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Item 7. Management’s Discussion and Analysis

2023-02-28 compared with 2022-02-28 · 279 added, 210 removed, 172 unchanged (74% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

MIMEDX is a transformational placental biologics company, developing and distributing placental tissue allografts with patent-protected, proprietary processes for multiple sectors of healthcare.

As a pioneer in placental biologics, we are focused on addressing unmet clinical needs in areas of advanced wound care, surgical recovery applications and musculoskeletal conditions.

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

We apply CGTP, CGMP, and terminal sterilization to produce our allografts.

MIMEDX provides products primarily in the wound care, burn, and surgical recovery sectors of healthcare.

MIMEDX is a pioneer and leader in placental biologics focused on addressing the needs of patients with acute and chronic non-healing wounds.

We are also advancing a promising late-stage biologics pipeline targeted at decreasing pain and improving function for patients with knee osteoarthritis (“ KOA ”).

To accomplish these goals, we operate under two defined internal business units:

Wound & Surgical and Regenerative Medicine.

All of our products are regulated by the FDA.

MIMEDX is a leading supplier of human placental allografts, which are human tissues that are derived from one person (the donor) and used to produce products that treat another person (the recipient).

MIMEDX has supplied over two million allografts, through both direct and consignment shipments.

Our platform technologies include tissue allografts derived from the amnion and chorion layers of the human placental membrane (EPIFIX and AMNIOFIX) and tissue allografts derived from human umbilical cord (EPICORD and AMNIOCORD).

EPIFIX and EPICORD products are marketed for external use, such as in advanced wound care applications, while our AMNIOFIX and AMNIOCORD products are positioned for use in surgical recovery applications, including lower extremity repair, plastic surgery, vascular surgery and multiple orthopedic repairs and reconstructions.

AMNIOFIX Injectable, or mdHACM is a micronized configuration of AMNIOFIX and is not currently marketed in the United States.

mdHACM is our lead product candidate for our late-stage pipeline targeted at achieving FDA approval for specific clinical indications, including degenerative musculoskeletal conditions.

We have two classes of products:

(1) Advanced Wound Care products, or Section 361 products, consisting of our tissue and cord sheet allograft products, and (2) Section 351 products, consisting of our micronized and particulate products, which, prior to May 31, 2021, the date of the FDA’s period of enforcement discretion ended, were used to treat a variety of clinical conditions, including both advanced wound care and musculoskeletal applications.

Our Advanced Wound Care business includes two product categories, Tissue/Other and Cord products.

We sell product through two distribution channels:

(1) direct to customers (healthcare professionals and/or facilities);

and (2) sales through distributors.

In November 2017, the FDA published a series of guidances that established an updated framework for the regulation of cellular and tissue-based products.

These guidances clarified the FDA’s views about the criteria that differentiate those products subject to regulation under Section 361 of the Public Health Service Act from those considered to be drugs, devices, and/or biological products subject to licensure under Section 351 of the Public Health Service Act and related regulations.

The FDA exercised enforcement discretion under limited conditions with respect to IND applications and pre-market approval requirements through May 31, 2021.

The enforcement discretion period ended on May 31, 2021.

We are not currently marketing our micronized and particulate products affected by the guidance in the United States.

This discussion, which presents our results for the fiscal years ended December 31, 2021 and December 31, 2020, should be read in conjunction with our Consolidated Financial Statements and the accompanying notes.

Also please refer to Item 1 — Business and Item 1A — Risk Factors, which include detailed discussions of various items impacting our business, results of operations and financial condition.

(1) Advanced Wound Care products, or Section 361 products, consisting of our tissue and cord sheet allograft products, as well as certain particulate products regulated under Section 361, and (2) Section 351 products, consisting of our micronized and certain other particulate products, which, prior to May 31, 2021, the date the FDA’s period of enforcement discretion ended (as described below), were used to treat a variety of clinical conditions, including both advanced wound care and musculoskeletal applications.

Our Advanced Wound Care products include two product categories:

Tissue/Other and Cord products.

We apply Current Good Tissue Practices (“ CGTP ”) and Current Good Manufacturing Practices (“ CGMP ”) standards in addition to terminal sterilization to produce our allografts.

The Wound & Surgical business focuses on the Advanced Wound Care and Surgical Recovery markets through sales of our existing product portfolio (as described in detail in the Our Products section below) and product development to serve these primary end markets.

This business unit is responsible for substantially all sales of our Advanced Wound Care products, as well as the sale of our Section 351 products internationally.

The Regenerative Medicine business focuses on progressing our placental biologics platform towards registration as an FDA-approved biological drug.

Micronized dehydrated human amnion chorion membrane (“ mDHACM ”) is an injectable placental biologic product candidate in our late-stage pipeline targeted at achieving FDA approval for an indication to help decrease pain and improve function in patients suffering from KOA.

Prior to May 31, 2021, this business unit was responsible for domestic sales of our Section 351 products.

Regenerative Medicine does not currently generate revenue.

Our primary platform technologies include tissue allografts derived from human placental membrane (EPIFIX, AMNIOFIX, and AMNIOEFFECT), tissue allografts derived from human umbilical cord (EPICORD and AMNIOCORD), and a particulate extracellular matrix derived from human placental disc (AXIOFILL).

EPIFIX and EPICORD products are marketed for external use, such as in Advanced Wound Care applications, while our AMNIOFIX, AMNIOEFFECT, AXIOFILL, and AMNIOCORD products are positioned for use in Surgical Recovery applications, including lower extremity repair, plastic surgery, vascular surgery and multiple orthopedic repairs and reconstructions.

In November 2017, the FDA published a series of guidance documents that established an updated framework for the regulation of cellular and tissue-based products.

These guidance documents clarified the FDA’s views about the criteria that differentiate those products subject to regulation under Section 361 of the Public Health Service Act from those considered to be drugs, devices, and/or biological products subject to licensure under Section 351 of the Public Health Service Act and related regulations.

The FDA exercised enforcement discretion under limited conditions with respect to IND applications and pre-market approval requirements for Section 351 products.

The FDA’s period of enforcement discretion ended effective May 31, 2021.

We are not currently marketing our micronized and certain particulate products affected by the guidance in the United States.

This discussion, which presents our results for the fiscal years ended December 31, 2022 and 2021, should be read in conjunction with our Consolidated Financial Statements and the accompanying notes.

Also please refer to Part I, Item 1, Business , and Part I, Item 1A, Risk Factors , which include detailed discussions of various items impacting our business, results of operations and financial condition.

We intend for this discussion to provide the reader with information that will assist in understanding our financial statements, the changes in certain key items in those financial statements from period to period and the primary factors that accounted for those changes.

We also discuss certain performance metrics that management uses to assess the Company's performance.

Further information on the factors that can affect our operating results can be found in Part I under the caption “Explanatory Note and Important Cautionary Statement Regarding Forward-Looking Statements.”

Our Annual Report for the year ended December 31, 2020 includes a discussion and analysis of our financial condition and results of operations for the year ended December 31, 2019 in Part II, Item 7, “ Management’s Discussion and Analysis of Financial Condition and Results of Operations .”

Trends in Our Business

Analysis of our Phase 2B Knee Osteoarthritis clinical trial has identified a probable root cause of the failure for this study to meet its primary endpoints.

We intend to use these findings to inform planned future clinical trials

In September 2021, we reported top-line data from the results of two late-stage musculoskeletal clinical trials of the Company’s mdHACM product, including a Phase 2B clinical trial for the treatment of Knee Osteoarthritis.

Results from a topline analysis of the six-month efficacy data for the Phase 2B clinical trial for Knee Osteoarthritis revealed that the study did not meet its primary endpoints, but did reveal varied efficacy signals between patient cohorts evaluated pre- and post-blinded interim analysis performed in mid-2019.

A root-cause analysis of the Knee Osteoarthritis study indicated that the varied efficacy signals between the pre-interim analysis and post-interim analysis cohorts was the result of faded potency of the investigational product over time.

We intend to incorporate these findings into the design of our Phase 3 program, which we plan to initiate in 2022.

We are expanding beyond advanced wound care and into areas of surgical recovery

Surgical recovery applications focus on the use of tissue products to augment tissue, serve as a barrier membrane, or aid in incisional closure with the goal of preventing or reducing procedural complications.

Following a thorough review of surgical procedures and potential clinical applications across several specialties, we have identified those areas where we believe our tissue products could be incorporated.

We are targeting certain procedures for use of our products based on unmet clinical need, potential procedural complication rate, clinical relevance, economic factors and overall business priorities.

As in advanced wound care, we believe this market is expanding as a result of demographic trends, including an aging population, increasing incidence of obesity and diabetes and the associated higher susceptibility to non-healing chronic wounds.

We are actively pursuing growth strategies by expanding our geographic reach

We are actively pursuing international expansion, with an initial focus in Japan.

We received regulatory approval by the Japanese Ministry of Health, Labor and Welfare in June 2021 to market EPIFIX in Japan.

We expect to secure reimbursement approval in mid-2022, and are putting in place the necessary structure, medical education programs, and market development initiatives that will operationalize our commercial strategy.

We are evaluating opportunities for geographic expansion in the United Kingdom, certain other areas of Europe and also the Middle East.

Our Annual Report for the year ended December 31, 2021 includes a discussion and analysis of our total company financial condition and results of operations for 2021 compared to 2020 in Part II, Item 7, Management’s Discussion and Analysis of

Financial Condition and Results of Operations .

A discussion of the results of operations and financial condition for Wound & Surgical and Regenerative Medicine for 2021 compared to 2020 are presented herein.

Impact of COVID-19 Pandemic

While the impact of the COVID-19 pandemic is still ongoing, the effects on our operations, such as access restrictions to hospitals and difficulties obtaining donor materials that we observed during the year ended December 31, 2020 did not materially affect our operations during the year ended December 31, 2021.

We are continuously monitoring developments with respect to novel variants of the virus and government and societal responses to mitigate the continued spread of COVID-19, which could impact our operations.

The COVID-19 pandemic is still ongoing, though the effects on our operations, such as access restrictions to hospitals and difficulties obtaining donor materials that we observed during the year ended December 31, 2020 and, to a lesser degree, during the year ended December 31, 2021, did not materially affect our operations during the year ended December 31, 2022.

We are continuously monitoring developments with respect to novel variants of the virus and government and societal responses to mitigate the spread of COVID-19, which could impact our operations.

We continue to exercise an abundance of caution with respect to the health and well-being of our employees.

We are providing employees with Personal Protective Equipment as needed, and advising all employees to receive a COVID-19 vaccine or booster as soon as reasonably possible.

Our offices are open and staffed, and we are operating under a hybrid work model for some personnel as well as encouraging all employees to get vaccinated if they have not already done so.

None of these efforts have materially affected the Company’s operations for the year ended December 31, 2022.

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We believe the items discussed below provide insight into the factors that affect these key measures.

Net sales is recognized based on the consideration we expect to receive from the sale.

Net sales is recognized based on the consideration we expect to receive from the sale at the point in time when control of the goods is transferred to the customer, which generally occurs upon our delivery to a third-party carrier.

This consists of the gross selling price of the product, less any discounts, rebates, fees paid to GPOs, and returns.

We derive the majority of our revenue from selling our tissue and cord products in the United States.

We are actively working to broaden our product portfolio in a number of clinical applications, while also seeking regulatory approval with the appropriate regulators to expand our geographic footprint.

We have two classes of products:

(1) Advanced Wound Care products, or Section 361 products, consisting of our tissue and cord sheet allograft products, and (2) Section 351 products, consisting of our micronized and particulate products, which, prior to May 31, 2021, the date the FDA’s period of enforcement discretion ended, were used to treat a variety of patient needs, including both advanced wound care and musculoskeletal applications.

Our Advanced Wound Care business includes two product categories, Tissue/Other and Cord products.

We have two distribution channels:

(1) direct to customers and (2) sales through distributors.

Several factors affect our reported revenue in any period, including product, payer and geographic sales mix, operational effectiveness, pricing realization, marketing and promotional efforts, timing of orders and shipments, regulatory actions including healthcare reimbursement scenarios, competition, and business acquisitions that involve our customers or competitors.

In early 2023, we announced the execution of an exclusive distribution agreement with Gunze Medical Limited to sell EPIFIX in Japan.

Cost of goods sold and gross profit

Cost of goods sold includes product testing costs, quality assurance costs, personnel costs, manufacturing costs, raw materials and product costs, depreciation and facility costs associated with our manufacturing and warehouse facilities.

Fluctuations in our cost of goods sold correspond with the fluctuations in these costs as well as in sales units driven by the changes in our sales force and sales territories, product portfolio offerings and the number of facilities that offer our products.

Fluctuations in our cost of goods sold correspond with the fluctuations in these costs as well as sales volume.

Gross profit is calculated as net sales less cost of goods sold.

Our gross profit is affected by product and geographic sales mix, realized pricing of our products, the efficiency of our manufacturing operations and the costs of materials used to make our products.

Gross margin is calculated as gross profit divided by net sales.

Our gross margin is affected by product and geographic sales mix, realized pricing of our products, the efficiency of our manufacturing operations and the costs of materials used to make our products.

Regulatory actions, including with respect to reimbursement for our products, may require costly expenditures or result in pricing pressure, and may decrease our gross profit and gross margin.

Selling, general and administrative expense

Selling, general and administrative expense includes personnel costs, commissions, incentive compensation, customer support, administrative and labor costs, insurance, professional fees, depreciation and bad debt expense.

We expect our selling, general and administrative expense to fluctuate based on revenue fluctuations, geographic changes, and any changes to the size of our headcount, particularly that of our sales and marketing forces.

Selling, general and administrative (“ SG&A ”) expense includes costs to execute our sales strategy.

These include personnel costs pertaining to our sales force and sales support functions, including salaries, commissions and other incentive compensation, commissions to sales agents, customer support, travel expenses, and bad debt expense.

We expect our SG&A expense to fluctuate based on revenue fluctuations, geographic changes, and any changes to the size of our headcount, particularly that of our sales and marketing forces.

Certain of these costs scale with sales, but can fluctuate depending on sales mix.

For example, we pay sales agents a greater commission than our internal sales force, meaning that we could incur greater commission expenses if a greater proportion of our sales are through sales agents.

SG&A expense also includes costs related to functions which support both of our business units, such as legal, finance, human resources, and other such functions.

These costs include personnel costs associated with these units, as well as insurance, and certain professional fees.

These costs tend to fluctuate based on headcount, which will vary depending on our projected business needs.

Research and development expense

Research and development expense relates to our investments in clinical trials to expand our product pipeline and platforms, as well as investments in improvements to our manufacturing process and the enhancement of existing products.

Research and development expense relates to our investments in clinical trials to expand our product pipeline and platforms, as well as expenditures in improvements to our manufacturing process and the enhancement of existing products.

Our research and development costs also include expenses such as salaries and benefits related to our research department, consulting costs and advisory costs, and regulatory costs.

We expense research and development costs as incurred.

Fluctuations in research and development expenses are potentially driven by the timing and cadence of our clinical trials.

Fluctuations in research and development expenses can be impacted by the timing and cadence of our clinical trials.

Investigation, restatement and related expense

Investigation, restatement and related expense primarily relates to legal fees advanced to certain former officers and directors of the Company under certain indemnification agreements and the Company’s liability from legal proceedings taken against us, which arose from the findings of the Audit Committee Investigation.

Investigation, restatement and related expense primarily relates to legal fees advanced to certain former officers and directors of the Company under certain indemnification agreements and our liability from legal proceedings taken against us which arose from the findings of the Audit Committee Investigation.

The timing and extent of these expenses depend on the stage and status of legal proceedings.

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Results of Operations for 2022 Compared to 2021

Total Company

Year Ended December 31,

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Net sales $ 267,841 $ 258,615 $ 9,226 3.6 %

Cost of sales 48,316 43,283 5,033 11.6 %

Gross profit 219,525 215,332 4,193 1.9 %

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Research and development 22,829 17,344 5,485 31.6 %

Investigation, restatement and related 3,791 59,465 (55,674) (93.6) %

Investigation, restatement and related 12,177 3,791 8,386 nm

Amortization of intangible assets 701 820 (119) (14.5) %

Impairment of intangible assets — 53 (53) (100.0) %

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

Interest expense, net (5,016) (4,980) (36) 0.7 %

Other expense, net (4) (23) 19 (82.6) %

Income tax provision (expense) benefit (247) 12,259 (12,506) —

Net loss $ (10,285) $ (49,284) $ 38,999 (79.1) %

Income tax provision expense (206) (247) 41 (16.6) %

Net loss $ (30,197) $ (10,285) $ (19,912) nm

We recorded net sales for the year ended December 31, 2022 of $267.8 million, an increase of $9.2 million or 3.6% over 2021 net sales of $258.6 million.

Net sales for 2021 and 2020 include collections on the Remaining Contracts of $1.0 million and $7.8 million, respectively.

Refer to Item 8, Note 2, “ Significant Accounting Policies ,” of the consolidated financial statements for additional details regarding the Remaining Contracts.

Adjusted Net Sales, which excludes cash collected on the Remaining Contracts, were $257.6 million in 2021, an increase of $17.1 million or 7.1%, compared to $240.5 million in 2020.

Adjusted Net Sales in these periods included net sales of Section 351 products of $17.6 million and $31.8 million in 2021 and 2020, respectively.

Adjusted Net Sales is a Non-GAAP measure intended to remove cash collections from the Remaining Contracts, which are not a reflection of recurring revenue.

We expect that collections on the Remaining Contracts will be negligible in 2022 and beyond.

Refer to the section “ Non-GAAP Financial Measures ” below for more information.

Sales of our Advanced Wound Care products, which excludes the Section 351 Products, increased $31.4 million or 15.0%, year-over-year.

This increase was primarily the result of an increase in sales volume due to lessening of restrictions implemented at the onset of the COVID-19 pandemic, including access to hospitals and travel restrictions.

The increase also reflects the initial results of our commercial focus on areas of surgical recovery.

We also saw growth in our EPIFIX sheet portfolio and the positive impact of sales of our EPICORD Expandable product launched in September 2020.

Refer to Item 8, Note 15, “ Revenue ”, for a disaggregation of our sales by product.

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

Year Ended December 31, Change

2022 2021 $ %

Advanced Wound Care

Tissue/Other $ 241,992 $ 216,418 $ 25,574 11.8 %

Cord 23,211 23,599 (388) (1.6) %

Total Advanced Wound Care 265,203 240,017 25,186 10.5 %

Section 351 2,379 17,610 (15,231) (86.5) %

Other 259 988 (729) (73.8) %

Total $ 267,841 $ 258,615 $ 9,226 3.6 %

The increase in net sales reflects sales growth in our Advanced Wound Care products of $25.2 million or 10.5%, year-over-year.

Our sales growth in this area was a result of our focus on the application of these products into areas of Surgical Recovery, including the introduction of AMNIOEFFECT and AXIOFILL to the market during 2022.

We saw further gains as a result of our prior initiatives to expand, realign and train our sales team.

The increase was partially offset by our inability to sell our Section 351 products in the United States as a result of the end of the FDA’s period of enforcement discretion on May 31, 2021.

Sales of our Section 351 products were $2.4 million for the year ended December 31, 2022 compared to $17.6 million for the year ended December 31, 2021, a decrease of $15.2 million.

Sales of Section 351 products during the year ended December 31, 2022 were derived from outside the United States.

Gross Margin and Cost of Sales

Gross margin in 2022 was 82.0%, compared to 83.3% in 2021.

The decrease in gross margin was driven primarily by write-downs of discontinued product recorded during 2021.

The write-downs related to our Section 351 Products, which we no longer market in the United States after May 31, 2021, the date the FDA’s period of enforcement discretion ended, and certain Advanced Wound Care product lines which we no longer intend to market.

We do not currently anticipate significant write-downs of our inventory to recur in 2022.

Cost of sales and gross profit for 2021 included inventory write-downs of $1.7 million related to our Section 351 products, resulting from the end of enforcement discretion and products which were discontinued.

There were no significant unusual write-downs during 2022.

Decreases in margins were driven by negative impacts from production variances, primarily due to lower product levels.

Cost of sales for the year ended December 31, 2022 was $48.3 million, an increase of $5.0 million, or 11.6%, compared to $43.3 million for the year ended December 31, 2021.

In addition to the factors affecting gross margin discussed above, overall increases in sales volume contributed to the increase in cost of sales.

Selling, General and Administrative Expense

Selling, general and administrative (“ SG&A ”) expense increased $17.3 million, or 9.6%, to $198.4 million for 2021, compared to $181.0 million for 2020.

SG&A expense increased $10.4 million, or 5.3%, to $208.8 million for 2022, compared to $198.4 million for 2021.

The increase in SG&A expense was driven by:

• the restoration of full-salary levels, which were restricted for a portion of 2020 as part of our response to the COVID-19 pandemic, and merit increases;

• incremental costs associated with the expansion of our sales force;

• higher travel costs during 2021 compared to 2020, as travel was restricted at the onset of the COVID-19 pandemic in 2020;

• a proxy contest during the second quarter of 2021, totaling $3.9 million of expenses;

• increases in sales commissions, resulting from higher sales volumes.

• an increase in travel expenses, reflecting the lifting of travel restrictions that were in place during the year ended December 31, 2021,

• increases in sales commissions, resulting from higher sales volumes through sales agents, who carry higher commission rates than our internal sales force.

• an increase in bad debt expense resulting from the deterioration of credit for certain specific customers, and

• an increase in severance costs incurred with the intention of reducing corporate costs.

This effect was partially offset by a year-over-year decrease in share-based compensation expense, primarily driven by the reversal of previously recognized share-based compensation expense associated with forfeitures of awards from the separated individuals.

These amounts were offset, primarily, by year-over-year decreases in professional service expenses.

Research and Development Expense

Our research and development expense increased $5.6 million, or 48.0%, to $17.3 million in 2021, compared to $11.7 million in the prior year.

The increase was driven by higher personnel costs due to headcount increases to support investments in our clinical trials and the restoration of full salary levels and merit increases, which were restricted for a portion of 2020.

We also incurred higher consulting fees in 2021, primarily to assist in the evaluation of the results of our clinical trials.

Our research and development expense increased $5.5 million, or 31.6%, to $22.8 million for the year ended December 31, 2022, compared to $17.3 million for the year ended December 31, 2021.

The increase reflects higher personnel costs and clinical trial-related expenses to support clinical research efforts, primarily connected to our commercial and late-stage pipelines.

Investigation, Restatement and Related Expense

Investigation, restatement, and related expenses decreased $55.7 million, or 93.6% to $3.8 million for 2021 compared to $59.5 million for 2020.

The decrease was the result of:

• lower fees advanced under indemnification agreements with certain former members of management during 2021 compared to 2020;

• recoveries from certain director and officer insurance policies relating to previously-recognized legal expenses in 2021;

• negotiated reductions in previously-recognized legal expenses in 2021;

• year-over-year reductions in costs related to the restatement of our prior period financial information.

The funds received from insurance providers and reductions in legal expenses were reflected as reductions to expense in the periods in which those transactions occurred.

The restatement of our prior period financial information concluded in 2020 and we will not incur any expenses related to the restatement moving forward.

We remain subject to indemnification agreements with certain former officers and directors of the Company (other than our former Chief Executive Officer and our former Chief Operating Officer) for whom legal proceedings are still ongoing.

Investigation, restatement, and related expenses increased $8.4 million to $12.2 million for the year ended December 31, 2022, compared to $3.8 million for the year ended December 31, 2021.

In 2021, we received funds from insurance providers and reductions in legal expenses that were reflected as reductions to expense for the year ended December 31, 2021.

We remain subject to indemnification agreements with certain former officers and directors of the Company (other than Messrs.

Petit and Taylor, our former Chief Executive Officer and Chief Operating Officer) for whom legal proceedings are still ongoing, in particular, our former Chief Financial Officer.

Amortization of Intangible Assets

Amortization expense related to intangible assets decreased $0.3 million to $0.8 million in 2021, compared to $1.1 million in 2020.

The decrease was the result of intangible assets impaired in 2020.

Amortization expense related to intangible assets decreased $0.1 million from $0.8 million for the year ended December 31, 2021 to $0.7 million for the year ended December 31, 2022.

The decrease was the result of the avoidance of amortization expense from assets that had become fully-amortized during 2021.

Impairment of Intangible Assets

Impairment of intangible assets of $0.1 million was recorded in 2021 related to the impairment of a supplier relationship acquired as part of the acquisition of Surgical Biologics, LLC (“ SB ”) in 2011.

Impairment of intangible assets of $1.0 million was recorded in 2020 related to the impairment of customer relationships acquired as part of the SB acquisition.

Loss on Extinguishment of Debt

Loss on extinguishment of debt of $8.2 million was recorded in 2020 resulting from the repayment and termination of a previous term loan agreement.

Impairment of intangible assets was $0.1 million for the year ended December 31, 2021, reflecting the impairment of a supplier relationship asset.

There were no impairments in 2022.

Interest Expense, Net

Interest expense, net decreased by $2.9 million to $5.0 million during 2021 from $7.9 million during 2020.

The decrease was the result of less principal outstanding, a lower stated interest rate, and lower amortization of deferred financing costs and original issue discount under the Hayfin Loan Agreement, as defined and described in the Liquidity and Capital Resources section below, compared to our previous term loan agreement which was outstanding for the first half of 2020.

Other Expense, Net

Other expense was negligible in both periods.

Income Tax Provision (Expense) Benefit

The effective tax rate for 2021 was (2.5)% on pre-tax book loss of $10.0 million, primarily reflecting a current tax expense associated with state income taxes and adjustment to federal income tax refund receivable.

Interest expense was $5.0 million for each of the years ended December 31, 2022 and 2021.

The rise in LIBOR rates during 2022 caused an increase in interest expense on our outstanding term loan.

In addition, we recognized interest income on our income tax receivable resulting from the Coronavirus Aid, Relief, and Economic Security Act.

These effects were offset by the avoidance of interest expense associated with the delayed draw term loan facility option under the Hayfin Loan Agreement that terminated on June 30, 2021.

We expect interest expense to increase in future quarters as a result of rising interest rates.

Income Tax Provision Expense

The effective tax rate for 2022 and 2021 was (0.7)% and (2.5)%, respectively on pre-tax book losses of $30.0 million and $10.0 million, respectively.

There were no discrete items which materially influenced the effective tax rate in either period, and net operating losses generated were offset by a valuation allowance.

Segment Results

Wound & Surgical

Our Wound & Surgical business focuses on the Advanced Wound Care and Surgical Recovery markets through sales of our existing product portfolio and product development to serve these end markets.

Its platform technologies include tissue allografts derived from human placental membrane (EPIFIX®, AMNIOFIX®, and AMNIOEFFECT™), tissue allografts derived from human umbilical cord (EPICORD® and AMNIOCORD®), and a particulate extracellular matrix derived from human placental disc (AXIOFILL™).

This segment is also responsible for the international sales of our Section 351 products.

Several factors affect reported net sales for our Wound & Surgical business in any period, including product, payer and geographic sales mix, operational effectiveness, pricing realization, marketing and promotional efforts, timing of orders and shipments, regulatory actions including healthcare reimbursement scenarios, competition, and business acquisitions that involve our customers or competitors.

SG&A expense includes costs to execute our sales strategy.

Research and development expenses for Wound & Surgical focus on the expansion of our product portfolio into similar areas of healthcare, specifically Advanced Wound Care and Surgical Recovery.

Wound & Surgical Results of Operations 2022 Compared to 2021

Year Ended December 31,

(in thousands)

2022 2021 $ Change % Change

Net sales $ 264,906 $ 238,940 $ 25,966 10.9 %

Cost of sales 44,462 35,204 9,258 26.3 %

Selling, general and administrative expense 145,887 123,583 22,304 18.0 %

Research and development expense 7,836 5,864 1,972 33.6 %

Segment contribution $ 66,721 $ 74,289 $ (7,568) (10.2) %

Our Wound & Surgical business recorded $264.9 million of net sales for the year ended December 31, 2022, a $26.0 million, or 10.9%, increase compared to the $238.9 million we recorded for the year ended December 31, 2021.

This increase was the result of our focus on the application of these products into areas of Surgical Recovery, including the introduction of AMNIOEFFECT and AXIOFILL to the market during 2022.

We saw further gains as a result of our prior initiatives to expand, realign and train our sales team.

Cost of sales for the year ended December 31, 2022 was $44.5 million, a $9.3 million, or 26.3%, increase compared to the $35.2 million recognized for the year ended December 31, 2021.

Cost of sales increased due to negative impacts from production variances, primarily due to lower production levels, as well as increases in sales volume.

SG&A expense was $145.9 million for the year ended December 31, 2022, a $22.3 million, or 18.0%, increase over the year ended December 31, 2021, during which we incurred $123.6 million of expenses.

The increase was driven by travel expenses, sales commissions, and bad debt expense.

Travel expenses increased due to the lifting of restrictions that were in place during the year ended December 31, 2021 due to the COVID-19 pandemic.

Increases in sales commissions reflected our focus on sales of products into areas of Surgical Recovery, resulting in a proportional increase in sales through sales agents, who carry higher commission rates than our internal sales force.

The increase in bad debt expense was primarily the result of the deterioration of credit for certain specific customers.

Research and development expense was $7.8 million for the year ended December 31, 2022, compared to $5.9 million for the year ended December 31, 2021, an increase of $2.0 million, or 33.6%.

The increase was primarily the result of expenses related to AMNIOEFFECT and AXIOFILL, both of which launched during the year ended December 31, 2022.

Wound & Surgical Results of Operations 2021 Compared to 2020

Year Ended December 31,

(in thousands)

2021 2020 $ Change % Change

Net sales $ 238,940 $ 213,489 $ 25,451 11.9 %

Cost of sales 35,204 30,185 5,019 16.6 %

Selling, general and administrative expense 123,583 103,039 20,544 19.9 %

Research and development expense 5,864 3,979 1,885 47.4 %

Segment contribution $ 74,289 $ 76,286 $ (1,997) (2.6) %

Our Wound & Surgical business recorded $238.9 million of net sales for the year ended December 31, 2021, a $25.5 million, or 11.9%, increase compared to the $213.5 million we recorded for the year ended December 31, 2020.

The increase also reflected the initial results of our commercial focus on areas of Surgical Recovery.

Finally, we saw growth in new products, such as EPICORD Expandable, which launched in September 2020.

Cost of sales for the year ended December 31, 2021 was $35.2 million, a $5.0 million, or 16.6%, increase compared to the $30.2 million recognized for the year ended December 31, 2020.

Cost of sales increased due to year-over-year increases in sales volumes as well as the unfavorable effects of production variances, year-over-year.

SG&A expense was $123.6 million for the year ended December 31, 2021, a $20.5 million, or 19.9%, increase over the year ended December 31, 2020, during which we incurred $103.0 million of expenses.

The increase was driven by salaries, travel expenses, and sales commissions.

Salary expenses increased due to the restoration of full-salary levels, which were reduced for

a portion of 2020 as part of our response to the COVID-19 pandemic.

Salary expenses also increased as a result of merit increases and costs associated with expansion of our sales force.

Travel expenses increased due to the lifting of restrictions that were in place during the year ended December 31, 2020 due to the COVID-19 pandemic, as well as result of inflationary pressures experienced during the year ended December 31, 2021.

Increases in sales commissions reflected higher sales volumes.

Research and development expense was $5.9 million for the year ended December 31, 2021, compared to $4.0 million for the year ended December 31, 2020, an increase of $1.9 million, or 47.4%.

The increase was driven by higher personnel costs due to headcount increases and the restoration of full salary levels and merit increases, which were restricted for a portion of 2020.

Regenerative Medicine

Our Regenerative Medicine business focuses solely on Regenerative Medicine technologies, specifically progressing our placental biologics platform towards registration as an FDA-approved biological drug.

mDHACM is the lead product candidate in its late-stage pipeline targeted at achieving FDA approval for an indication to help decrease pain and improve function in patients suffering from KOA.

Prior to May 31, 2021, net sales for the Regenerative Medicine segment consisted of domestic sales of Section 351 products.

Regenerative Medicine does not currently generate revenue, and will only produce revenue if and after such time that the FDA approves a BLA for mDHACM.

After that point in time, we re-focused our sales and marketing efforts exclusively toward the advancement of our Wound & Surgical products in the United States.

For this reason, our Regenerative Medicine segment does not generate meaningful SG&A expense.

Research and development expenditures for Regenerative Medicine are driven by clinical trial activities, primarily those undertaken by our clinical research organization, which we have engaged to provide full operational support related to our upcoming KOA clinical trial program.

Regenerative Medicine Results of Operations 2022 Compared to 2021

Year Ended December 31,

(in thousands)

2022 2021 $ Change % Change

Net sales $ — $ 16,596 $ (16,596) (100.0) %

Cost of sales — 3,655 (3,655) (100.0) %

Selling, general and administrative expense — 12,910 (12,910) (100.0) %

Research and development expense 14,993 11,480 3,513 30.6 %

Segment contribution $ (14,993) $ (11,449) $ (3,544) 31.0 %

Research and development expense was $15.0 million for the year ended December 31, 2022, compared to $11.5 million for the year ended December 31, 2021, an increase of $3.5 million, or 30.6%.

The increase was primarily the result of increases in headcount and the incurrence of clinical trial expenses to support our clinical research efforts.

Regenerative Medicine Results of Operations 2021 Compared to 2020

Year Ended December 31,

(in thousands)

2021 2020 $ Change % Change

Net sales $ 16,596 $ 32,362 $ (15,766) (48.7) %

Cost of sales 3,655 5,856 (2,201) (37.6) %

Selling, general and administrative expense 12,910 17,546 (4,636) (26.4) %

Research and development expense 11,480 7,736 3,744 48.4 %

Segment contribution $ (11,449) $ 1,224 $ (12,673) nm

Our Regenerative Medicine business recorded $16.6 million of net sales for the year ended December 31, 2021, a $15.8 million, or 48.7%, decrease compared to the $32.4 million we recorded for the year ended December 31, 2020.

Likewise, cost of sales for the year ended December 31, 2021 was $3.7 million, a $2.2 million, or 37.6%, decrease compared to the year ended

December 31, 2020, where we recognized cost of sales of $5.9 million.

These decreases reflected our inability to sell our Section 351 products in the United States as a result of the end of the FDA’s period of enforcement discretion on May 31, 2021.

SG&A expense for the year ended December 31, 2021 was $12.9 million, a $4.6 million, or 26.4%, decrease from the year ended December 31, 2020, where we recognized $17.5 million.

This decrease reflected the re-focusing of our sales and marketing efforts toward the advancement of our Wound & Surgical business.

Research and development expense was $11.5 million for the year ended December 31, 2021, compared to $7.7 million for the year ended December 31, 2020, an increase of $3.7 million, or 48.4%.

We also incurred higher consulting fees in 2021, primarily to assist in the evaluation of the results of our clinical trials.

Our Corporate function represents activities which support both of our business units, such as legal, finance, human resources, and other supporting functions.

Corporate expenses include personnel costs associated with these units, as well as insurance, and certain professional fees.

SG&A expense for the Corporate function was $62.9 million, or 23.5% of net sales, for the year ended December 31, 2022, compared to $61.9 million, or 23.9% of consolidated net sales for the year ended December 31, 2021.

The increase was primarily the result of an increase in severance costs associated with headcount reductions to lower ongoing costs.

This effect was partially offset by a year-over-year decrease in share-based compensation expense, primarily driven by forfeitures of awards from the separated individuals.

SG&A expense for the Corporate function was $61.9 million, or 23.9% of consolidated net sales, for the year ended December 31, 2021, compared to $60.4 million, or 24.3% of consolidated net sales for the year ended December 31, 2020.

The increase reflected greater personnel costs and professional services fees.

Liquidity and Capital Resources

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As of December 31, 2022, we had $66.0 million of cash and cash equivalents.

Our net working capital at December 31, 2021 was $106.2 million, an increase of $4.7 million from $101.5 million at December 31, 2020.

Our current ratio (current assets divided by current liabilities) was 3.5 to 1 as of December 31, 2021 and 2.7 to 1 as of December 31, 2020.

Our net working capital at December 31, 2022 was $90.6 million, a decrease of $15.5 million from $106.2 million at December 31, 2021.

Our current ratio was 3.1 to 1 as of December 31, 2022 and 3.5 to 1 as of December 31, 2021.

The Company is currently paying its obligations in the ordinary course of business.

We believe that our anticipated cash from operating activities and existing cash and cash equivalents will enable us to meet our operational liquidity needs for the twelve months following the filing date of this Annual Report.

We expect to incur additional costs in connection with the commencement of two late-stage clinical trials.

This includes development of protocols, site selection, patient recruitment, start-up costs, ongoing monitoring, and the costs advanced to sites for carrying out such trials.

These efforts also require human capital, expertise and resources.

Contractual Obligations

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Hayfin Term Loan Interest (1)

14,558 5,836 8,722 — —

Operating lease obligations 4,216 1,638 2,124 454 —

Finance lease obligations 170 55 110 5 —

Severance obligations to former employees 3,677 2,513 1,164 — —

Meeting space commitments 1,383 989 394 — —

Finance lease obligations 115 55 60 — —

Total $ 73,949 $ 11,031 $ 62,464 $ 454 $ —

We have not declared or paid any cash dividends on our Series B Convertible Preferred Stock since their issuance.

Dividends in arrears as of December 31, 2021 were $7.2 million.

These were convertible into 27,850,916 shares as of December 31, 2021.

Assuming we do not declare or pay a cash dividend, the holders do not exercise their option to convert, and the other conversion or redemption features are not triggered, we would accrue $6.6 million of dividends in 2022, $14.4 million in aggregate in 1-3 years, and $16.3 million in aggregate in 3-5 years.

Refer to Item 8, Note 11, “ Equity ” for more detailed discussion regarding the rights and preferences of our Series B Convertible Preferred Stock.

The Hayfin Loan Agreement was funded on July 2, 2020 and provided us with a senior secured term loan in an aggregate amount of $50 million (the “ Term Loan ”).

(1) Reflects an interest rate of 11.5% through maturity.

Nordic Agreement

In June 2022, we entered into a collaboration agreement (the “ Nordic Agreement ”) with Nordic Bioscience Clinical Development A/S (“ NBCD ”) to provide full operational support for our upcoming KOA clinical trial program.

As part of the agreement, NBCD will perform site selection and monitoring, manage patient recruitment and enrollment, data management, statistical analysis and reporting activities for the duration of the trial.

Under the terms of the Nordic Agreement, we are obligated to pay $10.2 million upon the achievement of specified milestones over the course of the clinical trial.

These amounts are not included in the table above because the timing of these payments is inherently uncertain.

The milestones are based upon various factors including, but not limited to, site selection and enrollment, patient enrollment, patient completion, and certain other activities related to clinical trial activities.

The milestone payments are revised semi-annually based on fluctuations in the consumer price index.

We have the ability to terminate the Nordic Agreement with 30 days written notice to NBCD.

At such time, we would be required to pay for services performed through the date of termination and any non-cancelable obligations.

In addition to the milestone payments, the Company will reimburse NBCD for actual expenses incurred related to third-party vendors to be contracted and managed by NBCD.

On January 24, 2023, we executed a change order to the Nordic Agreement (the “ Change Order ”), primarily to reflect additional elements required in conducting the trial.

The Change Order modified the scope of NBCD’s responsibilities under the Nordic Agreement, shifting certain activities to other vendors to be administered by NBCD and certain other activities to MIMEDX.

These responsibilities primarily related to areas of patient recruitment and screening and statistical analysis, among other areas of the trial.

Pursuant to the Change Order, the total payments owed to NBCD relating to NBCD’s responsibilities decreased from $13.3 million to $10.2 million.

While our total obligation to NBCD has decreased pursuant to the Change Order, we expect to pay these expenses to other vendors.

We have paid $2.0 million under the Nordic Agreement as of December 31, 2022 relating to milestones which have been achieved through that date.

Turn Agreement

As described above under Item 1.

“ Business-Our Product Portfolio & Pipeline ”, we acquired intellectual property rights pursuant to the Turn Agreement.

We paid an up-front cash payment of $1.0 million upon the execution of the agreement, and are obligated to make additional payments upon the meeting of regulatory and product commercial milestones, including $9.6 million if and when Turn receives 510(k) clearance from the FDA for FleX.

In addition, we are obligated to pay royalties on the sales of FleX and any products derived from PermaFusion.

These amounts are not included in the table above because the timing of these payments are inherently uncertain.

On June 30, 2020, we entered into a Loan Agreement with, among others, Hayfin Services, LLP, (“ Hayfin ”) an affiliate of Hayfin Capital Management, LLP (the “ Hayfin Loan Agreement ”), under which Hayfin provided us with a senior secured term loan of $50 million (the “ Term Loan ”).

The Term Loan matures on June 30, 2025 (the “ Maturity Date ”).

On February 28, 2022 (the “ Amendment Date ”), we executed an Amendment to the Hayfin Loan Agreement (the “ Amendment ”).

On February 28, 2022, we executed an Amendment to the Hayfin Loan Agreement (as amended, the “Amended Hayfin Loan Agreement” ).

No principal payments are due on the Term Loan until the Maturity Date.

Interest is payable on the Term Loan for principal outstanding quarterly through the Maturity Date.

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%.

Interest on any borrowings under the Term Loan is equal to LIBOR (subject to a floor of 1.5%) plus a margin of 6.75%.

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 6.75% margin.

An additional 3.0% margin would be applied to the interest rate upon the occurrence of an Event of Default as defined in the Hayfin Loan Agreement.

At issuance, and as of December 31, 2021, the Term Loan carried an interest rate of 8.3%.

Prior to the Amendment Date, the Hayfin Loan Agreement contained financial covenants requiring the Company, on a consolidated basis, to maintain the following:

• Maximum Total Net Leverage Ratio, required to be calculated on a quarterly basis, of 4.0x;

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

We were in compliance with all debt covenants as of December 31, 2021.

The Amendment changed these financial covenants and requires the Company, on a consolidated basis, to maintain the following beginning on the Amendment Date and continuing through the Maturity Date:

• Minimum Consolidated Total Net Sales (as defined in the Amendment) of varying amounts, required to be calculated on a quarterly basis,

• Minimum Liquidity of $20 million, an at-all-times financial covenant, tested monthly.

The Hayfin Loan Agreement, as amended, also specifies that any prepayment of the loan, voluntary or mandatory, as defined in the Hayfin Loan Agreement, will subject us to a prepayment premium applicable as of the date of the prepayment calculated as follows:

An additional 3.0% margin would be applied to the interest rate upon the occurrence of an Event of Default as defined in the Amended Hayfin Loan Agreement.

As of December 31, 2022, the Term Loan carried an interest rate of 11.5%.

The Amended Hayfin Loan Agreement contains financial covenants requiring the Company, on a consolidated basis, to maintain the following:

• Minimum Consolidated Total Net Sales (as defined in the Amended Hayfin Loan Agreement) of varying amounts, required to be calculated on a quarterly basis, and

• Minimum Liquidity (as defined in the Amended Hayfin Loan Agreement) of $20 million, an at-all-times financial covenant, tested monthly.

As of December 31, 2022, we are in compliance with all applicable financial covenants under the Amended Hayfin Loan Agreement.

The Amended Hayfin Loan Agreement also specifies that any prepayment of the Term Loan, voluntary or mandatory, as defined in the agreement, would subject us to a prepayment premium applicable as of the date of the prepayment, as follows:

• On or before July 2, 2023:

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• After July 2, 2024:

The Hayfin Loan Agreement also includes certain negative covenants and 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 Hayfin Loan Agreement may be accelerated or the lender’s 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.

From January 1, 2021, we are required to prepay the outstanding loans based on a percentage of Excess Cash Flow, as defined in the Hayfin Loan Agreement, if Excess Cash Flow is generated, with the percentage determined based on the Total Net Leverage thresholds.

To date, we have not been required to make any such prepayments.

A breach of a financial covenant in the Hayfin Loan Agreement, if uncured or unable to be cured, would likely result in an event of default that could trigger the lender’s remedies, including acceleration of the entire principal balance of the loan as well

as any applicable prepayment premiums.

The Amended Hayfin Loan Agreement also includes certain negative covenants and 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 Amended Hayfin Loan Agreement may be accelerated or the lenders’ commitments terminated.

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 (as defined in the Amended Hayfin Loan Agreement).

Annually, we are required to prepay the outstanding loans based on the percentage of our Excess Cash Flow (as defined in the Amended Hayfin Loan Agreement), if such is generated.

To date, we have not been required to make any prepayments under this provision.

A breach of a financial covenant in the Amended Hayfin Loan Agreement, if uncured or unable to be cured, would likely result in an event of default that could trigger the lender’s remedies, including acceleration of the entire principal balance of the loan as well as any applicable prepayment premiums.

Future compliance with the financial covenants, as amended, requires continuing growth in net sales consistent with the Company’s business strategy and plans.

Our business is subject to inherent uncertainties that could impact the Company’s net sales growth, including, but not limited to, the regulatory pathway of our cord-derived product.

Our business is subject to inherent uncertainties that could impact the Company’s net sales growth, including, but not limited to, the regulatory pathway of our cord-derived products.

While we currently have sufficient cash to repay all such amounts in an event of default, we may require alternative financing to cover other obligations.

Even if alternative financing were available in an event of default under the Hayfin Loan Agreement, it might be on unfavorable terms, and the interest rate charged on any new borrowings may be substantially higher than the interest rate under the Hayfin Loan Agreement, thus adversely affecting our future cash flows, liquidity, and results of operations.

Even if alternative financing were available in an event of default under the Amended Hayfin Loan Agreement, it might be on unfavorable terms, and the interest rate charged on any new borrowings may be substantially higher than the interest rate under the Amended Hayfin Loan Agreement, thus adversely affecting our future cash flows, liquidity, and results of operations.

Series B Preferred Stock

The Company has 100,000 shares of Series B Preferred Stock outstanding as of December 31, 2021.

The Series B Preferred Stock paid a 4.0% cumulative dividend per annum prior to June 30, 2021, and pays a 6.0% cumulative dividend per annum thereafter.

We have 100,000 shares of Series B Preferred Stock outstanding as of December 31, 2022.

The Series B Preferred Stock currently accumulates dividends at a rate of 6.0% per annum.

Dividends are declared at the sole discretion of our board of directors.

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If we do not exercise such repurchase right, holders of the Series B Preferred Stock will have the option to (1) require us to repurchase any or all of our 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.

Liquidity Considerations

Our net sales increased 4% in 2021 compared to 2020.

This increase was due primarily to increases in sales volume due to lessening of access restrictions imposed by hospitals and travel restrictions implemented at the onset of the COVID-19 pandemic.

However, our sales were negatively impacted by our inability to market our Section 351 products in the United States after May 31, 2021.

Sales of our Section 351 products were $17.6 million and $31.8 million in 2021 and 2020, respectively.

In addition, there is a possibility that the FDA may rule that our cord-derived products do not meet the requirements to be regulated solely under the authority of Section 361 of the Public Health Service Act, in which case we might need to cease marketing such products in the United States until FDA approval or clearance is secured.

We have not declared or paid any cash dividends on our Series B Preferred Stock since their issuance.

Dividends in arrears as of December 31, 2022 were $13.8 million.

Assuming we do not declare or pay a cash dividend, the holders do not exercise their option to convert, and the other conversion or redemption features are not triggered, we would accumulate and accrue $7.0 million of dividends in 2023, $15.3 million in aggregate in 1-3 years, and $17.2 million in aggregate in 3-5 years.

As of December 31, 2022, the Series B Preferred Stock was convertible into 29,559,946 common shares.

Refer to Item 8, Note 11, Equity, for more detailed discussion regarding the rights and preferences of our Series B Preferred Stock.

Regulatory Items

There is a possibility that the FDA may rule that our cord-derived products do not meet the requirements to be regulated solely under the authority of Section 361 of the Public Health Service Act.

In such a case, in order to continue to market the products, we would be required to obtain the appropriate FDA clearance or approval.

The loss of our ability to market and sell our umbilical cord-derived product would have an adverse effect on the Company’s revenue, business, financial condition, and results of operations.

Sales of our cord products were $23.2 million and $23.6 million in 2022 and 2021, respectively.

See Item 1A - Risk Factors - “ Certain of our products no longer qualify for regulation as human cells, tissues and cellular and tissue-based products solely under Section 361 of the Public Health Service Act (“Section 361”), which has resulted in removal of the applicable products from the market, made the introduction of some new tissue products more expensive, significantly delayed the expansion of our tissue product offerings and subjected us to additional post-market regulatory requirements.

Additional regulatory requirements may be imposed in the future.

Reimbursement Developments

Recently, several wide-ranging proposals have been published for public comment, including relating to payment methodology within the physician office, and are under consideration by the U.S.

Centers for Medicare and Medicaid Services.

In addition, three Medicare Administrative Contractors have recently published for public comment changes to their Local Coverage Determinations that they are considering.

If adopted, these proposals would significantly change Medicare policies governing the reimbursement of skin substitute products principally when used for wound treatment in the private physician office setting.

Refer to Item 1A, Risk Factors — Our revenues depend on adequate reimbursement from public and private insurers and health systems and changes to the ways in which our products are reimbursed in various sites of service could adversely impact our financial results.

Other Liquidity Considerations

Further, our liquidity will be impacted by expected and unexpected costs, investments in clinical trials to support BLAs, and contingent liabilities:

• Advancement of our clinical trials and BLA pipeline will involve substantial cost.

• Advancement of our clinical trials will involve substantial cost.

Products subject to the FDA’s BLA requirements must comply with a range of pre- and post-market provisions.

Pre-market compliance includes the conduct of clinical trials in support of BLA approval, the development and submission of a BLA, and the production of product for use in the clinical trials that meets the FDA’s quality expectations.

See Item 1A - Risk Factors - “Obtaining and maintaining the necessary regulatory approvals for certain of our products will be expensive and time

consuming and may impede our ability to fully exploit our technologies,” and “If any of the BLAs are approved, the Company would be subject to additional regulation which will increase costs and could result in adverse sanctions for non-compliance.”

• The international expansion of our business will require investment through the costs to achieve necessary regulatory approvals and reimbursement schemes, establishing a physical presence through office and warehouse space, identifying and hiring employees, and other costs to establish ongoing operations.

Whether we pursue such opportunities will depend on a myriad of factors and the amount and timing of these costs are uncertain at this time.

Pre-market compliance includes the conduct of clinical trials in support of BLA approval, the development and submission of a BLA, and the production of product for use in the

clinical trials that meets the FDA’s quality expectations.

See Item 1A - Risk Factors - “Obtaining and maintaining the necessary regulatory approvals for certain of our products will be expensive and time consuming and may impede our ability to fully exploit our technologies,” and “If any of the BLAs are approved, the Company would be subject to additional regulation which will increase costs and could result in adverse sanctions for non-compliance.

• The continued expansion of our product lines and the development of new products will require continuous investment in intellectual property and research and development.

• International expansion of our business will require investment through the costs to achieve necessary regulatory approvals and reimbursement schemes, establishing a physical presence through office and warehouse space, identifying and hiring employees, and other costs to establish ongoing operations.

• We are exposed to potential liabilities and reputational risk associated with litigation, regulatory proceedings, and government enforcement actions.

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Additional regulatory requirements may be imposed in the future.”

Moreover, the COVID-19 pandemic may affect our operations in 2022 and beyond.

More specifically:

• Our results of operations may be adversely affected if our customers restrict access to hospitals and our ability to access other healthcare providers, particularly for elective procedures.

• Our manufacturing operations, sales and demand for our products, and clinical trials may be adversely affected if our leadership, employees, sales agents, suppliers, medical professionals, or users of our products are impacted by illness or through actions taken to stop or slow the spread of the COVID-19 pandemic.

• Our results of operations may be adversely affected if we experience shortages of donated placentas because donors or our recovery specialists are excluded from hospitals, or because additional testing protocols are implemented for donated tissues based on guidance issued by the AATB, FDA, or other standards and are screened as ineligible.

• Because our sales are not evenly spread across the United States, to the extent that areas most impacted by COVID- are those where we have more of our sales, the pandemic will have a greater adverse impact on our results from operations.

• While vaccines have been approved by the FDA, the continued efficacy of the vaccine against current and future variants, as well as the general willingness to accept the vaccine and any recommended “boosters”, could influence the magnitude of the impact of the COVID-19 pandemic and any of the factors noted above.

The ultimate impact of the COVID-19 pandemic is highly uncertain.

The duration and magnitude of these impacts on our business is uncertain.

Expectations for 2022 Operating Results

We expect net sales of our Advanced Wound Care products, which were $240 million in 2021, to grow 11% to 14% in 2022.

We expect gross margin for 2022 to be slightly lower than 2021.

We anticipate beginning the Phase 3 Knee Osteoarthritis clinical trial program in 2022, and expect the cost to be approximately $30 million, representing $15 million per trial for two trials incurred over the next three years.

We expect research and development expense to increase over 2021 as we plan and begin to execute new clinical trials and execute other product development initiatives.

However, the amount and timing of these expenses are dependent on many factors.

Discussion of Cash Flows

Operating Activities

During the year ended December 31, 2021, net cash used in operating activities decreased $28.3 million to $2.0 million compared to $30.3 million for the year ended December 31, 2020.

The decrease in cash used was primarily attributable to year-over-year reductions in amounts paid related to the Audit Committee Investigation, the Restatement, and related expenses, particularly those incurred with respect to the Restatement and the indemnification of certain former officers and directors of the Company.

In addition, we received $9.2 million in income tax refunds during 2021.

These effects were offset by year-over-year increases in SG&A and research and development expense.

During the year ended December 31, 2022, net cash used in operating activities increased $15.9 million to $17.9 million compared to $2.0 million for the year ended December 31, 2021.

The increase in cash used was primarily the result of increases in selling, general, and administrative expenses and research and development expenses during the year ended December 31, 2022.

In addition, cash used for the year ended December 31, 2021 was positively impacted by an income tax refund of $9.2 million and insurance settlements of $8.0 million.

Investing Activities

During the year ended December 31, 2022, net cash used in investing activities was $2.7 million, a decrease of $0.7 million, compared to $3.4 million for the year ended December 31, 2021.

The primary reason for the decrease was a $1.0 million decrease in capital expenditures, year-over-year.

The remaining variance was the result of a year-over-year decrease in paid for patent application costs as well as collections on a note receivable in 2021.

The primary reason for the decrease was a $1.7 million decrease in capital expenditures, year-over-year, offset by $1.0 million of payments made pursuant to the Turn Agreement.

Financing Activities

During the year ended December 31, 2021, net cash used in financing activities was approximately $3.4 million compared to cash provided from financing activities of $61.6 million for the year ended December 31, 2020.

Activity in 2020 was driven by the issuance of our Series B Convertible Preferred Stock, for which we received proceeds of $92.5 million, net of stock issuance costs.

In addition, we received net proceeds on the borrowing of our Term Loan of $46.3 million, net of deferred financing costs and original issue discount.

These proceeds were used to repay the outstanding principal and prepayment premium on a previous term loan of $73.4 million.

We did not have a similar financing transaction in 2021.

The remaining variance was driven by year-over-year increases in the cash paid for shares repurchased for tax withholding ($2.4 million), offset by increases in proceeds from option exercises ($1.0 million).

During the year ended December 31, 2022, net cash used in financing activities was $0.6 million, a decrease of $2.8 million compared to cash used in financing activities of $3.4 million for the year ended December 31, 2021.

Activity in 2022 was driven by year-over-year decreases in the cash paid for shares repurchased for tax withholding ($3.6 million), offset by decreases in proceeds from option exercises ($0.8 million).

Non-GAAP Financial Measures

In addition to our GAAP results, we provide the following Non-GAAP measures:

Adjusted Net Sales, Earnings Before Interest, Taxes, Depreciation and Amortization (“ EBITDA ”), and Adjusted EBITDA.

Earnings Before Interest, Taxes, Depreciation and Amortization (“ EBITDA ”) and Adjusted EBITDA.

We believe that the presentation of these measures provides important supplemental information to management and investors regarding our performance.

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Company management uses these Non-GAAP measures as aids in monitoring our on-going financial performance from quarter-to-quarter and year-to-year on a regular basis and for benchmarking against comparable companies.

Adjusted Net Sales

We provide Adjusted Net Sales to provide a normalized view of revenue by removing effects related to our Transition Adjustment in revenue recognition practices.

Specifically, we recognized a one-time Transition Adjustment in 2019 to reflect the change in our pattern of revenue recognition from a “cash receipts” to an “as-shipped” basis.

Since the third quarter of 2019, we have recognized revenue from cash collections related to the Remaining Contracts, or transactions which occurred prior to the Transition but for which we had not previously recognized revenue.

Refer to Item 8, Note 2, “ Significant Accounting Policies, ” of the consolidated financial statements for additional details regarding the Transition Adjustment and the Remaining Contracts.

Adjusted Net Sales provides comparative assessments of our revenue and assists in evaluating our sales performance.

Adjusted Net Sales consists of GAAP net sales less the effects of the Transition.

For 2019, this includes the Transition Adjustment and cash received from the Remaining Contracts.

For 2020 and 2021, this reflects cash received from the Remaining Contracts.

A reconciliation of GAAP net sales to Adjusted Net Sales is provided in the table below (in thousands):

Year Ended December 31,

2021 2020 2019

Net sales $ 258,615 $ 248,234 $ 299,255

Effect of change in revenue recognition (1,038) (7,767) (29,604)

Adjusted net sales $ 257,577 $ 240,467 $ 269,651

EBITDA and Adjusted EBITDA

We provide EBITDA and Adjusted EBITDA to facilitate comparisons to results of other companies.

We use EBITDA as a measure of our operating performance, planning, and budgeting purposes as it eliminates the effects of financing and investing activities.

We use EBITDA as a measure of our operating performance, planning, and budgeting purposes as it eliminates the effects of financing and investing activities, as well as irregular and non-cash expenses.

EBITDA is widely used by investors and analysts to measure operating performance and evaluate enterprise value.

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Adjusted EBITDA consists of GAAP net loss excluding:

(i) depreciation, (ii) amortization of intangibles, (iii) interest expense, net, (iv) loss on extinguishment of debt, (v) income tax provision, (vi) costs incurred in connection with Audit Committee Investigation and Restatement, (vii) the effect of the change in revenue recognition on net income, (viii) share-based compensation, and (ix) impairment of intangible assets.

(i) depreciation, (ii) amortization of intangibles, (iii) interest expense, net, (iv) loss on extinguishment of debt, (v) income tax provision, (vi) costs incurred in connection with Audit Committee Investigation and Restatement, (vii) share-based compensation, and (vii) impairment of intangible assets.

A reconciliation of GAAP net loss to EBITDA and Adjusted EBITDA appears in the table below (in thousands):

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Costs incurred in connection with Audit Committee Investigation and Restatement 12,177 3,791 59,465

Effect of change in revenue recognition (864) (6,680) (24,450)

Share-based compensation 12,666 14,757 15,357

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Sensitivity of Estimate to Change

We have accrued $1.0 million as of December 31, 2021 for potential losses relating to legal proceedings discussed in Item 8, Note 14, “Commitments and Contingencies.” The outcome of court judgments could lead to a change in our evaluation of probability of loss or our estimate for such loss.

In addition, court judgments may result from matters for which we had previously assessed loss as being not probable or which result in losses which materially depart from our estimate, both favorably or unfavorably.

As of December 31, 2022, we have reserved $0.2 million for potential losses relating to legal proceedings discussed in Item 8, Note 16, Commitments and Contingencies.

The outcome of court judgments could lead to a change in our evaluation of probability of loss or our estimate for such loss.

We believe that our estimates applied are based on reasonable assumptions, but are inherently uncertain.

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Sensitivity of Estimate to Change

As of December 31, 2021, we had valuation allowances recorded of $41.1 million, fully offsetting our net deferred tax asset.

As of December 31, 2022, we had $47.6 million of valuation allowances recorded, fully offsetting our net deferred tax asset.

This determination may change due to changes in tax law, a revision to our expectation regarding taxable income in the future, taxable income generated in a period in which we had not previously anticipated taxable income, a change in scheduled reversals of deferred tax liabilities, and other changes.

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Recently Adopted Accounting Pronouncements

See Note 2, “ Significant Accounting Policies ,” in the Consolidated Financial Statements for recently adopted accounting pronouncements.

Quantitative and Qualitative Disclosures About Market Risk

Based on our lack of market risk sensitive instruments outstanding at December 31, 2021, we have determined that we had no material market risk exposure as of such date.

See Item 8, Note 2, Significant Accounting Policies , in the Consolidated Financial Statements for recently adopted accounting pronouncements.

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 7. Management’s Discussion and Analysis