strong commercial execution.
Net sales in Other care settings increased by $7.7 million, or 34.2%,
to $30.3 million for the nine months ended September 30, 2023 compared to $54.8 million for the nine months ended September 30, 2022. The increase was primarily driven by the addition of new customers in certain sites of service and sales of EPIFIX in Japan.
Cost of Sales and Gross Profit Margin
Cost of sales for the nine months ended September 30, 2023 was $40.8 million, an increase of $6.8 million, or 20.2%, compared to $33.9 million for the nine months ended September 30, 2022. Increases in cost of sales were driven by increases in sales volume noted above.
Gross profit margin for the nine months ended September
30, 2023 and 2022 was 82.6% and 82.5%, respectively.
Selling, General and Administrative Expense
30
SG&A expense for the nine months ended September 30, 2023 decreased by $2.1 million, or 1.3%, to $156.8 million, compared to $158.8 million for the nine months ended September 30, 2022. The decrease was driven by decreases in professional services expenses, personnel costs and bad debt expense. The decrease in professional services expenses reflects $2.1 million in consulting and advisory expenses related to a withhold the vote campaign launched by a shareholder together
with fees paid to other third-party advisers in 2022. There were no similar activities during 2023. The decrease in personnel costs reflects the results of our continued cost reduction efforts that began in the third quarter of 2022. Increases in stock based compensation were offset by reduced severance expense in 2023 compared to the expense associated with the departure of our former CEO in 2022. Finally, the decrease in bad debt expense was the result of the greater deterioration of credit for certain specific customers in 2022 compared to 2023.
These decreases were offset in part by increases in sales commissions, driven by increases in sales volumes, as well as, greater travel expenses, reflecting the removal of COVID-19 travel restrictions that were in place in 2022.
Research and Development Expense
Our research and development expenses
increased by $0.7 million, or 4.2%, to $18.2 million for the nine months ended September 30, 2023, compared to $17.4 million for the nine months ended September 30, 2022. The increase reflects clinical trial expenses ramping up in the first half of 2023, including associated personnel costs offset in part by the disbanding of our Regenerative Medicine business unit from June 20, 2023.
Investigation, Restatement and Related Expense
Investigation, restatement and related expenses for the nine months ended September 30, 2023 decreased by $4.1 million, or 47.0%, to $4.7 million compared to $8.8 million for the nine months ended September 30,
2022. The decrease was primarily related to negotiated reductions in legal fees previously incurred under indemnification agreements with certain former members of management year-over-year. In addition, following the end of a legal proceeding, expenses under our last material indemnification agreement substantially ceased during the third quarter of 2023.
Amortization of Intangible Assets
Amortization expense increased from $0.5 million for the nine months ended September 30, 2022 to $0.6 million for the nine months ended September 30, 2023.
Restructuring Expense
Restructuring expense of $3.5 million for the nine months ended September 30, 2023
reflects certain charges related to the disbanding of our Regenerative Medicine business unit, including write-downs of prepaid clinical trial assets of $2.1 million, charges for the wind-down of our KOA clinical trial program of $0.8 million, and impairment of goodwill of $0.5 million.
Interest Expense, Net
Interest expense, net was $4.9 million for the nine months ended September 30, 2023 compared to $3.6 million for the nine months ended September 30, 2022. The increase was the result of year-over-year increases in the reference market interest rates on our outstanding debt.
Income Tax Provision Benefit (Expense)
The effective tax rates for the
Company were 10.7% and (0.6)% for the nine months ended September 30, 2023 and 2022, respectively. The Company's net income is partially offset by prior net operating losses and research and development tax credits, in accordance with the 2018 Tax & Jobs Act legislation.
Discussion of Cash Flows
Operating Activities
Net cash provided by operating activities during the nine months ended September 30, 2023 was $16.5 million, compared to cash used of $12.3 million for the nine months
ended September 30, 2022. The change was primarily the result of year-over-year increases in net sales, which drove increases in collections from customers, as well as year-over-year decreases in operating expenses.
Investing Activities
31
Net cash used for investing activities during the nine months ended September 30, 2023 was $1.7 million, compared to $1.0 million for the nine months ended September 30, 2022. This increase reflects a $0.7 million year-over-year increase in capital expenditures.
Financing Activities
Net
cash provided by financing activities during the nine months ended September 30, 2023 was $0.4 million. Cash used in financing activities was $0.6 million during the nine months ended September 30, 2022. We ceased withholding shares to satisfy employee tax obligations upon vesting of equity awards in 2022. Accordingly, we did not have any cash paid for tax withholdings during the nine months ended September 30, 2023, compared to $1.2 million for the nine months ended September 30, 2022. This effect was offset by $0.6 million of cash receipts from option exercises in the nine months ended September 30, 2022, compared to $0.4 million of cash receipts from option exercises in the nine months ended September 30,
2023.
Liquidity 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.
As of September 30, 2023, we had $81.2 million of cash and cash equivalents, total current assets of $154.5 million and total current liabilities of $43.6 million, reflecting a current ratio of 3.5.
We are currently paying our obligations in the ordinary course of business.
We
anticipate cash requirements related to the following items within one year of the date of the filing of this Quarterly Report:
•investments to advance and expand our existing product portfolio;
•expenditures required to achieve necessary regulatory approval and establish operations in new markets deemed strategically important toward the enhancement of our global footprint;
•costs to wind-down certain contracts associated with our KOA clinical trial program; and
•severance payments related to certain former members of management and other employees.
We have analyzed
our ability to address these 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
On June 30, 2020, we entered into a Loan Agreement with, among others, Hayfin Services, LLP, (“Hayfin”) an affiliate of Hayfin Capital Management, LLP (as amended, the “Hayfin Loan Agreement”), under which Hayfin 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”).
No principal payments are due on the Term Loan until the Maturity Date. Interest is payable on the Term Loan for principal outstanding quarterly through the Maturity Date. Pursuant to Amendment No. 2 to the Loan Agreement entered into in June 2023, interest on any borrowings under the Term Loan is equal to the Secured Overnight Finance Rate (“SOFR”), plus a fallback provision of 0.15%, subject to a floor of 1.5%, plus a margin of 6.75%. An additional 3.0% margin would be applied to the interest rate upon the occurrence of an Event of Default, as defined in the Hayfin Loan Agreement. As of September 30, 2023, the Term Loan carried an interest rate of 12.3%.
The
Hayfin Loan Agreement contains certain financial covenants, including a Minimum Consolidated Total Net Sales covenant, tested quarterly, and a Minimum Liquidity covenant, tested monthly (each as defined). In addition, the Hayfin Loan Agreement includes certain negative covenants and events of default customary for facilities of this type. Upon the occurrence of such events of default, all outstanding loans under the Hayfin Loan Agreement may be accelerated or the lenders’ commitments terminated. The Hayfin Loan Agreement also specifies mandatory prepayments based on a percentage of Excess Cash Flow (as defined in the Hayfin Loan Agreement, if such is generated), as well as upon the occurrence of other events specified in the Hayfin Loan Agreement.
32
As of September 30,
2023, we were in compliance with all financial covenants under the Hayfin Loan Agreement. A breach of a financial covenant in the Hayfin Loan Agreement, if uncured or unable to be cured, would likely result in an event of default that could trigger the lenders’ remedies, including acceleration of the entire principal balance of the loan as well as any applicable prepayment premiums.
Series B Preferred Stock
We have 100,000 shares of Series B Preferred Stock outstanding as of September 30, 2023.
The Series B Preferred Stock accumulates dividends at a rate of 6.0% 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, we may elect to accrue the dividend owed to shareholders. Dividend balances accumulate at the prevailing dividend rate for each dividend period during 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. The Series B Preferred Stock converts automatically at any time after July 2, 2023, provided that the volume-weighted average price of a share of our common stock is $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. If we do not exercise this right, holders of the Series B Preferred Stock will have the option to (1) require us to repurchase any or all of their then-outstanding shares of Series B Preferred Stock in an amount equal to the liquidation preference plus unpaid dividends, or (2) convert the Series B Preferred stock into common stock and receive their pro rata consideration thereunder.
We have not declared or paid any cash dividends on our Series B Preferred Stock since issuance. Dividends accumulated but not paid as of September 30, 2023 were $19.0 million. The Series B Preferred Stock was convertible into 30,906,441 shares of common stock as of September 30, 2023
Share
Repurchases
We did not repurchase any shares of our common stock during the three months ended September 30, 2023. 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.
On October 27, 2023, we repurchased 5,000 shares of Series B Preferred Stock held by certain entities managed by or affiliated with Hayfin Capital Management, LLP for $9.5 million in cash.
Contractual Obligations
Except as described
below and as previously disclosed in our Quarterly Report for the three months ended March 31, 2023, there were no significant changes to our contractual obligations during the nine months ended September 30, 2023 from those disclosed in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results from Operations”, in our 2022 Form 10-K.
Nordic Agreement
In June 2022, we entered into a collaboration agreement (the “Nordic Agreement”) with Nordic Bioscience Clinical Development A/S (“NBCD”) to provide full operational support for our KOA clinical trial program. Under the terms of the Nordic Agreement, we were obligated to pay
$10.2 million upon the achievement of specified milestones over the course of the clinical trial.
During the three months ended September 30, 2023, the Company terminated the Nordic Agreement. Pursuant to the Nordic Agreement, the Company is obligated to reimburse NBCD for services performed through the effective termination date and for non-cancelable obligations reasonably incurred prior to that date. In addition, the Company and NBCD have certain regulatory obligations to all trial participants enrolled in the study prior to the suspension of clinical trial activities. Refer to Note 16, “Restructuring,”
for additional discussion.
33
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 2022 Form 10-K.
In addition, during the period covered by this Quarterly Report, we identified
the following critical accounting estimates which were not material to the 2022 Form 10-K.
Share-Based Compensation Expense
Description
We measure stock options and other stock-based awards granted to employees based on their fair value on the date of the grant and recognize the assessed fair value as share-based compensation expense, straight-line, over the requisite service period to achieve the award based on the vesting requirements, to the extent that the achievement of performance conditions associated with such awards, as applicable, are determined to be “probable.”
Judgments and Uncertainties
Share-based payment arrangements are measured at fair value on the grant date. The fair value of equity incentive awards, which are usually shares
of our common stock, are generally measured at the last trading price on the grant date.
The fair value of stock options is calculated using an appropriate valuation technique. The valuation technique generally requires us to make certain assumptions, including (1) the fair value of the common stock, (2) the expected volatility of our stock price, (3) the expected term of the award, (4) the risk-free interest rate, and (5) expected dividends. Our expectation for volatility is generally based on historical daily share price movements, with certain adjustments for abnormal share price activity associated with events which are not expected to recur during the expected term. The expected term of the award requires us to make assumptions regarding the post-vesting behavior of the recipients, which is based off available evidence. Our assumption for the risk-free rate is derived from prevailing U.S. Treasuries with similar terms
to the award on the grant date. Our assumption for dividends is derived from our own dividend history.
To the extent that any such awards are subject to a market condition, the resolution of the market condition is reflected in the fair value of the grant date. Further, the requisite service period associated with an award containing a market condition must derive the service period over which the market condition is expected to be met. Fair value and derived service periods are generally determined using a Monte Carlo simulation.
Subsequent to the determination of fair value, we recognize expense to the extent we evaluate that performance conditions associated with share-based payment arrangements are probable of occurring. In certain cases where the extent of vesting is based on the extent of achievement, we are required to determine the extent to which achievement is probable.
We determine probable performance based on actual performance to date, internally-developed budgets and forecasts for periods covered by the relevant performance condition, and other evidence deemed relevant to this determination. We re-evaluate our probability assessments at least quarterly, with any revisions reflected as a cumulative adjustment to expense. Because of the cumulative nature of adjustments, during any period in which we re-evaluate probability, the adjustments could significantly impact our results of operations.
Sensitivity of Estimate to Change
During the nine months ended September 30, 2023, we granted stock options with a fair value on the grant date of $7.0 million. This estimate was determined using a Monte Carlo simulation using the following inputs:
Assumption
Stock
price on grant date
$
3.70
Exercise price
$
3.70
Risk-free interest rate
3.58
%
Expected volatility (annualized)
75.00
%
Dividend yield
—
%
Weighted average grant date
fair value
$
1.93
34
The granted stock options reflected an expected term based on our expectations for exercise activity. Changes in any of these assumptions could result in a revised estimate of fair value of the granted stock options, which would impact the amount of expense recognized over the requisite service period, and could materially affect the total fair value or the amount of expense recognized in a particular period.
In addition, cumulative expense recognized for unvested performance stock unit awards was $1.6 million as of September 30,
2023. This is based on determinations regarding probable resolution or the extent of probable resolution of relevant performance conditions to earn such awards. If it is subsequently determined that the performance conditions associated with these awards are no longer probable of being met, or performance conditions which were determined to be probable of occurring do not actually occur, we could reverse up to this amount of expense in the period such determination is made. Furthermore, if probable levels of achievement are later determined to be greater, or actual achievement exceeds the level of achievement assessed as probable, we could record increases to expense to reflect this level of achievement. The amount of any incremental expense recognition or reversal will depend on the magnitude and timing of such change in estimate.
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.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
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 is determined quarterly based on the 3-month SOFR rate, subject to a floor of 1.5%. As of September 30,
2023, the interest rate on our Term Loan was 12.3%. A 100 basis point change in SOFR, to the extent that such change would not cause SOFR to be below the 1.5% floor, would change our interest expense by $0.5 million on an annualized basis.
During the three and nine months ended September 30, 2023, we incurred $0.4 million and $1.3 million in incremental interest expense compared to the equivalent periods in the prior year resulting from increases in the relevant reference rate during the intervening period.
Item 4. Controls and Procedures
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 September 30, 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
35
PART
II – OTHER INFORMATION
Item 1. Legal Proceedings
The Company and its subsidiaries are parties to numerous claims and lawsuits arising in the ordinary course of its business activities, some of which involve claims for substantial amounts. The ultimate outcome of these suits cannot be ascertained at this time. The description of our the Welker v. MiMedx, et. Al case contained in Note 13,
“Commitments and Contingencies,” to the unaudited condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report, is incorporated herein by reference.
Item 1A. Risk Factors
There have been no material changes to the Company’s risk factors included in its 2022 Form 10-K.
Item 2. Unregistered
Sales of Equity Securities and Use of Proceeds
(a) None.
(b) None.
(c) None.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other
Information
Insider trading arrangements and policies
During the three months ended September 30, 2023, no director or officer of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
