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Item 7. Management’s Discussion and Analysis

2024-02-28 compared with 2023-02-28 · 163 added, 362 removed, 89 unchanged (86% of the section changed)

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

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.

We have two classes of products:

(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.

Executive Summary

During 2023, the Company delivered 20.0% growth in net sales, with broad-based contributions by customer type.

This growth was driven by a combination of commercial execution, favorable end market demand and contributions from newer products to our portfolio.

Operating and financial highlights during the year include:

• Fourth quarter and full year 2023 net sales of $86.8 million and $321.5 million, respectively, reflecting 16.7% and 20.0% growth over the fourth quarter and full year 2022, respectively.

• Net income from continuing operations for the fourth quarter and full year 2023 of $51.3 million and $67.4 million, respectively.

• Announced strategic realignment of the Company, increasing focus on Wound & Surgical business and significantly improving profitability;

disbanded the Regenerative Medicine business unit and suspended knee osteoarthritis clinical trial program.

• Launched EPIEFFECT, the latest addition to the Company’s broad portfolio of Advanced Wound Care products.

• Announced conversion of outstanding Series B convertible preferred stock to common stock.

• Appointed new members to the Company’s Executive Leadership Team, including a new CEO, CFO and Chief Operating Officer.

MIMEDX is a pioneer and leader in placental biologics focused on delivering innovative solutions to patients and the healthcare professionals who treat them.

With more than a decade of experience helping clinicians manage acute and chronic wounds, MIMEDX has been dedicated to providing a leading portfolio of products for applications in the wound care, burn, and surgical sectors of healthcare.

All of our products sold in the United States are regulated by the U.S.

Food & Drug Administration ( “FDA” ).

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

Our product portfolio is divided into two categories (1) Wound Care Products and (2) Surgical and Other Products.

Our Wound Care Products include EPIFIX, EPICORD and EPIEFFECT, which are all marketed for external use, such as in Advanced Wound Care applications.

Within Surgical and Other, our product offering includes AMNIOFIX, AMNIOCORD and AMNIOEFFECT, which are positioned for use in a variety of applications and surgical settings, including lower extremity repair, plastic surgery, vascular surgery and multiple orthopedic repairs and reconstructions.

Our AXIOFILL product has also seen the most uptake by clinicians for surgical applications.

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

This discussion, which presents our results for the fiscal years ended December 31, 2023 and 2022, should be read in conjunction with our Consolidated Financial Statements and the accompanying notes.

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

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

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.

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.

Components of and Key Factors Influencing Our Results of Operations

Our Annual Report for the year ended December 31, 2022 (the “ 2022 Annual Report ”) includes a discussion and analysis of our total company financial condition and results of operations for 2022 compared to 2021 in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations .

Please note that, subsequent to the publication of our 2022 Annual Report, we announced our plan to disband our Regenerative Medicine business unit, the results of which we believe are not material to an understanding of our financial condition, changes in financial condition and results of operation, is now classified as discontinued operations.

For further details, please see Note 13, Discontinued Operations , to our consolidated financial statements included in Part II, Item 8 of this Annual Report.

Components of and Key Factors Influencing Our Results of Continuing Operations

In assessing the performance of our business, we consider a variety of performance and financial measures.

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 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, beginning in Japan.

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

Our net sales are derived from selling to a wide range of customers, including hospitals, wound care centers and private physician offices that have clinicians using our suite of products to aid in the management of patients with chronic or hard-to-heal wounds.

These customers choose products like ours based upon a variety of factors, including clinical efficacy, availability, handling characteristics, and reimbursement coverage and payer sources.

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

Cost of goods sold and gross profit

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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.

SG&A expense also includes costs related to functions which support our business, such as legal, finance, human resources, and other such functions that include costs such as personnel costs, insurance, and certain professional fees.

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.

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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 expenditures in improvements to our manufacturing process and the enhancement of existing products.

Research and development expense relates to our investments to expand our product pipeline and platforms, including historically through clinical trials, 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.

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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 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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Interest expense

We incur interest expense primarily through stated interest on our outstanding term loan.

The interest on our term loan is tied to the three-month London Interbank Offered Rate (“ LIBOR ”), subject to a floor of 1.5%.

Increases in LIBOR could cause our interest expense to increase.

We incur interest expense primarily through stated interest on our outstanding term and revolving loans.

The interest on our term and revolving loans are currently tied to applicable Secured Overnight Financing Rates (“ SOFR ”).

Increases in SOFR

could cause our interest expense to increase.

Other activity influencing interest expense relates to the amortization of deferred financing costs and original issue discount associated with credit facilities outstanding.

Results of Operations for 2022 Compared to 2021

Total Company

We generate tax liability primarily in the United States and have net operating losses, research and development tax credit carryforwards, and other deferred tax assets which defray our liability.

Large fluctuations are generally due to changes in our expectations of the realizability of our deferred tax assets.

See “ Critical Accounting Estimates ” for further details.

Results of Continuing Operations for 2023 Compared to 2022

Year Ended December 31,

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Research and development 12,665 12,701 (36) (0.3) %

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

Investigation, restatement and related 5,176 12,177 (7,001) (57.5) %

Amortization of intangible assets 762 701 61 8.7 %

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

Interest expense, net (6,457) (5,016) (1,441) 28.7 %

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

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.

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

Other expense, net (26) (4) (22) nm

Income tax provision benefit (expense)

36,806 (206) 37,012 nm

Net income (loss) from continuing operations $ 67,439 $ (19,953) $ 87,392 nm

We recorded net sales for the year ended December 31, 2023 of $321.5 million, an increase of $53.6 million, or 20.0%, over the year ended December 31, 2022 net sales of $267.8 million.

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

Year Ended December 31, Change

2023 2022 $ %

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) %

Hospital $ 187,000 $ 163,206 $ 23,794 14.6 %

Private Office 95,789 77,158 $ 18,631 24.1 %

Other 38,688 27,477 $ 11,211 40.8 %

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.

$ 321,477 $ 267,841 $ 53,636 20.0 %

Net sales in the Hospital setting were $187.0 million for the year ended December 31, 2023, a $23.8 million, or 14.6% increase, compared to $163.2 million for the year ended December 31, 2022.

The increase was primarily driven by sales of our new products introduced since the third quarter of 2022, particularly AMNIOEFFECT.

Net sales in the Private Office setting grew by $18.6 million, or 24.1%, to $95.8 million for the year ended December 31, 2023, compared to $77.2 million for the year ended December 31, 2022.

The increase reflects general increases in sales volume, driven by strong commercial execution, an evolving Medicare reimbursement landscape in this site of service and sales of our new products introduced since the fourth quarter of 2023.

Net sales in Other care settings increased by $11.2 million, or 40.8%, to $38.7 million for the year ended December 31, 2023 compared to $27.5 million for the year ended December 31, 2022.

The increase was primarily driven by the addition of new customers in certain other sites of service and, to a lesser extent, initial contributions related to our commercial efforts in Japan.

Gross Margin and Cost of Sales

Gross margin in 2023 was 83.0%, compared to 82.0% 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.

The increase in margin was driven by a higher proportion of sales with lower manufacturing costs as well as increased throughput efficiencies compared to 2022.

Cost of sales for the year ended December 31, 2023 was $54.6 million, an increase of $6.3 million, or 13.1%, compared to $48.3 million for the year ended December 31, 2022.

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

The increase in cost of sales was driven by the increase in sales volume and the changes in margins noted above.

Selling, General and Administrative Expense

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:

• 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.

SG&A expense increased $2.5 million, or 1.2%, to $211.1 million for December 31, 2023, compared to $208.7 million for December 31, 2022.

The increase was driven by higher levels of sales commissions due to higher sales volumes, as well as increases in stock-based compensation in 2023.

These increases were partially offset by a decrease in certain administrative expenses, including severance expenses associated with the departure of our former CEO in 2022.

Research and Development Expense

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.

Our research and development (“ R&D ”) expense remained essentially flat at $12.7 million for the years ended December 31, 2023 and December 31, 2022.

Our R&D expenses in 2022 and 2023 were primarily driven by the development and launches of our newest products in the portfolio, AMNIOEFFECT, AXIOFILL and EPIEFFECT, along with additional early-stage Wound & Surgical products in development.

Investigation, Restatement and Related Expense

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.

Investigation, restatement, and related expenses decreased $7.0 million to $5.2 million for the year ended December 31, 2023, compared to $12.2 million for the year ended December 31, 2022.

The decrease was related to negotiated reductions in legal fees previously incurred under indemnification agreements with certain former members of management year-over-year.

In addition, following the end of a legal proceeding, expenses under our last material indemnification agreement substantially ceased in 2023.

Prior to this, the Company had incurred significant expenses in fulfilling its obligations under indemnification agreements by advancing and reimbursing legal fees of certain former officers and directors of the Company.

Amortization of Intangible Assets

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 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.

Amortization expense related to intangible assets increased $0.1 million from $0.7 million for the year ended December 31, 2022 to $0.8 million for the year ended December 31, 2023.

Interest Expense, Net

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.

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 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%.

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 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.

Interest expense increased $1.4 million to $6.5 million for the year ended December 31, 2023 from $5.0 million for the year ended December 31, 2022.

The increase was the result of year-over-year increases in the reference market interest rates on our outstanding debt.

We expect interest expense to decrease in future quarters as a result of our debt refinancing transactions completed on January 2024.

Income Tax Provision

The effective tax rate for 2023 and 2022 was (120.2)% and (1.0)%, respectively, on pre-tax book income from continuing operations of $30.6 million for 2023 and pre-tax book loss from continuing operations of $19.7 million for 2022.

Our effective tax rate for the year ended December 31, 2023 was significantly influenced by the reversal of a valuation allowance, reflecting a change in the determination of the likelihood of the realizability of certain of the Company’s deferred tax assets as of that date.

This re-evaluation occurred as a result of the conclusion that the disbanding of our Regenerative Medicine segment qualified as a discontinued operation, in concert with the Company’s operating results.

Net operating losses incurred during 2022 were offset by a full valuation allowance.

Liquidity and Capital Resources

We require capital for our operating activities, including costs associated with the sale of product through direct and indirect sales channels, the conduct of clinical trials and other research and development activities, compliance costs, costs to sell and market our products, regulatory fees, and legal and consulting fees in connection with ongoing litigation and other matters.

We require capital for our operating activities, including costs associated with the sale of product through direct and indirect sales channels, research and development activities, compliance costs, costs to sell and market our products, regulatory fees, and legal and consulting fees in connection with ongoing litigation and other matters.

We generally fund our operating capital requirements through our operating activities and cash reserves.

We expect to use capital in the near and medium term to commence late-stage clinical trials for certain of our products, invest in the international expansion of our business and the broadening of our product portfolio, and invest in certain capital projects.

We expect to use capital to invest in the broadening of our

product portfolio, including through potential acquisitions, licensing agreements or other arrangements, the international expansion of our business and certain capital projects.

As of December 31, 2023, we had $82.0 million of cash and cash equivalents.

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 net working capital at December 31, 2023 was $118.3 million, an increase of $27.6 million from $90.6 million at December 31, 2022.

Our current ratio was 3.6 to 1 as of December 31, 2023 and 3.1 to 1 as of December 31, 2022.

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 believe that our anticipated cash from operating activities, existing cash and cash equivalents, and available credit under the Citizens Credit Agreement, as defined below, will enable us to meet our operational liquidity needs for the twelve months following the filing date of this Annual Report.

Contractual Obligations

Contractual obligations associated with ongoing business activities are expected to result in cash payments in future periods.

The table below summarizes the amounts and estimated timing of these future cash payments as of December 31, 2022 (in thousands):

Contractual Obligations Total 1 year 1-3 years 3-5 years Thereafter

Hayfin Term Loan Principal $ 50,000 $ — $ 50,000 $ — $ —

Hayfin Term Loan Interest (1)

14,558 5,836 8,722 — —

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

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 $ —

(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, 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.

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 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:

2% of the principal balance repaid.

• After July 2, 2023 but on or before July 2, 2024:

1% of the principal balance repaid.

• After July 2, 2024:

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 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 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

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.

Dividends, if declared, are paid in cash at the end of each quarter based on dividend amounts that accumulate beginning on the last payment date through the day prior to the end of each quarter.

In lieu of paying a dividend in cash, we may elect to accrue the dividend owed to shareholders.

Dividend balances accumulate 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 our 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 July 2, 2023, provided that the common stock has traded at $7.70 or higher (i) for 20 out of 30 consecutive trading days and (ii) on such date of conversion.

If we undergo a change of control, we will have the option to repurchase some or all of the then-outstanding shares of Series B Preferred Stock for cash in an amount equal to the liquidation preference and any accumulated and unpaid dividends, subject to the rights of the holders of the Series B Preferred Stock in connection with such change in control.

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.

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.

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 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 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.

The amounts, if any, for which we may be liable resulting from such proceedings are highly uncertain.

See Item 3, Legal Proceedings and Item 8, Note 16, Commitments and Contingencies and Item 1A, “ Risk Factors ” - “We are currently, and may in the future be, subject to substantial litigation and ongoing investigations that could cause us to incur significant legal expenses and result in harm to our business.

• The application of CGMP requires investment in our manufacturing establishments for production for our micronized products.

The transition process includes development and enhancement of production processes, procedures, test and assays, and it requires extensive validation work.

It can also involve the procurement and installation of new production or lab equipment.

These efforts require human capital, expertise and resources.

– “ Risk Factors ” under the heading “ 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.”

Discussion of Cash Flows

Operating Activities

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.

See Item 8, Note 16, Commitments and Contingencies , in the Consolidated Financial Statements for more information regarding our contractual commitments.

Citizens Loan Facilities

On January 19, 2024, we entered into a Credit Agreement (the “ Citizens Credit Agreement ”) with a syndicate of banks comprised of Citizens Bank, N.A.

as administrative agent (the “ Agent ”), and Bank of America, N.A.

The Citizens Credit Agreement was designed to simultaneously improve our capital structure, providing the ability to refinance the $50 million Hayfin Term Loan at lower interest rates and have access to additional borrowing capacity that could be deployed in the future in support of our organic and potential inorganic growth objectives.

The Citizens Credit Agreement provides for senior secured credit facilities in an aggregate principal amount of up to $95.0 million consisting of:

(i) a $75.0 million senior secured revolving credit facility (the “ Revolving Credit Facility ”) with a $10.0 million letter of credit sublimit and a $10.0 million swingline loan sublimit, and (ii) a $20.0 million senior secured term loan facility (the “ Term Loan Facility ” and, together with the Revolving Credit Facility, the “ Credit Facilities ”).

All obligations are required to be paid in full on January 19, 2029 (the “ Maturity Date ”), and are guaranteed by certain of the Company’s subsidiaries, and secured by substantially all of the assets of the Company and the guarantors pursuant to a customary security agreement.

Subject to the terms of the Citizens Credit Agreement, the Company has the option to obtain one or more incremental term loan facilities and/or increase the commitments under the Revolving Credit Facility in an aggregate principal amount equal to the greater of (i) $50.0 million and (ii) 1.00 times the Company’s Consolidated EBITDA as defined therein, each subject to the existing or any new lenders’ election to extend additional term loans or revolving commitments.

At our option, borrowings under the Citizens Credit Agreement (other than any swingline loan) will bear interest at a rate per annum equal to (i) the Alternate Base Rate, as defined therein, or (ii) a Term SOFR as defined therein, in each case plus an applicable margin ranging from 1.25% and 2.50% with respect to Alternate Base Rate borrowings and 2.25% and 3.50% for Term SOFR borrowings.

Swingline loans will bear interest at a rate per annum equal to one-month Term SOFR plus the applicable margin.

The applicable margin will be determined based on the Company’s consolidated total net leverage ratio.

The Company is required to pay a quarterly commitment fee on any unused portion of the Revolving Credit Facility, letter of credit fees, and other customary fees to the Agent and the Lenders.

The Term Loan Facility will amortize on a quarterly basis at 1.25% (for year one and two), 1.875% (for year three and four), and 2.5% (for year five) based on the aggregate principal amount outstanding under the Term Loan Facility, with the remainder due on the Maturity Date.

The Company must make mandatory prepayments in connection with certain asset dispositions and casualty events, subject in each case to customary reinvestment rights.

The Company may prepay borrowings under the Credit Facilities at any time, without premium or penalty, and may, at its option, reduce the aggregate unused commitments under the Revolving Credit Facility in whole or in part, in each case subject to the terms of the Credit Agreement.

The Company must also comply with certain financial covenants, including a maximum total net leverage ratio and a minimum consolidated fixed charge coverage ratio, as well as other customary restrictive covenants.

In addition, on January 19, 2024, we borrowed $30.0 million under the Revolving Credit Facility and $20.0 million under the Term Loan Facility.

Proceeds from the initial drawings under the Credit Facilities, together with cash on hand, were used to repay in full the $50.0 million principal amount and other obligations under that certain Loan Agreement, dated as of June 30, 2020 (as amended from time to time), by and among the Company, the guarantors party thereto, the lenders party thereto and Hayfin Services LLP, as administrative and collateral agent (as amended from time to time, the “ Hayfin Loan Agreement ”) and to pay related fees, premiums, costs and expenses (collectively with the entry into the Citizens Credit Agreement and the initial borrowings thereunder, the “ Debt Refinancing Transactions ”).

On February 27, 2024, we repaid the initial $30.0 million drawing under the Revolving Credit Facility.

Hayfin Term Loan

In June 2020, we entered into the Hayfin Loan Agreement, under which Hayfin provided us with a senior secured term loan of $50 million (the “ Hayfin Term Loan ”).

The Hayfin Term Loan was to mature on June 30, 2025 (the “ Maturity Date ”).

Interest on any borrowings was based on SOFR, plus a fallback provision of 0.15%, subject to a floor of 1.5%, plus a margin of 6.75%.

As of December 31, 2023, the Hayfin Term Loan carried an interest rate of 12.3%.

As noted above, in January 2024, we repaid in full the Hayfin Term Loan as part of the Debt Refinancing Transactions and terminated the Hayfin Loan Agreement.

Separation Agreement

In 2022, the Company entered into a Separation Agreement and General Release with Timothy R.

Wright, the former Chief Executive Officer of the Company (the “ Separation Agreement ”).

Pursuant to the terms of the Separation Agreement and Mr.

Wright’s general release of all claims against the Company, the Company will pay Mr.

Wright a total of $3.1 million in cash in a series of installments through September 2024.

Of this amount, $1.2 million is reflected in accrued compensation in the consolidated balance sheet as of December 31, 2023.

Discussion of Cash Flows for 2023 Compared to 2022

Operating Activities from Continuing Operations

During the year ended December 31, 2023, net cash provided by operating activities of continuing operations increased $42.9 million to $34.9 million compared to cash used of $8.0 million for the year ended December 31, 2022.

The increase in cash provided by operating activities was primarily as a result of year-over-year increases in net sales, which drove increases in collections from customers, as well as year-over-year decreases in operating expenses during the year ended December 31, 2023.

Investing Activities

During the year ended December 31, 2023, net cash used in investing activities was $2.2 million, a decrease of $0.5 million, compared to $2.7 million for the year ended December 31, 2022.

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.

The primary reason for the decrease was a $0.5 million increase in capital expenditures, year-over-year, offset by $1.0 million of payments made pursuant to a licensing agreement in 2022.

Financing Activities

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:

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.

These measurements are not, and should not be used as, a substitute for GAAP measures.

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.

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, as well as irregular and non-cash expenses.

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

EBITDA consists of GAAP net loss excluding:

(i) depreciation, (ii) amortization of intangibles, (iii) interest expense, net, (iv) loss on extinguishment of debt, and (v) income tax provision.

Adjusted EBITDA is intended to provide an enduring, normalized view of EBITDA and our broader business operations that we expect to experience on an ongoing basis by removing from EBITDA certain items which may be irregular, non-recurring, or non-cash items not excluded when calculating EBITDA.

This enables us to identify underlying trends in our business that could otherwise be masked by such items.

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) 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):

Year Ended December 31,

2022 2021 2020

Net loss $ (30,197) $ (10,285) $ (49,284)

Non-GAAP Adjustments:

Depreciation expense 3,345 4,363 5,782

Amortization of intangible assets 701 820 1,073

Interest expense, net 5,016 4,980 7,941

Loss on extinguishment of debt — — 8,201

Income tax provision expense (benefit) 206 247 (12,259)

EBITDA $ (20,929) $ 125 $ (38,546)

Additional Non-GAAP Adjustments:

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

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

Impairment of intangible assets — 53 1,027

Adjusted EBITDA $ 3,914 $ 18,726 $ 37,303

During the year ended December 31, 2023, net cash used in financing activities was $8.6 million, an increase of $8.0 million compared to cash used in financing activities of $0.6 million for the year ended December 31, 2022.

During 2023, we repurchased 5,000 shares of our Series B Preferred Stock for $9.5 million.

The repurchase was offset by increases in proceeds from option exercises ($0.3 million) and decreases in stock repurchases for tax withholdings ($1.2 million).

Critical Accounting Estimates

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Actual results may differ from these estimates.

Share-Based Compensation

We measure the fair value of stock options and other stock-based awards granted to employees on the grant date and recognize the assessed fair value as share-based compensation expense, straight-line, over the requisite service period to achieve the award based on the vesting requirements, to the extent that the achievement of performance conditions associated with such awards, as applicable, are determined to be “probable.”

Judgments and Uncertainties

Share-based payment arrangements are measured at fair value on the grant date.

The fair value of equity incentive awards, which are usually shares of our common stock, are generally measured at the last trading price on the grant date.

The fair value of stock options is calculated using an appropriate valuation technique.

The valuation technique generally requires us to make certain assumptions, including (1) the fair value of the common stock, (2) the expected volatility of our stock price, (3) the expected term of the award, (4) the risk-free interest rate, and (5) expected dividends.

Our expectation for volatility is generally based on historical daily share price movements, with certain adjustments for abnormal share price activity associated with events which are not expected to recur during the expected term.

The expected term of the award requires us to make assumptions regarding the post-vesting behavior of the recipients, which is based off available evidence.

Our assumption for the risk-free rate is derived from prevailing U.S.

Treasuries with similar terms to the award on the grant date.

Our assumption for dividends is derived from our own dividend history.

To the extent that any such awards are subject to a market condition, the resolution of the market condition is reflected in the fair value of the grant date.

Further, the requisite service period associated with an award containing a market condition must derive the service period over which the market condition is expected to be met.

Fair value and derived service periods are generally determined using a Monte Carlo simulation.

Subsequent to the determination of fair value, we recognize expense to the extent we evaluate that performance conditions associated with share-based payment arrangements are probable of occurring.

In certain cases where the extent of vesting is based on the extent of achievement, we are required to determine the extent to which achievement is probable.

We determine probable performance based on actual performance to date, internally-developed budgets and forecasts for periods covered by the relevant performance condition, and other evidence deemed relevant to this determination.

We re-evaluate our probability assessments at least quarterly, with any revisions reflected as a cumulative adjustment to expense.

Because of the cumulative nature of adjustments, during any period in which we re-evaluate probability, the adjustments could significantly impact our results of operations.

Sensitivity of Estimate to Change

For the year ended December 31, 2023, we granted stock options with a fair value on the grant date of $7.0 million.

This estimate was determined using a Monte Carlo simulation using the following inputs:

Stock price on grant date $ 3.70

Exercise price $ 3.70

Risk-free interest rate 3.58 %

Expected volatility (annualized) 75.00 %

Dividend yield — %

Weighted average grant date fair value $ 1.93

The granted stock options reflected an expected term based on our expectations for exercise activity.

Changes in any of these assumptions could result in a revised estimate of fair value of the granted stock options, which would impact the amount of expense recognized over the requisite service period, and could materially affect the total fair value or the amount of expense recognized in a particular period.

In addition, cumulative expense recognized for unvested performance stock unit awards was $1.7 million for the year ended December 31, 2023.

This is based on determinations regarding probable resolution or the extent of probable resolution of relevant performance conditions to earn such awards.

If it is subsequently determined that the performance conditions associated with these awards are no longer probable of being met, or performance conditions which were determined to be probable of occurring do not actually occur, we could reverse up to this amount of expense in the period such determination is made.

Furthermore, if probable levels of achievement are later determined to be greater, or actual achievement exceeds the level

of achievement assessed as probable, we could record increases to expense to reflect this level of achievement.

The amount of any incremental expense recognition or reversal will depend on the magnitude and timing of such change in estimate.

We record estimates for returns and allowances as a reduction to net sales based on our expectation for such returns.

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We maintain a return policy that allows our customers to return product for any reason within 30 days of sale, and to return product that is damaged or non-conforming, ordered in error, or due to recall at any time.

We anticipate increases in sales returns in light of potential or actual regulatory actions.

We derive an expectation for product returns based on historical return patterns and other factors, including shifts in our regulatory environment and product recalls.

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Changes in return patterns or unforeseen changes in regulations or identified product recalls could cause returns significantly in excess of this estimate.

Contingencies

We record contingent liabilities related to legal and other proceedings at such point in time when loss is probable and reasonably estimable.

Judgments and Uncertainties

We evaluate the probability of loss and the range of potential losses based on salient details about a case.

These evaluations consider evidence derived from discussions with counsel and include the merits and jurisdiction of the proceeding, the nature and the number of other similar current and past proceedings, damages sought by the counterparty, settlement offers we have extended to the counterparty and other factors.

From this information, we make a judgmental determination of whether loss from a case is probable and whether a reasonable estimate of loss can be derived.

In situations where a reasonable estimate is a range of estimates, we record the most likely amount in the range or, if no single amount is more likely than any of the others, we record the minimum amount of the range.

Sensitivity of Estimate to Change

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.

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, either favorably or unfavorably.

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

Actual results may differ from the assumptions and judgments used to derive our accrual.

We record a valuation allowance to offset our net deferred tax asset to the extent that realization is not likely.

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Sensitivity of Estimate to Change

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.

Historically, exclusive of changes in tax law such as that enacted under the Coronavirus Aid, Relief and Economic Security Act, we have not reversed our valuation allowance.

If the weight of available evidence suggests that some or all of this amount is more likely than not to be realized, we will derecognize the valuation allowance as an income tax benefit to the extent that the underlying deferred tax asset is more likely than not to be realized.

As of December 31, 2023, we had $0.9 million in valuation allowances recorded against our deferred tax assets balance of $41.7 million.

The amount and extent of the valuation allowance necessary to reflect the extent of realization of these deferred tax assets being more likely than not 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.

If the weight of available evidence suggests that some or all of this amount is more likely than not to be realized, we will change the valuation allowance with a corresponding adjustment to income tax provision (benefit) expense to the extent that the underlying deferred tax asset is more likely than not to be realized.

Recently Adopted Accounting Pronouncements

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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 7. Management’s Discussion and Analysis