As Parker Petite’s Trial is going on, MiMedx reported this disaster:

MDXG released their Q3 2020 results and relisted on Nasdaq on November 4, 2020.  MDXG’s business continues to struggle and common shareholders are experiencing the brunt of their pain.  Sales decreased, earnings decreased in the quarter substantially, and margins declined in the quarter on a year-over-year basis.  MDXG is also having trouble with collecting placenta during the pandemic, and thus, have been supplementing their normal distribution network with third-party providers of donated placentas.  There was limited information about their third-party providers in the 10-Q, particularly where and from who, they were sourced from.  This seems like an area of potential safety concern.  They cited disruptions in their supply as a reason for the over-manufacturing of product in the quarter, causing an increase in inventory.  It seems likely that the increased inventory was merely due to the unexpected decline in sales during the quarter.

MDXG continues to expense large legal bills for their former executive management team.  The longer the trial continues, the more MDXG and its shareholders will pay.  Other expenses decreased in the quarter as MDXG negotiated discounts and deferred merit salary increases.  These reductions are only temporary and will resume at some point.

MDXG’s offering of preferred shares for the Hayfin equity purchase earlier in the summary is lucrative for preferred shareholders and preferred shareholders only.  Preferred shareholders are guaranteed an annual dividend of 4% through June 2021, and then 6% thereafter.  Each preferred share is convertible into $262.33 ordinary shares.  The amortization of the convertible preferred feature cost the common shareholders $31.110 million in the quarter, pushing their net loss to $52 million.

Additionally during the quarter, MDXG hired two new executives with lucrative pay packages of nearly $2 million each.  The total compensation packages for the new hires are pretty large for a company that was forced into signing unfavorable equity and debt agreements in a plea to get cash, during the same month of June 2020.

MDXG’s internal controls remain ineffective with material weaknesses.

o   Net sales of $64.3 million, a decrease from $88.9 million last year

o   Net loss of $19.4 million, a decrease from positive $12.4 million last year

o   Net loss for shareholders = $52 million, down from a positive $12.4 million last year

o   Operating loss of $9.7 million, from positive $14.2 million last year

o   $12 million of investigation, restatement costs, an increase from $7 million last year

  • “Legal and restatement costs incurred to rectify and litigate the actions of former management have been significant and have prevented us from making more meaningful investments in our core business. The criminal trial against our former executives began in October 2020 so we expect our indemnification obligations to continue in the next quarter before declining over time.”

o   Adjusted EBITDA of $6.9 million, a decrease from $7.6 million last year

o   EBITDA of negative $7.9 million, a decrease from positive $16.2 million last year

o   Sales in Q3 2019 include a benefit of $21.4 million from a  change in MDXG’s methods for recognizing revenue for time of cash collection = Still a decrease in sales

o   Gross margin = 84%, down from 85.1% last year (and 84% down from 84.8% last year without revenue recognition changes)

o   Expenses decreased 6.3%

  • “In response to these challenges, our management team initiated several actions. Most discretionary expenses were eliminated or postponed, including non-essential travel and new hires, with the exception of new hires in areas critical to the business. We negotiated additional discounts with vendors. Merit salary increases scheduled for the second quarter of 2020 were deferred. Beginning on April 5, 2020, we reduced employees’ salaries, including those of senior executives, on a sliding scale with larger reductions applied to larger salaries. The salary reductions ended June 28, 2020. We estimate that the combination of these efforts have saved the Company approximately $13 million through September 30, 2020. This has allowed us to reduce our expense base and reduce cash outlays, although we expect our margins to be temporarily reduced until sales return to normal levels.”

o   $109.6 million of cash, up from $69.1 million at 12/31/2019

o   Cash, net of debt = $62 million

o   Received $150 million from private equity and debt financing in July 2020

o   Accounts receivables increased to $33 million from $32.3 million at 12/31/2019

o   Inventory increased by $2 million from 12/31/2019 to $11.02 million

  • “We experienced interruptions for a portion of our hospitals in specific geographic areas beginning in the second half of March 2020. However, we have been successful in mitigating this disruption to our supply by adding additional donor hospitals, using third-party providers of donated placentas (where necessary and in accordance with MiMedx quality standards), and increasing efforts at hospitals that did not impose access limits. Additionally, in anticipation of expected disruptions, we ran manufacturing at levels greater than demand and have been successful in building our inventory of safety stock.”

o   Accounts payable increased $1 million to $9.05 million from 12/31/2019

o   Accrued expenses and compensation decreased from 12/31/2019

o   Long term debt = $47.6 million

  • Hayfin Term loan = $50 million
  • + Hayfin Term loan interest of $19.869 million due over 5 years

o   Preferred shares = $91.1 million = 100,000 shares

o   Equity decreased to $12.87 million from $34 million at 12/31/2019

o   Accrued legal costs of $15.094 million, up from $12.2 million at 12/31/2019

o   Financial covenants for Credit Facilities;

  • Maximum total net leverage ratio of 5x through 12/31/2020
  • Reduces to 4.5x through June 30, 2021
  • Reduces to 4x thereafter
  • Delayed draw term loan incurrence of 3.5x total net leverage
  • Minimum liquidity of $10 million

o   Fair value of Term loan = $50.3 million due in 2025

o   Loss on extinguishment of debt in the quarter = $8.2 million

o   Dividends on convertible preferred stock = $32.565 million

  • Preferred stock pays 4% cumulative dividend per year prior to June 30, 2021
  • Pays 6% cumulative dividend per year thereafter
  • “The Company elected not to declare or pay the quarterly dividend on the Series B Convertible Preferred Stock for September 30, 2020. The dividend was $9.86 per share, or approximately $1.0 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, 2020. Dividends in arrears as of September 30, 2020 was $1.0 million.” – 10Q Q3 2020
  • “Based on accumulated dividends as of September 30, 2020, each share of Series B Convertible Preferred Stock was convertible into 262.33 shares of the Company’s common stock, or 26,233,055 common shares in total.”

o   Legal Matters:

  • USAO-SDNY = cooperating with Petit and Taylor trials
  • Received a subpoena on June 3, 2020 from the VA-OIG in relation to VA Long Beach Healthcare System
  • USAO-MDNC (North Carolina) – on-going investigation
  • False Claims Suit is in discovery
  • Former employee Vitale case is in discovery
  • Sparrow defamation case is in discovery
  • Viceroy defamation suit on-going
  • Osiris case settled on October 26, 2020

o   October 2, 2020 = Board of Directors authorized additional 37,500,000 shares

o   Relisted on Nasdaq on November 4, 2020, authorized on October 30, 2020

o   “Results of our business have declined due to internal and external factors, including continued efforts to resolve areas of business impacted by the Company’s former management.”

o   Repurchased 14,123 shares surrendered by employees for tax obligations

o   Internal controls were not effective because of material weaknesses

  • “We expect that our remediation efforts will continue for all identified material weaknesses through 2020 as described in our remediation plan and status in Item 9A, “Controls and Procedures” of our 2019 10-K.”

o   Rohit Kashyap was hired on July 23, 2020 to serve as the Chief Commercial Officer

  • Base salary = $500,000
  • Target annual bonus = 52.5% of base salary
  • Long-term Target bonus = 200% base salary = $1 million per year
  • Start bonus = $200,000, must stay employed for 1 year or to repay
  • Restricted stock grant of $1,000,000, vested over 3 years
  • Retention bonus = $100,000 on March 30, 2022
  • Did not have to relocate and can work at local labs

o   Robert Stein was hired on July 10, 2020 to serve as EVP, Research and Development

  • Base salary = $500,000
  • Target bonus = 50% of base salary = $250,000
  • Target annual long-term incentive value = 200% of salary = $1 million
  • Start bonus = $250,000, must stay employed for 1 year or to repay
  • Restricted stock of $500,000, vested over 3 years