What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2021-03-08 compared with 2020-07-06 · 747 added, 729 removed, 711 unchanged (67% of the section changed)

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Consolidated Statements of Operations – For the years ended December 31, 20 20, 2019 and 2018

Consolidated Statements of Stockholders’ Equity – For the years ended December 31, 201 9, 2018 and 2017

Consolidated Statements of Stockholders’ (Deficit) Equity – For the years ended December 31, 20 20, 2019 and 2018

Consolidated Statements of Cash Flows – For the years ended December 31, 20 20, 2019 and 2018

Notes to Consolidated Financial Statements

Schedule II - Valuation and Qualifying Accounts

Schedule II - Valuation and Qualifying Accounts F- 46

Report of Independent Registered Public Accounting Firm

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We have audited the accompanying consolidated balance sheets of MiMedx Group, Inc.

(the “Company”) as of December 31, 2019 and 2018, the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2019, and the related notes and schedule (collectively referred to as the “consolidated financial statements”).

(the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of operations, stockholders’ (deficit) equity, and cash flows for each of the three years in the period ended December 31, 2020, and the related notes and schedule (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated July 6, 2020 expressed an adverse opinion thereon.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated March 8, 2021 expressed an adverse opinion thereon.

Basis for Opinion

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Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

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We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.

Evaluation of the audit evidence for revenue recognition

The Company recorded consolidated net sales of $248.2 million for the year ended December 31, 2020.

As more fully described in Note 2 to the consolidated financial statements, during 2018 and into part of 2019, the Company’s control environment was such that it created uncertainty surrounding all of its customer arrangements.

The control environment allowed for the existence of extra-contractual or undocumented terms or arrangements initiated by or agreed to by the Company and former members of Company management at the outset of the transactions (side agreements).

Concessions were also agreed to subsequent to the initial sale (e.g.

sales above established customer credit limits, extended and unusually long payment terms, return or exchange rights, and contingent payment obligations).

Beginning October 1, 2019, for all new customer arrangements, the Company determined adequate measures were in place to understand the terms of its contracts with customers.

As such, the Company concluded that the Step 1 Criteria (identify the contracts with a customer) for revenue recognition would be met prior to shipment of product to the customer or implantation of the products on consignment.

We identified the evaluation of the sufficiency of audit evidence over revenue recognition as a critical audit matter.

Evaluating the sufficiency of audit evidence required especially challenging auditor judgment to determine that extracontractual arrangements or side agreements did not exist at the onset of the transaction and that fictitious customer purchase orders were not entered into the system by sales personnel.

The primary procedures we performed to address this critical audit matter included:

• Testing the design and operating effectiveness of internal controls over the Company’s revenue processes, including controls over management’s review of the Step 1 Criteria.

• Testing the existence of revenue by selecting a sample of revenue transactions and comparing the amounts recorded for consistency with the underlying documentation, including the customer contract, purchase order, sales invoice, third party shipping documents, support documenting the implantation date (for consignment revenue), authorized pricing tables and customer payment support.

• Obtaining the monthly sales returns information recorded during 2020 to determine whether any unauthorized side agreements existed.

• Obtaining the January and February 2021 sales returns information to determine the completeness of the sales returns and associated credit memos.

• Performing data analytics over revenue transactions (excluding consignment and cash basis revenue) during the year ensuring a match of the sales order, sales invoice, shipping documents and payment support and investigating any items that did not agree.

/s/ BDO USA, LLP

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Atlanta, Georgia

March 8, 2021

Report of Independent Registered Public Accounting Firm

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In our opinion, the Company did not maintain, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on the COSO criteria.

We do not express an opinion or any other form of assurance on management’s statements referring to any corrective actions taken by the Company after the date of management’s assessment.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of the Company as of December 31, 2019 and 2018, the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2019, and the related notes and schedule (collectively referred to as “the financial statements”)” and our report dated July 6, 2020 expressed an unqualified opinion thereon.

We do not express an opinion or any other form of assurance on management’s statement referring to any corrective actions taken by the Company after the date of management’s assessment.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of the Company as of December 31, 2020 and 2019, the related consolidated statements of operations, stockholders’ (deficit) equity, and cash flows for each of the three years in the period ended December 31, 2020, and the related notes and schedule (collectively referred to as “the financial statements”)” and our report dated March 8, 2021 expressed an unqualified opinion thereon.

Basis for Opinion

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Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.

Our audit also included performing such other procedures as we considered necessary in the circumstances.

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The following material weaknesses have been identified and described in management’s assessment:

Failure to maintain an effective control environment based on the criteria in the COSO framework;

Failure to design, implement and maintain controls over certain information technology systems, financial reporting, income tax, revenue, inventory, and procure-to-pay processes, including certain accruals for expenses such as stock-based compensation expense.

These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2019 financial statements, and this report does not affect our report dated July 6, 2020 on those financial statements.

• Failure to design, implement and maintain controls over financial reporting, revenue, income taxes, inventory, procure-to-pay, financial forecasting, goodwill impairment testing and going concern.

These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2020 financial statements, and this report does not affect our report dated March 8, 2021 on those financial statements.

Definition and Limitations of Internal Control over Financial Reporting

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A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are

being made only in accordance with authorizations of management and directors of the company;

and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

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Atlanta, Georgia

March 8, 2021

MIMEDX GROUP, INC.

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Cash and cash equivalents $ 95,812 $ 69,069

Accounts receivable

Accounts receivable, net 35,423 32,327

Inventory, net 10,361 9,104

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Right of use asset 3,623 3,397

Goodwill 19,976 19,976

Intangible assets, net 6,004 7,777

LIABILITIES AND STOCKHOLDERS’ EQUITY

Other assets 375 443

Total assets $ 202,032 $ 167,166

LIABILITIES, CONVERTIBLE PREFERRED STOCK, AND STOCKHOLDERS’ (DEFICIT) EQUITY

Current liabilities:

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Commitments and contingencies (Note 14)

Stockholders’ equity:

Preferred stock;

Convertible preferred stock Series B;

$ .001 par value;

5,000,000 shares authorized and 0 shares issued and outstanding

Common stock;

100,000 shares authorized, issued and outstanding at December 31, 2020 and 0 authorized, issued and outstanding at December 31, 2019

Stockholders’ (deficit) equity:

Preferred stock Series A;

$ .001 par value;

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0 issued and outstanding at December 31, 2020 and 0 issued and outstanding at December 31, 2019

Common stock;

$ .001 par value;

187,500,000 shares authorized, 112,703,926 issued, and 110,930,243 outstanding at December 31, 2020 and 150,000,000 authorized, 112,703,926 issued and 110,818,649 outstanding at December 31, 2019

Additional paid-in capital 158,610 147,231

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1,773,683 shares at December 31, 2020 and 1,885,277 shares at December 31, 2019

( 7,449 ) ( 10,806 )

Accumulated deficit ( 151,424 ) ( 102,140 )

Total stockholders’ equity

Total liabilities and stockholders’ equity

Total stockholders’ (deficit) equity ( 150 ) 34,398

Total liabilities, convertible preferred stock, and stockholders’ (deficit) equity $ 202,032 $ 167,166

See notes to the consolidated financial statements.

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Years Ended December 31,

2020 2019 2018

Net sales $ 248,234 $ 299,255 $ 359,111

Cost of sales 39,330 43,081 36,386

Gross profit 208,904 256,174 322,725

Operating expenses:

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Impairment of intangible assets 1,027 446 —

Operating (loss) income

Other income (expense)

Loss on divestiture of Stability

Operating loss ( 45,398 ) ( 21,160 ) ( 3,924 )

Other (expense) income

Loss on extinguishment of debt ( 8,201 ) — —

Interest (expense) income, net ( 7,941 ) ( 4,708 ) 527

Other income, net

(Loss) income before income tax provision

Other (expense) income, net ( 3 ) 283 —

Loss before income tax provision ( 61,543 ) ( 25,585 ) ( 3,397 )

Income tax provision benefit (expense) 12,259 5 ( 26,582 )

Net (loss) income

Net (loss) income per common share - basic

Net (loss) income per common share - diluted

Weighted average shares outstanding - basic

Weighted average shares outstanding - diluted

Net loss $ ( 49,284 ) $ ( 25,580 ) $ ( 29,979 )

Net loss available to common stockholders (Note 9) $ ( 83,328 ) $ ( 25,580 ) $ ( 29,979 )

Net loss per common share - basic $ ( 0.77 ) $ ( 0.24 ) $ ( 0.28 )

Net loss per common share - diluted $ ( 0.77 ) $ ( 0.24 ) $ ( 0.28 )

Weighted average common shares outstanding - basic 108,257,112 106,946,384 105,596,256

Weighted average common shares outstanding - diluted 108,257,112 106,946,384 105,596,256

See notes to the consolidated financial statements.

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AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ (DEFICIT) EQUITY

(in thousands, except share data)

Treasury Stock

Common Stock Additional

Paid-in Treasury Stock Accumulated

Shares Amount Capital Shares Amount Deficit Total

Balance at December 31, 2017 112,703,926 $ 113 $ 164,649 3,356,409 $ ( 44,384 ) $ ( 46,581 ) 73,797

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Restricted stock cancellation / forfeited — — 19,194 1,861,314 ( 19,194 ) — —

Shares issued for services performed

Shares repurchased — — — 507,600 ( 7,572 ) — ( 7,572 )

Shares repurchased for tax withholding on vesting of restricted stock units — — — 614,123 ( 4,914 ) — ( 4,914 )

Net loss — — — — — ( 29,979 ) ( 29,979 )

Balance at December 31, 2018 112,703,926 $ 113 $ 164,744 3,605,263 $ ( 38,642 ) $ ( 76,560 ) $ 49,655

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Restricted stock cancellation / forfeited — — 9,939 1,084,971 ( 9,939 ) — —

Shares repurchased

Shares repurchased for tax withholding on vesting of restricted stock units — — — 429,918 ( 1,474 ) — ( 1,474 )

Net loss — — — — — ( 25,580 ) ( 25,580 )

Balance at December 31, 2019 112,703,926 $ 113 $ 147,231 1,885,277 $ ( 10,806 ) $ ( 102,140 ) $ 34,398

Issuance of Series B Convertible Preferred Stock

— — 32,954 — — — 32,954

Deemed dividends — — ( 32,028 ) — — — ( 32,028 )

Share-based compensation expense — — 15,733 — — — 15,733

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Shares repurchased for tax withholding on vesting of restricted stock units — — — 435,492 ( 2,334 ) — ( 2,334 )

Net loss — — — — — ( 49,284 ) ( 49,284 )

Balance at December 31, 2020 112,703,926 $ 113 $ 158,610 1,773,683 $ ( 7,449 ) $ ( 151,424 ) $ ( 150 )

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Years Ended December 31,

2020 2019 2018

Cash flows from operating activities:

Net (loss) income

Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:

Net loss $ ( 49,284 ) $ ( 25,580 ) $ ( 29,979 )

Adjustments to reconcile net loss to net cash (used in) provided by operating activities:

Effect of change in revenue recognition — ( 17,382 ) —

Share-based compensation 15,357 12,064 14,768

Amortization of intangible assets

Amortization of inventory fair value step-up

Loss on extinguishment of debt 8,201 — —

Depreciation 5,782 6,546 5,882

Amortization of deferred financing costs and debt discount 2,276 1,431 137

Amortization of discount on notes receivable

Amortization of intangible assets 1,073 1,039 1,034

Impairment of intangible assets 1,027 1,258 —

Non cash lease expenses 983 947 —

Change in fair value of earn-out consideration

Accretion of asset retirement obligation 10 — —

Loss on fixed asset disposal 1 318 —

Intangible asset impairment

Amortization of discount on notes receivable — — ( 190 )

Change in deferred income taxes — — 25,541

Loss on divestiture of Stability

Increase (decrease) in cash, net of effects of divestiture, resulting from changes in:

Increase (decrease) in cash resulting from changes in:

Accounts receivable ( 3,096 ) ( 10,938 ) —

Inventory ( 1,257 ) 6,882 ( 6,519 )

Prepaid expenses 1,064 4 ( 4,548 )

Income tax receivable

Other assets ( 119 ) ( 5,770 ) 3,562

Accounts payable 177 ( 6,171 ) 6,585

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Accrued expenses 1,746 ( 57 ) 16,074

Income taxes ( 10,027 ) 436 202

Other liabilities ( 1,718 ) ( 2,717 ) 1,164

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Purchases of property and equipment ( 4,228 ) ( 1,752 ) ( 9,419 )

Proceeds from property and equipment sale

Principal payments from note receivable

Patent application costs ( 327 ) ( 466 ) ( 609 )

Net cash flows provided by (used in) investing activities

Principal payments from note receivable — 2,722 778

Proceeds from property and equipment sale — — 30

Net cash flows (used in) provided by investing activities ( 4,555 ) 504 ( 9,220 )

Cash flows from financing activities:

Proceeds from term loan

Repayment of term loan

Proceeds from sale of Series B convertible preferred stock 100,000 — —

Stock issuance costs ( 7,470 ) — —

Proceeds from term loans 59,500 72,750 —

Deferred financing costs ( 3,235 ) ( 6,650 ) —

Shares repurchased for tax withholdings on vesting of restricted stock

MIMEDX GROUP, INC.

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

Repayment of term loans ( 83,872 ) ( 1,875 ) —

Prepayment premium on early repayment of term loan ( 1,439 ) — —

Stock repurchased for tax withholdings on vesting of restricted stock ( 2,334 ) ( 1,474 ) ( 4,914 )

Proceeds from exercise of stock options 411 108 3,555

Shares repurchased under repurchase plan

Stock repurchase under repurchase plan — — ( 7,572 )

Payments under capital lease obligations

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MiMedx Group, Inc.

(together with its subsidiaries except where the context otherwise requires “ MiMedx ,” or the “ Company ”) is an advanced wound care and emerging therapeutic biologics company, developing and distributing human placental tissue allografts with patent-protected processes for multiple sectors of healthcare.

The Company derives its products from human placental tissues processed using proprietary processing methodologies.

The Company’s mission is to offer physicians products and tissues to help the body heal itself.

MiMedx provides products in the wound care, burn, surgical, orthopedic, spine, sports medicine, ophthalmic and dental sectors of healthcare.

All of the Company’s products are regulated by the United States Food and Drug Administration (“ FDA ”).

MiMedx is the leading supplier of human placental allografts, which are human tissues that are transplanted from one person (a donor) to another person (a recipient).

The Company operates in one business segment, Regenerative Biomaterials, which includes the design, manufacture, and marketing of products and tissue processing services for the wound care, burn, surgical, sports medicine, ophthalmic and dental sectors of healthcare.

The Company’s allograft product families include:

dHACM family with AmnioFix® and EpiFix® brands;

Umbilical family with EpiCord® and AmnioCord® brands;

and Placental Collagen family with AmnioFill™ brands.

AmnioFix and EpiFix are tissue allografts derived from amnion and chorion layers of human placental membrane;

EpiCord and AmnioCord are tissue allografts derived from umbilical cord tissue.

AmnioFill is a placental connective tissue matrix, derived from the placental disc and other placental tissue.

The Company’s business model is focused primarily on the United States of America but the Company is exploring potential future international expansion opportunities.

Liquidity and Capital Resources

Net Working Capital

As of December 31, 2019 , the Company had $ 69.1 million of cash and cash equivalents.

The Company reported total current assets of $ 123.2 million and current liabilities of $ 67.3 million and had net working capital of $ 55.9 million as of December 31, 2019 .

Overall Liquidity and Capital Resources

The Company’s largest cash requirement for the twelve months ended December 31, 2019 was cash for general working capital needs;

investigation, restatement, and related expenses;

and other cash requirements included capital expenditures.

The Company funded its cash requirements for 2019 through its existing cash reserves, the Term Loan (as defined below) received in 2019 and its operating activities during the period.

The Company believes that its anticipated cash from operating and financing activities and existing cash and cash equivalents will enable the Company to meet its operational liquidity needs and fund its planned investing activities for the twelve months from issuance of the consolidated financial statements.

As discussed in Note 16, “ Commitments and Contingencies ,” of the consolidated financial statements, the Company anticipates additional cash requirements related to the following items within one year from the date of filing this Form 10-K:

private securities lawsuits, for which the Company is currently not able to estimate a loss and for which it is unclear whether the Company would be indemnified under various insurance policies;

investments and other expenditures required in order to bring the Company’s facilities into compliance with current Good Manufacturing Practices (“ cGMPs ”).

As discussed further in Note 21, “ Subsequent Events , ” the Company consummated the Preferred Stock Transaction (as defined below), entered into a new loan facility with Hayfin Services, LLP, repaid the BT Term Loan (as defined below), and terminated the BT Loan Agreement.

The Company has analyzed its ability to address the aforementioned commitments and potential liabilities while remaining compliant with the financial covenants set forth in the Hayfin Loan Agreement (as defined below) for the 12 months from the date of the issuance of the consolidated financial statements, consistent with the guidance prescribed by Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2014-05, “Going Concern:

Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern .”

Based on this analysis, and in combination with existing cash on hand, it is probable that the Company will be able to meet all obligations as they become due while remaining in compliance with the financial covenants set forth by the Hayfin Loan Agreement.

Therefore, the Company concluded that there is no substantial doubt surrounding its ability to continue as a going concern.

(together with its subsidiaries, except where the context otherwise requires, “ MiMedx ,” or the “ Company ”) is an industry leader in utilizing birth tissue as a platform for regenerative medicine, developing and distributing placental tissue allografts with patent-protected, proprietary processes for multiple sectors of healthcare.

As a pioneer in placental biologics, we have both a core business, focused on addressing the needs of patients with acute and chronic non-healing wounds, and a promising late-stage pipeline targeted at decreasing pain and improving function for patients with degenerative musculoskeletal conditions.

We derive our products from human placental tissues and process these tissues using our proprietary processing methods, including the PURION® process.

We employ Current Good Tissue Practices, Current Good Manufacturing Practices, and terminal sterilization to produce our allografts.

MiMedx provides products primarily in the wound care, burn, surgical, and non-operative sports medicine sectors of healthcare.

All of our products are regulated by the FDA.

The Company’s business model is focused primarily on the United States of America but the Company is pursuing opportunities for international expansion.

Effect of the COVID-19 Pandemic

On March 11, 2020, the World Health Organization designated the outbreak of a novel strain of coronavirus as a global pandemic (the “ Pandemic ” or “ COVID-19 Pandemic ”).

The COVID-19 pandemic and associated governmental and societal responses have affected the Company’s business, results of operations and financial condition.

The continuation or additional waves of the outbreak of the COVID-19 pandemic or the outbreak of other health epidemics could harm the Company’s operations, hinder the Company’s ability to generate revenue, or increase the Company’s costs and expenses.

The ultimate impact of the pandemic is highly uncertain.

As a result of the pandemic, the Company has experienced delays and impacts on the business and clinical trials.

It is uncertain the extent and how long the pandemic will affect the healthcare system and the global economy as a whole.

The effects of the pandemic or other health epidemics could continue to have an adverse impact on the Company’s business, results of operations, and financial condition in the future.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “ CARES Act ”) was signed into law.

The CARES Act includes provisions relating to refundable payroll tax credits, deferment of the employer portion of certain payroll taxes, loans, and grants to certain businesses, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property.

Certain of these provisions were extended or expanded as a result of the Consolidated Appropriations Act, 2021, which was signed into law on December 27, 2020.

As a result of these laws, the Company recorded a federal tax benefit of approximately $ 11.3 million due to the release of a previously-recorded valuation allowance.

Of this amount, the Company received $ 1.2 million during the year ended December 31, 2020.

The remaining $ 10.1 million is recorded as part of income tax receivable on the consolidated balance sheet as of December 31, 2020.

Significant Accounting Policies

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The consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“ GAAP ”) in the United States of America (“ U.S.

Conformity with 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.

Generally accepted accounting principles require 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, goodwill and intangible assets, estimate 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 of share-based payments and valuation of deferred tax assets.

Significant estimates include estimated useful lives and potential impairment of property and equipment, 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 of share-based payments, and valuation of deferred tax assets.

Principles of Consolidation

The consolidated financial statements include the accounts of MiMedx Group, Inc.

and its wholly-owned subsidiaries, including, for the periods prior to its divestiture further discussed in Note 4, Stability Biologics, LLC (“ Stability ”) formerly known as Stability, Inc.

and its wholly-owned subsidiaries.

All intercompany balances and transactions have been eliminated upon consolidation.

Segment Reporting

Accounting Standards Codification (“ ASC ”) 280, “ Segment Reporting ” requires use of the “management approach” model for segment reporting.

Accounting Standards Codification (“ ASC ”) 280, “ Segment Reporting ” requires the use of the “management approach” model for segment reporting.

The management approach model is based on the way a company’s chief operating decision-maker organizes segments within the Company for which separate discrete financial information is available regarding resource allocation and assessing performance.

The Company has determined it has one operating segment.

The Company has determined it operates as one operating segment.

Market Concentrations and Credit Risk

The Company places its cash and cash equivalents on deposit with financial institutions in the U.S.

Federal Deposit Insurance Corporation (“ FDIC ”) coverage is $250,000 for substantially all depository accounts.

The Company places its cash and cash equivalents on deposit with U.S.-based financial institutions.

Federal Deposit Insurance Corporation (“ FDIC ”) provides insurance coverage for deposits up to $ 250,000 for substantially all depository accounts.

As of December 31, 2020 and 2019, the Company had cash and cash equivalents of approximately $ 95.1 million and $ 68.4 million, respectively, in excess of the insured amounts in four depository institutions.

Cash and Cash Equivalents

Cash and cash equivalents include cash and FDIC insured certificates of deposit held at various banks with an original maturity of three months or less.

Cash and cash equivalents include cash held at various banks.

The Company considers all highly-liquid investments purchased with an original maturity of three months or less at the date of purchase and money market mutual funds to be cash equivalents.

Accounts Receivable

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Generally, the Company does not require collateral or any other security to support its receivables.

Bad debt expense and the allowance for doubtful accounts are based on historical trends.

The Company’s policy to reserve for potential bad debts is based on the aging of the individual receivables.

The Company manages credit risk by not selling to customers who are delinquent, generally after sixty days of delinquency.

Bad debt expense and the allowance for doubtful accounts are based on historical trends and current expectations for credit losses.

The Company’s policy to reserve for potential bad debts is based on the aging of the individual receivables as well as customer-specific qualitative factors, such as bankruptcy proceedings.

The Company manages credit risk by routinely performing credit checks on customers prior to sales.

The individual receivables are written-off after all reasonable efforts to collect the funds have been made.

Actual write-offs may differ from the amounts reserved.

Notes Receivable

Notes receivable represent formal payment agreements with customers which generally arise in situations where amounts shipped and billed have aged significantly as well as the promissory note issued by Stability as part of the divestiture discussed in Note 4 which was repaid in full in the third quarter of 2019.

The Company’s notes receivable are included in other current and long-term assets in the consolidated balance sheets and were valued taking into consideration cost of the market participant inputs, market conditions, liquidity, operating results and other qualitative factors.

Inventories are valued at the lower of cost or net realizable value, using the first–in, first-out (“ FIFO ”) method.

Inventory is tracked through raw material, work-in-progress, and finished goods stages as the product progresses through various production steps and stocking locations.

Inventory is tracked through raw material, work-in-process, and finished goods stages as the product progresses through various production steps and stocking locations.

Labor and overhead costs are absorbed through the various production processes up to when the work order closes.

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Property and Equipment

Property and equipment are recorded at cost and depreciated on a straight-line method over their estimated useful lives, principally three years to seven years .

Property and equipment are recorded at cost and depreciated on a straight-line method over their estimated useful lives, principally three to seven years .

Leasehold improvements are depreciated on a straight-line method over the shorter of the estimated useful lives or the lease term.

The Company is party to various lease arrangements for its facility space and equipment.

These arrangements include interest, scheduled rent increases and rent holidays which are included in the determination of minimum lease payments when assessing lease classification, and are included in rent expense on a straight line basis over the lease term.

See “Lease Obligations ” below and Note 7 “ Leases,” for further information regarding capital leases, operating leases and rent expense.

Asset Retirement Obligations

The Company records obligations associated with the retirement of tangible long-lived assets and right of use assets and the associated asset retirement costs in accordance with authoritative guidance on asset retirement obligations.

The Company reviews legal obligations associated with the retirement of long-lived assets that result from contractual obligations or the acquisition, construction, development and/or normal use of the assets.

If it is determined that a legal obligation exists, regardless of whether the obligation is conditional on a future event, the fair value of the liability for an asset retirement obligation is recognized in the period in which it is incurred, if a reasonable estimate of fair value can be made.

The fair value is calculated as the estimate of the expected cash outflow to satisfy the legal obligation discounted to present value using the Company’s incremental borrowing rate.

At such point in time, an asset and liability are recorded for the amount of the expected liability.

The asset amount is depreciated, straight-line over the life of the underlying asset, while the liability is accreted to the amount of the expected outflow through selling, general and administrative expense using the effective interest method.

Impairment of Long-lived Assets

The Company evaluates the recoverability of its long-lived assets (property and equipment) whenever adverse events or changes in business climate indicate that the expected undiscounted future cash flows from the related assets may be less than previously anticipated.

If the net book value of the related assets exceeds the expected undiscounted future cash flows of the assets, the carrying amount would be reduced to the present value of their expected future cash flows and an impairment loss would be recognized.

The Company evaluates the recoverability of its long-lived assets (property, equipment, and intangible assets with finite lives) whenever adverse events or changes in business climate indicate that the expected undiscounted future cash flows from the related assets may be less than their carrying amounts.

When a situation determines that it is more likely than not that an asset is not recoverable, the Company estimates cash flows expected to be derived from the continuing use and eventual disposition of the asset.

If the sum of those cash flows, not discounted to present value, does not exceed the net book value of the asset, the Company estimates the fair value of the asset.

Impairment loss is recorded to the extent that the net book value exceeds the fair value of the asset.

Impairment reviews are based on an estimated future cash flow approach that requires significant judgment with respect to future revenue and expense growth rates, selection of appropriate discount rate, asset groupings, and other assumptions and estimates.

The Company uses estimates that are consistent with its business plans and a market participant view of the assets being evaluated.

Actual results may differ from these estimates.

The Company recorded impairment losses on amortizable intangible assets of $ 1.0 million, $ 0.5 million, and $ 0 in in 2020, 2019, and 2018, respectively.

The Company recorded no impairment losses with respect to its property and equipment in those periods.

Goodwill and Indefinite-lived Intangible Assets

Goodwill represents the excess of purchase price over the fair value of net assets of acquired businesses.

The Company assesses the recoverability of its goodwill at least annually on September 30, or more frequently whenever events or substantive changes in circumstances indicate that the asset may be impaired.

The Company may first choose to assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount.

If the Company determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then the Company performs a quantitative analysis.

In performing the goodwill impairment test, the Company assesses qualitative factors to determine the existence of impairment.

If the qualitative factors indicate that it is more likely than not that the carrying value of the reporting unit exceeds its fair value, the Company proceeds to a quantitative test to measure the existence and amount of goodwill impairment.

The Company may also choose to bypass the qualitative assessment and proceed directly to the quantitative analysis.

When testing for goodwill impairment, the Company first assesses qualitative factors to determine whether the existence of events or circumstances lead to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount.

If the Company concludes it is more likely than not that the fair value of a reporting unit is less than its carrying amount, a quantitative fair value test is performed.

At present, the Company has only one reporting unit.

Under the quantitative test, if the carrying value exceeds the fair value of the reporting unit, goodwill impairment is recorded for the amount that the reporting unit’s carrying value exceeds its fair value, not to exceed the total amount of goodwill allocated to the reporting unit.

At present, the Company has one reporting unit.

In performing the quantitative test, impairment loss is recorded to the extent that the carrying value of the reporting unit exceeds the assessed fair value of the reporting unit, not to exceed goodwill allocated to that reporting unit.

No impairment is recognized if fair value is determined to exceed carrying value.

The Company determines the fair value utilizing the income and market approaches.

Under the income approach, the fair value of the Company is the present value of its future economic benefits.

These benefits can include revenue, cost savings, tax deductions, and proceeds from its disposition.

Value indications are developed by discounting expected cash flows to their present value at a rate of return that incorporates the risk-free rate for the use of funds, trends within the industry, and risks associated with particular investments of similar type and quality as of the goodwill impairment testing date.

Under the market approach, the Company uses its market capitalization which is calculated by taking the Company’s share price times the number of outstanding shares.

Under the income approach, the fair value of the Company is the present value of its future cash flows.

These future cash flows are derived from revenue, cost savings, tax deductions, working capital flows, capital expenditures, and other projected sources and uses of cash.

Value indications are developed by discounting expected cash flows to their present value at a risk-adjusted weighted average cost of capital using the capitalization of market comparable companies.

The weighted average cost of capital is rooted in the risk-free rate of a U.S.

Treasury with a similar maturity to the time period evaluated, credit risk specific to the Company, relevant equity risk premia, the incremental borrowing rate for the Company, and the prevailing marginal income tax rate.

Under the market approach, the Company uses its market capitalization, which is calculated by taking the Company’s share price times the number of outstanding common shares plus the value of Convertible preferred stock Series B outstanding.

The Company’s estimates associated with the goodwill impairment test are considered critical due to the amount of goodwill recorded on its consolidated balance sheets and the judgment required in determining fair value, including projected future cash flows.

Acquired indefinite live intangible assets are tested for impairment annually on September 30 or whenever events or changes in circumstances indicate that the carrying amount of an intangible asset may not be recoverable.

Acquired indefinite-lived intangible assets are tested for impairment annually on September 30 or whenever events or changes in circumstances indicate that the carrying amount of an intangible asset may not be recoverable.

The Company’s impairment reviews are based on an estimated future cash flow approach that requires significant judgment with respect to future revenue and expense growth estimates.

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Actual results may differ from the estimates used in these analyses.

For the goodwill impairment test performed on September 30, 2020, the Company performed a quantitative test for its reporting unit, concluding that the fair value exceeded the carrying value.

Therefore, no goodwill impairment was recognized related to this test.

There were no recorded impairment losses related to goodwill in 2020, 2019, or 2018.

The Company recorded impairment losses of $ 0.8 million , $ 0 , and $ 0.6 million related to the abandonment of patents in process during 2019 , 2018 , and 2017, respectively.

Impairment of Intangible Assets with Finite Lives

The Company reviews purchased intangible assets with finite lives for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable using a two-step impairment test.

In step one, the Company determines the sum of the undiscounted future cash flows of the assets based on management’s estimates and compare it to the carrying value of the assets.

If the carrying amount is greater than the sum of the undiscounted cash flows, then the asset is impaired and step two is required.

In step two, the impairment loss is calculated as the difference between the fair value of the assets and the carrying value of the assets.

The Company uses estimates that are consistent with its business plans and a market participant view of the assets being evaluated.

Actual results may differ from these estimates.

The Company recorded an impairment loss of $ 0.5 million during 2019.

There were no impairment losses recognized with respect to intangible assets with finite lives in 2018 or 2017.

The Company recorded impairment losses related to our indefinite-lived intangible assets of $ 0 , $ 0.8 million, and $ 0 related to the abandonment of patents in process during 2020, 2019, and 2018, respectively.

The Company incurs certain legal and related costs in connection with patent applications for tissue-based products and processes.

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Lease Obligations

Effective January 1, 2019, the Company accounts for its leases under ASC 842, “ Leases ”.

The Company determines if an arrangement is, or contains, a lease at inception.

Right-of-use assets and the related liabilities resulting from operating leases were included in Right of use asset, Other current liabilities and Other liabilities, respectively, in the consolidated balance sheet as of December 31, 2019.

The Company determines if a contract is, or contains, a lease at inception.

Right of use assets and the related liabilities resulting from operating leases were included in Right of use asset, Other current liabilities, and Other liabilities, respectively, in the consolidated balance sheets as of December 31, 2020 and 2019.

Operating lease assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease.

Operating lease assets and liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term.

Since most of the Company’s leases do not have a readily determinable implicit discount rate, the Company uses its incremental borrowing rate to calculate the present value of lease payments determined using the rate of interest that the Company would have to pay on collaterialized or secured borrowing over a similar term .

Variable components of the lease payments such as fair market value adjustments, utilities, and maintenance costs are expensed as incurred and not included in determining the present value of lease liabilities, which will include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.

As an accounting policy election, the Company excludes short-term leases having initial terms of 12 months or fewer.

The lease term and applicable payments include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.

As an accounting policy election, the Company does not capitalize leases having initial terms of 12 months or fewer.

Lease expense is recognized on a straight-line basis over the lease term.

The Company continues to account for leases in the prior period financial statements under ASC 840.

The Company has made an accounting policy election not to separate lease components from non-lease components in the event that the agreement contains both.

The Company continues to account for leases in financial statements prior to January 1, 2019 under ASC 840.

See Note 5, “ Leases” for further information regarding lease obligations.

Lease expense for operating lease payments is recognized on a straight-line basis over the term of the lease.

Operating lease assets and liabilities are recognized based on the present value of lease payments over the lease term.

As a practical expedient, the Company has made an accounting policy election not to separate lease components from non-lease components in the event that the agreement contains both.

The Company includes both the lease and non-lease components for purposes of calculating the right-of-use asset and related lease liability.

Contingencies

The Company is subject to various patent challenges, product liability claims, government investigations, shareholder derivative suits, former employee matters and other legal proceedings, see Note 16 “ Commitments and Contingencies .” Legal fees and other expenses related to litigation are expensed as incurred and included in selling, general and administrative expenses in the consolidated statements of operations.

The Company is or has been subject to various patent challenges, product liability claims, government investigations, former employee matters, and other legal proceedings, see Note 14, “ Commitments and Contingencies .” Legal fees and other expenses related to litigation are expensed as incurred and included in selling, general and administrative expenses in the consolidated statements of operations.

The Company records an accrual for legal settlements and other contingencies in the consolidated financial statements when the Company determines that a loss is both probable and reasonably estimable.

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Revenue Recognition

Current Policy

The Company sells its products primarily to individual customers and independent distributors (collectively referred to as “ customers ”).

Customers obtain and use products either through ship and bill sales or consignment arrangements.

Under ship and bill arrangements, the Company retains possession of the product until the customer submits an order.

Upon approval of the sales order, the Company ships product to the customer and invoices them for the product sold.

Under consignment arrangements, the customer takes possession of the product, but the Company retains title until the implantation, or application of the Company’s product to the end user.

Subsequent to the Transition (as defined below) and including all of the year ended December 31, 2020, the Company recognizes revenue as performance obligations are fulfilled;

which occurs upon the shipment of product to the customers for ship and bill orders or upon implantation for consignment sales.

Revenue is recognized based on the consideration the Company expects to receive from the sale.

This consists of the gross selling price of the product, less any discounts or rebates (collectively, “ deductions ” or “ sales deductions ”).

Gross selling price

is a standard set by the Company for all customers unless a contract governing the sale provides for a specified price.

Sales deductions are specified in individual contracts with customers and generally achieved based on total sales during a specified period.

The Company estimates the total sales deductions which a specific customer will achieve over the relevant term and applies the reduction to sales as they are made throughout the period.

Rebates owed to customers are accrued and recorded in accrued expenses on the consolidated balance sheets.

The Company acts as the principal in all of its customer arrangements and therefore records revenue on a gross basis.

Shipping is considered immaterial in the context of the overall customer arrangement, and damages or loss of goods in transit are rare.

Therefore, shipping is not deemed a separately recognized performance obligation and the Company has elected to treat shipping costs as activities to fulfill the promise to transfer the product.

The Company maintains a returns policy that allows its customers to return product that is consigned, damaged or non-conforming, ordered in error, or due to a recall.

The estimate of the provision for returns is based upon historical experience with actual returns given consideration to any changes in historical periods presented.

The Company’s payment terms for customers are typically 30 to 60 days from receipt of title of the goods.

In addition to the above revenue recognition policy, the Company recognizes revenue associated with the Remaining Contracts (as defined below) upon cash receipt.

The Remaining Contracts represent contracts for which all of the criteria necessary for revenue recognition were not met at the time of shipment and that such criteria would not be met until ultimate collection of such sales.

A summary of amounts collected and recorded as net sales for the years ended December 31, 2020 and 2019, as well as amounts still outstanding as of those dates, are as follows (amounts in thousands):

Amounts Invoiced and Not Collected Deferred Cost of Sales

Amounts as of September 30, 2019 $ 48,883 $ 6,415

Revenue recognized related to amounts invoiced and not collected at September 30, 2019:

Transition Adjustment during the three months ended September 30, 2019 ( 21,385 ) ( 2,565 )

Cash collected during the three months ended December 31, 2019 related to the Remaining Contracts ( 8,219 ) ( 1,151 )

( 29,604 ) ( 3,716 )

Write-off of customer contracts where collection is no longer reasonably assured (a) ( 10,273 ) ( 1,438 )

Amounts as of December 31, 2019 9,006 1,261

Cash collected during the year ended December 31, 2020 related to the Remaining Contracts ( 7,767 ) ( 1,087 )

Amounts as of December 31, 2020 $ 1,239 $ 174

(a) The Company determined that for approximately $ 10.3 million of existing contracts where payment had not been received, collection was no longer reasonably assured.

As a result, $ 1.4 million of deferred cost of sales relating to these customers was written off.

Any future collections relating to these customer contracts will be recorded as revenue at the time payment is received.

Previous Revenue Recognition Policy and Transition

In 2018, and into part of 2019, the Company’s control environment was such that it created uncertainty surrounding all of its customer arrangements, which required consideration related to the proper revenue recognition under the applicable literature.

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The applicable revenue recognition guidance also changed beginning January 1, 2018, which further impacted the Company’s revenue recognition methodology.

As a result, the Company’s application of the applicable revenue recognition guidance varies for of the years ended December 31, 2019, 2018 and 2017.

Additionally, the Company changed its pattern of revenue recognition effective October 1, 2019.

The Company changed its pattern of revenue recognition effective October 1, 2019.

As a result, the Company’s pattern of revenue recognition varies between the years ended December 31, 2020, 2019, and 2018.

The application of the relevant revenue recognition guidance and the pattern of revenue recognition are further discussed below for each period presented.

Fiscal Year Ended December 31, 2018

For the year ended December 31, 2017, the Company applied the revenue recognition guidance in ASC Topic 605, Revenue Recognition (“ ASC 605 ”).

Under ASC 605, revenue should not be recognized until it is realized or realizable and earned.

SEC Staff Accounting Bulletin (“ SAB ”) Topic 13.A.1 (as codified in ASC 605-10-S99-1) outlines four criteria that generally indicate when revenue is realized or realizable and earned.

If any of these criteria are not met, revenue recognition should be deferred until all criteria have been met.

Therefore, the Company assessed these four criteria as follows:

Persuasive evidence of an arrangement exists - The Company’s sales are driven either by contracts or purchase orders.

These types of documents are typically used to establish persuasive evidence of an arrangement.

The Company’s customary business practices, however, must be taken into account as a contract can be written, oral, or modified based on customary business practices.

Throughout 2017, although the Company may have created a legal contract upon the execution of a contract and/or fulfillment of a purchase order, the lack of clarity around the final terms of the arrangement due to the pervasive side agreements with customers precluded the Company’s sales transactions from meeting this criterion upon shipment of product.

Therefore, even though there may have been a legal contract governing the arrangement (which typically would indicate persuasive evidence of an arrangement), the Company’s selling and collection practices amended the stated contract terms.

After considering these factors, the Company concluded that persuasive evidence of an arrangement did not exist upon shipment of product.

Delivery has occurred or services have been rendered - For sales to customers, physical possession and title transferred upon shipment to the customer.

However, the Company concluded that it did not pass the risks of ownership to the customer upon shipment because customers were allowed to return product for multiple reasons, which included being unable to sell the product, damages which may have occurred subsequent to delivery, and dropped product.

for additional discussion of the Company’s rationale for concluding that delivery had not yet occurred upon shipment to the customer.

The seller’s price to the buyer is fixed or determinable - At certain quarter-ends, the Company was significantly increasing sales to customers without having visibility into the level of product remaining unsold at the customer’s location.

This practice made it difficult to develop an appropriate estimate of future credits to be issued to customers at the time of sale, which, in turn, impacted whether the price at the time of transfer of physical possession to the customer was fixed or determinable.

This previous practice in combination with the following actions of the Company precluded the price of the Company’s sales transactions from being fixed or determinable upon shipment of product:

Offering customers an unconditional right of return,

Offering extended payment terms to customers, and

A history of exceeding established credit limits for customers.

Collectibility is reasonably assured - At the time of transfer of physical possession to the customer, collectibility of the sales was questionable.

The Company determined that the customers’ intention to pay amounts when due was uncertain in light of the conflicting messages customers received with respect to the payment terms, rights of return and lack of adherence to credit limits.

Although the Company did have processes in place to establish credit limits, evidence indicated that those credit limits were overridden by certain sales personnel and members of management.

The Company recovered the majority of its billings made in 2017 with insignificant write-offs recorded;

however, a significant amount of these billings were collected well after payment was due under the contractual terms.

Furthermore, the quantitative and qualitative evidence gathered by the Company raised considerable doubt as to the collectibility of its billings at the time of shipment, but this evidence was not persuasive enough for the Company to reach a conclusion as to whether collectibility was reasonably assured.

In the Company’s evaluation of the point at which delivery occurred (the second criterion discussed above), the Company further considered the fact that there are instances under ASC 605 where the transfer of title of the product did not coincide with revenue recognition.

Based on its review of all facts and circumstances, the Company determined that it did not meet all of the criteria to recognize revenue at the time of shipment of product to the customer.

Specifically, the Company determined that they did not transfer the risks of ownership upon the transfer of physical possession because the Company’s customers were routinely granted an extended return period with very limited restrictions on the right of return and extended payment terms which raised doubt as to the intent or ability of customers to use and pay for the product delivered.

Customers were allowed to return product for multiple reasons which included being unable to sell the product, damages which may have occurred subsequent to delivery, and dropped product (i.e., product that becomes contaminated and unusable).

In other words, only upon use of the product in a surgical application (whether by the customer or by the ultimate end user in the case of distributors) would the customer no longer have the ability to return the product.

Accordingly, the Company determined that the aforementioned revenue recognition criteria were met only when both of the following events had occurred:

(1) the Company fulfilled the customer's purchase order by delivering product ordered, and (2) the Company collected payment for the product delivered.

Furthermore, the Company determined that the amount of revenue to be recognized should be limited to the amount of payment received in a given period less the amount expected to be refunded or credited to customers for sales returns made after payment.

An exception to the above revenue recognition under ASC 605 during the year ended December 31, 2017 related to the sales generated by the Company’s wholly owned subsidiary, Stability.

On January 13, 2016, the Company completed the acquisition of Stability, a provider of human tissue products to surgeons, facilities, and distributors serving the surgical, spine, and orthopedic sectors of the healthcare industry.

For sales of the Company’s products through Stability, the Company recognized revenue under ASC 605 only when both of the following events had occurred:

(1) the Company has fulfilled the customer’s purchase order by delivering all product ordered;

and (2) the product has been delivered to the customer.

Total sales from Stability were $ 7.0 million for the year ended December 31, 2017.

Stability was divested on September 30, 2017.

Prior to 2015, substantially all federal healthcare providers, including the Department of Veterans Affairs, purchased Company product from one distributor customer of the Company, AvKARE Inc.

(“ AvKARE ”), which is a veteran-owned General Services Administration Federal Supply Schedule contractor.

In 2015, the Company began selling product directly to federal customers rather than exclusively allowing federal healthcare providers to purchase Company product from AvKARE.

Upon expiration of the Company’s agreement with AvKARE on June 30, 2017, the Company had an obligation to repurchase AvKARE’s remaining inventory within 90 days in accordance with the terms of the agreement.

As of September 30, 2017, the Company had satisfied the repurchase obligation.

Additionally, the Company considered how to account for costs associated with the delivered products of the contract for which revenue has been deferred, which is whether to match the related cost of sales expense with revenue or to recognize expense upon shipment.

In making this assessment, the Company considered the financial viability of its distributors and customers based on their creditworthiness to determine if collectibility of amounts sufficient to realize the costs of the products shipped was reasonably assured at the time of shipment.

As the Company determined that there was a probable future economic benefit associated with the sales transactions, the Company deferred the costs of sales until the revenue was recognized.

The Company offset deferred revenue with the associated accounts receivable obligations in connection with the sales of products to its customers.

The Company believes that because the conditions for revenue recognition have not yet been met and payment has not been received, neither party has fulfilled its obligations under the contract.

The amount shipped and billed but not recorded as revenue was $ 64.8 million for the year ended December 31, 2017.

Fiscal Year Ended December 31, 2018

The Company adopted ASC Topic 606, Revenue from Contracts with Customers (“ ASC 606 ”) , on January 1, 2018 by using the modified retrospective method.

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The Company concluded that the first three of the above criteria were not met upon shipment of product to the customer, the fourth criteria had been met and the Company acknowledges that there is a degree of uncertainty as to whether last criteria above had been met.

Although the parties to the contract may have approved the contract and purchase orders in writing, the Company concluded that upon shipment of products to the customer there is not sufficient evidence that its customers were committed to perform their obligations defined in the contract due to the existence of extra-contractual or undocumented terms or arrangements (e.g., regarding payment terms, right of return, etc.).

Although the parties to the contract may have approved the contract and purchase orders in writing, the Company concluded that upon shipment of products to the customer there was not sufficient evidence that its customers were committed to perform their obligations defined in the contract due to the existence of extra-contractual or undocumented terms or arrangements (e.g., regarding payment terms, right of return, etc.).

The Company could not reliably identify each party’s rights regarding the products to be transferred upon shipment of those products to customers.

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Despite these overrides, the Company recovered the majority of its billings made in 2018.

that collectibility was not probable.

As a result of the considerations outlined above, the Company determined that it did not meet the criteria necessary for its revenue arrangements to qualify as “contracts” under the requirements of ASC 606 (i.e., these arrangements did not pass the Step 1 Criteria of the revenue recognition model).

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The Company determined the transaction price of its contracts to equal the amount of consideration received from customers less the amount expected to be refunded or credited to customers, which is recognized as a refund liability that is updated at the end of each reporting period for changes in circumstances.

The refund liability is included within accrued expenses in the consolidated balance sheet.

The Company continued to defer the costs of sales consistent with the assessment noted above for the year ended December 31, 2017.

The refund liability was included within accrued expenses in the consolidated balance sheet as of December 31, 2018.

The Company considered how to account for costs associated with the delivered products of the contract for which revenue has been deferred, which is whether to match the related costs of sales expense with revenue or recognize expense upon shipment.

As the Company determined that there was a probable economic benefit associated with sales transactions, the Company deferred the cost of sales until the revenue was recognized for the year ended December 31, 2018.

The Company also continued to offset deferred revenue with the associated accounts receivable obligations in connection with the sales of products to its customers.

The amount shipped and billed but not recorded as revenue was $ 51.0 million for the year ended December 31, 2018.

Fiscal Year Ended December 31, 2019

Fiscal Year Ended December 31, 2019 and Transition

The Company continued to assess contracts, new and existing, throughout 2019 to determine if the Step 1 Criteria noted above for the determination of a contract under ASC 606 were met for new contracts at the outset of a sales transaction (i.e., upon shipment of product) or for existing contracts at some point within 2019 when all the terms of the arrangement would have been known.

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however, the Company determined that adequate knowledge of the contractual arrangements with its customers did exist in 2019 for new and certain existing arrangements.

Management did note that there is no single determinative change that overcame the pervasive challenges noted above, but rather an accumulation of efforts that

taken together, resulted in sufficient knowledge of contractual relationships both internally within the Company and externally with its customers.

To address the tone at the top issues, the Company noted that proper remediation involved not only the removal of members of management who were setting an inappropriate tone but also the establishment of new management throughout the organization who emphasized a commitment to integrity, ethical values and transparency and have that reinforcement for a sustained period of time.

Management did note that there is no single, definitive change that overcame the pervasive challenges noted above, but rather an accumulation of efforts that, taken together, resulted in sufficient knowledge of contractual relationships both internally within the Company and externally with its customers.

The changes made to management positions throughout the organization and the resulting organization behavior changes were assessed to have been sufficiently addressed by mid-2019.

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While the measures summarized above provided significant evidence necessary to understand the terms of the Company’s contractual arrangements with its customers, certain of these customers continued to exhibit behaviors that resulted in extended periods until cash collection.

Such delays in collection suggested that uncertainty regarding extracontractual arrangements may continue, particularly as it relates to payment terms.

Such delays in collection suggested that uncertainty regarding extra-contractual arrangements may continue, particularly as it relates to payment terms.

As a result, the Company concluded the following for any existing arrangements, which remained unpaid at September 30, 2019:

• For customer arrangements where collection was considered probable within 90 days from the date of original shipment or implantation of the products, the Company concluded the Step 1 Criteria were met (the “ Transition Adjustment ”).

For the remaining customer arrangements (the “ Remaining Contracts ”), the Company concluded that due to the uncertainty that extracontractual arrangements may continue the Step 1 Criteria would not be satisfied until the Company receives payment from the customer.

• For the remaining customer arrangements (the “ Remaining Contracts ”), the Company concluded that, due to the uncertainty that extra-contractual arrangements may continue, the Step 1 Criteria would not be satisfied until the Company receives payment from the customer.

At that point, the Company determined that an accounting contract would exist and the performance obligations of the Company to deliver product and the customer to pay for the product would be satisfied.

As of December 31, 2019, upon reassessment, the Company concluded that the Step 1 Criteria continued to not be met due to the same circumstances described above.

The Company continued to reassess the Remaining Contracts for settlement of the Step 1 Criteria prior to payment, concluding that the Step 1 Criteria continued to not be met due to the same circumstances described above.

The Company continued to record the deferred costs of sales on the arrangements that failed the Step 1 Criteria where collectibility was reasonably assured and will recognize the costs when the related revenue is recognized.

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The Company has determined that the performance obligation was met upon delivery of the product to the customer, or at the time the product is implanted for products on consignment, at which point the Company determined it will collect the consideration it is entitled to in exchange for the product transferred to the customer.

As a result, the Company

recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied, generally upon shipment of the product to the customer.

The nature of the Company’s contracts gives rise to certain types of variable consideration, including rebates and other discounts.

As a result, the Company recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied, generally upon shipment of the product to the customer or upon implantation of the product to the end user.

The nature of the Company’s contracts gives rise to certain types of variable

consideration, including rebates and other discounts.

The Company includes estimated amounts of variable consideration in the transaction price to the extent that it is probable there will not be a significant reversal of revenue.

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The Company does have consignment agreements with several customers and distributors which allow the Company to better market its products by moving them closer to the end user.

In these cases, the Company determined that it has fulfilled its performance obligation once control of the product has been delivered to the customer, which occurs simultaneously with the product being implante d.

The Company acts as the principal in all of its customer arrangements and therefore records revenue on a gross basis.

Shipping is considered immaterial in the context of the overall customer arrangement, and damages or loss of goods in transit are rare.

Therefore, shipping is not deemed a separately recognized performance obligation and the Company has elected to treat shipping costs as activities to fulfill the promise to transfer the product.

The Company maintains a returns policy that allows its customers to return product that is consigned, damaged or non-conforming, ordered in error, or due to a recall.

The estimate of the provision for returns is based upon historical experience with actual returns given consideration to any changes in historical periods presented.

The Company’s payment terms for customers are typically 30 to 60 days from receipt of title of the goods.

Based on the assessment noted above, the Company concluded that through the first two quarters of 2019, the pattern of revenue recognition under ASC 606 remained the same as the application for the year ended December 31, 2018;

that is, revenue was deferred until the product was paid for or returned.

In order to account for the determination that the Step 1 Criteria had been met during the third quarter of 2019, for certain existing customer arrangements, the Company recorded the following (in thousands):

Amounts Invoiced and Not Collected

Deferred Cost of Sales

Amounts as of September 30, 2019

Revenue recognized related to amounts invoiced and not collected at September 30, 2019:

Transition Adjustment during the three months ended September 30, 2019

Cash collected during the three months ended December 31, 2019 related to the Remaining Contracts

Write-off of customer contracts where collection is no longer reasonably assured (a)

Amounts as of December 31, 2019

(a) The Company determined that for approximately $10.3 million of existing contracts where payment had not been received, collection was no longer reasonably assured.

As a result, $1.4 million of deferred cost of sales relating to these customers was written off.

Any future collections relating to these customer contracts will be recorded as revenue at the time payment is received.

The Company sells to Group Purchasing Organization (“ GPO ”) members who transact directly with the Company at GPO-agreed pricing.

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These fees are set as a percentage of the purchase volume, which is typically 3 % of sales made to the GPO members.

Prior to adoption of ASC 606, for all periods presented prior to January 1, 2018, the Company presented the administrative fees paid to GPOs as a reduction of revenues as the benefit received by the Company in exchange for the GPO fees was not sufficiently separable from the GPO member’s purchase of the Company’s products.

Upon adoption of ASC 606, the Company concluded that a lthough it benefited from the access that a GPO provides to its members, this benefit was neither distinct from other promises in the Company’s contracts with GPOs nor was the benefit separable from the sale of goods by the Company to the end customer.

Therefore, the Company continued presenting fees paid to GPOs as a reduction of product revenues.

Upon adoption of ASC 606, the Company concluded that although it benefited from the access that a GPO provides to its members, this benefit was neither distinct from other promises in the Company’s contracts with GPOs nor was the benefit separable from the sale of goods by the Company to the end customer.

Therefore, the Company presents fees paid to GPOs as a reduction of product revenues.

Cost of Sales

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Amounts include direct and indirect costs to manufacture products including raw materials, personnel costs and direct overhead expenses necessary to convert collected tissues into finished goods, product testing costs, quality assurance costs, facility costs associated with the Company’s manufacturing and warehouse facilities, including depreciation, freight charges, costs to operate equipment and other shipping and handling costs for products shipped to customers.

Prior to the Transition, the Company deferred the cost of sales resulted from transactions where title to inventory transferred from the Company to the customer, but for which all revenue recognition criteria have not yet been met.

The Company obtains raw material in the form of human placenta donations from participating mothers who give birth via scheduled Caesarean section.

Prior to the Transition, the Company deferred the cost of sales from transactions where title to inventory transferred from the Company to the customer, but for which all revenue recognition criteria have not yet been met.

Once all revenue recognition criteria are met, the revenue and associated cost of sales was recognized.

These amounts were recorded within other current assets on the consolidated balance sheet in the amount of $ 4.3 million as of December 31, 2018.

Subsequent to the Transition, the Company continued to defer the cost of sales for certain arrangements for which all revenue recognition criteria have not been met.

These amounts were recorded within other current assets on the consolidated balance sheet in the amount of $ 1.3 million as of December 31, 2019.

These amounts were recorded within other current assets on the consolidated balance sheets in the amount of $ 0.2 million and $ 1.3 million as of December 31, 2020 and 2019, respectively.

Research and Development Costs

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Advertising expense for each of the years ended December 31, 2020, 2019, and 2018 amounted to $ 0.1 million.

Income tax expense (benefit), deferred tax assets and liabilities, and liabilities for unrecognized tax benefits reflect management’s best assessment of estimated current and future taxes to be paid.

Income tax provision benefit (expense), deferred tax assets and liabilities, and liabilities for unrecognized tax benefits reflect management’s best assessment of estimated current and future taxes to be paid.

The Company is subject to income taxes in the United States, including numerous state jurisdictions.

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If the Company determines that it would be able to realize its deferred tax assets in the future in excess of their net recorded amount, the Company would make an adjustment to the deferred tax asset valuation allowance.

In evaluating the Company’s ability to recover its deferred tax assets within the jurisdiction from which they arise, management considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies, and results of recent operations.

In projecting future taxable income, the Company begins with historical results and incorporates assumptions about the amount of future state and federal pretax operating income adjusted for items that do not have tax consequences.

In projecting future taxable income, the Company begins with historical results and incorporates assumptions about the amount of future state and federal

pretax operating income adjusted for items that do not have tax consequences.

The assumptions about future taxable income require significant judgment and are consistent with the plans and estimates the Company uses to manage the underlying businesses.

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The Company recognizes interest and penalties related to unrecognized tax benefits within the income tax expense line in the consolidated statements of operations.

Accrued interest and penalties, if any, are included within the related deferred tax liability line in the consolidated balance sheet and recorded as a component of income tax expense.

Accrued interest and penalties, if any, are included within the related deferred tax liability line in the consolidated balance sheets and recorded as a component of income tax expense.

Share-based Compensation

The Company grants share-based awards to employees and members of the Company’s Board of Directors (the “ Board ”) and non-employee consultants.

Such awards are recognized as share-based payment expense over the requisite service or vesting period, to the extent such awards are expected to vest in accordance with FASB ASC Topic 718 “ Compensation—Stock Compensation, ” and under the issued guidance following FASB’s pronouncement, ASU 2018-07, “ Compensation-Stock Compensation (Topic 718):

Improvements to Nonemployee Share-Based Payment Accounting ”, which the Company adopted on January 1, 2019, the effective date of the new guidance.

Awards to employees and the Board are generally made annually as well as at certain points of time throughout the year at the discretion of the Board.

Awards to non-employee consultants are rare, occurring most recently in February 2018.

” The amount of expense to be recognized is determined by the fair value of the award using inputs available as of the grant date.

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Treasury yield curve in effect at the time of grant for the estimated option expected term.

The Company estimates volatility using a blend of its own historical stock price volatility as well as that of market comparable publicly traded peer companies, since historically, the Company did not have enough history to establish volatility based upon its own stock trading.

The Company estimates volatility using a blend of its own historical stock price volatility as well as that of market-comparable publicly-traded peer companies.

The Company routinely reviews its calculation of volatility for potential changes in future volatility, the Company’s life cycle, its peer group, and other factors.

In addition, an expected dividend yield of zero is used in the option valuation model because the Company does not pay cash dividends and does not expect to pay any cash dividends in the foreseeable future.

For awards with service conditions only, the Company recognizes share-based compensation expense on a straight-line basis over the requisite service or vesting period.

For awards with service and performance-based vesting conditions, the Company recognizes stock-based compensation expense using the graded vesting method over the requisite service period beginning in the period in which the awards are deemed probable to vest.

Vesting probability for an award with performance vesting conditions is assessed based upon the Company’s expectations to become compliant with applicable securities law regulatory requirements and reporting obligations, as well as other performance vesting conditions specified in the restricted share unit award agreements.

Finally, the Company uses an expected dividend yield of zero;

the Company does not pay cash dividends on its common stock and does not expect to pay any cash dividends on its common stock in the foreseeable future.

For awards with service-based vesting conditions only, the Company recognizes share-based compensation expense on a straight-line basis over the requisite service or vesting period.

For awards with service- and performance-based vesting conditions, the Company recognizes stock-based compensation expense using the graded vesting method over the requisite service period beginning in the period in which the awards are deemed probable to vest, to the extent such awards are probable to vest.

The Company recognizes the cumulative effect of changes in the probability outcomes in the period in which the changes occur.

The Company recognizes the fixed dollar amount known on a grant date with respect to the restricted stock unit awards that will be settled by issuing shares on the vesting date, with the number of shares to be determined based on the Company’s stock price on the settlement date over the vesting period, with an offsetting liability.

Once the number of shares has been fixed and the shares are issued, the Company reclassifies the liability related to the restricted share unit awards to equity.

Basic and Diluted Net (Loss) Income per Share

Basic net (loss) income per share is determined by dividing net (loss) income by the weighted average ordinary shares outstanding during the period.

Diluted net income per ordinary share is based on the weighted average number of ordinary shares outstanding and potentially dilutive ordinary shares outstanding determined by using the treasury stock method.

For all periods presented with a net loss, the shares underlying the common share options, warrants and restricted stock have been excluded from the calculation because their effect would have been anti‑dilutive.

Therefore, the weighted average shares outstanding used to calculate both basic and diluted loss per share are the same for periods with a net loss.

Basic and Diluted Net Loss per Common Share

Basic net loss per common share is calculated as net loss available to common stockholders divided by weighted average common shares outstanding for the applicable period.

Net loss available to common stockholders is determined by adjusting net loss for preferred dividends accrued or deemed during the period.

This amount is divided by the weighted average common shares outstanding during the period.

Diluted net loss per common share adjusts basic net loss per common share for convertible securities, options, restricted stock unit awards, and other share-based payment awards which have yet to vest, to the extent such adjustments reduce basic net loss per common share.

The dilutive effect of the Company’s Series B Convertible Preferred Stock, and other convertible securities to the extent they are outstanding, is determined based on the if-converted method.

The if-converted method assumes that convertible securities are converted at the later of the issuance date or the beginning of the period.

If the hypothetical conversion of convertible securities, and the consequential avoidance of any deemed or accumulated preferred dividends, would decrease basic net loss per common share, these effects are incorporated in the calculation of diluted net loss per common share, adjusted for the proportion of the period the securities were outstanding.

The dilutive effect of outstanding options, restricted stock unit awards, and other share-based payments is derived using the treasury stock method.

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.

For all periods with a net loss available to common stockholders, any adjustment for potential common shares would be naturally anti-dilutive.

Therefore, the weighted average shares outstanding used to calculate both basic and diluted net loss per common share are the same for periods with a net loss.

Fair Value of Financial Instruments and Fair Value Measurements

The respective carrying value of certain on-balance sheet financial instruments approximated their fair values due to the short-term nature and type of these instruments.

These financial instruments include cash and cash equivalents, accounts receivable, notes receivable, and certain current financial liabilities.

These financial instruments include cash and cash equivalents, accounts receivable, notes receivable, and certain other financial assets and liabilities.

The Company measures certain non-financial assets at fair value on a non-recurring basis.

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Recently Adopted Accounting Pronouncements

In February 2016, FASB issued ASU No.

2016-02, Leases (Topic 842), ( “ ASU 2016-02 ” ) which amended the guidance on accounting for leases.

The FASB issued this update to increase transparency and comparability among organizations.

This update requires the recognition of lease assets and lease liabilities on the balance sheet and the disclosure of key information about leasing arrangements.

The Company adopted ASU 2016-02 effective January 1, 2019 using the additional (optional) approach, in accordance with ASU 2018-11 Leases (Topic 842):

Targeted Improvements.

The Company initially recorded a right of use asset and lease liability of $ 4.3 million , net of the $ 0.9 million rent credit, and $ 5.2 million , in Right of use asset, Other current liabilities and Other liabilities for the non-current portion, respectively.

There was no effect on opening retained earnings, and the Company continues to account for leases in the prior period financial statements under ASC Topic 840.

In adopting the new lease standard, the Company elected the permitted package of practical expedients permitted, which allowed the Company to account for existing leases under their current classification, as well as omit any new costs classified as initial direct costs, under the new standard.

See Note 7 for additional information on leases.

In February 2018, the FASB issued ASU No.

2018-02, Income Statement - Reporting Comprehensive Income (Topic 220) (“ ASU 2018-02” ), to address certain income tax effects in Accumulated Other Comprehensive Income (“ AOCI ”) resulting from the tax reform enacted in 2017.

The amended guidance provides an option to reclassify tax effects within AOCI to retained earnings in the period in which the effect of the tax reform is recorded.

The amendments were effective for fiscal years beginning after December 15, 2018, including interim periods.

The Company has adopted ASU 2018-02 as of January 1, 2019, which did not have any impact on the Company's results of operations or financial condition as there were no balances in AOCI that are tax effected.

In June 2018, the FASB issued ASU 2018-07, “Compensation-Stock Compensation (Topic 718):

Improvements to Non-employee Share-Based Payment Accounting” (“ ASU 2018-07 ”), which simplifies the accounting for share-based payments to non-employees by aligning it with the accounting for share-based payments to employees, with certain exceptions.

Under the new guidance, the measurement of equity-classified nonemployee awards will be fixed at the grant date.

ASU 2018-07 is effective for interim and annual reporting periods beginning after December 15, 2018 and early adoption was permitted.

The Company adopted the new standard on January 1, 2019.

The adoption of ASU 2018-07 did not have a material impact on the Company’s consolidated financial statements and related disclosures .

Recently Issued Accounting Pronouncements Not Yet Adopted

In June 2016, the FASB issued ASU 2016-13, “ Financial Instruments - Credit Losses (Topic 326):

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This ASU is effective for the Company and all public filers which do not qualify as smaller reporting companies for fiscal years beginning after December 15, 2019.

The Company does not expect adoption to materially affect the consolidated financial statements.

All other ASUs issued and not yet effective for the twelve months ended December 31, 2019 , 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 current or future financial position or results of operations.

Stability Biologics, LLC

On January 13, 2016, the Company completed the acquisition of Stability Inc., a provider of human tissue products to surgeons, facilities, and distributors serving the surgical, spine, and orthopedic sectors of the healthcare industry.

As a result of this transaction, the Company acquired all of the outstanding shares of Stability, Inc.

in exchange for $ 6.0 million cash, $ 3.3 million (or 441,009 shares) of the Company’s common stock, par value $ 0.001 per share (“ Common Stock ”), and assumed debt of $ 1.8 million .

Additional one-time costs incurred in connection with the transaction totaled $ 1.1 million and were included within selling, general and administrative expenses on the consolidated statements of operations.

Contingent consideration might have been payable based on a formula determined by sales less certain expenses for the years 2016 and 2017.

The contingent consideration was valued at $ 17.5 million as of January 13, 2016 and is shown in the schedule below as fair value of earn-out.

The contingent consideration was classified as a liability.

On September 30, 2017, the Company completed its divestiture of Stability pursuant to the Membership Interest Purchase Agreement by and among the Company, Stability, each person that, as of January 13, 2016, was a stockholder of Stability Inc., a Florida corporation and a predecessor-in-interest to Stability, and Brian Martin, as stockholder representative.

A summary of the assets divested and consideration received follows (in thousands):

December 31, 2017

Assets divested

Trade receivables

Prepaid expenses and other assets

Intangible assets

Property and equipment, net

Total assets divested

Liabilities divested

Accounts payable and accrued liabilities

Total liabilities divested

Total net assets divested

Transaction costs

Consideration received

Non-trade receivable (b)

Note receivable (c)

Intangible assets (d)

Extinguishment of earn out liability (e)

Total consideration received

(a) In accordance with ASC 350-20-35-52 when a portion of a reporting unit is disposed of, goodwill associated with that business shall be included in the carrying amount of the business in determining the gain on disposal.

In accordance with ASC 350-20-35-53, the amount of goodwill to be included in that carrying amount shall be based on the relative fair values of the business to be disposed of and the portion of the reporting unit that will be retained.

Based on an estimated fair value of Stability of $ 16.2 million representing a consideration received for the business compared to the fair value of business retained determined based on the market approach, approximately $ 0.2 million of the total goodwill of $ 20.2 million residing in the reporting unit was included in the carrying amount of the business sold.

(b) non-trade receivable represents a cash payment due within 60 days of closing.

(c) a promissory note issued by Stability in the principal amount of $ 3.5 million in favor of the Company recognized at a discounted value of $ 3.2 million .

(d) a fair value of $ 0.5 million for the distributor agreements with Stability and a fair value of $ 0.1 million for the non-compete agreements with the former stockholders of Stability Inc.

(e) a waiver by the former stockholders of Stability Inc.

of all claims and rights to earn-out consideration, which was recorded as a liability at a fair value of $ 12.2 million immediately prior to the divestiture.

The fair value of the earn-out liability was determined based on the income approach and includes the actual realized results of operations and expected future performance over the remaining earn-out period.

The total loss on the Stability Divestiture of $ 0.5 million is comprised of a pretax book loss of $ 1.0 million and an associated tax benefit of $ 0.5 million .

The earn-out arrangement was classified as a liability on the Stability acquisition date of January 13, 2016 and remeasured at fair value each reporting period until the Stability was divested on September 30, 2017.

A decrease in fair value of $ 3.6 million for the year ended December 31, 2017 was included in Selling, general and administration expenses on the consolidated statements of operations.

The Company adopted this ASU on January 1, 2020 using a modified retrospective transition method which requires a cumulative-effect adjustment to the opening balance of retained earnings to be recognized on the date of adoption with no change to financial results reported in prior periods.

The Company adopted this ASU on January 1, 2020 using a modified retrospective transition method which requires a cumulative-effect adjustment to the opening balance of retained earnings to be recognized on the date of adoption, with no change to the financial results reported in prior periods.

There was no impact on the Company’s consolidated financial statements upon adoption of this ASU.

Recently Issued Accounting Pronouncements Not Yet Adopted

In August 2020, the FASB issued ASU 2020-06, “ Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity ,” which simplifies and clarifies certain calculation and presentation matters related to convertible equity and debt instruments.

Specifically, ASU 2020-06 removes requirements to separately account for conversion features as a derivative under ASC Topic 815 and removing the requirement to account for beneficial conversion features on such instruments.

Accounting Standards Update 2020-06 also provides clearer guidance surrounding disclosure of such instruments and provides specific guidance for how such instruments are to be incorporated in the calculation of Diluted EPS.

The guidance under ASU 2020-06 is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years.

Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020.

The Company will adopt this standard using a modified retrospective approach effective January 1, 2021.

The Company does not expect a material impact on the consolidated financial statements as a result of adoption.

All other ASUs issued and not yet effective as of December 31, 2020, 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 current or future financial position or results of operations.

Inventory consists of the following (in thousands):

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Inventory, net $ 10,361 $ 9,104

Consignment inventory, included as a component of finished goods in the table above, was $ 3.5 million and $ 3.4 million as of December 31, 2020 and 2019, respectively.

Property and Equipment

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Laboratory and clean room equipment 15,524 14,894

Furniture and equipment

Furniture and office equipment 15,295 15,118

Construction in progress 3,321 972

Asset retirement cost 785 —

Property and equipment, gross 40,935 36,305

Less accumulated depreciation and amortization ( 29,498 ) ( 23,977 )

Property and equipment, net

Property and equipment, net of accumulated depreciation $ 11,437 $ 12,328

Depreciation expense for each of the years ended December 31, 2020, 2019, and 2018 was recorded in certain captions of the consolidated statements of operations for those periods in the amounts shown in the table below (in thousands):

For the year ended December 31,

Year ended December 31,

2020 2019 2018

Cost of sales $ 2,022 $ 1,965 $ 1,757

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Research and development expenses 344 358 365

As discussed in Note 3, on January 1, 2019, the Company adopted new guidance for the accounting and reporting of leases.

Total $ 5,782 $ 6,546 $ 5,882

The Company has operating leases primarily for corporate offices, vehicles, and certain equipment.

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The Company determines if an arrangement is or contains a lease at inception.

Under ASC 842 transition guidance, the Company has not elected the hindsight practical expedient to determine the lease term for existing leases, which permits companies to consider available information prior to the effective date of the new guidance as to the actual or likely exercise of options to extend or terminate the lease.

Certain of the Company’s leases include renewal options and escalation clauses;

renewal options have not been included in the calculation of the lease liabilities and right of use assets as the Company is not reasonably certain to exercise the options.

Lease expense for operating lease payments is recognized on a straight-line basis over the term of the lease.

Operating lease assets and liabilities are recognized based on the present value of lease payments over the lease term.

As a practical expedient, the Company has made an accounting policy election not to separate lease components from non-lease components in the event that the agreement contains both.

The Company includes both the lease and non-lease components for purposes of calculating the right of use asset and related lease liability.

The Company does not act as a lessor or have any leases classified as financing leases.

Operating lease cost was $ 1.5 million for the year ended December 31, 2019 and was recorded in Selling, general, and administrative expenses.

Interest on lease obligations was $ 0.5 million for the year ended December 31, 2019 and was recorded in Selling, general, and administrative expenses.

Cash paid for amounts included in the measurement of operating lease liabilities was $ 1.7 million at December 31, 2019 .

The amortization of leased assets for the year ended December 31, 2019 was $ 0.9 million .

As of December 31, 2020, the Company does not have any leases classified as financing leases.

The Company subleases one of its leased industrial warehouse spaces.

The sublease income from the facility offsets the lease expense associated with the facility.

Sublease income for the facility is $ 0.1 million, $ 0 , and $ 0 for the years ended December 31, 2020, 2019, and 2018, respectively, and is presented as a reduction to selling, general, and administrative expense on the consolidated statements of operations in those periods.

Supplemental balance sheet information related to operating leases is as follows (amounts in thousands, except lease term and discount rate):

December 31, 2019

Right of use asset $ 3,623 $ 3,397

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Long term lease liability 2,960 2,919

Weighted-average remaining lease term (years)

Weighted-average remaining lease term (years) 4.4 years 3.1 years

Weighted-average discount rate 10.0 % 11.5 %

Maturities of operating leases liabilities are as follows (amounts in thousands):

Year ending December 31,

Information related to lease costs for operating leases are as follows (amounts in thousands):

Year ended December 31,

Operating lease cost $ 1,392 $ 1,469

Amortization of leased assets 983 947

Rent expense for the year ended December 31, 2018, which was accounted for under ASC 840, Leases , was $ 1.5 million.

This amount, as well as those included in the table above, are allocated among cost of sales, research and development and selling, general and administrative expenses in the consolidated statements of operations.

Maturities of operating lease liabilities are as follows (amounts in thousands):

Year ending December 31, Maturities

Thereafter 705

Total lease payments 4,993

imputed interest ( 857 )

Future minimum lease payments under operating leases at December 31, 2018 and thereafter were as follows (amounts in thousands):

Year ending December 31,

Total lease payments

Certain lease agreements require the Company to return designated areas of leased space to its original condition upon termination of the lease agreement, for which the Company records an asset retirement obligation and a corresponding capital asset in an amount equal to the estimated fair value of the obligation.

In subsequent periods, the asset retirement obligation is accreted for the change in its present value and the capitalized asset is depreciated, both over the term of the associated lease agreement.

Asset retirement obligations of $ 0.8 million and $ 0 of December 31, 2020 and 2019, respectively, are included under Other liabilities in the consolidated balance sheets.

Goodwill and Intangible Assets

Goodwill is evaluated for impairment on an annual basis on September 30, and when events or changes indicate it is more likely than not the carrying value exceeds fair value.

The Company operates as one reporting unit.

For the impairment test performed September 30, the Company performed a quantitative analysis to determine the existence and extent of impairment.

The quantitative analysis concluded that the fair value of the Company’s reporting unit exceeded its carrying value.

As a result of these assessments, the Company concluded that there was no impairment.

Accordingly, no impairment was recorded for the year ended December 31, 2020.

For the impairment test performed September 30, 2019, the Company performed a qualitative analysis to determine if it was more likely than not that goodwill impairment existed as of the annual impairment test date.

As a result of this assessment, the Company concluded that it was not more likely than not that goodwill was impaired.

Accordingly, the Company did not perform a quantitative assessment.

There was no impairment recorded with respect to goodwill for the year ended December 31, 2019.

The following represents the changes in the carrying amount of goodwill for 2020 and 2019 (in thousands):

Balance as of January 1, 2019 $ 19,976

Balance as of December 31, 2019 19,976

Balance as of December 31, 2020 $ 19,976

Intangible Assets

Intangible assets are summarized as follows (in thousands):

December 31, 2019

December 31, 2018

Gross Carrying Amount

Accumulated Amortization

Net Carrying Amount

Gross Carrying Amount

Accumulated Amortization

Net Carrying Amount

December 31, 2020 December 31, 2019

Gross Carrying Amount Accumulated Amortization Net Carrying Amount Gross Carrying Amount Accumulated Amortization Net Carrying Amount

Amortized intangible assets

Licenses $ 1,414 $ ( 1,334 ) $ 80 $ 1,414 $ ( 1,200 ) $ 214

Patents and know-how 9,510 ( 5,730 ) 3,780 9,099 ( 5,070 ) 4,029

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Unamortized intangible assets

Trade names and trademarks

Tradenames and trademarks $ 1,008 $ 1,008 $ 1,008 $ 1,008

Patents in process 1,045 1,045 1,130 1,130

Total intangible assets $ 13,338 $ 6,004 $ 16,532 $ 7,777

Amortization expense for the years ended December 31, 2019 , 2018 , and 2017 , was $ 1.0 million .

$ 1.0 million , and $ 1.7 million , respectively.

Patents and patents in process related write-downs due to abandonment were $ 1.3 million , $ 0.0 million , and $ 0.6 million during the years ended December 31, 2019, 2018, and 2017, respectively and are recorded in Selling, general and administrative expenses.

Amortization expense for the years ended December 31, 2020, 2019, and 2018, is summarized in the table below (amounts in thousands):

Year ended December 31,

2020 2019 2018

Amortization of intangible assets $ 1,073 $ 1,039 $ 1,034

Impairment of intangible assets 1,027 1,258 —

Impairment of intangible assets in 2020 related to customer relationship assets that were determined to be unrecoverable due to lower than expected margins.

Impairment of intangible assets in 2019 were related to the abandonment of patents in process and customer relationship assets.

Expected future amortization of intangible assets as of December 31, 2020, is as follows (in thousands):

Year ending December 31,

Goodwill is evaluated for impairment on an annual basis on September 30 and in interim periods when events or changes indicate the carrying value may not be recoverable.

The Company operates under one reporting unit.

For the year ended December 31, 2019, the Company elected to perform a qualitative analysis to determine whether it was more likely than not that the fair value of its reporting unit was less than their carrying value.

As a result of this assessment, the Company determined that it was not necessary to perform a quantitative impairment test and concluded that goodwill was not impaired at December 31, 2019.

For the year ended December 31, 2018, the Company performed a quantitative analysis to determine if there was any impairment.

As a result of this assessment, the Company determined that there was no impairment for the year ended December 31, 2018.

The following represents the changes in the carrying amount of goodwill for 2019 and 2018 (in thousands):

Balance as of January 1, 2018

Balance as of December 31, 2018

Balance as of December 31, 2019

Year ending December 31, Expense

Thereafter 806

Accrued Expenses

Accrued expenses consist of the following (in thousands):

Legal costs $ 14,822 $ 12,202

Settlement costs 9,975 12,825

Pricing adjustment settlement with Veterans Affairs

Estimated returns 688 2,581

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Accrued clinical trials 651 1,076

Accrued rebates 886 142

Other 1,297 1,613

Total $ 30,460 $ 32,161

The Company’s accrual for the pricing adjustment with the Department of Veterans Affairs of $ 6.9 million, which was presented separately in previously-issued financial statements, is included as part of settlement costs above as of December 31, 2019.

This matter was settled and paid during the year ended December 31, 2020.

Long Term Debt

Credit Facility

On October 12, 2015, the Company and its subsidiaries entered into a Credit Agreement (the “Credit Agreement”) with certain lenders and Bank of America, N.A., as administrative agent.

The Credit Agreement established a senior secured revolving credit facility in favor of the Company with a maturity date of October 12, 2018 and an aggregate lender commitment of up to $ 50 million .

In September 2017, the expiration date of the Credit Agreement was extended to October 12, 2019.

The Credit Agreement also provided for an uncommitted incremental facility of up to $ 35 million , which could be exercised as one or more revolving commitment increases or new term loans, all subject to certain customary terms and conditions set forth in the Credit Agreement.

The obligations of the Company under the Credit Agreement were guaranteed by the Company’s subsidiaries.

The obligations of the loan parties under the Credit Agreement and the other credit documents were secured by liens on and security interests in substantially all of the assets of each of the loan parties and a pledge of the equity interests of each subsidiary owned by a loan party, subject to certain customary exclusions.

Borrowings under the facility had an interest at LIBOR plus 1.5 % to 2.25 % .

Fees paid in connection with the initiation of the credit facility totaled approximately $ 0.5 million .

These deferred financing costs were being amortized to interest expense over the three -year life of the facility.

The Credit Agreement contained customary representations, warranties, covenants, and events of default, including restrictions on certain payments of dividends by the Company.

On August 31, 2018, the lending parties’ terminated their commitments to make loans and issue letters of credit under the Credit Agreement due to the Company’s failure to timely file its periodic reports with the SEC.

Accordingly, since then, the Company has not had the ability to borrow under the Credit Agreement.

There were no outstanding borrowings or letters of credit issued under the Credit Agreement at the time of termination, and the Company never drew down any amounts under the credit facility during the entire term of the Credit Agreement.

No termination penalties were paid as a result of the termination.

Hayfin Term Loan Agreement

On June 30, 2020, the Company entered into a Loan Agreement with, among others, Hayfin Services, LLP, (“ Hayfin ”) an affiliate of Hayfin Capital Management LLP (the “ Hayfin Loan Agreement ”), which was funded (the “ Hayfin Loan Transaction ”) on July 2, 2020 (the “ Closing Date ”) and provided the Company with a senior secured term loan in an aggregate amount of $ 50.0 million (the “ Term Loan ”) and an additional delayed draw term loan (the “ DD TL ”, collectively, the “ Credit Facilities ”) in the form of a committed but undrawn $ 25.0 million facility.

The Company has the right to draw upon the DD TL until June 30, 2021.

The Term Loan and the DD TL (if drawn upon prior to expiry) both mature on June 30, 2025 (the “ Maturity Date ”).

Interest is payable on the Term Loan and the DD TL for balances outstanding quarterly through the Maturity Date.

No principal payments on either the Term Loan or the DD TL are due and payable until the Maturity Date.

The Term Loan and DD TL, which are senior secured obligations, were entered into together with the sale of the Company’s Series B Convertible Preferred Stock (as defined and described in Note 10, “ Equity ”) for $ 100.0 million (collectively, the “ Financing Transactions ”) in order to:

(1) refinance, in whole, the outstanding indebtedness (the “ Refinancing ”) under the Loan Agreement, dated as of June 10, 2019 (as amended and restated, the “ BT Term Loan Agreement ”), among the Company, the lenders and Blue Torch Finance LLC as administrative agent and collateral agent for such lenders,

(2) pay fees and expenses incurred with certain financing transactions, and

(3) finance the working capital, capital expenditures, and other general corporate obligations of the Company.

The interest rate applicable to any borrowings under the Term Loan is equal to LIBOR (subject to a floor of 1.5 %) plus a margin of 6.75 % per annum.

If LIBOR is unavailable, the loan will carry interest at the greatest of the Prime Rate, the Federal Funds Rate plus 0.5 % per annum, and 2.5 %, plus the margin of 6.75 %.

After December 31, 2020, the margin on the interest rate is eligible for a reduction;

• 6.75 % per annum if the Total Net Leverage Ratio (as defined in the Hayfin Loan Agreement) is greater than 2.0 x,

• 6.5 % per annum if the Total Net Leverage Ratio is less than 2.0 x but greater than or equal to 1.0 x, or

• 6.0 % per annum if the Total Net Leverage Ratio is less than 1.0 x.

An additional 3.0 % margin is applied to the interest rate in the event of default as defined by the Hayfin Term Loan Agreement.

Both at issuance and as of December 31, 2020, the Term Loan carried an interest rate of 8.3 %.

The Credit Facilities contain financial covenants requiring the Company, on a consolidated basis, to maintain the following:

• Maximum Total Net Leverage Ratio of 5.0 x through December 31, 2020, reduced to 4.5 x through June 30, 2021, further reduced to 4.0 x thereafter for the life of the loans, required to be calculated on a quarterly basis,

• Delayed Draw Term Loan Incurrence Covenant (as defined in the Hayfin Loan Agreement) of 3.5 x Total Net Leverage, tested prior to any drawings under the DD TL, and

• Minimum Liquidity (as defined in the Hayfin Term Loan Agreement) of $ 10 million, an at-all-times financial covenant, tested monthly.

The Credit Facilities also specify that any prepayment of the loan, voluntary or mandatory, as defined in the Term Loan Agreement, subjects the Company to a prepayment premium applicable as of the date of the prepayment:

• On or before the first anniversary of the Closing Date:

◦ A make-whole premium, equal to the greater of:

▪ 5 % of the principal balance repaid,

▪ 102 % of the principal balance plus interest that would have been accrued from the repayment date to 12 months following the Closing Date.

• After the first anniversary of the Closing Date but on or before the second anniversary of the Closing Date:

2 % of the principal balance repaid.

• After the second anniversary of the Closing Date but on or before the third anniversary of the Closing Date:

1 % of the principal balance repaid.

• After the third anniversary of the Closing Date:

0 % of the principal balance repaid.

The Hayfin Loan Agreement also includes events of default customary for facilities of this type, and upon the occurrence of such events of default, subject to customary cure rights, all outstanding loans under the Credit Facilities may be accelerated or the lenders’ commitments terminated.

The mandatory prepayments are also required in the event of a change in control, incurring other indebtedness, certain proceeds from disposal of assets and insured casualty event.

Beginning with the fiscal year ending December 31, 2021, the Company is required to prepay the outstanding loans based on the percentage of Excess Cash Flow (as defined in the Hayfin Loan Agreement), if such is generated, with the percentage determined based on the Total Net Leverage thresholds.

Hayfin maintains a first-priority security interest in substantially all of the Company’s assets.

Original issue discount and deferred financing costs incurred as part of the Financing Transactions were allocated between the sale of the Series B Convertible Preferred Stock and the Hayfin Term Loan on the basis of the relative fair values of the transactions.

The costs allocated to the Hayfin Term Loan were further allocated between the Term Loan and the DD TL on the basis of the maximum potential principal outstanding between the Credit Facilities.

The allocation of the deferred financing costs and original issue discount between Term Loan and the DD TL on July 2, 2020 was as follows (amounts in thousands):

Term Loan DD TL Total

Long term debt Other current assets

Original issue discount $ 333 $ 167 $ 500

Deferred financing costs 2,169 1,084 3,253

Deferred financing costs and original issue discount allocated to the Term Loan are amortized using the effective interest method through the Maturity Date.

The amortization of such amounts are presented as part of interest expense (income), net on the consolidated statement of operations for the year ended December 31, 2020.

Deferred financing costs and original issue discount associated with the DD TL are amortized using the straight-line method through the earlier of the expiration of the DD TL commitment term on June 30, 2021, or the date the balance of the DD TL is funded.

To the extent that there are unamortized deferred financing costs or original issue discount associated with the DD TL upon funding, such amounts will be amortized using the effective interest method through the Maturity Date.

Amortization of these amounts are presented as part of interest expense (income), net on the consolidated statements of operations.

Unamortized deferred financing costs and original issue discount associated with the DD TL are presented as other current assets on the consolidated balance sheet as of December 31, 2020.

The DD TL is subject to a commitment fee of 1 % per annum of the amount undrawn, which is recognized as interest expense.

The DD TL was not drawn upon as of December 31, 2020.

The balances of the Term Loan as of December 31, 2020 were as follows (amounts in thousands):

December 31, 2020

Outstanding principal $ 50,000

Deferred financing costs ( 1,996 )

Original issue discount ( 307 )

Long term debt $ 47,697

Components of interest expense related to the Term Loan, included in interest expense (income), net on the consolidated statements of operations, was as follows (amounts in thousands):

Year ended December 31, 2020

Stated interest $ 2,085

Amortization of deferred financing costs 173

Accretion of original issue discount 26

Interest expense $ 2,284

Interest expense related to the DD TL, included in interest (expense) income, net in consolidated statements of operations, was as follows (amounts in thousands):

Year ended December 31, 2020

Commitment fee $ 128

Amortization of deferred financing costs 542

Accretion of original issue discount 83

Interest expense $ 753

Scheduled principal payments on the Term Loan as of December 31, 2020 are as follows:

Year ending December 31, Principal

Outstanding principal $ 50,000

The DD TL was not funded as of December 31, 2020.

Consequently, no principal payments are owed.

As of December 31, 2020, the fair value of the Term Loan was $ 52.8 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.

The remaining cash flows associated with the Term Loan were discounted to December 31, 2020 using this discount rate to derive the fair value.

On June 10, 2019, the Company entered into a loan agreement (the “ BT Loan Agreement ”) with Blue Torch Finance LLC (“ Blue Torch ”), as administrative agent and collateral agent, to borrow funds with a face value of $ 75.0 million (the “ BT Term Loan ”), of which the full amount was borrowed and funded.

The proceeds from the BT Term Loan were used (i) for working capital and general corporate purposes and (ii) to pay transaction fees, costs and expenses incurred in connection with the BT Term Loan and the related transactions.

The BT Loan Agreement provided that the BT Term Loan would mature on June 20, 2022 and was repayable in quarterly installments of $ 0.9 million , with the balance due on June 20, 2022.

The BT Term Loan would have matured on June 20, 2022 and was repayable in quarterly installments of $ 0.9 million, with the balance due on June 20, 2022.

Blue Torch maintained a first-priority security interest in substantially all the Company’s assets.

The BT Term Loan was issued net of the original issue discount of $ 2.3 million.

The Company also incurred $ 6.7 million of deferred financing costs.

The BT Term Loan was amended on April 22, 2020 and was repaid on July 2, 2020, each of which is addressed in Note 21, “ Subsequent Events ,” of the consolidated financial statements.

The interest rate applicable to any borrowings under the BT Term Loan accrued at a rate equal to LIBOR plus a margin of 8.00 % per annum.

The BT Term Loan had an interest rate equal to 10.46 % at the time the BT Loan Agreement was executed.

The interest as of December 31, 2019 was 10.11 % .

The BT Loan Agreement originally contained financial covenants requiring the Company, on a consolidated basis, to maintain the following:

Maximum Total Leverage Ratio, defined as funded debt divided by consolidated adjusted EBITDA, of not more than 3.0 to 1.0 as of the last day of the previous four consecutive fiscal quarters.

Minimum Liquidity, defined as unrestricted cash and cash equivalents, of less than $ 40.0 million as of the last business day of each fiscal month following the BT Term Loan closing date through and including the fiscal month ending May 31, 2020.

For fiscal months beginning June 30, 2020, the Company was not permitted to have liquidity of less than $ 30.0 million .

Beginning with the fiscal month ending December 31, 2020, if the total leverage ratio was less than 2.50 to 1.0 as of the last business day of any fiscal month, the Company was not permitted to have liquidity of less than $ 20.0 million .

The BT Loan Agreement also provided that any prepayment of the loan, voluntary or mandatory, as defined in the BT Loan Agreement, would subject MiMedx to a prepayment penalty as of the date of the prepayment with respect to the Term Loan of:

During the period from June 10, 2019 through June 10, 2020, an amount equal to 3 % of the principal amount of the BT Term Loan prepaid on such date;

During the period from June 11, 2020 through June 10, 2021, an amount equal to 2 % of the principal amount of the BT Term Loan prepaid on such date.

Principal prepayments after June 10, 2021 were not subject to a prepayment penalty.

The BT Loan Agreement also included events of default customary for facilities of this type, and the BT Loan Agreement provided that upon the occurrence of such events of default, subject to customary cure rights, all outstanding loans under the BT Loan Agreement may be accelerated and/or the lenders’ commitments terminated.

The balances of the BT Term Loan as of December 31, 2019 was as follows (amounts in thousands):

The Company incurred $ 6.7 million of deferred financing costs.

On April 22, 2020, the Company amended the BT Loan Agreement with Blue Torch.

The amendment provided for an increase in the maximum Total Leverage Ratio, which was a quarterly test, for the remainder of 2020, and also provided for a reduction in the minimum Liquidity requirement from April 2020 through November 2020.

In connection with the amendment, the Company agreed to pay a one-time fee of approximately $ 0.7 million, added to the principal balance, and a 1 percentage point increase in the interest rate to LIBOR plus 9 %.

On July 2, 2020, a portion of the proceeds from the Financing Transactions were used to repay the outstanding balance of principal, accrued but unpaid interest, and prepayment premium under the BT Loan Agreement.

In connection with the repayment of the BT Term Loan, the Company terminated the BT Loan Agreement.

The Company has no continuing obligations related to the BT Term Loan as of December 31, 2020.

The Company recorded a loss on extinguishment of debt of $ 8.2 million.

The composition of the loss on extinguishment of debt was as follows (amounts in thousands):

Unamortized deferred financing costs $ 4,528

Unamortized original issue discount 1,538

Unamortized amendment fee 671

Prepayment premium 1,439

Other fees 25

Loss on extinguishment of debt $ 8,201

The balances of the BT Term Loan were as follows (amounts in thousands):

December 31, 2019

Current portion

Liability component - principal

Current portion Long-term

Outstanding principal $ 3,750 $ 69,375

Original issue discount — ( 1,890 )

Deferred financing cost — ( 5,579 )

Liability component - net carrying value

Interest expense related to the BT Term Loan, included in Interest income (expense), net in the consolidated statements of operations, was as follows (amounts in thousands):

For the Year Ended

December 31, 2019

Interest expense - stated interest rate

Interest expense - amortization of original issue discount

Interest expense - amortization of deferred financing costs

Total term loan interest expense

The future principal payments for the Company’s BT Term Loan as of December 31, 2019 were as follows (in thousands):

Year ending December 31,

Total Long Term Debt

As of December 31, 2019, the fair value of the Company’s BT Term Loan was $ 70.6 million .

This valuation was calculated based on a series of Level 2 and Level 3 inputs by calculating a discount rate based on the credit risk spread of debt instruments of a similar risk character in reference to U.S.

Treasury instruments with identical securities, with an incremental risk premium for Company-specific risk factors.

The remaining cash flows associated with the BT Term Loan were discounted to December 31, 2019 with this calculated discount rate to derive the fair value as of that date.

As described below in Note 21, “ Subsequent Events ,” on July 2, 2020, a portion of the proceeds from the Preferred Stock Transaction (as defined below) and the Hayfin Loan Transaction (as defined below) was used to repay the outstanding balance of principal, accrued but unpaid interest, and prepayment premium under the BT Loan Agreement.

In connection with the repayment of the BT Term Loan, the Company terminated the BT Loan Agreement.

Net (Loss) Income Per Share

Basic net (loss) income per common share is computed using the weighted-average number of common shares outstanding during the period.

Diluted net income per common share is computed using the weighted-average number of common and dilutive common equivalent shares from stock options and restricted stock using the treasury stock method.

The following table sets forth the computation of basic and diluted net income per share (in thousands except for share and per share data):

Long-term debt $ 3,750 $ 61,906

Interest expense related to the BT Term Loan, included in interest (expense) income, net in the consolidated statements of operations was as follows (amounts in thousands):

Year ended December 31,

Net (loss) income

Denominator for basic earnings (loss) per share - weighted average shares

Effect of dilutive securities:

Stock options and restricted stock (a)

Denominator for diluted (loss) earnings per share - weighted average shares adjusted for dilutive securities

(Loss) income per common share - basic

(Loss) income per common share - diluted

(a) Securities that are included in the computation of the denominator above, utilizing the treasury stock method for the years ended December 31, 2019 , 2018 and 2017 are as follows:

Effect of dilutive securities:

Stock options

Interest on principal balance $ 3,773 $ 4,331

Accretion of original issue discount 354 360

Accretion of amendment fee 53 —

Amortization of deferred financing costs 1,051 1,071

Total BT Term Loan interest expense $ 5,231 $ 5,762

Paycheck Protection Program Loan

The Company applied for and, on April 24, 2020, received proceeds of $ 10.0 million in the form of a loan under the Paycheck Protection Program (the “ PPP Loan ”).

On May 11, 2020, the Company repaid the PPP Loan in full.

There are no continuing obligations under the PPP Loan as of December 31, 2020.

Net Loss Per Common Share

Net loss per common share is calculated using two methods:

basic and diluted.

Basic Net Loss Per Common Share

Basic net loss per common share is calculated as net loss available to common shareholders divided by weighted average common shares outstanding.

Net loss available to common shareholders is calculated as net loss less (i) dividends accumulated on the Company’s Convertible preferred stock Series B during the period, (ii) periodic amortization of beneficial conversion feature, and (iii) periodic accretion of the increasing-rate dividend feature.

The following table provides a reconciliation of Net loss to Net loss available to common shareholders and calculation of basic net loss per common share for each of the years ended December 31, 2020, 2019, and 2018 (amounts in thousands, except share and per share amounts):

Year ended December 31,

2020 2019 2018

Net loss $ ( 49,284 ) $ ( 25,580 ) $ ( 29,979 )

Adjustments to reconcile to net loss available to common stockholders:

Accumulated dividend on Series B Convertible Preferred Stock 2,016 — —

Amortization of beneficial conversion feature 31,110 — —

Accretion of increasing-rate dividend feature 918 — —

Total adjustments 34,044 — —

Net loss available to common stockholders $ ( 83,328 ) $ ( 25,580 ) $ ( 29,979 )

Weighted average common shares outstanding 108,257,112 106,946,384 105,596,256

Basic net loss per common share $ ( 0.77 ) $ ( 0.24 ) $ ( 0.28 )

Diluted Net Loss Per Common Share

Diluted loss per common share is calculated as net loss available to common shareholders, adjusted for dividends on convertible preferred stock (to the extent conversions of such shares would be dilutive), divided by weighted average common shares outstanding plus potential common shares.

Potential common shares considers incremental shares resulting from certain transactions, including the exercise of stock options and the issuance of restricted stock using the treasury stock method, as well as the hypothetical conversion of the Company’s Series B Preferred Stock using the if-converted method.

The treasury stock method assumes that proceeds from the transaction are used to purchase common stock at the average market price throughout the period.

The if-converted method adds back dividends accrued or deemed on the Company’s Series B Convertible Preferred Stock and assumes conversion as of the later of the beginning of the period or the original transaction date, to the extent that such effects are determined to be dilutive.

Each individual transaction is assessed for its dilutive effect on net loss per common share.

To the extent that the transaction is antidilutive, or does not reduce net loss per common share, the effect is excluded from the calculation.

The following table sets forth the computation of basic and diluted net loss per common share (in thousands, except share and per-share data):

Year ended December 31,

2020 2019 2018

Net loss available to common stockholders $ ( 83,328 ) $ ( 25,580 ) $ ( 29,979 )

Dividends on Series B Convertible Preferred Stock 34,044 — —

Numerator - net loss available to common stockholders adjusted for hypothetical conversion of Series B Convertible Preferred Stock (a) $ ( 83,328 ) $ ( 25,580 ) $ ( 29,979 )

Denominator - weighted average common shares outstanding adjusted for potential common shares (b) 108,257,112 106,946,384 105,596,256

Diluted net loss per common share $ ( 0.77 ) $ ( 0.24 ) $ ( 0.28 )

(a) Diluted net loss per common share is not adjusted for dividends of $ 34.0 million on the Series B Convertible Preferred Stock because the effect of a hypothetical conversion was determined to be anti-dilutive.

(b) Weighted average common shares outstanding for the calculation of diluted net loss per common share does not include the following adjustments for potential common shares below because their effects were determined to be anti-dilutive for the periods presented:

Year ended December 31,

2020 2019 2018

Convertible preferred stock Series B 12,987,013 — —

Restricted stock awards 1,299,770 1,157,563 365,978

Outstanding stock options 752,499 978,243 3,172,943

Restricted stock unit awards 616,141 — —

Performance stock unit awards 31,621 — —

Potential common shares 15,687,044 2,135,806 3,538,921

Convertible Preferred Stock Series B

On July 2, 2020, the Company issued shares of its Convertible preferred stock Series B, par value $ 0.001 per share (the “ Series B Preferred Stock ”) to an affiliate of EW Healthcare Partners and to certain funds managed by Hayfin (individually, the “ Holder ”, collectively the “ Holders ”) pursuant to a Securities Purchase Agreement with Falcon Fund 2 Holding Company, L.P., an affiliate of EW Healthcare Partners, and certain funds managed by Hayfin, dated as of June 30, 2020 (the “ Securities Purchase Agreement ”), for an aggregate purchase price of $ 100 million (the “ Preferred Stock Transaction ”).

The Series B Preferred Stock accumulates a 4.0 % cumulative dividend per annum prior to the quarterly dividend payment for the period ending June 30, 2021, and a 6.0 % cumulative dividend per annum thereafter.

Dividends are declared at the sole discretion of the Company’s board of directors.

Dividends are paid at the end of each quarter based for 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, the Company may elect to accrue the dividend owed to shareholders.

Accrued dividend balances accumulate dividends at the prevailing dividend rate for each dividend period for which they are outstanding.

Each share of Series B Preferred Stock, including any accrued and unpaid dividends, is convertible into Company’s common stock at any time at the option of the Holder at a conversion price of $ 3.85 per common share, or 259.74 common shares for each Series B Preferred Share prior to any accrued and unpaid dividends.

The Series B Preferred Stock, including any accrued and unpaid dividends, automatically converts into common stock at any time after the third anniversary of the issuance date, provided that the common stock has traded at 200 % or more of the conversion price (i) for 20 out of 30 consecutive trading days and (ii) on such date of conversion.

Holders of the Series B Preferred Stock, voting as a class, are entitled to appoint two members to the board of directors.

Holders of the Series B Preferred Stock are entitled to vote on all matters to be voted on by the Company’s shareholders shall vote on an as-converted basis as a single class with the Common Stock not to exceed 19.9 % of the total voting stock of the Company.

Holders of the Series B Preferred Stock are also entitled to a liquidation preference in an amount equal to the original issue price plus all accrued and unpaid dividends in the event of a liquidation, dissolution, or winding-up of the Company.

The Company evaluated its Series B Preferred Stock and determined that it was considered an equity host under ASC 815, Derivatives and Hedging .

As a result of the Company’s conclusion that the Series B Preferred Stock represented an equity host, the conversion feature of all Series B Preferred Stock was considered to be clearly and closely related to the associated Series B Preferred Stock host instrument.

Accordingly, the conversion feature of all Series B Preferred Stock was not considered an embedded derivative that required bifurcation.

At the time of the issuance of the Series B Preferred Stock, the Company’s common stock, into which the Company’s Series B Preferred Stock is convertible, had an estimated fair value exceeding the effective conversion price of the Series B Preferred Stock, giving rise to a beneficial conversion feature in the amount of $ 31.1 million.

This amount was immediately recognized as a deemed dividend on the commitment date since there is no stated redemption date and the Series B Preferred Stock is immediately convertible.

The Series B Preferred Stock instrument contains an increasing-rate cumulative dividend feature.

The Company determined the present value of the difference between the (1) dividends that will be payable, in the period preceding commencement of the

perpetual dividend;

and (2) the perpetual dividend amount for a corresponding number of periods to ascribe a fair value to this feature.

These amounts were discounted to present value using a market rate for dividend yield as of the Closing Date.

The Company calculated the amount of the increasing-rate dividend feature as $ 1.8 million.

This amount is amortized as a deemed dividend to preferred shareholders using the effective interest method through the commencement date of the Perpetual Dividend Rate.

During the year ended December 31, 2020, the Company recognized $ 0.9 million of deemed dividends related to the amortization of the increasing-rate dividend feature.

If the Company undergoes a change of control, the Company 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, subject to the rights of the Holders of the Series B Preferred Stock in connection with such change in control.

If the Company does not exercise such repurchase right, Holders of the Series B Preferred Stock will have the option to (1) require the Company to repurchase any or all of its then-outstanding shares of Series B Preferred Stock for cash in an amount equal to the liquidation preference or (2) convert the Series B Preferred Stock, including accrued and unpaid dividends into common stock and receive its pro rata consideration thereunder.

Because the contingent redemption of the Series B Preferred Stock by the holder in the event of change in control is outside the Company’s control, the Series B Preferred Stock and related beneficial conversion feature were classified as temporary equity.

The below table illustrates changes in the Company’s balance of Convertible preferred stock Series B for the year ended December 31, 2020 (in thousands, except per share amounts):

Convertible preferred stock Series B

Shares Amount

Balance at December 31, 2019 — $ —

Issuance of Series B Preferred Stock 100,000 59,540

Deemed dividends — 32,028

Balance at December 31, 2020 100,000 $ 91,568

The Company has not declared or paid any dividends on the Series B Convertible Preferred Stock since issuance.

Dividends in arrears as of December 31, 2020 was $ 2.0 million.

As this amount has not been declared, the Company has not recorded this amount on its consolidated balance sheet as of December 31, 2020.

Based on accumulated dividends as of December 31, 2020, the Series B Convertible Preferred Stock was convertible into an aggregate of 26,497,570 shares of the Company’s common stock.

Stock Incentive Plans

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the MiMedx Group, Inc.

2016 Equity and Cash Incentive Plan (the “ 2016 Plan ”), which was approved by shareholders on May 18, 2016 and the MiMedx Group, Inc.

2016 Equity and Cash Incentive Plan Amended and Restated through October 2, 2020 (the “ 2016 Plan ”), which was approved by shareholders on May 18, 2016 and the MiMedx Group, Inc.

Assumed 2006 Stock Incentive Plan (the “ Prior Incentive Plan ”).

During the years ended December 31, 2020, 2019, and 2018 the Company used only the 2016 Plan to make grants.

The 2016 Plan permits the grant of equity awards to the Company’s employees, directors, consultants and advisors for up to 5,000,000 shares of the Company’s Common Stock plus (i) the number of shares of the Company’s Common Stock that remain available for issuance under the Prior Incentive Plan, and (ii) the number of shares that are represented by outstanding awards that later become available because of the expiration or forfeiture of the award without the issuance of the underlying shares.

The 2016 Plan permits the grant of equity awards to the Company’s employees, directors, consultants and advisors for up to 8,400,000 share s o f the Company’s common stock plus (i) the number of shares of the Company’s common stock that remain available for issuance under the Prior Incentive Plan, and (ii) the number of shares that are represented by outstanding awards that later become available because of the expiration or forfeiture of the award without the issuance of the underlying shares.

The awards are subject to a vesting schedule as set forth in each individual agreement.

Option awards are generally granted with an exercise price equal to the market price of the Company’s stock at the date of grant, and those option awards generally vest based on three years of continuous service and have 10-year contractual terms.

Restricted Common Stock awards generally vest over three years .

Certain option and restricted stock awards provide for accelerated vesting if there is a change in control and upon death or disability.

A summary of stock option activity as of December 31, 2019 , and changes during the year then ended are presented below:

Restricted stock awards generally vest over three years .

Certain option and restricted stock awards provide for accelerated vesting if there is a change in control or upon death or disability.

A summary of stock option activity for the year ended December 31, 2020, and changes during the year then ended are presented below:

Shares Weighted-

Price Weighted-

(in years) Aggregate

Outstanding at January 1, 2020 2,885,334 $ 4.42

Exercised ( 508,300 ) 2.62

Unvested options forfeited — —

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The Company has a policy of using its available repurchased treasury stock to satisfy option exercises.

The fair value of options vested during the years ended December 31, 2019 , 2018 and 2017 were $ 1.4 million , $ 0.1 million , and $ 3.7 million , respectively.

There were no options granted during the years ended December 31, 2019 , 2018 and 2017 and no unrecognized compensation expense at December 31, 2019 .

During the year ended December 31, 2019, the Company extended the contractual life of 612,000 fully vested share options held by 7 members of the Board and 278,916 fully vested share options held by a former employee.

The fair value of options vested during the years ended December 31, 2020, 2019 and 2018 were $ 0 , $ 1.4 million, and $ 0.1 million, respectively.

There were no options granted during the years ended December 31, 2020, 2019 and 2018 and there was no unrecognized compensation expense at December 31, 2020.

Modification of Stock Options

During the year ended December 31, 2019, On June 13, 2019, our Board of Directors (prior to the election or appointment of any of the Company’s current non-executive Board members), in its capacity as Administrator of the 2006 Plan, extended the contractual life of 612,000 fully vested share options held by 7 members of the Board and 278,916 fully vested share options held by a former employee.

As a result of that modification, the Company recognized incremental share-based compensation expense of $ 0.4 million for the year ended December 31, 2019.

The incremental fair value of the modified options in 2019 was estimated on the modification date using the Black-Scholes-Merton option-pricing model that uses assumptions for expected volatility, expected dividends, expected term, and the risk-free interest rate.

The incremental fair value of the modified options in 2020 was estimated on the modification date using the Black-Scholes option-pricing model that uses assumptions for expected volatility, expected dividends, expected term, and the risk-free interest rate.

Expected volatilities were the blend of the Company’s historical stock price volatility as well as that of market comparable publicly traded peer companies and other factors estimated over the expected term of the options.

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Risk-free interest rate 1.56 % - 2.02 %

1.56% - 2.02%

Restricted Stock Awards

Following is summary information for restricted stock awards for the year ended December 31, 2019 .

Shares vest over a one to three year period in equal annual increments and require continuous service.

As of December 31, 2019 , there was approximately $ 11.4 million of total unrecognized stock-based compensation related to non-vested restricted stock.

The Company has issued several classes of restricted stock awards to employees:

restricted stock (“ RSAs ”), restricted stock unit awards (“ RSUs ”), and performance stock unit awards (“ PSUs ”).

The following is summary information for restricted stock awards for the year ended December 31, 2020.

Restricted stock and RSUs vest over a one - to three-year period in equal annual increments and require continuous service.

Performance stock unit awards vest based on specific agreements with employees and require continuous service through the specified event.

As of December 31, 2020, there was approximately $ 11.5 million of total unrecognized stock-based compensation related to unvested restricted stock awards.

That expense is expected to be recognized over a weighted-average period of 1.99 years, which approximates the remaining vesting period of these grants.

All shares noted below as unvested are considered issued and outstanding at December 31, 2019 .

Weighted-Average Grant Date

All RSAs noted below as unvested are considered issued and outstanding at December 31, 2020, while unvested RSAs and PSUs are not considered issued and outstanding as of December 31, 2020.

Shares Weighted-Average Grant Date

Fair Value Number of

Shares Weighted-Average Grant Date

Fair Value Number of

Shares Weighted-Average Grant Date

Unvested at January 1, 2020 3,383,196 $ 5.13 — $ — 140,845 $ 7.10

Modification of prior year grants — — 271,184 5.90 — —

Granted 599,728 6.33 2,432,654 5.90 25,422 5.90

Vested ( 1,416,888 ) 6.18 ( 271,184 ) 5.90 ( 87,370 ) 6.87

Forfeited ( 390,177 ) 5.11 ( 107,381 ) 5.90 ( 43,685 ) 6.87

Unvested at December 31, 2020 2,175,859 $ 4.78 2,325,273 $ 5.90 35,212 $ 7.10

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During the year ended December 31, 2019, the Company granted a fixed dollar value restricted share unit award to the members of its Board in the amount of $ 1.6 million.

The restricted share unit awards vest upon the earlier of one year or the date of the 2019 Annual Meeting and will be settled in Common Stock with the number of shares of Common Stock to be determined based on the Company’s closing share price on the future settlement date.

During the year ended December 31, 2019 , the Company recognized $ 0.4 million of share-based compensation expense, with an offsetting liability recorded in Accrued compensation in the consolidated balance sheets.

The restricted share unit awards vested at the date of the 2019 Annual Meeting and were settled in common stock with the number of shares of common stock based on the closing price of the Company’s share price on August 5, 2020, a date thirty days after the Company became current on its SEC filings.

Upon this event, these awards were modified from a fixed dollar-amount of awards to be settled in a variable number of shares to a fixed number of shares based on the closing price of the Company’s common stock on August 5, 2020.

This event constituted a modification of the awards from liability-based awards to equity-based awards and did not change the total amount of expense recognized.

Prior to August 5, 2020, the Company recorded $ 1.3 million of expense, of which $ 0.9 million and $ 0.4 million were recognized during the years ended December 31, 2020 and 2019, respectively.

The Company reclassified $ 1.3 million of recorded liability to additional paid-in capital to reflect this modification on August 5, 2020.

Subsequent to the modification, $ 0.3 million of expense was recognized as additional paid-in capital.

For the years ended December 31, 2020, 2019, and 2018 the Company recognized share-based compensation as follows (in thousands):

Years Ended December 31,

2020 2019 2018

Cost of sales $ 520 $ 477 $ 705

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Treasury Stock

On May 8, 2014, the Board authorized the repurchase of up to $ 10 million of shares of Common Stock from time to time through December 31, 2014.

The Board increased the authorization during the year ended December 31, 2015 to $ 60 million, during the year ended December 31, 2016 to $ 66 million, and during the year ended December 31, 2017 to $ 130 million.

I n January 2018 the Board announced that it had increased the total authorization to $ 140 million.

The share repurchase program subsequently expired during the year ended December 31, 2018.

For the years ended December 31, 2018 and 2017, the Company purchased 507,600 , and 5,635,077 shares of its Common Stock, respectively, for an aggregate purchase price of approximately $ 7.6 million , and $ 68.3 million , respectively, exclusive of commissions of approximately $ 0.0 million , and $ 0.2 million , respectively.

Repurchases of shares of Common Stock in connection with the satisfaction of employee tax withholding obligations upon vesting of restricted stock for the years ended December 31, 2019, 2018 and 2017 were 429,918 , 614,123 , and 419,928 , respectively, for an aggregate purchase price of approximately $ 1.5 million , $ 4.9 million, and $ 4.1 million, respectively.

For the year ended December 31, 2018, the Company purchased 507,600 shares of its Common Stock under the Company’s share repurchase program, for an aggregate purchase price of approximately $ 7.6 million.

The share repurchase program expired during the year ended December 31, 2018.

Repurchases of shares of Common Stock in connection with the satisfaction of employee tax withholding obligations upon vesting of restricted stock and exercise of stock options for the years ended December 31, 2020, 2019, and 2018 were 435,492 , 429,918 , and 614,123 , respectively, for an aggregate purchase price of $ 2.3 million, $ 1.5 million, and $ 4.9 million, respectively.

During 2020, certain stock option holders elected to return restricted shares to the Company as consideration to exercise stock options.

In total, 148,972 shares were returned to the Company during the year ended December 31, 2020 for an aggregate fair value of $ 0.9 million.

There were no equivalent transactions during either the years ended December 31, 2019 or 2018.

On March 27, 2020, the U.S.

government enacted the CARES Act which, among other changes, eliminated the taxable income limit for certain net operating losses (“ NOL ”), allowed businesses to carry back NOLs arising in 2018, 2019, and 2020 to the five prior years, and provided a payment delay of employer payroll taxes during 2020 after the date of enactment.

These provisions allowed the Company to carry back federal tax losses related to 2018 and 2019.

The Company recorded net tax receivable totaling $ 11.3 million in 2020 related to these provisions, of which $ 1.2 million has been collected as of December 31, 2020.

The remaining $ 10.1 million is reflected in income tax receivable on the consolidated balance sheet as of December 31, 2020.

The Company has deferred payment on $ 2.2 million in employer taxes until 2021, which is included as part of accrued compensation on the consolidated balance sheet as of December 31, 2020.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

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Deferred Tax Assets:

Accrued expenses

Deferred revenue

Sales return and allowances

Accrued settlement costs

Research and development and other tax credits

Net operating loss $ 17,010 $ 14,350

Research and development and other tax credits 5,920 2,349

Share-based compensation 3,259 3,439

Interest limitation carryforward 2,992 839

Accrued expenses 2,918 3,759

Accrued settlement costs 2,464 3,276

Bad debts 2,138 4,859

Lease obligation 1,021 1,044

Sales return and allowances 170 659

Other 1,075 1,285

Deferred Tax Liabilities:

Prepaid expenses ( 1,170 ) ( 1,189 )

Right of use asset

Property and equipment ( 1,073 ) ( 1,582 )

Unearned insurance refund

Deferred costs of goods sold

Right of use asset ( 895 ) ( 868 )

Intangible assets ( 160 ) ( 389 )

Deferred costs of goods sold ( 43 ) ( 322 )

Unearned insurance refund — ( 894 )

Net Deferred Tax Assets 35,626 30,615

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Net Deferred Tax Assets after Valuation Allowance $ — $ —

The reconciliation of the federal statutory income tax rate of 21 % for 2019 and 2018, and 35 % for 2017 to the effective rate is as follows:

Interest limitation carryforward of $ 0.8 million was included as part of other in 2019.

This amount is presented separately in the table above for comparative purposes.

The reconciliation of the federal statutory income tax rate of 21 % to the effective rate is as follows:

Year ended December 31,

2020 2019 2018

Federal statutory rate 21.00 % 21.00 % 21.00 %

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Meals and entertainment ( 0.50 ) % ( 2.04 ) % ( 24.16 ) %

Keyman life insurance

Inventory contribution deduction

Domestic production activities deduction

Fair value adjustment

Share-based compensation ( 1.24 ) % ( 5.05 ) % 10.82 %

Uncertain tax position

Tax credits 0.32 % 0.45 % 19.75 %

Uncertain tax positions 0.24 % 1.22 % ( 2.35 ) %

Write-off of net operating losses — % — % ( 11.81 ) %

Payable true-up

Sale of Stability

Fixed asset true-up

Federal provision to return

Impact of federal rate change

Fixed asset adjustment — % — % 5.33 %

NOL carryback rate differential 10.99 % — % — %

Other ( 1.66 ) % 0.12 % ( 1.03 ) %

Valuation allowance ( 8.14 ) % ( 12.83 ) % ( 788.33 ) %

Share-based Compensation had a significant impact on the Company's effective tax rate as of December 31, 2019.

Effective tax rate 19.92 % 0.02 % ( 782.59 ) %

The tax benefit associated with the carryback of federal net operating losses under the CARES Act had a significant impact on the Company’s effective tax rate for the year ended December 31, 2020.

Additionally, the effective tax rate was affected by other permanent differences, as well as the change in the valuation allowance.

Share-based Compensation had a significant impact on the Company's effective tax rate for the year ended December 31, 2019.

Additionally, state taxes, Meals and Entertainment, and Nondeductible Compensation had a significant impact on the Company's effective tax rate.

Meals and Entertainment had a significant impact on the Company's effective tax rate as of December 31, 2018 due to the impact of the Act on the Company's method of calculating this permanent adjustment.

Meals and Entertainment had a significant impact on the Company's effective tax rate for the year ended December 31, 2018 due to the impact of the Act on the Company's method of calculating this permanent adjustment.

Additionally, Federal and state tax credits, mostly related to the Company's Research and Development activities, had a significant impact on the Company's effective rate.

Stock based compensation had a significant impact on the Company’s effective tax rate as of December 31, 2017 due to the Company’s adoption of ASU 2016-09.

Additionally, on September 30, 2017, the Company completed the Stability Divestiture, which resulted in a significant reduction in the Company’s effective tax rate.

See Note 4 for details regarding the transaction.

Current and deferred income tax expense (benefit) is as follows (in thousands):

Current and deferred income tax (benefit) expense is as follows (in thousands):

2020 2019 2018

Federal $ ( 12,418 ) $ ( 53 ) $ 614

State 159 48 427

Total current ( 12,259 ) ( 5 ) 1,041

Federal — — 19,452

State — — 6,089

Total deferred — — 25,541

Total expense (benefit)

Total (benefit) expense $ ( 12,259 ) $ ( 5 ) $ 26,582

Certain items of income and expense are not reported in tax returns and financial statements in the same year.

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The Company establishes a valuation allowance for deferred tax assets for which realization is not likely.

As of each reporting date, management considers new evidence, both positive and negative, that could affect its view of the future realization of deferred tax assets.

As of each reporting date,

management considers new evidence, both positive and negative, that could affect its view of the future realization of deferred tax assets.

A valuation allowance of $ 35.6 million and $ 30.6 million was recorded against the deferred tax asset balance as of December 31, 2020 and December 31, 2019, respectively.

To the extent the Company determines that, based on the weight of available evidence, all or a portion of its valuation allowance is no longer necessary, the Company will recognize an income tax benefit in the period such determination is made for the reversal of the valuation allowance.

If management determines that, based on the weight of available evidence, it is more-likely-than-not that all or a portion of the net deferred tax assets will not be realized, the Company may recognize income tax expense in the period such determination is made to increase the valuation allowance.

The Company maintains a full valuation allowance because it is not more likely than not the deferred tax assets will be utilized based on all available positive and negative evidence.

In the event that the weight of the evidence changes in the future, any reduction in the valuation allowance would result in an income tax benefit.

At December 31, 2020 and 2019, the Company had income tax net operating loss (“ NOL ”) carryforwards for federal and state purposes of $ 62.7 million and $ 68.5 million and $ 56.8 million and $ 49.3 million, respectively.

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The following is a tabular reconciliation of the total amounts of unrecognized tax benefits (in thousands) included in other liabilities in the consolidated balance sheets:

2020 2019 2018

Unrecognized tax benefits - January 1 $ 627 $ 938 $ 847

Gross increases - tax positions in current period — 56 91

Gross increases - tax positions in prior period

Gross decreases - lapse of statute of limitations

Decreases in prior year positions ( 150 ) ( 367 ) —

Unrecognized tax benefits - December 31 $ 477 $ 627 $ 938

Included in the balance of unrecognized tax benefits as of December 31, 2019 and December 31, 2018, are $ 0.6 million and $ 0.9 million , respectively, of tax benefits that, if recognized, would affect the effective tax rate.

Included in the balance of unrecognized tax benefits as of December 31, 2020 and December 31, 2019, are $ 0 and $ 0.6 million, respectively, of tax benefits that, if recognized, would affect the effective tax rate.

The Company recognizes accrued interest related to unrecognized tax benefits and penalties as income tax expense.

Related to the unrecognized tax benefits noted above, the Company accrued $ 0.1 million of interest during 2019, and, in total, as of December 31, 2019 has recognized $ 0.1 million of interest.

Related to the unrecognized tax benefits noted above, the Company accrued $ 0 of interest during 2020.

The Company accrued $ 0.1 million of interest during 2019 and, in total, as of December 31, 2019 had recognized $ 0.1 million of interest.

The Company accrued $ 0.1 million of interest during 2018, and, in total, as of December 31, 2018 had recognized $ 0.1 million of interest.

Certain positions included in the tabular reconciliation above will be reduced as a result of the expiration of statutes of limitations within the next 12 months.

The reserve would be reduced by approximately $ 0.2 million .

The Company is subject to taxation in the U.S.

and various state jurisdictions.

As of December 31, 2019, the Company’s tax returns for 2018, 2017 and 2016 were subject to full examination by the tax authorities.

The 2013, 2011, 2010, 2009, and 2008 federal tax returns were open to the extent of the NOL carryovers generated.

As of December 31, 2019, the Company was generally no longer subject to state or local examinations by tax authorities for years before 2016, except to the extent of NOLs generated in prior years claimed on a tax return.

As of December 31, 2020, the Company’s tax returns for 2017 through 2019 generally remain open for exam by taxing jurisdictions.

Additional prior years may be open to the extent attributes are being carried forward to an open tax year.

Supplemental Disclosure of Cash Flow and Non-Cash Investing and Financing Activities

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Years Ended December 31,

2020 2019 2018

Cash paid for interest $ 7,456 $ 4,331 $ 197

Income taxes paid 208 308 859

Cash paid for operating leases 1,569 1,650 —

Non-cash activities:

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Deferred financing costs 53 6,650 —

Stock issuance in exchange for services performed

Deemed dividends on convertible preferred stock Series B 32,028 — —

Amendment fee on BT Term Loan 722 — —

Lease right of use asset and liability 1,169 — —

Fair value of non-cash consideration received for option exercise 922 — —

The Company has a 401(k) plan (the “ 401(k) Plan ”) covering all employees who have completed one month of service.

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Employees age 50 or over in 2020 could make additional pre-tax contributions up to $ 6,500 .

Annually, the Company could elect to match employee contributions up to 5 % of the employee’s eligible compensation.

The Company matched 50 % of employee contributions up to 5 % of the employee’s eligible compensation.

The matching contribution for the years ended December 31, 2020, 2019, and 2018 was $ 1.5 million, $ 1.5 million, and $ 1.9 million, respectively.

For 2021, the Company continues to match to 50 % of employee contributions and has increased the cap on its matching contribution to 8 % of the employee’s eligible compensation.

Additionally, the Company could elect to make a discretionary contribution to the 401(k) Plan.

The Company did not provide matching contributions for the year ended December 31, 2017.

The matching contribution for the year ended December 31, 2019 and 2018 was $ 1.5 million and $ 1.9 million , respectively.

Commitments and Contingencies

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In addition to the leases noted under Note 5, “ Leases ,” the Company has commitments for meeting space.

These leases expire over 3 to 3.5 years following December 31, 2019, and generally contain renewal options.

These leases expire over 3 years following December 31, 2020, and generally contain renewal options.

The Company anticipates that most of these leases will be renewed or replaced upon expiration.

The estimated annual lease payment and meeting space commitments are as follows (in thousands):

The estimated meeting space commitments are as follows (in thousands):

Years Ended December 31,

Rent expense for the years ended December 31, 2019 , 2018 and 2017 , was approximately $ 1.4 million , $ 1.5 million , and $ 1.6 million , respectively, and is allocated among cost of sales, research and development, and selling, general and administrative expenses.

Letters of Credit

Previously, as a condition of the leases for the Company’s facilities, the Company was obligated under standby letters of credit in the amount of approximately $ 0.1 million .

The Company amended its lease during 2018 to eliminate this obligation.

Separation and Transition Services Agreement of Edward J.

On November 18, 2019, the Company entered into a Separation and Transition Services Agreement (“ Separation Agreement ”) with Edward J.

Borkowski, under which Mr.

Borkowski resigned as Executive Vice President and Interim Chief Financial Officer of the Company, as well as from any and all officer, director or other positions that he held with the Company and its affiliates, effective November 15, 2019.

Pursuant to the Separation Agreement, Mr.

Borkowski agreed to perform the duties of the Interim Chief Financial Officer with respect to the Company’s 2018 Form 10-K and assist with the transition of his duties as described in the Separation Agreement from November 15, 2019 through the earlier of the first business day following the Company’s filing of its 2018 Form 10-K with the SEC or December 31, 2019 (the “ Transition Period ”).

From the end of the Transition Period until March 31, 2020, Mr.

Borkowski agreed to provide services as may be requested by the Company with respect to matters related to the 2018 Form 10-K and the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

The Company has paid Mr.

Borkowski the full amount of $ 4.0 million as of the date of the issuance of these consolidated financial statements payable under the Separation Agreement .

See Note 5, “ Leases” for further information regarding maturities of operating lease liabilities.

Litigation and Regulatory Matters

In the ordinary course of business, the Company and its subsidiaries are parties to numerous civil claims and lawsuits and subject to regulatory examinations, investigations, and requests for information.

Some of these matters involve claims for substantial amounts.

The Company’s experience has shown that the damages alleged by plaintiffs or claimants are often overstated, based on unsubstantiated legal theories, unsupported by facts, and/or bear no relation to the ultimate award that a court might grant.

Additionally, the outcome of litigation and regulatory matters and the timing of ultimate resolution are inherently difficult to predict.

These factors make it difficult for the Company to provide a meaningful estimate of the range of reasonably possible outcomes of claims in the aggregate or by individual claim.

However, on a case-by-case basis, reserves are established for those legal claims in which it is probable that a loss will be incurred and the amount of such loss can be reasonably estimated.

In the ordinary course of business, the Company and its subsidiaries may routinely be a party to many 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.

In accordance with applicable accounting guidance, the Company accrues a liability when those matters present loss contingencies that are both probably and estimable.

The Company's financial statements at December 31, 2020 reflect the Company's current best estimate of probable losses associated with these matters, including costs to comply with various settlement agreements, where applicable.

The actual costs of resolving these claims may be substantially higher or lower than the amounts reserved.

As of December 31, 2020, the Company had accrued $ 10.0 million related to the matters described below.

The Company paid $ 7.4 million to settle legal proceedings during 2020.

In addition, $ 3.5 million was paid on the Company’s behalf through an insurance provider during 2020.

As of December 31, 2019, the Company had accrued $ 12.8 million related to legal proceedings and other matters of litigation.

The actual costs of resolving these matters may be in excess of the amounts reserved.

The following is a description of certain litigation and regulatory matters:

Securities Class Action

On January 16, 2019, the United States District Court for the Northern District of Georgia entered an order consolidating two 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 as lead plaintiff.

On May 1, 2019, the lead plaintiff filed a consolidated amended complaint, naming as defendants the Company, Michael J.

Senken, Parker H.

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, the lead plaintiff was granted leave to file an amended complaint.

The lead plaintiff filed its amended complaint against the Company, Michael Senken, Pete Petit, William 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, which remain pending.

At this time, given the uncertainty of litigation, the preliminary stage of the case, and the legal standards that must be met for, among other things, class certification and success on the merits, the Company is unable to predict the outcome of the securities class action described above.

In the event of an adverse judgment or material settlement with respect to the securities class actions described above, the Company may be required to pay significant damages or settlement costs.

Successful claims brought against the Company with respect to the securities class action in excess of its available insurance coverage could have a material adverse effect on its business, financial condition and results of operations.

Shareholder Derivative Suits

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Following continued discussions, on May 1, 2020, the parties notified the Court that plaintiffs and the Company had reached an agreement in principle to settle this consolidated derivative action, which settlement also encompasses all claims asserted in the Hialeah derivative lawsuit, the Nix and Demaio derivative lawsuit, and the Murphy derivative lawsuit.

As of the date of the filing of this Form 10-K, the parties are drafting, and intend to file, a stipulation of settlement and motion seeking preliminary approval of the settlement.

The hearing on final approval was held on December 21, 2020 and the Court entered an Order granting final approval of the settlement the same day.

On October 29, 2018, the City of Hialeah Employees Retirement System (“ Hialeah ”) filed a shareholder derivative complaint in the Circuit Court for the Second Judicial Circuit in and for Leon County, Florida (the “ Florida Court ”).

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The Company also filed a motion to dismiss on April 8, 2019.

As discussed above, the plaintiff participated in the mediation that took place in connection with the prior-filed consolidated derivative action in the Northern District of Georgia and is a party to the agreement in principle to settle that consolidated derivative action.

The agreement in principle provides that the plaintiff in this action will file a notice of dismissal to dismiss its action with prejudice within seven calendar days after the date that the judgment entered by the Northern District of Georgia becomes final.

In accordance with the terms of the settlement, Hialeah filed a motion for leave to dismiss its derivative action with prejudice on January 4, 2021.

On May 15, 2019, two individuals purporting to be shareholders of the Company filed a shareholder derivative complaint in the Superior Court for Cobb County, Georgia.

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Papasan and Neil S.

The allegations generally involve claims that the defendants breached their fiduciary duties by causing or allowing the Company to misrepresent its financial statements as a result of improper revenue recognition.

The allegations generally involve claims that the defendants breached their fiduciary duties by

causing or allowing the Company to misrepresent its financial statements as a result of improper revenue recognition.

The Court ordered this matter stayed pending the resolution of the consolidated derivative suit pending in the Northern District of Georgia.

The agreement in principle provides that the plaintiffs in this action will file a notice of dismissal to dismiss their action with prejudice within seven calendar days after the date that the judgment entered by the Northern District of Georgia becomes final.

As discussed above, the plaintiffs participated in the mediation that took place in connection with the prior-filed consolidated derivative action in the Northern District of Georgia and are a party to the agreement settling that consolidated derivative action.

In accordance with the terms of the settlement, plaintiffs filed a notice of settlement and voluntary dismissal with prejudice on January 13, 2021.

On August 12, 2019, John Murphy filed a shareholder derivative complaint in the United States District Court for the Southern District of Florida ( Murphy v.

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Prior to resolution of that motion, the plaintiff voluntarily dismissed this action without prejudice.

Under the agreement in principle, the plaintiff has agreed that this action shall not be reinstated and, after the judgment entered by the Northern District of Georgia becomes final, this action shall be deemed dismissed with prejudice.

On February 10, 2020, Charles Pike filed a shareholder derivative complaint in the United States District Court for the Southern District of Florida ( Pike v.

Petit, et al.

The complaint alleges claims for breaches of fiduciary duty against certain former officers, and certain current and former directors, of the Company:

Petit, William C.

Taylor, Michael J.

Senken, John E.

Cranston, Charles R.

Evans, Luis A.

Aguilar, Joseph G.

Terry Dewberry, Bruce L.

Hack, Charles E.

Koob, Larry W.

Papasan and Neil S.

Similar to the prior-filed actions discussed above, the allegations generally involve claims that the defendants breached their fiduciary duties by causing or allowing the Company to misrepresent its financial statements as a result of improper revenue recognition.

On May 12, 2020, prior to the Company’s time to respond to the complaint, the plaintiff filed a notice of voluntary dismissal of this action without prejudice.

On February 18, 2020, Bruce Cassamajor filed a shareholder derivative complaint in the United States District Court for the Northern District of Florida (C assamajor v.

Petit, et al.

The complaint alleges claims for breaches of fiduciary duty against certain former officers, and certain current and former directors, of the Company:

Petit, William C.

Taylor, Michael J.

Senken, John E.

Cranston, Charles R.

Evans, Luis A.

Aguilar, Joseph G.

Terry Dewberry, Bruce L.

Hack, Charles E.

Koob, Larry W.

Papasan and Neil S.

On May 22, 2020, prior to service of the complaint, the plaintiff filed a notice of voluntary dismissal of this action without prejudice.

On May 26, 2020, the court ordered this case to be dismissed for failure to serve process.

Securities Class Action

On January 16, 2019, the United States District Court for the Northern District of Georgia entered an order consolidating two 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 as lead plaintiff.

On May 1, 2019, the lead plaintiff filed a consolidated amended complaint, naming as defendants the Company, Michael J.

Senken, Parker H.

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, the lead plaintiff was granted leave to file an amended complaint.

defendants filed motions to dismiss on May 29, 2020.

Pursuant to the terms of the settlement, this action is deemed dismissed with prejudice.

Investigations

SEC Investigation

On April 4, 2017, the Company received a subpoena from the SEC requesting information related to, among other things, the Company’s recognition of revenue, practices with certain distributors and customers, its internal accounting controls and certain employment actions.

The Company cooperated with the SEC in its investigation (the “ SEC Investigation ”).

In November 2019, the SEC brought claims against the Company and the Company’s former officers Parker H.

Petit, Michael J.

Senken, and William C.

The SEC alleged that from 2013 to 2017, the Company prematurely recognized revenue from sales to its distributors and exaggerated its revenue growth.

The SEC’s complaint also alleged that the Company improperly recognized revenue because its former CEO and COO entered into undisclosed side arrangements with certain distributors.

These side arrangements allowed distributors to return product to the Company or conditioned distributors’ payment obligations on sales to end users.

The SEC complaint further alleged that the Company’s former CEO, COO, and CFO allegedly covered up their scheme for years, including after the Company’s former controller raised concerns about the Company’s accounting for specific distributor transactions.

The SEC also alleged that the Company’s former CEO, COO, and CFO all misled the Company’s outside auditors, members of the Company’s Audit Committee, and outside lawyers who inquired about these transactions.

The SEC brought claims against the Company and its former CEO, COO, and CFO for violating the antifraud, reporting, books and records, and internal controls provisions of the federal securities laws.

The SEC also brought claims against the Company’s former CEO, COO, and CFO for lying to the Company’s outside auditors.

In November 2019, without admitting or denying the SEC’s allegations, the Company settled with the SEC by consenting to the entry of a final judgment that permanently restrains and enjoins the Company from violating certain provisions of the federal securities laws.

As part of the resolution, the Company paid a civil penalty of $ 1.5 million .

The settlement concluded, as to the Company, the matters alleged by the SEC in its complaint.

The SEC’s litigation continues against the Company’s former officers.

United States Attorney’s Office for the Southern District of New York (“ USAO-SDNY ”) Investigation

The USAO-SDNY conducted an investigation into topics similar to those at issue in the SEC Investigation.

The USAO-SDNY requested that the Company provide it with copies of all information the Company furnished to the SEC and made additional requests for information.

The USAO-SDNY conducted an investigation into, among other things, the Company’s recognition of revenue and practices with certain distributors and customers.

The USAO-SDNY conducted interviews of various individuals, including employees and former employees of the Company.

The USAO-SDNY issued indictments in November 2019 against former executives Messrs.

Petit and Taylor for securities fraud and conspiracy to commit securities fraud, to make false filings with the SEC, and improperly influence the conduct of audits relating to alleged misconduct that resulted in inflated revenue figures for fiscal 2015.

The Company is cooperating with the USAO-SDNY.

The USAO-SDNY issued an indictment in November 2019 against former executives Messrs.

Petit and Taylor charging them with one count each for (i) securities fraud and (ii) conspiracy to commit securities fraud, to make false filings with the SEC, and to influence improperly the conduct of audits relating to alleged misconduct that resulted in inflated revenue figures for fiscal 2015.

On November 19, 2020, the jury found Mr.

Petit guilty of securities fraud and Mr.

Taylor guilty of conspiracy to commit securities fraud.

The Company has cooperated with the investigation, and the USAO-SDNY recently advised the Company that, based on the USAO-SDNY’s current understanding of facts, it does not intend to pursue further action or remedies against the Company.

Department of Veterans’ Affairs Office of Inspector General (“ VA-OIG ”) and Civil Division of the Department of Justice (“ DOJ-Civil ”) Subpoenas and/or Investigations

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Periodically, VA-OIG has requested additional documents and information regarding payments to individual VA clinicians.

Most recently, on June 3, 2020, the Company received a subpoena from the VA-OIG requesting information regarding the Company’s financial relationships and interactions with two healthcare providers at the VA Long Beach Healthcare System.

On June 3, 2020, the Company received a subpoena from the VA-OIG requesting information regarding the Company’s financial relationships and interactions with two healthcare providers at the VA Long Beach Healthcare System.

The Company has continued to cooperate and respond to these requests.

As part of its cooperation, the Company provided documents in response to subpoenas concerning its relationship with three now former VA employees in South Carolina, who were ultimately indicted in May 2018.

Among other things, the indictment referenced speaker fees paid by the Company to the former VA employees and other interactions between now former Company employees and the former VA employees.

In January 2019, prosecution was deferred for 18 months to allow the three former VA employees to enter and complete a Pretrial Diversion Program, the completion of which would result in the dismissal of the indictment.

As far as the Company is aware, two of the former VA employees have completed the program early and the indictment has been dismissed with respect to them.

To date, no actions have been taken against the Company with respect to this matter.

United States Attorney’s Office for the Middle District of North Carolina (“ USAO-MDNC ”) Investigation

On January 9, 2020, the USAO-MDNC informed the Company that it is investigating the Company’s financial relationships with two former clinicians at the Durham VA Medical Center.

The Company is cooperating with the investigation.

The Company has cooperated with the investigation and reached an agreement in principal to resolve this issue with the government.

On February 8, 2021, the Company received a subpoena issued by the Department of Defense Office of Inspector General seeking records regarding the sales of the Company’s micronized and other products to federal medical facilities and federal contracting offices, including those operated by the Department of Veterans Affairs or the Department of Defense.

The subpoena also seeks information regarding the Company’s communications with the FDA regarding its products.

The Company understands that the Office of the United States Attorney for the Western District of Washington Civil Division is overseeing the investigation, which is being conducted principally by agents employed by the Department of the Army Criminal Investigation Command.

The Company is cooperating with the government’s investigation and at this time the Company is unable to predict the outcome of the investigation, including whether the investigation will result in any action or proceeding against us.

Qui Tam Actions

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The Company filed a motion to dismiss on October 1, 2018.

The Company’s motion to dismiss was granted in part and denied in part on May 15, 2019.

The case is in discovery.

The Company’s

motion to dismiss was granted in part and denied in part on May 15, 2019.

The parties have reached an agreement to resolve this matter.

On January 20, 2017, two former employees of the Company, filed a qui tam False Claims Act complaint in the United States District Court for the District of Minnesota ( Kruchoski et.

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An amended complaint was filed on January 27, 2017.

The operative complaint alleges that the Company failed to provide truthful, complete and accurate information about the pricing offered to commercial customers in connection with the Company’s FSS contract.

On May 7, 2019, the Department of Justice (“ DOJ ”) declined to intervene, and the case was unsealed.

In April 2020, without admitting the allegations, the Company agreed to pay $ 6.5 million to the DOJ to resolve this matter.

This amount was paid during the year ended December 31, 2020.

Accordingly, there is no liability outstanding with respect to this matter as of December 31, 2020.

Former Employee Litigation

On December 13, 2016, the Company filed a complaint in the Circuit Court for Palm Beach County, Florida ( MiMedx Group, Inc.

Academy Medical, LLC et.

) alleging several claims against a former employee, primarily based on his alleged competitive activities while he was employed by the Company (breach of contract, breach of fiduciary duty and breach of duty of loyalty).

The former employee countersued for monetary damages and injunctive relief, alleging whistleblower retaliation in violation of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “ Dodd-Frank Act ”), unlawful discharge and defamation.

The Court dismissed the Dodd-Frank Act whistleblower counterclaim, and in response, the former employee filed an amended complaint on September 11, 2018, adding allegations of post-termination retaliation in violation of the Dodd-Frank Act.

The court dismissed the former employee’s retaliation counterclaim on January 24, 2019.

After this dismissal, only the former employee’s

claims of unlawful discharge and defamation remained pending.

The parties resolved this matter and the case was dismissed on September 5, 2019.

On December 29, 2016, the Company filed a complaint in the United States District Court for the Northern District of Illinois ( MiMedx Group, Inc.

Michael Fox ) alleging several claims against a former employee of the Company, primarily based on his alleged competitive activities while he was employed by the Company (breach of contract, breach of fiduciary duty and breach of duty of loyalty).

The former employee countersued the Company for monetary damages and injunctive relief, alleging improper wage rate adjustment, interference with the former employee’s job after his termination from the Company and retaliation.

The parties resolved this matter and the case was dismissed on November 4, 2019.

On July 13, 2018, a former employee filed a complaint against the Company in the United States District Court for the Northern District of Texas ( Jennifer R.

MiMedx Group, Inc.

), alleging sex discrimination and retaliation.

The parties resolved this matter, and the case was dismissed on November 6, 2019.

On November 19, 2018, the Company’s former Chief Financial Officer filed a complaint in the Superior Court for Cobb County, Georgia ( Michael J.

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To date, no deadlines have been established by the court.

In December 2019, MiMedx received notice of a complaint filed in July 2018 with the Occupational Safety and Health Administration (“OSHA”) section of the Department of Labor (“DOL”) by Thomas Tierney, a former Regional Sales Director, against MiMedx and the referenced individuals, Tierney v.

MiMedx Group, Inc., Parker Petit, William Taylor, Christopher Cashman, Thornton Kuntz, Jr.

and Alexandra Haden, DOL No.

4-5070-18-243.

Tierney alleged that he was terminated from MiMedx in retaliation for reporting concerns about revenue recognition practices, compliance issues, and the corporate culture, in violation of the anti-retaliation provisions of the Sarbanes-Oxley Act.

The parties settled this matter and OSHA dismissed the complaint on May 20, 2020.

On January 21, 2019, a former employee filed a complaint in the Fifth Judicial Circuit, Richland County, South Carolina ( Jon Michael Vitale v.

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The Company filed a motion to dismiss on April 8, 2019, which was denied by the Court.

This case is in discovery.

MiMedx Group, Inc., Parker Petit, William Taylor, Christopher Cashman, Thornton Kuntz, Jr.

and Alexandra Haden, DOL No.

4-5070-18-243.

The parties settled this matter and OSHA dismissed the complaint on May 20, 2020.

The parties have reached an agreement to resolve this matter.

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.

) against its former CEO, Parker “Pete” Petit, and its former COO, Bill 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 moneys previously paid on behalf of Petit and Taylor in connection with such cases.

Defamation Claims

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The Magistrate has recommended Sparrow’s motion for leave to amend be granted in part and denied in part and the Judge adopted the Magistrate’s recommendation.

Sparrow filed its amended complaint against MiMedx (Mr.

Petit has been dropped from the lawsuit) on April 3, 2020 and the Company filed its answer.

On April 3, 2020, Sparrow filed its amended complaint against MiMedx (Mr.

Petit has been dropped from the lawsuit) , on April 3, 2020 and the Company subsequently filed its answer.

This case is in discovery.

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On November 1, 2019, the Court granted Mr.

Petit’s motion to dismiss on jurisdictional grounds, denied the Company’s motion to dismiss, and granted plaintiffs leave to file an amended complaint to address the deficiencies in its claims against Mr.

Petit’s motion to dismiss on jurisdictional grounds, denied the

Company’s motion to dismiss, and granted plaintiffs leave to file an amended complaint to address the deficiencies in its claims against Mr.

Petit, which they did on November 21, 2019.

The Company filed its answer on December 20, 2019.

The parties have agreed to a stay of this matter in order to hold a mediation in March 2021.

Intellectual Property Litigation

The Bone Bank Action

On May 16, 2014, the Company filed a patent infringement lawsuit against Transplant Technology, Inc.

d/b/a Bone Bank Allografts (“ Bone Bank ”) and Texas Human Biologics, Ltd.

(“Biologics”) in the United States District Court for the Western District of Texas (MiMedx Group, Inc.

Tissue Transplant Technology, LTD.

d/b/a/ Bone Bank Allografts et.

The Company has asserted that Bone Bank and Biologics infringed certain of the Company’s patents through the manufacturing and sale of their placental-derived tissue graft products, and the Company is seeking permanent injunctive relief and unspecified damages.

On July 10, 2014, Bone Bank and Biologics filed an answer to the complaint, denying the allegations in the complaint, and filed counterclaims seeking declaratory judgments of non-infringement and invalidity.

The matter settled in 2019 prior to trial, and the case was dismissed on April 4, 2019.

The NuTech Action

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NuTech Medical, Inc.

The Company has alleged that NuTech and DCI infringed and continue to infringe the Company’s patents through the manufacture, use, sale and/or offering of their tissue graft product.

The Company has alleged that NuTech and DCI infringed and continue to infringe on the Company’s patents through the manufacture, use, sale and/or offering of their tissue graft product.

The Company has also asserted that NuTech knowingly and willfully made false and misleading representations about its products to customers and prospective customers.

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The case was stayed pending the restatement of the Company’s financial statements.

Since the Company has completed its restatement, the case has resumed and discovery has recommenced.

Since the Company has completed its restatement, the case resumed.

The parties have reached a settlement in the matter and the case was dismissed with prejudice.

The Osiris Action

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MiMedx Group, Inc.

Osiris has alleged that the Company acquired Stability, a former distributor of Osiris, in order to illegally obtain trade secrets.

On February 24, 2020, the Court issued an order granting in part and denying in party MiMedx’s motion to dismiss.

The Court dismissed Osiris’s claims for tortious interference, conspiracy to breach contract, unfair competition, and conspiracy to commit unfair competition.

The Court denied MiMedx’s motion to dismiss with respect to the claim for breach of the contract between Osiris and Stability, finding that there is a question as to whether Osiris can maintain such a claim by piercing the corporate veil between MiMedx and its former subsidiary.

If Osiris cannot pierce the corporate veil, the claim against MiMedx fails;

if Osiris can pierce the corporate veil, the breach of contract claim must be brought in an arbitration proceeding.

MiMedx did not move to dismiss Osiris’s claims for misappropriation of trade secrets and conspiracy to misappropriate trade secrets.

MiMedx plans to defend against all remaining claims.

As of December 31, 2019, the Company has accrued approximately $ 12.8 million related to the legal proceedings discussed above.

The Company has paid approximately $ 9.2 million to settle certain cases noted above.

As of December 31, 2018, the Company accrued $ 15.6 million related to legal proceedings and other matters of litigation.

The parties have reached a settlement in the matter and the case was dismissed with prejudice on October 26, 2020.

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 already borne substantial costs to satisfy these indemnification and expense advance obligations and expects to continue to do so in the future.

Pursuant to the Florida Business Corporation Act and indemnification agreements with its former Chairman and CEO, Parker H.

“Pete” Petit, and former COO, William Taylor, the Company has advanced defense costs to Petit and Taylor in connection with certain legal proceedings arising from their corporate status as former directors and officers of the Company.

Following the jury verdict against Petit for securities fraud and Taylor for conspiracy to commit securities fraud, on January 12, 2021, the Company filed suit in the Eleventh Judicial Circuit of Florida in and for Miami-Dade County ( MiMedx Group, Inc.

Petit and Taylor ) seeking (1) a declaratory judgment that a conviction of Petit and Taylor means the Company has no further obligation to indemnify or advance expenses to them, (2) reimbursement of amounts previously advanced to Petit and Taylor, and (3) any other relief deemed just and proper by the court.

Given the inherent difficulty of predicting the outcome of litigation, the Company cannot estimate recoveries, ranges of recoveries, losses or ranges of losses in these proceedings, nor can it predict whether it may be required to continue to indemnify or advance defense costs to Petit and Taylor.

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 is deemed to be individually material at this time.

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Revenue Data by Customer Type

MiMedx has two primary distribution channels:

The Company has two primary distribution channels:

(1) direct to customers (healthcare professionals and/or facilities) (“ Direct Customers ”);

and (2) sales through distributors (“ Distributors ”).

For purposes of the required disclosure under ASC 606-10-50-5, the Company groups its customers into these two groups.

This grouping by customer types does not constitute a basis for resource allocation but is information intended to provide the reader with ability to better understand how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors applicable to each customer type.

These groupings also do not meet the criteria under ASC 280-10-50-1 to qualify as separate operating segments.

The Company did not have significant foreign operations or a single external customer from which 10% or more of revenues were derived during the years ended December 31, 2020, 2019, and 2018.

Below is a summary of net sales by each customer type (in thousands):

Years Ended December 31,

Year Ended December 31,

2020 2019 2018

Direct Customers

(1) The “Other” balances are comprised entirely of the Net Sales generated by Stability while it was a subsidiary of the Company.

$ 240,690 $ 288,800 $ 343,464

7,544 10,455 15,647

$ 248,234 $ 299,255 $ 359,111

Related Party Transactions

The Company employs Simon Ryan, the brother-in-law of the Company’s former General Counsel, Alexandra O.

Haden (who resigned from the Company effective August 12, 2019), as a sales representative.

In 2018, the Company paid Mr.

Ryan total compensation of $ 0.2 million , consisting of a salary of $ 0.1 million and sales commissions, equity and other compensation of $ 0.1 million .

In 2019, the Company paid Mr.

Ryan total compensation of $ 0.2 million , consisting of a salary of $ 0.1 million and sales commissions, equity and other compensation of $ 0.1 million .

The Company has employed Thomas Koob as its Chief Scientific Officer (a non-executive officer) since 2006.

Thomas Koob is the brother of a director, Charles Koob.

Thomas Koob is the brother of a former director, Charles Koob.

Subsequent to the Company’s employment of Thomas Koob, Charles Koob was appointed as a director of the Company in March 2008.

Charles Koob's term as a Director expired at the 2020 Annual Meeting held on November 20, 2020.

In 2019, the Company paid Thomas Koob a salary of $ 0.2 million and provided equity, incentive compensation and other compensation of $ 0.2 million.

In 2020, the Company paid Thomas Koob an annual salary of $ 0.2 million and provided equity, incentive compensation and other compensation of $ 0.3 million.

The Company employs Simon Ryan, the brother-in-law of the Company’s former General Counsel, Alexandra O.

Haden as a sales representative.

In 2019, the Company paid Mr.

Ryan total compensation of $ 0.2 million, consisting of a salary of $ 0.1 million and sales commissions, equity and other compensation of $ 0.1 million.

Haden resigned from her position as General Counsel and Secretary of the Company, effective August 12, 2019, to accept another position.

Restructuring

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These charges are included in the cost of sales, research and development, and selling, general and administrative expenses in the consolidated statements of operations.

The Company’s restructuring program concluded in 2020.

All obligations related to the Company’s restructuring program have been settled as of December 31, 2020.

The liability related to restructuring activities during 2020 are included in accrued compensation in the consolidated balance sheets.

Changes to this liability during the year ended December 31, 2019 were as follows (in thousands):

Changes to this liability during the years ended December 31, 2020 were as follows (in thousands):

Liability balance as of January 1, 2018 $ —

Expenses 6,055

Cash distributions ( 448 )

Liability balance as of December 31, 2018 5,607

Expenses 8,543

Cash distributions ( 10,589 )

Liability balance as of December 31, 2019 3,561

Quarterly Financial Data (Unaudited) (in thousands except per share data)

Cash distributions ( 3,561 )

Liability balance as of December 31, 2020 $ —

Quarterly Financial Data

The following table sets forth selected quarterly financial data for 2020 and 2019.

First Quarter

Second Quarter

Third Quarter (1)

Fourth Quarter

Income tax (provision) benefit

Net income (loss)

Net income (loss) per common share - basic

Net income (loss) per common share - diluted

(1) - Third quarter amounts include the transition adjustment discussed in Note 3.

Amounts for the fourth quarter of 2020 reflect the recording of out of period adjustments related to certain accruals recorded in prior quarters, including accruals of rebates, which were identified subsequent to the filings of the financial statements for those periods.

The reflection of these adjustments increased net sales and gross profit by $ 0.8 million and decreased net loss by $ 1.3 million in the fourth quarter.

The adjustments decreased basic and diluted net loss per common share in the fourth quarter by $ 0.01 .

All identified adjustments exclusively related to 2020 and did not affect any reported amounts for periods prior to 2020.

Amounts presented are unaudited, in thousands, except per share amounts:

First Quarter Second Quarter Third Quarter (1) Fourth Quarter

Net sales 2020 $ 61,736 $ 53,647 $ 64,303 $ 68,548

2019 66,555 67,437 88,863 76,400

Gross profit 2020 51,711 45,449 54,014 57,730

2019 59,137 57,688 75,658 63,691

Income tax provision benefit (expense) 2020 11,304 ( 27 ) ( 38 ) 1,020

2019 ( 42 ) ( 42 ) 309 ( 220 )

Net (loss) income 2020 ( 4,821 ) ( 8,466 ) ( 19,417 ) ( 16,580 )

2019 ( 13,273 ) ( 17,210 ) 12,379 ( 7,476 )

Net (loss) income per common share - basic 2020 $ ( 0.04 ) $ ( 0.08 ) $ ( 0.48 ) $ ( 0.17 )

2019 $ ( 0.12 ) $ ( 0.16 ) $ 0.12 $ ( 0.07 )

Net (loss) income per common share - diluted 2020 $ ( 0.04 ) $ ( 0.08 ) $ ( 0.48 ) $ ( 0.17 )

2019 $ ( 0.12 ) $ ( 0.16 ) $ 0.11 $ ( 0.07 )

(1) - Q3 2019 amounts include the transition adjustment discussed in Note 2.

Subsequent Events

Coronavirus Aid, Relief and Economic Security (CARES) Act

On March 27, 2020, the “ Coronavirus Aid, Relief and Economic Security (CARES) Act ” was signed into law.

The Act includes provisions relating to refundable payroll tax credits, deferment of the employer portion of certain payroll taxes, loans and grants to certain business, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property.

The Company applied for and received a $ 10.0 million loan under the Paycheck Protection Program.

On May 11, 2020 the Company repaid the PPP loan.

In addition, modifications to the tax rules for carryback of net operating losses are expected to result in an estimated federal tax refund of $ 11.3 million and a resulting income tax benefit.

The COVID-19 pandemic and governmental and societal responses thereto have affected the Company’s business, results of operations and financial condition.

The continuation or a second-wave outbreak of COVID-19 or the outbreak of other health epidemics could harm the Company’s operations and increase the Company’s costs and expenses in numerous ways.

The ultimate impact of the COVID-19 pandemic is highly uncertain and subject to change.

The Company does not yet know the full extent of delays or impacts on the business, clinical trials, healthcare systems or the global economy as a whole, or how long such effects will endure.

The effects of the COVID-19 pandemic or other health epidemics could have an adverse impact on the Company’s business, results of operations and financial condition.

On April 1, 2020 the Company successfully subleased its industrial warehouse space that expires on May 31, 2023.

The Company performed an asset recovery test comparing the sum of estimated undiscounted future cash flows attributable to the sublease to its carrying amount.

The total undiscounted cash flows for the remaining lease term exceed the carrying amount of the asset, therefore there is no impairment.

BT Term Loan Amendment

On April 22, 2020, the Company amended its BT Loan Agreement with Blue Torch.

The amendment provided for an increase in the maximum Total Leverage Ratio (as defined in the BT Loan Agreement), which was a quarterly test, for the remainder of 2020, and also provided for a reduction in the minimum Liquidity (as defined in the BT Loan Agreement) requirement from April 2020 through and including November 2020.

Specifically, the maximum Total Leverage Ratio increased from 3.0 to 1.0 to 5.0 to 1.0 through December 31, 2020.

The minimum Liquidity requirement was reduced from $ 40.0 million to $ 20.0 million for April and May 2020, and from $ 30.0 million to $ 20.0 million for June through November 2020.

In connection with the amendment, the Company agreed to pay a one-time fee of approximately $ 0.7 million , added to the principal balance, and a 1 percentage point increase in the interest rate to LIBOR plus 9 % .

Repayment and Termination of BT Loan Agreement

On July 2, 2020, the Company terminated the BT Loan Agreement and repaid the $ 72.0 million outstanding balance of principal and accrued but unpaid interest under the BT Loan Agreement.

As a result of the early repayment of the loans under the BT Loan Agreement, the Company also paid a prepayment premium in the amount of $ 1.4 million .

The Company paid the outstanding balance, accrued but unpaid interest, and prepayment premium using a portion of the proceeds from the Preferred Stock Transaction and the Hayfin Loan Transaction.

Issuance of $100 Million of Series B Convertible Preferred Stock

On July 2 , 2020, the Company issued $ 100 million of the Company’s Series B Convertible Preferred Stock, par value $ 0.001 per share (the “ Series B Preferred Stock ”) to an affiliate of EW Healthcare Partners and certain funds managed by Hayfin Capital Management LLP pursuant to a Securities Purchase Agreement with Falcon Fund 2 Holding Company, L.P., an affiliate of EW Healthcare Partners, and certain funds managed by Hayfin Capital Management LLP , dated as of June 30 , 2020, for an aggregate purchase price of $ 100,000,000 (the “ Preferred Stock Transaction ”).

See Item 9B, “ Other Information.

$75 Million Loan Facility with Hayfin

On June 30 , 2020, the Company entered into a Loan Agreement with, among others, Hayfin Services, LLP, an affiliate of Hayfin Capital Management LLP (the “ Hayfin Loan Agreement ”), which was funded on July 2 , 2020 (the “ Hayfin Loan Transaction ”) and provided the Company with a senior secured term loan in an aggregate amount of $ 50 million (the “ Term Loan ”) and an additional $ 25 million delayed draw term loan (the “ DD TL ”) in the form of a committed but undrawn facility.

The Term Loan and the DD TL mature on July 2, 2025 (the “ Maturity Date ”).

The Term Loan and the DD TL have no fixed amortization (i.e.

interest only through the Maturity Date).

Borrowings under the Hayfin Loan Agreement bear interest at a rate equal to LIBOR (subject to a floor of 1.5 % ) plus a margin of 6.75 % .

The margin will be eligible to step down to 6.5 % or 6.0 % based on future Total Net Leverage levels, as defined in the Hayfin Loan Agreement.

The Company paid an upfront commitment fee of 2 % of the aggregate of the Hayfin Term Loan and the DD TL.

The DD TL is subject to an additional commitment fee of 1 % of the amount undrawn.

The Hayfin Loan Agreement contains certain affirmative covenants that impose certain reporting and/or performance obligations on the Company and its subsidiaries, including (i) Maximum Total Net Leverage of 5.0 x through December 31, 2020, stepping

down to 4.5 x through June 30, 2021, and to 4.0 x thereafter until the Maturity Date;

(ii) Cap on Cash Netting for the purposes of calculation Total Net Leverage set at $ 10,000,000 ;

(iii) DD TL Incurrence Covenant of 3.5 x Total Net leverage, tested prior to any drawings under the DD TL;

and (iv) Minimum Liquidity of $ 10 M , an at-all-times covenant tested monthly.

The Company has assessed subsequent events through March 8, 2021, the date which these consolidated financial statements were first available to be issued.

Based on this assessment, there were no material subsequent events requiring disclosure.

Schedule II Valuation and Qualifying Accounts

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Years ended December 31, 2020, 2019 and 2018 (in thousands)

Beginning of Year

Additions charged to Expense or Revenue

and write-offs

Beginning of Year Additions charged to Expense or Revenue Deductions

and write-offs Balance at

For the Year ended December 31, 2020

Allowance for doubtful accounts $ — $ 719 $ 18 $ 737

Allowance for product returns 4,115 705 ( 2,499 ) 2,321

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data