MiMedx Group, Inc. (MDXG) Earnings Call Transcript & Summary

Greetings. Welcome to MiMedx Group Corporate Update. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to Hilary Dixon, Vice President of Investor Relations and Corporate Communications. Thank you. You may begin.

Thank you, operator. Good morning, and welcome to the MiMedx 2019 Full Year and 2020 First Quarter Conference Call. With me today are Tim Wright, MiMedx Chief Executive Officer; and Pete Carlson, MiMedx Chief Financial Officer. They will provide comments on our financial results from the year ended December 31, 2019, and the results of our first quarter ended March 31, 2020. Pete will also provide some comments on the financing transactions we announced on July 2. We do not plan to take questions on today's call. A few logistical comments. We recently issued a press release relating to our 2019 financial statements as well as a press release relating to our financial statements for the first quarter of 2020. We also issued a press release that announced the closing of concurrent private equity and debt financings. Remarks during today's call include forward-looking statements. Although the company believes that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, actual outcomes and results are subject to risks and uncertainties and may differ materially from those anticipated due to many factors. Listeners are directed to the cautionary notes in the press releases I mentioned as well as the risk factors set forth in MiMedx's 2019 annual report on Form 10-K for factors that could cause actual outcomes and results to differ materially from those reflected in the forward-looking statements. The company assumes no obligation to update or supplement any forward-looking statements, except as required by law. With that, I'm now pleased to turn the call over to MiMedx Chief Executive Officer, Tim Wright. Tim?

Thank you, Hilary, and thank you to everyone joining us on the call. As I begin, I'd like to take an opportunity to thank our shareholders, employees and customers who've endured this period of uncertainty in our company's history. Timely dialogue and consistent operational and financial updates are our top priority. We look forward to increasing our communications and are now in a situation where that will be possible. I am proud of the resilience, dedication and effort of our employees and the passion they demonstrate for our patients and our products. Together, we worked hard to move the company beyond the past, and these announcements represent a significant step forward. We recently issued 3 press releases. Let me recap those announcements. First, we announced the concurrent closings of $150 million in private equity and debt financing. The equity financing was led by EW Healthcare Partners, and the debt financing provided by Hayfin Capital management. In conjunction with this financing, Marty Sutter and Bill Hawkins, 2 highly seasoned and accomplished health care industry leaders, have joined our Board of Directors. Second, we announced the filing of our 2019 annual report, which includes our audited financial statements for our most recently completed fiscal year. The company was largely successful in transitioning to revenue recognition on an as-shipped basis, and this reflects the improvements we have made in the company's internal control environment. And then third, we announced the filing of our first quarter 2020 Form 10-Q, which means we are now caught up in our financial reporting. With this announcement, we also communicated that we have initiated the process to apply for -- to relist our common stocks. Each of these mark a significant step forward for the company, for our employees and for us as a community and for the patient care mission that we all share. I joined MiMedx because I believed beyond the troubles that seemed to grab too much attention. I believed in the fundamentals and saw the value in the wound care business and the potential of a promising musculoskeletal pipeline. I was compelled by the early innovative work to develop foundational clinical and scientific evidence that enabled amniotic tissue to reach the market in a safe, commercially viable and logistically feasible way. In short, I thought the company had an excellent platform technology to build upon. Let me share some of the key points that underscore my basic thesis for joining the company. In the United States in 2018, third-party estimates indicate that there were 8.2 million total reported wounds, with 2.9 million of these wounds classified as chronic. Of these wounds that are chronic, we estimate that approximately 35% are candidates for advanced skin substitute product treatment regimens, providing for a total addressable opportunity of approximately $3.3 billion based on our estimates. Many of these patients will face serious complications, including repeated unhealed wounds that may lead to a limb amputation. Within the advanced wound care sector alone, there is a significant unmet patient need due to an aging population and an increasing incidence of obesity and diabetes in the United States. These factors along with other contributing comorbidities lead to a heightened cost of care. The overall cost of treating chronic wounds is rising sharply, and the current annual estimated cost in the United States exceeds $28 billion. Now these demographics extend into the musculoskeletal markets as well. Musculoskeletal pain and dysfunction is a growing cause of chronic pain and disability in the United States. A number of patients do not get adequate relief from the current treatment modalities or do not want the side effects of these modalities. Nonsurgical treatment options and alternatives approaches to pain management are under consideration, and physicians and patients are searching for new products that are safe and effective for the management of their chronic musculoskeletal condition. An example of this would be knee osteoarthritis. These unmet needs are important, and I feel as a health care company, we have an obligation and responsibility to use our best efforts to develop and commercialize these products. I believe we have an opportunity to make a difference for these patients, and in doing so, grow a successful and meaningful health care company. I will update you on our pipeline and manufacturing efforts in a moment. We can make a difference by advancing the underlying placental science and more rigorously establishing the clinical and economic value of our products. We believe this science will shape future regulatory and coverage policy change and better inform the potential of our musculoskeletal pipeline to address other areas of significant unmet clinical need. This should also differentiate the value of our products. Our business certainly has seen plenty of challenges. Quickly, the company's common stock was delisted from NASDAQ. We experienced significant staff turnover through 2019. The marketing and sale of our micronized products faced risk in an unsettled regulatory environment as we approached the end of the FDA's period of enforcement discretion, plus, we needed to get the company back on track, and that required the significant restatement and legal cost that strained our ability to invest in the underlying business. One of our greatest priorities has been strengthening the company's internal controls and culture. With oversight from the Board, the company's management has designed and begun implementing a number of changes in processes and controls. Some of these changes include the creation of an ethics and compliance committee, the adoption of a revised code of business conduct and enhanced training that emphasizes the importance of compliance and avenues to report potential compliance violations. We also permanently hired a new Chief Financial Officer and new accounting officer and strengthened and formalized accounting policies that encompass numerous levels of review. We also improved processes and controls to monitor sales practices and recognize revenue and tighten policies and procedures in governance of customer credit and product returns. Simply stated, we have an entirely new and experienced management team focused on instilling a culture of transparency, accuracy, collaboration and everyday pursuit of operational excellence. These filings provide a transparent reset of where we are at this moment and provide perspective of the challenges facing the business, both financially and operationally. Importantly, these announcements also set the groundwork for our future. I believe we are rebuilding the company, and we have an opportunity to instill operational excellence and also more strategically invest in the key primary growth drivers of our organization: research and development, manufacturing and commercial. I'd like to take a moment to summarize some of the key takeaways from each of our announcements, and then I will turn the call over to Pete Carlson for a review of our financial results. We continue to take actions that focus on our patients, provide business resiliency and restore the company's financial integrity and reputation. Following the December 2019 Food and Drug Administration inspections at both of our processing facilities that measured the company's Compliance with Good Manufacturing Processes, otherwise known as CGMP, the FDA issued a Form 483 for both facilities at the conclusion of each inspection. We provided responses to all the observations and commitments to take corrective actions. I'm pleased to share that all of these remediation actions are now complete. During the past year, significant effort has been made to characterize, understand and assess the company's true state of readiness to file biologic license applications. The regulation of human amniotic tissue as a biologic is not only novel for our category and our company, but also a novel pathway for the FDA as well. We conducted a thorough analysis of our existing IND programs to better understand our current state, including the expected timing and resources needed to improve the probability of technical and regulatory success. We have worked with a number of external advisers in this important effort. We are well advanced in the enrollment of our clinical trials, but that's just one step in the process. We have also taken measures to advance our purity, potency and identity tests to demonstrate consistency and reliability of our manufacturing process through a rigorous focus on basic chemistry, manufacturing and controls. We are communicating proactively with the FDA to refine the necessary steps for our trials, and we are preparing to schedule end-of-phase review meetings. Our RMAT status designation can help -- be very helpful in this effort. We expect to complete enrollment in our Phase III plantar fasciitis trial by October 2020. If the trials are successful, determined to be adequate proof of efficacy and safety and accepted by the FDA following an end-of-phase meeting, we expect to file a BLA in the second half of 2021. We expect the outcome of this trial to help inform additional areas of unmet need for potential clinical studies as we examine the broader utility of our product in other areas of musculoskeletal degeneration. We are well advanced in the enrollment of our Phase IIb knee osteoarthritis trial and have amended the protocol and established an open-label extension to the trial to allow patients to receive a second injection of the active treatment if their pain and function has not resolved or responded regardless of the treatment arm. If this trial is successful and determined to be adequate support for safety and efficacy observations, we expect to request an end-of-Phase IIb meeting with the FDA to discuss next steps, including discussion of our pivotal Phase III clinical trial design and then refine our time lines for this program. At this time, we've completed subject enrollment in our Phase III IND study for Achilles tendinitis, and we anticipate that the last patient visit will occur in the first half of 2021. Data analyzed following a sample size analysis indicated a substantial increase in sample size would be required to observe clinically and statistically significant improvement and separation between treatment and control groups. We do not plan to increase the study size, and instead, we plan to review our options for this program after we have assessed the results of the study. The end-of-phase meetings I've mentioned will help inform our next steps so that we can have more definitive information on timing and expectations for these trials and we can formally communicate this to you and set a realistic view of our program time lines. I look forward to sharing that information with you at the appropriate time. I'm also pleased to share that we've begun efforts to file INDs for AmnioFill and for injectable micronized EpiFix for the treatment of diabetic foot ulcers or other areas of advanced wound care. Both of these filings are anticipated for the second half of 2020, while clinical and study initiation will depend on the FDA feedback from both these programs. I'd like now to turn the call over to Pete Carlson, who can provide an overview of our financial results. Pete?

Thanks, Tim, and good morning, everyone. Thank you for joining us on the call today. I will provide more details on some of the comments Tim shared a few minutes ago. While I am personally disappointed that we did not meet our goal to file in the first half of the year, I am very happy to have filed the 2019 10-K and the first quarter 2020 10-Q and look forward to discussing the business with you going forward. Work has been done to strengthen the company's internal controls, improve liquidity and provide an accurate picture of our business performance. These filings are the culmination of tremendous teamwork and collaboration at all levels of the organization and marked decisive progress for the company. I would like to take a moment and thank all of our teammates for their work on these filings. Ultimately, restoring our financial reputation will enable us to better address the needs of people who can benefit from our products, deliver the level of quality and excellence our customers deserve and elevate the standards of patient care, science and regulatory compliance for the category as a whole. I am pleased to share that the improved internal control environment, including the tone at the top, largely allowed us to transition to revenue new recognition on an as-shipped basis in the third quarter of 2019. Let me take a moment to clarify how revenue is reflected in the 2019 financial statements, and I also encourage you to read the notes to the financial statements for the detail behind these concepts. From January 1 through September 30, 2019, revenue is reflected on a cash basis consistent with the treatment in 2018 Form 10-K. From October 1 forward, revenue is reflected on an as-shipped basis, similar to most companies. That leaves the transactions shipped and billed prior to September 30 but not paid at that date, which totaled approximately $48.9 million. For reference purposes, the amount of transactions shipped and billed but not yet paid at December 31, 2018, was $51.0 million as previously disclosed. Management's review identified $10.3 million for which collection was no longer reasonably assured. The footnotes explaining the accounting policies used for the remaining $38.6 million of transactions shipped and billed prior to September 30, which results in net sales of $21.4 million recorded in the third quarter of 2019 and net sales of $8.2 million recorded in the fourth quarter of 2019 for total net sales of $29.6 million recorded in 2019. At December 31, 2019, there is a remaining balance of transaction shipped, billed and not yet collected of $9.0 million. In total in 2019, we recorded net sales of $299.3 million, a decrease of $59.9 million or 16.7% compared to 2018 revenue of $359 million. As I just described, this includes a benefit of $29.6 million related to the method in which the company recognizes revenue. Excluding this benefit related to the method in which company recognizes revenue, the decrease primarily resulted from previously announced unfavorable insurance coverage developments which resulted in a decrease in the number of units sold. Additionally, approximately 50% of the reduction of the company's workforce announced in December 2018 were sales personnel. The disruption to our customers from these personnel changes, negative publicity resulting from the Audit Committee investigation and discontinuation of the OrthoFlo and AmnioFix sports medicine product lines adversely affected revenues. Gross margin in 2019 was 85.6% compared to 89.9% in 2018. This gross margin decrease reflects fixed overhead cost being spread over lower production levels, increased cost of production related to the higher quality standards of Current Good Manufacturing Practices implemented in 2019 and higher scrap levels in the second half of the year. We implemented an electronic batch record system late in 2019, are enhancing that system this year and expect to reduce the incidence of scrap going forward. I would note that we have already seen an impact as a result of this effort with a reduction in scrap in the first half of 2020. Research and development expenses decreased 29.3% from 2018 to 2019 due primarily to year-over-year decreases in clinical trial activities, reductions in personnel due to the 2018 reduction in workforce as well as the previous decision to significantly reduce basic research and preclinical studies. We are increasing our research and development spend in 2020 as we work to advance our clinical trials which Tim discussed. Selling, general and administrative expense for 2019 decreased 23.3% compared to 2018. Sales and marketing expense included in SG&A decreased 19.8%, primarily due to a decrease in compensation related to the reduced headcount and reduced commissions from the lower sales levels. Investigation, restatement and related expenses were $66.5 million in 2019. I will talk about the -- our expectations on those costs for a minute. The Audit Committee investigation was completed in May 2019, and we do not expect to incur these costs going forward. Restatement costs for third-party service costs related to compiling, completing and auditing the financial statements included in the 2018 and 2019 Form 10-Ks, and thus, we continued incurring these costs through the first half of 2020. Included in the $66.5 million were litigation cost of $26.2 million, which reflects settlement of disputes and resolution of near-term contingencies, including legal fees and litigation settlements related to the issues that were the subject of the Audit Committee investigation. We expect to continue incurring these costs in the future as we address our contingent liabilities. In 2019, we began to incur cost to indemnify former officers and directors in legal proceedings against them and in which they participated. To date, the company has already borne substantial cost to satisfy these indemnification and expensed advanced obligations, and we expect to continue to do so in the future. As of December 31, 2019, the company had approximately $69.1 million of cash and cash equivalents and $73.1 million in debt, of which $3.75 million was reflected as current debt on our balance sheet as of the year-end. I will now discuss the first quarter of 2020. Reported net sales for the quarter ended March 31, 2020, were $61.7 million, primarily recognized on an as-shipped basis, a 7.2% decrease compared to the reported net sales for the quarter ended March 31, 2019, of $66.6 million recognized on a cash receipts basis. Additionally, shipment levels declined in the last half of March 2020, reflecting the impact of the COVID-19 global pandemic, which I will address shortly. Gross margin in the first quarter of 2020 was 84% as compared to 89% in the first quarter of 2019. The gross margin decrease reflects the higher quality standards of CGMP compliance implemented to date and some investments in our BLA programs. SG&A expenses for the first quarter of 2020 decreased approximately $3.9 million or 7.7% to $46.9 million. The decrease was primarily related to a reduction in legal fees related to the normal course of business matters and a decrease in discretionary expenses as the company implemented safety and cost-containment measures to mitigate the impact to the business from COVID-19. This was partially offset by an increase in severance expense. Investigation, restatement and related expenses were $15.6 million for the first quarter of 2020. I now want to spend some time discussing the impact of COVID-19 on the business. Our ability to sell product has been hampered by the pandemic. Our commercial team is spread across the country, and in many areas, our sales force has been unable to access hospitals and the offices of health care providers. Additionally, many patients stayed away from health care facilities in part due to shelter-in-place restrictions. We first began to see significant effects from the pandemic in mid-March. Patients started returning for treatment in mid-May. For the second quarter, we expect to report a decrease in net sales of 23% to 27% compared to the second quarter of 2019 reported amount of $67.4 million. While June sales were the strongest of the 3 months, we are closely monitoring the recent uptick in COVID-19 cases in some areas of the country, including states that represent a significant portion of our sales. And we're watching the related restrictions that may limit or postpone elective surgeries in those areas. In response to these challenges, management initiated several actions. Most discretionary expenses, such as travel, were canceled. Merit increases were deferred, and we reduced employee salaries on a sliding scale for all salaried employees, including salary deferrals for some senior executives. We intend for these reductions to last up to 6 months and estimate that the combination of these efforts has saved the company approximately $9 million through June 30, 2020. This has allowed us to reduce our expense base and reduce cash outlays, although we do expect our margins to be temporarily reduced until sales levels return to normal. During the past months, we have worked to manage the business within restrictive loan covenants contained in the Blue Torch loan agreement. Although the April 2020 amendment provided some relief from these original covenants, the negotiated relief would have become more restrictive after November 30, 2020. These debt covenants, when considered together with negative impacts from COVID-19 and the other liabilities noted earlier, significantly restricted our flexibility for strategic actions across our value drivers such as investments in the BLAs Tim discussed. Last week, we announced the closing of concurrent $150 million private equity and debt financings, with the equity financing led by EW Healthcare Partners and the debt financing provided by Hayfin Capital Management. The agreements consist of equity financing pursuant to a securities purchase agreement with EW Healthcare Partners and certain funds managed by Hayfin and a debt financing pursuant to a loan agreement with Hayfin. The company used the proceeds from the private equity and debt financings to, among other things, repay the outstanding principal, interest and prepayment premium resulting from the early termination of the Blue Torch loan agreement. As part of the transaction, EW Healthcare Partners has designated Marty Sutter and Bill Hawkins, both of whom have extraordinary backgrounds in health sciences, to serve on our Board as preferred directors. We have made tremendous progress as a company with the filing of our 2019 annual report, the closing of critical financing from premier healthcare investors and the addition of 2 industry leaders to our Board of Directors. With the filing of our first quarter Form 10-Q, we are now caught up in our financial reporting and have taken the initial steps to apply to relist our stock. We are now focused on the future and positioning the organization to anticipate and address unmet patient needs. I'll now turn the call back over to Tim.

Thank you, Pete. Where MiMedx is now, as for all of us, has been a long time coming. MiMedx has faced more than its share of challenges during the past 2 years resulting from the actions of previous leadership. The new executive team is comprised of seasoned leaders who joined the company, recognizing that they would be tackling business challenges for an important health care company in returning it to its patient care mission. I believe the company has great people who are smart, hard-working and passionate about our products. There is a big market opportunity with significant patient need. We have a strong leadership team in place to help us move forward. These developments put forward by the new team in place provide the economic grounding, the opportunity and the leadership vision for MiMedx to act strategically and deliberately. I agree with our employees and our customers that we have great brands. Our EpiFix brand remains the #1 brand of choice for an advanced skin substitute as reported by third-party estimates. But we must earn the right to continue leading. Today, more than 30 million Americans have -- suffer with diabetes, and are close -- and close to 3 million of these people suffer from chronic wounds. Within the advanced wound care market alone, there is significant unmet patient need. Market leadership is more than a brand portfolio. It also demands that we invest in our commitment to innovate, conduct peer-reviewed science that elevates the amniotic tissue category as a whole. We have an opportunity to advance the underlying placental science and more rigorously establish the clinical and economic value of our brands. We believe this science will shape future regulatory and insurance coverage policy change and better inform the potential of our musculoskeletal pipeline to address other areas of unmet clinical need. With the filings of our 2019 annual report and upon the filing of our forthcoming proxy statement, we will be able to hold the 2019 shareholder meeting, something my management team is looking forward to. Our next steps also include advancing the process for relisting our common stock. Today, we have sought to transparently reset where we are and the work we have ahead of us. Our next step is to share with you where we're going and to tell you how we plan to get there. Yes, we do have a promising pipeline with our ongoing PF and knee OA trials. Yet as with all pipelines, there is risk that we must manage. Our communications plan is strong and includes a return to more frequent interaction with you along with an enhancement of our website and other robust communication vehicles. On behalf of the Board, our leadership team and our employees, I thank you for your investment in support of MiMedx and appreciate your time today. We are at a new starting point for our future as leaders and partners in innovation that can improve people's lives.

Thank you. This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.