MIMEDX GROUP, INC. - Annual Report: 2018 (Form 10-K)

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•	a distributor was given a lucrative consulting agreement simultaneous with a large purchase near the end of a reporting period;

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•	instances of intentionally shipping types and volumes of product that were not needed by the customer and recording revenue, typically near the end of a reporting period, and facilitating such sales by agreeing at the time of shipment to allow customers to return or exchange these products in subsequent accounting periods without recording specific provisions for such return or exchanges;

•	the booking of a large end of quarter sale to a distributor that the Company was in the process of acquiring and for which the Company never received payment;

•	several “side deals” with distributors and other customers, whereby the purchasers agreed to take product but were not required to pay for the product until the purchasers were successful in re-selling the product; however, the Company recorded revenue at the time of shipment rather than when the purchasers were obligated to pay, which was inconsistent with GAAP; and

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in at least one instance, Mr. Taylor concealed such a side deal from the Company’s Finance and Accounting group. In late 2015, Mr. Taylor forwarded to Messrs. Senken and Cranston a significant purchase order from an international distributor that provided for 180-day payment terms. Shortly after doing so, Mr. Taylor sent the distributor an email stating that if the distributor was unable to resell the product as expected, MiMedx would grant extended payment terms, assist the distributor with reselling the product or repurchase the product from the distributor. Mr. Taylor did not inform Messrs. Senken or Cranston about this side deal, and as a result MiMedx improperly recognized $2.5 million in revenue from this sale near the end of the fourth quarter of 2015.

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After Mr. Cranston’s predecessor questioned the Company’s accounting for revenue from its largest distributor, Messrs. Petit, Taylor, Senken and Cranston did not disclose to the Audit Committee or the Company’s outside auditors that the Company routinely issued credits to the distributor for lost, damaged or missing tissues, nor did they disclose that the distributor only paid the Company for a tissue after it had sold that tissue to its customer.

•	On multiple occasions, Messrs. Petit, Senken and Cranston signed letters to the Company’s outside auditors misrepresenting that the Company had no side deals or other arrangements that had not been disclosed to the outside auditors.

•	In November 2016, after two former employees alleged that the Company had engaged in channel stuffing and improper revenue recognition practices, Messrs. Petit and Senken signed a letter to the Company’s outside auditors misrepresenting that they had no knowledge of any allegations of fraud affecting the Company made by current or former employees.

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In early 2017, after the Audit Committee had retained counsel to investigate the allegations made by these former employees, Mr. Petit forwarded to the Board a set of written responses in which counsel for the Company’s largest distributor explicitly stated that it only paid the Company for tissues after receiving payment from the distributor’s customer. Mr. Petit misled the Board about the accuracy of the information provided by the distributor’s counsel.

•	Also in early 2017, the Company retained an outside expert to opine on the appropriateness of the Company’s recognition of revenue from sales to its largest distributor. Messrs. Petit, Senken and Cranston made misrepresentations to the expert concerning the actual course of dealing between the Company and its largest distributor.

•	In early 2017, in letters signed by Mr. Senken, the Company responded to comment letters received from the SEC’s Division of Corporation Finance by misrepresenting that the Company’s largest distributor was obligated to pay the Company, regardless of whether the distributor resold the product. As noted above, the Company routinely issued credits

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•	In early 2018, the Company’s former senior management prepared a misleading memorandum to the Company’s outside auditors that misrepresented key facts regarding the Company’s historical relationship with its largest distributor, which were relevant to determining the appropriate revenue recognition under GAAP.

•	During a deposition, Mr. Petit falsely testified under oath that it was not true that the Company’s largest distributor only paid the Company after the distributor had received a purchase order from its customer.

•	Former senior management disregarded revenue recognition rules under GAAP and directed others to take actions that caused the Company to take actions that caused the Company to improperly recognize revenue under GAAP, which was a key factor in the Audit Committee concluding it was necessary to restate the Company’s financials, as described above.

•	Former senior management was involved in conduct that appears to have been designed to manipulate the timing and recognition of revenue - in some instances where the improper recognition of revenue allowed the Company to meet its published guidance.

•	After questions began to be raised regarding the Company’s accounting practices, former senior management made material misstatements and omissions to a number of key stakeholders and regulators, including the SEC’s Division of Corporation Finance, the Board, the Audit Committee and the Company’s outside auditors.

•	Former senior management engaged in a pattern of taking action against employees who raised concerns about the Company’s practices.

•	Former senior management overrode internal controls that otherwise might have mitigated certain issues identified in the Investigation. These included former senior management personally overseeing, outside of the Company’s normal control processes, the Company’s relationships with certain health care providers.

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Former senior management marginalized the Company’s legal and accounting departments and outside legal and accounting advisors, by dismissing or ignoring professional advice, withholding information from legal and accounting advisors necessary to appropriately exercise professional judgments and determinations and excluding senior legal and accounting personnel from regular senior management meetings.

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•	our strategic focus, as illustrated by our strategic priorities and our ability to implement these priorities;

•	our ability to access capital sufficient to implement our strategic priorities;

•	our expectations regarding our ability to fund our ongoing and future operating costs;

•	our expectations regarding future income tax liability;

•	the advantages of our products and development of new products;

•	market opportunities for our products;

•	the regulatory pathway for our products, including the design and success of our clinical trials and pursuit of BLAs (as defined below) for certain products;

•	our expectations regarding our ability to manufacture certain of our products in compliance with current Good Manufacturing Practices (“cGMP”);

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•	our expectations regarding costs relating to compliance with regulatory standards, including those arising from our clinical trials, pursuit of BLAs, and cGMP compliance;

•	our ability to continue marketing our micronized, injectable products and certain other products during and following the end of the period of enforcement discretion announced by the United States Food and Drug Administration (“FDA”);

•	expectations regarding government and other third-party coverage and reimbursement for our products;

•	expectations regarding future revenue growth;

•	our belief in the sufficiency of our intellectual property rights in our technology;

•	our ability to procure sufficient supplies of human tissue to manufacture and process our products;

•	the outcome of pending litigation and investigations;

•	our ability to complete remedial actions to address all observations in the Forms FDA 483 issued to us by the FDA;

•	our ability to regain and remain in compliance with SEC reporting obligations;

•	our ability to relist our Common Stock on The Nasdaq Capital Market in connection with becoming current in our SEC reporting obligations;

•	ongoing and future effects arising from the Audit Committee Investigation, the Restatement, the SEC investigation, and related litigation;

•	demographic and market trends;

•	our expectations regarding future compliance with our debt obligations, including under the Term Loan Agreement (as described below);

•	our plans to remediate the identified material weaknesses in our internal control environment and to strengthen our internal control environment; and

•	our ability to compete effectively.

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•	AmnioFix is provided in sheet form for homologous use as a barrier membrane. (“Homologous use” is when a tissue is intended to have the same basic function or functions in the recipient as it performed in the donor.) It has been used in spine, orthopedic, sports medicine, lower extremity repair, urology and general surgery applications.

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AmnioFix Injectable is supplied in micronized powder form and is reconstituted with 0.9% sterile saline for injection. This product is our lead BLA candidate. We are studying the product’s potential to address musculoskeletal degeneration across multiple indications. We have three IND studies underway: plantar fasciitis, Achilles tendonitis and knee osteoarthritis. We currently are in Phase 3 trial for the plantar fasciitis, Phase 2B for knee osteoarthritis, and Phase 3 for Achilles tendonitis.

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•	it must be minimally manipulated;

•	it must be intended for homologous use;

•	its manufacture must not involve combination with another article, except for water, crystalloids or a sterilizing, preserving or storage agent; and

•	it must not have a systemic effect and must not be dependent upon the metabolic activity of living cells for its primary function.

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•	Completion of preclinical laboratory tests, animal studies and formulations studies under the FDA’s Good Laboratory Practice regulations;

•	Submission to the FDA of an IND application for human clinical testing, which must become effective before human clinical trials may begin and which must include independent Institutional Review Board approval at each clinical site before the trials may be initiated;

•	Performance of adequate and well-controlled clinical trials in accordance with Good Clinical Practices to establish the safety and efficacy of the product for each indication;

•	Development of purity, potency and identity tests to demonstrate consistency and reliability of the manufacturing process through a chemistry, manufacturing and control program;

•	Submission to the FDA of a BLA for marketing the product, which includes, among other things, reports of the outcomes and full data sets of the clinical trials, and proposed labeling and packaging for the product;

•	Satisfactory review of the contents of the BLA by the FDA, including the satisfactory resolution of any questions raised during the review;

•	Satisfactory completion of an FDA Advisory Committee review, if applicable;

•	Satisfactory completion of an FDA inspection of the manufacturing facility or facilities at which the product is produced to assess compliance with FDA’s cGMP regulations, to assure that the facilities, methods and controls are adequate to ensure the product’s identity, strength, quality and purity; and

•	FDA approval of the BLA, including agreement on post-marketing commitments, if applicable.

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The federal Anti-Kickback Statute, which is a criminal law that prohibits, among other things, any person from knowingly and willfully offering, soliciting, receiving or providing any remuneration (including any kickback, bribe or rebate), directly or indirectly, overtly or covertly, in cash or in kind, to induce or reward referrals, purchases or orders, or arranging for or recommending the purchase, order or referral of any item or service for which payment may be made in whole or in part by a federal healthcare program, such as the Medicare and Medicaid programs. The term “remuneration” has been broadly interpreted to include anything of value. The Patient Protection and Affordable Care Act amended the intent requirement of the federal Anti-Kickback Statute, so that a person or entity no longer needs to have actual knowledge of this statute or specific intent to violate it. A conviction for violation of the Anti-Kickback Statute results in criminal fines and requires mandatory exclusion from participation in federal health care programs. Although there are a number of statutory exceptions and regulatory safe harbors to the federal Anti-Kickback Statute that protect certain common industry practices from prosecution, the exceptions and safe harbors are drawn narrowly, and arrangements may be subject to scrutiny or penalty if they do not fully satisfy all elements of an available exception or safe harbor. See discussion below under “Risk Factors–We and our sales representatives, whether employees or independent contractors, must comply with various federal and state anti-kickback, self-referral, false claims and similar laws, any breach of which could cause an adverse effect on our business, results of operations and financial condition.”

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The federal False Claims Act (“FCA”) imposes significant civil liability on any person or entity that knowingly presents, or causes to be presented, a claim for payment to the U.S. government, including the Medicare and Medicaid programs, that is false or fraudulent. The FCA also allows a private individual or entity as a whistleblower to sue on behalf of the government to recover civil penalties and treble damages. FCA liability is potentially significant in the healthcare industry because the statute provides for treble damages and mandatory penalties of between $11,181 and $22,363 per false claim or statement for penalties assessed after January 29, 2018, with respect to violations occurring after November 2, 2015. As a result of a modification made by the Fraud Enforcement and Recovery Act of 2009, a claim includes “any request or demand” for money or property presented to the U.S. government.

•	The federal Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) fraud and abuse provisions prohibit executing a scheme to defraud any healthcare benefit program, willfully obstructing a criminal investigation of a health care offense, or making false statements or concealing a material fact relating to payment for healthcare benefits, items or services.

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While manufacturers of human cell and tissue products regulated solely under Section 361 are not subject to the federal Physician Payments Sunshine Act and its implementing regulations (together with the Act, the “Sunshine Act”), in the future, if we receive a BLA, this law will require us (with certain exceptions) to report information to CMS related to certain payments or other transfers of value we make to U.S.-licensed physicians and teaching hospitals, and for reports submitted on or after January 1, 2022, physician assistants, nurse practitioners, clinical nurse specialists, certified nurse anesthetists and certified nurse-midwives. If we receive a BLA, the Sunshine Act would also require us to report annually certain ownership and investment interests held by U.S.-licensed physicians and their immediate family members. Such information will subsequently be made publicly available by CMS on the Open Payments website.

•	Federal conflicts of interest laws, the Standards of Ethical Conduct for Employees of the Executive Branch, and local site policies for each federal institution we call upon govern our interactions federal employees at our various government accounts (e.g., Department of Defense (“DoD”), VA, etc.) and impose a number of limitations on such interactions.

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•	There are state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws, which may apply to items or services reimbursed by any third-party payer, including commercial insurers, many of which differ from each other in significant ways and often are not preempted by federal laws, thus complicating compliance efforts.

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•	the revenues generated by sales of our products;

•	the costs associated with expanding our sales and marketing efforts;

•	the expenses we incur in manufacturing and selling our products;

•	the costs of developing and commercializing new products or technologies;

•	the cost of obtaining and maintaining regulatory approval or clearance of certain products and products in development;

•	the costs associated with capital expenditures, including those required in connection with our efforts to become cGMP compliant; and

•	unanticipated general and administrative expenses.

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•	incur indebtedness;

•	make investments;

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•	incur liens;

•	pay dividends; and

•	engage in mergers and consolidations, sale and leasebacks and asset dispositions.

•	limiting our flexibility in operating our business and planning for, or reacting to, changes in our business and our industry;

•	limiting our ability to withstand a future downturn in our business or the economy in general;

•	requiring the dedication of a portion of any cash flow from operations to the payment of principal of, and interest on, the indebtedness, thereby reducing the availability of such cash flow to fund our operations, working capital, capital expenditures, future business opportunities and other general corporate purposes;

•	restricting us from making acquisitions or causing us to make divestitures;

•	limiting our ability to obtain additional financing;

•	limiting our ability to adjust to changing market conditions; and

•	placing us at a competitive disadvantage relative to our competitors who are less highly leveraged.

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•	properly identify and anticipate physician and patient needs;

•	acquire, through licensing, co-development or outright purchase, new technology developed outside of MiMedx;

•	develop and introduce new products or product enhancements in a timely manner;

•	adequately protect our intellectual property and avoid infringing upon the intellectual property rights of third parties;

•	demonstrate the safety and efficacy of new products; and

•	obtain the necessary regulatory clearances or approvals for new products or product enhancements.

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•	their lack of experience with prior procedures in the field using our products;

•	lack of evidence supporting additional patient benefits of our products over conventional methods in certain therapeutic applications;

•	perceived liability risks generally associated with the use of new products and procedures;

•	limited availability of reimbursement from third-party payers; and

•	the time that must be dedicated to physician training in the use of our products.

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•	issue additional equity securities that would dilute the value of equity currently held by our shareholders;

•	divest or license existing products or technology;

•	use cash that we may need in the future to operate our business;

•	incur debt that could have terms unfavorable to us or that we might be unable to repay;

•	structure the transaction in a manner that has unfavorable tax consequences, such as a stock purchase that does not permit a step-up in the tax basis for the assets acquired;

•	be unable to realize the anticipated benefits, such as increased revenues, cost savings, or synergies from additional sales;

•	be unable to secure the services of key employees related to the acquisition; and

•	be unable to succeed in the marketplace with the acquisition.

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•	untitled letters, warning letters, cease and desist orders, fines, injunctions, and civil penalties;

•	recall or seizure of our products;

•	operating restrictions, partial suspension or total shutdown of production;

•	refusing our requests for clearance or approval of new products;

•	withdrawing or suspending current applications for approval or approvals already granted;

•	refusal to grant export approval for our products; and

•	criminal prosecution.

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•	provisions of HIPAA that limit how covered entities and business associates may use and disclose protected health information, provide certain rights to individuals with respect to that information and impose certain security requirements;

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HITECH, which strengthened and expanded the HIPAA Privacy Rule and Security Rules, imposed data breach notification obligations, created new tiers of civil monetary penalties, amended HIPAA to make civil and criminal penalties directly applicable to business associates and gave state attorneys general new authority to file civil actions for damages or injunctions in U.S. federal courts to enforce the federal HIPAA laws and seek attorneys’ fees and costs associated with pursuing federal civil actions;

•	other federal and state laws restricting the use and protecting the privacy and security of personal information, including health information, many of which are not preempted by HIPAA;

•	federal and state consumer protection laws; and

•	federal and state laws regulating the conduct of research with human subjects.

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•	Fluctuations in stock market prices and trading volumes of similar companies or of the markets generally;

•	Our ability to successfully launch, market and earn significant revenue from our products;

•	Our ability to obtain additional financing to support our continuing operations;

•	Disclosure of the details and results of regulatory applications and proceedings;

•	Developments in and disclosure or publicity regarding existing or new litigation or contingent liabilities;

•	Changes in government regulations or our failure to comply with any such regulations;

•	Additions or departures of key personnel;

•	Our investments in research and development or other corporate resources;

•	Announcements of technological innovations or new commercial products by us or our competitors;

•	Developments in the patents or other proprietary rights owned or licensed by us or our competitors;

•	The timing of new product introductions;

•	Actual or anticipated fluctuations in our operating results, including any restatements of previously reported results;

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•	Our ability to effectively and consistently manufacture our products and avoid costs associated with the recall of defective or potentially defective products;

•	Our ability and the ability of our distribution partners to market and sell our products;

•	Changes in reimbursement for our products or the price for our products to our customers;

•	Removal of our products from the Federal Supply Schedule, or changes in how government accounts purchase products such as ours or in the price for our products to government accounts;

•	Material amounts of short-selling of our Common Stock; and

•	The other risks detailed in this Item 1A.

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•	Sales to external customers by Stability Biologics, LLC, our wholly-owned subsidiary acquired on January 13, 2016 and sold on September 30, 2017, were $7.0 million and $11.7 million during the years ended December 31, 2017 and 2016, respectively.

•	Investigation, restatement and related expenses were $51.3 million in 2018 as compared with $0.0 million in 2017;

•	As a result of the December 2018 broad-based organizational realignment, cost reduction and efficiency program, the Company incurred pre-tax charges of $6.1 million during 2018.

•	Loss on sale of Stability Biologics, LLC of $1.0 million recognized during the year ended December 31, 2017 and further discussed in Item 8, Note 5 “Stability Biologics, LLC.”

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•	the timing of revenue recognition for sales through distributors and direct sales to customers, except for the sales recognized by our wholly-owned subsidiary, Stability, for the period from January 13, 2016 to September 30, 2017, which were not restated and continued to be recognized at the time of physical delivery of the product;

•	the presentation of net revenue instead of gross revenue for administrative fees paid to GPOs;

•	the impact of changes in revenue recognition on cost of goods sold;

•	the timing of recognizing certain general and administrative expenses;

•	the impact on losses associated with contingency exposures;

•	the impact of other miscellaneous adjustments, such as patent cost and share-based compensation, and

•	the impact of the above on income tax.

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•	changes in the amount of reported cash, due to the timing of certain cash collections;

•	changes to reported accounts receivable and other current assets and the related reserves on each, due to the restatement of revenue recognition;

•	accrual balances that are impacted by the expense and contingency determinations discussed above; and

•	the related income tax effects of the above.

•	improved processes and controls to monitor sales practices and recognize revenue;

•	a restructured and bolstered pricing committee;

•	tightened policies, procedures, and governance of credit and returns;

•	revised criteria for granting credit and periodic credit limit and terms reviews;

•	improved cash collection procedures and efforts;

•	the enhancement of the cash forecast process;

•	the establishment of an independent compliance department reporting to the Board;

•	the assessment and initial implementation of remediation of controls required under the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”);

•	the hiring of a Vice President of Internal Audit to develop and implement an internal audit function for the Company; and

•	executing on the realignment program announced in December 2018.

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•	For sales to distributors, revenue was recorded upon shipment to the distributor;

•	Certain sales to direct customers were treated as consignment sales as the customer could return the product at any time and was not required to pay until the product was used, despite no formal consignment agreement being in place. Therefore, the Company did not record revenue until the product was sold to an end-user (i.e., the recipient of the product);

•	For other sales to direct customers, revenue was recorded upon shipment to the customer.

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Persuasive evidence of an arrangement exists - The Company’s sales are driven either by contracts or purchase orders. These documents are typically used to establish persuasive evidence of an arrangement. The Company’s customary business practices, however, must be taken into account as a contract can be written, oral, or based on customary business practices. Throughout 2012-2017, although the Company may have created a legal contract upon the execution of a contract and/or fulfillment of a purchase order, the lack of clarity around the final terms of the arrangement due to the pervasive side agreements with customers preclude the Company’s sales transactions from meeting this criterion upon shipment of the product. Therefore, even though there may have been a legal contract governing the arrangement (which typically would indicate persuasive evidence of an arrangement), the Company’s selling and collection practices amended the stated contract terms. After considering these factors, the Company concluded that persuasive evidence of an arrangement did not exist upon shipment of the product.

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Delivery has occurred or services have been rendered - For sales to customers, physical possession and title transferred upon shipment to the customer. However, the Company concluded that it did not pass the risks of ownership to the customer upon shipment because customers were allowed to return product for multiple reasons, which included being unable to sell the product, damages which may have occurred subsequent to delivery, and dropped product. See below for additional discussion of the Company’s rationale for concluding that delivery had not yet occurred upon shipment to the customer.

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The seller’s price to the buyer is fixed or determinable - At certain quarter-ends, the Company was significantly increasing sales to customers without having visibility into the level of product remaining unsold at the customer’s location. This practice made it difficult to develop an appropriate estimate of future credits to be issued to customers at the time of sale, which, in turn, impacted whether the price at the time of transfer of physical possession to the customer was fixed or determinable. This previous practice in combination with the following actions of the Company preclude the price of the Company’s sales transactions from being fixed or determinable upon shipment of product:

a.	Offering customers an unconditional right of return with many items being returned over a year after the initial sale.

b.	Offering extended payment terms to customers with days sales outstanding averaging almost 3 months, and

c.	A history of exceeding established credit limits for customers.

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Collectability is reasonably assured - At the time of transfer of physical possession to the customer, collectability of the sales was questionable. As noted in the Investigation and described further below, the customers’ intention to pay amounts when due was uncertain in light of the conflicting messages customers received with respect to the payment terms, rights of return and lack of adherence to credit limits. Although the Company did have a process in place to establish credit

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•	timing adjustments for prepaid expenses and expense accruals for research and development expenses related to clinical trials, employee compensation and other employee-related costs, legal costs and other accruals;

•	adjustments to stock-based compensation, primarily to reflect share-based awards granted to consultants as non-employee instead of as employee awards; and

•	an adjustment for a change in fair value of $1.7 million for earn-out. See Note 5. “Stability Biologics, LLC” in the Consolidated Financial Statements.

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•	shareholder derivative lawsuits, for which we are not able to estimate a loss;

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•	private securities lawsuits, for which we are unable to estimate a loss and for which it is unclear whether we would be indemnified under various insurance policies;

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the Company’s self-disclosure to the VA concerning the eligibility of one of its products for inclusion in the Company’s FSS contract, for which we recorded a liability of $6.9 million as of December 31, 2018, representing our best estimate for a potential loss. As explained below, the Company has reached an agreement in principle with the Department of Justice to resolve a qui tam matter relating to that issue. The settlement amount is within the Company’s previously-recorded liability;

•	litigation involving former employees of the Company; we have settled with one former employee for $4.8 million, but we have potential exposure in other cases brought by former employees for which a loss is not currently estimable;

•	$2.3 million in payments owed to Mr. Borkowski under the terms of the Separation and Transition Services Agreement dated November 18, 2019;

•	payments in connection with our operating and capital lease agreements; and

•	investments and other expenditures required in order to bring the Company’s facilities into compliance with cGMPs.

•	Maximum total leverage ratio, defined as funded debt divided by consolidated adjusted EBITDA, of not more than 3.0 to 1.0 as of the last day of the four consecutive fiscal quarters. We estimate our total leverage ratio to have been 2.0 times at December 31, 2019, a cushion of 1.0 times.

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Minimum liquidity of the Company, defined as unrestricted cash and cash equivalents, is not permitted, as of the last business day of each fiscal month following the term loan closing date through and including the fiscal month ending May 31, 2020, to be less than $40 million, and (b) beginning with the fiscal month ending June 30, 2020 and for each month ending thereafter, to be less than $30 million; provided that, beginning with fiscal month ending December 31, 2020, the total leverage ratio is less than 2.50 to 1.00 as of the last business day of any fiscal month, the liquidity of the Company shall not be less than $20 million. Our cash on hand was $69.1 million at December 31, 2019, exceeding the $40 million minimum liquidity by $29.1 million.

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

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

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1.	Nature of Business

2.	Liquidity and Capital Resources

•	shareholder derivative lawsuits or potential settlements, for which the Company is not able to estimate a loss;

•	operating loss of $3.9 million and net loss of $30.0 million;

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

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the Company’s self-disclosure to the Department of Veterans’ Affairs (“VA”) concerning the eligibility of one of its products for inclusion in the Company’s FSS contract. The Company recorded a liability of $6.9 million as of December 31, 2018 representing the Company’s best estimate for a potential loss. As explained below, the Company has reached an agreement in principle with the Department of Justice to resolve a qui tam matter relating to this issue. The settlement amount is within the Company’s previously-recorded liability.

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•	litigation involving former employees of the Company. The Company has settled with one former employee for $4.8 million, but it has potential exposure in other such cases for which a loss is not currently estimable;

•	payments owed to the Company’s former Interim Chief Financial Officer, under a Separation and Transition Services Agreement dated November 18, 2019;

•	payments in connection with the Company’s operating and capital lease agreements; and

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

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

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Minimum Liquidity, defined as unrestricted cash and cash equivalents, of not less than $40.0 million as of the last business day of each fiscal month following the term loan closing date through and including the fiscal month ending May 31, 2020. For fiscal months beginning June 30, 2020, the Company is not permitted to have liquidity of less than $30.0 million. If, beginning December 31, 2020, the total leverage ratio is less than 2.50 to 1.0 as of the last business day of a fiscal month, the Company’s liquidity shall not be less than $20.0 million.

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

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

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•	Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets or liabilities;

•	Level 2: Quoted prices in active markets for similar assets or liabilities or observable prices that are based on inputs not quoted on active markets, but corroborated by market data.

•	Level 3: Unobservable inputs or valuation techniques that are used when little or no market data is available.

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4.	Restatement of the Consolidated Financial Statements

•	the timing of revenue recognition for sales through all distributors and direct sales to all customers, as discussed above;

•	the impact of bad debt expense as a result of the timing of revenue recognition;

•	the presentation of net revenue instead of gross revenue for administrative fees paid to GPOs;

•	the impact of changes in revenue recognition on cost of goods sold;

•	the timing of recognizing certain general and administrative expenses;

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•	the impact on losses associated with contingency exposures;

•	the impact of other miscellaneous adjustments, such as patent cost and share-based compensation, and

•	the impact of the above on income tax.

•	changes in the amount of reported cash, due to the timing of certain cash collections;

•	changes to reported accounts receivable and other current assets and the related reserves on each, due to the restatement of revenue recognition;

•	accrual balances that are impacted by the expense and contingency determinations discussed above; and

•	the related income tax effects of the above.

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•	For sales to distributors, revenue was recorded upon shipment to the distributor;

•	Certain sales to direct customers were treated as consignment sales as the customer could return the product at any time and was not required to pay until the product was used, despite no formal consignment agreement being in place. Therefore, the Company did not record revenue until the product was sold to an end-user (i.e., the recipient of the product); and

•	For other sales to direct customers, revenue was recorded upon shipment to the customer.

1.

Persuasive evidence of an arrangement exists - The Company’s sales are driven either by contracts or purchase orders. These types of documents are typically used to establish persuasive evidence of an arrangement. The Company’s customary business practices, however, must be taken into account as a contract can be written, oral, or modified based on customary business practices. Throughout 2012-2017, although the Company may have created a legal contract upon the execution of a contract and/or fulfillment of a purchase order, the lack of clarity around the final terms of the arrangement due to the pervasive side agreements with customers preclude the Company’s sales transactions from meeting this criterion upon shipment of product. Therefore, even though there may have been a legal contract governing the arrangement (which typically would indicate persuasive evidence of an arrangement), the Company’s selling and collection practices amended the stated contract terms. After considering these factors, the Company concluded that persuasive evidence of an arrangement did not exist upon shipment of product.

2.

Delivery has occurred or services have been rendered - For sales to customers, physical possession and title transferred upon shipment to the customer. However, the Company concluded that it did not pass the risks of ownership to the customer upon shipment because customers were allowed to return product for multiple reasons, which included being unable to sell the product, damages which may have occurred subsequent to delivery, and dropped product. See below for additional discussion of the Company’s rationale for concluding that delivery had not yet occurred upon shipment to the customer.

3.

The seller’s price to the buyer is fixed or determinable - At certain quarter-ends, the Company was significantly increasing sales to customers without having visibility into the level of product remaining unsold at the customer’s location. This practice made it difficult to develop an appropriate estimate of future credits to be issued to customers at the time of sale, which, in turn, impacted whether the price at the time of transfer of physical possession to the customer was fixed or determinable. This previous practice in combination with the following actions of the Company preclude the price of the Company’s sales transactions from being fixed or determinable upon shipment of product:

a.	Offering customers an unconditional right of return with many items being returned over a year after the initial sale,

b.	Offering extended payment terms to customers with days sales outstanding averaging almost 3 months, and

c.	A history of exceeding established credit limits for customers.

4.	Collectability is reasonably assured - At the time of transfer of physical possession to the customer, collectability of the sales was questionable. As determined in the Investigation and described further below, the customers’ intention to pay amounts when due was uncertain in light of the conflicting messages customers received with respect to the payment

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•	timing adjustments for prepaid expenses and expense accruals for research and development expenses related to clinical trials, employee compensation and other employee-related costs, legal costs and other accruals;

•	adjustments to stock-based compensation, primarily to reflect share-based awards granted to consultants as non-employee instead of as employee awards; and

•	an adjustment for a change in fair value of $1.7 million for earn-out discussed further in Note 5. “Stability Biologics, LLC.”

5.	Stability Biologics, LLC

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9.	Accrued Expenses

10.	Long-Term Debt

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17.	Revenue Data by Customer Type

18.	Related Party Transactions

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19.	Restructuring

20.	Quarterly Financial Data (Unaudited) (in thousands except per share data)

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21.	Subsequent Events

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

•

Minimum Liquidity, defined as unrestricted cash and cash equivalents, of less than $40.0 million as of the last business day of each fiscal month following the term loan closing date through and including the fiscal month ending May 31, 2020. For fiscal months beginning June 30, 2020, the Company is not permitted to have liquidity of less than $30.0 million. Beginning with the fiscal month ending December 31, 2020, if the total leverage ratio is less than 2.50 to 1.0 as of the last business day of any fiscal month, the Company’s liquidity shall not be less than $20.0 million.

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

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

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•	EY advised the Company that the internal controls necessary for the Company to develop reliable financial statements did not exist;

•

Although EY could accept representations from the Company’s Interim CEO and Interim CFO based on their knowledge, EY advised the Company that EY was unable to rely on representations from them because, as of the date of the resignation, the current Company’s CEO and Interim CFO, in turn, would have needed to rely on representations from certain legacy management personnel still in positions that could affect what is reflected in the Company’s books and records. At the time of EY’s resignation, the Audit Committee Investigation was still ongoing;

•

EY advised the Company of the need to significantly expand the scope of the Audit Committee Investigation, due to material allegations of inappropriate financial reporting, material allegations of noncompliance with laws and regulations, the findings to date from the Audit Committee Investigation into these allegations, and the lack of internal controls necessary for the Company to develop reliable financial statements. EY had not completed the necessary work in connection with this expanded audit scope at the time of its resignation; and

•	EY advised the Company that information had come to EY’s attention that EY had concluded materially impacts the reliability of previously issued financial statements, and the issues raised by this information had not been resolved to EY’s satisfaction prior to its resignation.

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•	The Company failed to establish a tone at the top that demonstrated a commitment to integrity and ethical values, resulting in activity by senior management, members of the sales group and others that was inconsistent with both the accounting applied and applicable regulatory requirements.

•	Both the Board and senior management failed to appropriately respond to allegations of improper accounting activities, improper sales practices, and activities consistent with retaliation against employees who raised concerns of such inappropriate accounting and sales activity.

•	There were not adequate policies and procedures for review, authorization and approval of certain transactions (such as contracts with vendors and customers) by the appropriate internal resources.

•	The Company did not have a sufficient complement of personnel with an appropriate level of knowledge, experience, and oversight commensurate with its financial reporting requirements to ensure proper selection and application of U.S. GAAP.

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•	There was not a mechanism in place to regularly educate and communicate to management and employees the importance of internal controls, and to raise their level of understanding of controls.

•	The organization did not have an effective process to evaluate the range of its activities to assess whether all material activities were appropriately reflected in the financial statements.

•	There were not adequate processes in place to communicate changes in the operating environment to the accounting department so they could review the changes and determine what, if any, effect the change may have on the Company’s accounting policies.

•	There were not adequate processes in place to ensure that the accounting department (and/or Audit Committee) was aware of significant transactions with related parties so it could determine whether such transactions are appropriately approved, accounted for, and disclosed.

•

The Company did not have an effective, documented and continuous risk assessment process and related controls to properly monitor, identify and analyze regulatory compliance risks, including compliance with applicable regulations around product pricing, payments to medical professionals, and related activities, and related risks of financial misstatement due to error and / or fraud, including management override of controls.

•

The Company had inadequate or ineffective senior accounting leadership and corresponding process level and monitoring controls in the area of accounting close and financial reporting around the accounting for and disclosure of material transactions and business activities. These ineffective processes and controls impacted the Company’s ability to meet a variety of its financial reporting objectives, including (but not limited to) the following: proper cutoff for cash receipts, appropriate application of cash receipts to the correct corresponding receivables, accurate calculation of stock based compensation expense, the development of quality estimates related to accrued expenses, and the expensing of prepaid expenditures (such as clinical trial costs) within the correct periods.

•	The Company did not properly design or maintain effective controls to prevent unauthorized access to certain systems, programs and data, or provide for periodic review and monitoring of access, including analysis of segregation of duties conflicts.

•	There was a lack of robust, established and documented accounting policies and insufficiently detailed Company procedures to put these policies into effective action.

•	The Company did not have adequate management oversight around completeness and accuracy of data material to financial reporting.

•

The Company’s revenue recognition methodology was not aligned with the Company’s customary business practices, resulting in certain revenue events being recorded prior to the time at which all of the sales recognition criteria were met. Such misalignment was frequently due to the existence of extra-contractual or undocumented terms or arrangements initiated by former executives of the Company at the onset of sales transactions, such as sales above established distributor and customer credit limits, and concessions agreed to by former executives of the Company subsequent to the initial transaction, such as extended unusually long payment terms, granting return or exchange rights, and contingent payment obligations.

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•	Management did not have processes in place to assess whether controls within each of the five components of internal control were present and functioning as intended.

•	The level of staffing, training and specialized skills of the people performing the monitoring were not adequate given the environment.

•	There were not adequate procedures in place to monitor when controls were overridden and to determine whether the override was appropriate.

•	The Company underwent a leadership transition during the second and third quarters of 2018, during which the former CEO, CFO, COO, Controller, and VP of IT were removed from the organization. During this same period, each of these positions was filled by interim resources with appropriate technical expertise.

•	The Board created an Ethics and Compliance Committee consisting solely of independent directors. This committee is responsible for reviewing the status of the Company’s ethics and compliance program, reviewing and advising the Board regarding any open cases and trends that may impact the business, and recommending future initiatives to improve compliance performance and effectiveness.

•	Management conducted internal training courses over Sarbanes-Oxley regulations and the Company’s internal control over financial reporting program for Company personnel involved in the execution of the program.

•

Management reinforced the importance of integrity, accountability, and adherence to established internal controls, policies, and procedures through the adoption of a revised Code of Business Conduct Policy. Each newly hired employee or agent (including executives and Board members) will be required to certify that they read and understood the policy upon hire, and then re-certify their reading and understanding of the policy on an annual basis thereafter.

•	The Company enhanced the onboarding training provided to newly hired salespeople to emphasize the importance of compliance with the various regulations specific to the Life Sciences industry to which the Company is subject.

•	The Chief Compliance Officer intends to facilitate ethics and compliance training for all members of the Company’s Board.

•

The purpose of the whistleblower hotline and the mechanics of its use were formally communicated by the Chief Compliance Officer during numerous meetings with all levels of the sales department during the last two quarters of 2018, with an emphasis on the following: (a) each employee’s responsibility to report any actual or apparent violations of law or ethical standards and any questionable accounting or auditing matters so that they may be investigated and dealt with appropriately, and (b) management’s commitment to ensuring that any employees communicating such an issue via the hotline will not be subject to retaliation.

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•

In addition to enhancing processes and controls over adoption of new accounting standards and the proper application of existing accounting standards, the Company enhanced the technical capabilities of its accounting department by leveraging third party consultants with expertise in U.S. GAAP. In December 2019, the Company hired an experienced EVP of Finance and, as of the date of the filing of this Form 10-K, the Company is searching for a full-time Controller. Furthermore, the Company intends to lessen its reliance on third-party consultants for its technical accounting needs during 2020 by transitioning roles currently assigned to outside consultants to full-time employees with similar technical accounting competencies.

•	Management plans to develop and implement a contract management policy that defines who is required to review new, extended, or amended contracts (including those with distributors and agents).

•	The Company hired a new Chief Compliance Officer during the second quarter of 2018 to manage compliance and regulatory risk. This person reports directly to the Board’s Ethics and Compliance Committee.

•	Management hired consultants to evaluate the Company’s compliance with regulations specific to the Life Sciences industry. Going forward, similar periodic assessments will be performed by the Chief Compliance Officer.

•	Management is designing an Anti-Fraud Program to assess (and subsequently mitigate) the organization’s susceptibility to fraud, including management override of controls. The first phase of this Anti-Fraud Program to be implemented will in an annual fraud risk assessment.

•	Management has developed a set of procedures to identify and define its population of related parties, identify transactions with those related parties, and analyze such transactions to determine whether additional approval or financial statement disclosure is required.

•

Prior to the filing of this Form 10-K, the Company established a Disclosure Committee comprised of senior management representatives from all relevant departments within the organization.  Members of this committee are responsible for reviewing all quarterly and annual SEC filings, and meet prior to each filing to discuss the completeness and accuracy of the document being filed. The Company is designing and implementing a variety of new procedures, such as monthly operational meetings amongst senior management that are attended by members of the accounting department, to confirm that the accounting department is aware of operational changes that may affect the Company’s accounting policies.

•	On an annual basis (or more frequently, should a significant triggering event occur), the Company now performs a risk assessment designed to ensure that the scope of its Sarbanes-Oxley compliance program adequately reflects changes to the business and its operations.

•

Management collaborated with outside consultants possessing significant financial reporting and internal control expertise to perform an extensive review of the design of the Company’s internal controls over financial reporting. This review included the identification of internal control deficiencies and the development of remediation plans for each identified deficiency. These internal control deficiencies identified included (but were not limited to) the following: improper cutoff for cash receipts, application of cash receipts to the incorrect receivables, inaccurate calculation of stock-based compensation expense, the use of suboptimal methodologies in the development of estimates related to accrued expenses, and the expensing of prepaid expenditures (such as clinical trial costs) within the incorrect periods.

•	The Company is enhancing its financial close process by formalizing its accounting policies, introducing additional layers of independent reviews by appropriately qualified individuals, improving the precision applied to various financial result analyses, and providing education and training to the members of the finance department.

•	The Company has enhanced its review of salesperson activity which may indicate noncompliance with the Company’s sales policies, such as a quarterly review of data by the PFO, Interim Controller, and SVP of Sales which quantifies no charge evaluations, sales returns, and other key metrics both by region and at the individual salesperson level.

•	Management has gained a better understanding of system functionality through a comprehensive review of permissions and profiles within each IT application that is significant to the Company’s financial reporting objectives, and subsequently reconfigured profiles with appropriate permissions to better align with job responsibilities and enforce segregation of duties.

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•	Once user profiles and their associated permissions were reconfigured, management employed procedures to ensure the continued appropriateness of all applicable system and network access. This objective was achieved through the performance of periodic user access reviews and the enhancement of procedures related to the granting and removing of system and network access.

•	Management implemented additional procedures (such as the evaluation of report query parameters and the sampling of data within reports) to validate the completeness and accuracy of system generated reports and other data deemed to be significant to the Company’s financial reporting objectives.

•

Management implemented quarterly required communications amongst relevant members of senior management in the form of certification surveys. A control certification survey is distributed to obtain information regarding any internal control related issues or concerns that control owners may have, and additional certification surveys are distributed to Disclosure Committee members and key members of the sales department which address (to the best of their knowledge) whether the period’s financial statements are free from either material misstatements, material misclassifications, or material omissions.

•	The Company further developed its Internal Audit Department, led by a VP of Internal Audit, comprised of internal resources who are tasked with continually evaluating and monitoring the effectiveness of the Company’s internal controls over financial reporting.

•

Management modified its sales procedures to enhance the Finance Department’s awareness and oversight of sales activities in order to verify the validity and proper accounting treatment of sales transactions. This has been achieved via the participation of the Finance Department in various sales and operations meetings, as well as through new requirements that all credit limit increases, credit memos related to out of policy returns, and bulk sales orders exceeding a defined threshold be reviewed and approved by the Interim Controller prior to being processed.

•

Management began, and will continue, to schedule training sessions with the Company’s Sales Department to ensure that they are familiar with the Company’s current sales related policies and procedures, including those which are significant to the Company’s financial reporting objectives. Portions of these training sessions are facilitated by the Interim Controller, who presents on topics such as the Company’s current sales return policy, acceptable credit terms for customers, events that would trigger commission claw-backs, customer credit limit modification approval protocol, and the importance of proper revenue recognition.

•	The Company modified the composition of its Pricing Committee to include representatives from the Legal and Finance departments. This committee meets monthly to discuss any requested deviations from the Company’s standard price list, and its approval is required in order for any such deviation to be applied to a sales transaction.

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•	Adding procedural mechanics for shareholders to call special meetings of shareholders or act by written consent;

•	Enhancing procedural mechanics in connection with shareholder nominations of directors and submission of shareholder proposals at shareholder meetings;

•	Specifying powers of the chair of a shareholder meeting to establish and enforce rules of conduct and the order of business at the meeting;

•	Enhancing provisions related to the adjournment and postponement of, and establishment of record dates for, shareholder meetings;

•	Clarifying that the Chair of the Board shall be chosen from among Board members and may, but need not, be the Chief Executive Officer of the Company; and

•	Allowing emergency special Board meetings to be held with less than 24 hours’ notice.

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•	Parker H. “Pete” Petit. Mr. Petit served as Chairman and Chief Executive Officer from February 2009 until June 30, 2018. On September 20, 2018, the Board of Directors determined that his termination of employment was “for cause.”

•	David Coles. Mr. Coles served as Interim Chief Executive Officer from July 2, 2018 until May 13, 2019. He was an employee of Alvarez & Marsal North America, LLC.

•	Michael J. Senken. Mr. Senken served as Chief Financial Officer from January 2010 until June 6, 2018. On September 20, 2018, the Board of Directors determined that his termination of employment was “for cause.”

•	Edward Borkowski. Mr. Borkowski served as Executive Vice President and Interim Chief Financial Officer from June 7, 2018 until his resignation on November 15, 2019. He continued to serve as Acting Chief Financial Officer through the date of this filing.

•	William C. Taylor. Mr. Taylor served as President and Chief Operating Officer from September 2009 until June 30, 2018. On September 20, 2018, the Board of Directors determined that his termination of employment was “for cause.”

•	Alexandra O. Haden. Ms. Haden served as General Counsel & Secretary from March 2015 until her resignation on August 12, 2019.

•	I. Mark Landy. Mr. Landy served as Executive Vice President and Chief Strategy Officer from December 5, 2018 until the Company eliminated this role effective September 16, 2019.

•	Scott M. Turner. Mr. Turner has served as Senior Vice President—Operations & Procurement since December 5, 2018 and continues to serve in such role.

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•	develop financial assumptions and components of five-year strategic plan;

•	develop 2019 budget;

•	restate financial statements;

•	work with external firms to identify, assess, interview and select qualified candidates for senior finance and accounting positions; and

•	remediate control deficiencies.

•	hit forecast legal spend through end of year, decrease legal spend overall and develop a framework for managing legal needs going forward;

•	lead insurance renewal process;

•	support transition to biologics via intellectual property program; and

•	support upgrade of sales practices/polices/procedures.

•	form and lead Internal BLA Launch Team;

•	define commercialization plans for BLA products;

•	identify specific pipeline projects for product development; and

•	lead execution of aspects of five-year strategic plan.

•	achieve operational metrics;

•	align monthly sales and operations plan process with financial plan;

•	define facility plan and costs; and

•	implement facility plan to support business.

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•	All awards of stock options and awards of restricted stock to current employees were granted and priced as of the close of the business day on which the Committee approved the grant.

•	All awards of stock options and awards of restricted stock granted to newly-hired employees were granted and priced as of the later of the business day on which the Committee approved such grants or the date of employment.

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(1)	The Board appointed Mr. Coles as Interim Chief Executive Officer effective July 2, 2018. The Company paid his employer, A&M, $1,147,751 for Mr. Coles’ services in 2018. Mr. Coles stepped down from his position as of May 13, 2019, when Mr. Wright became the Company’s new Chief Executive Officer.

(2)	The Board appointed Mr. Borkowski as Interim Chief Financial Officer effective June 6, 2018. He resigned effective November 15, 2019.

(3)	On August 12, 2019, Ms. Haden resigned from her position as General Counsel and Secretary of the Company.

(4)	The Board appointed Mr. Landy as Executive Vice President and Chief Strategy Officer effective December 5, 2018. On September 16, 2019, the Company notified Mr. Landy that the position of Chief Strategy Officer was eliminated on such date.

(5)	The Board designated Mr. Turner as an executive officer on December 5, 2018.

(6)	The bonus for Mr. Borkowski reflects a one-time cash signing bonus. Mr. Landy received a one-time cash bonus for his outstanding performance.

(7)

Represents the aggregate grant date fair value of awards of restricted stock made to the executive officer in accordance with FASB ASC Topic 718. The restricted stock awards vest pro rata annually over a three-year period. In addition to their February 2018 grants, Messrs. Landy and Turner received additional equity awards in December when their roles were enlarged as part of a management restructuring.

(8)	Represents the following amounts: (a) reimbursement for travel expenses for their spouses to attend certain work-related events: Haden—$2,621; Turner—$3,103; (b) 401(k) match: Borkowski, Haden and Turner—each, $6,875; (c) commuting expense between Atlanta and personal residence: Borkowski—$6,040; (d) lodging in Atlanta: Borkowski—$22,099; and (e) automobile lease, Borkowski—$12,280.

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(1)	Mr. Petit resigned as Chief Executive Officer effective June 30, 2018. On September 20, 2018, the Company announced that the Compensation Committee and the Board determined that his termination would be treated as “for cause.”

(2)	Mr. Senken resigned as Chief Financial Officer effective June 6, 2018 and continued in a transitional role through June 30, 2018. On September 20, 2018, the Company announced that the Compensation Committee and the Board determined that his termination would be treated as “for cause.”

(3)	Mr. Taylor resigned as President and Chief Operating Officer effective June 30, 2018. On September 20, 2018, the Company announced that the Compensation Committee and the Board determined that his termination would be treated as “for cause.”

(4)	Represents a one-time cash bonus, paid in recognition of outstanding performance, and a one-time bonus of restricted share awards. Amount reported for restricted share awards is grant date fair value.

(5)	Represents the aggregate grant date fair value of awards of restricted stock made to the executive officer in accordance with FASB ASC Topic 718. The restricted stock awards vest pro rata annually over a three-year period. See the “Forfeited Awards Table” as all of the restricted stock awards granted in 2018 were forfeited.

(6)	Represents the following amounts: for 2018: (a) reimbursement for travel expenses for their spouses to attend certain work-related events: Petit—$4,651; Taylor—$4,851; and (b) 401(k) match: Senken—$6,875; Taylor—$6,875.

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(1)

For Non-Equity Incentive Plan Awards, these columns show the range of possible cash payouts that could have been earned by each of the NEOs under the 2018 MIP. “Threshold” represents the lowest possible payout if there is a payout and “Maximum” reflects the highest possible payout. In 2018, threshold performance would have resulted in a 15% payout of the revenue portion, a 10% payout of the Adjusted EBITDA portion and a 0% payout of the individual performance portion of the award.

(2)	Represents restricted stock awards granted under the 2016 Plan. The restricted shares vest ratably over three years from the grant date.

(3)	The amounts shown reflect the grant date fair market values of the awards computed in accordance with FASB ASC Topic 718—“Compensation-Stock compensation.”

(1)

For Non-Equity Incentive Plan Awards, these columns show the range of possible cash payouts that could have been earned by each of the NEOs under the 2018 MIP. “Threshold” represents the lowest possible payout if there is a payout and “Maximum” reflects the highest possible payout. In 2018, threshold performance would have resulted in a 15% payout of the revenue portion and a 10% payout of the Adjusted EBITDA portion of the award. Importantly, although the non-equity incentive plan awards were granted to Messrs. Petit, Senken and Taylor in February 2018, none of them actually received these awards for 2018 given the “for cause” termination finding in September 2018.

(2)	Represents restricted stock awards granted under the 2016 Plan. The restricted shares vest ratably over three years from the grant date. See the “Forfeited Awards Table” as the 2018 awards have been forfeited.

(3)	The amounts shown reflect the grant date fair market values of the awards computed in accordance with FASB ASC Topic 718—“Compensation-Stock compensation.”

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(1)	The remaining balance vested on February 22, 2019.

(2)	The remaining balance vested on April 25, 2019.

(3)	The remaining balance vested on July 25, 2019.

(4)	The remaining balance vested on October 26, 2019.

(5)	The remaining balance vested and on December 14, 2019.

(6)	An installment vested on February 22, 2019 and the remaining balance vested on February 22, 2020.

(7)	An installment vested on July 26, 2019 and the remaining balance was scheduled to vest on July 26, 2020.

(8)	An installment vested on October 26, 2019 and the remaining balance was scheduled to vest on October 26, 2020.

(9)	Installments vested on February 22, 2019 and February 22, 2020, and the remaining balance was scheduled to vest on 2021.

(10)	An installment vested on December 11, 2019, and the remaining balance was scheduled to vest December 11, 2020 and 2021.

(11)	Calculated based on a closing stock price of $1.79 per share on December 31, 2018.

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(1)	Represents the number of shares acquired on vesting multiplied by the closing price of Company common stock on the vesting date.

(1)	Represents the number of shares acquired on vesting multiplied by the closing price of Company common stock on the vesting date. Because the vesting date of the restricted stock awards is the anniversary of the date of grant, which is in the first quarter, restricted stock awards vested in 2018 prior to the September 20, 2018 “for cause” termination.

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(1)	Includes (a) annual base salary as of December 31, 2018, plus (b) annual targeted bonus for the year ended December 31, 2018, times the multiple applicable to the NEO.

(2)	Payable only in the event the executive’s employment is terminated without cause or for “good reason” within three years following a change in control.

(3)	Includes (a) the estimated value of medical, dental, vision and life insurance, plus (b) the employer’s cost of FICA for the duration of the severance period.

(4)	Includes the value of (a) unvested stock options as of December 31, 2018 that are in-the-money based on the December 31, 2018 closing stock price of $1.79, plus (b) unvested restricted stock based on the December 31, 2018 stock price, the vesting of which is deemed accelerated to December 31, 2018.

(5)

Also includes $1.5 million pursuant to a letter agreement with Mr. Borkowski when he first joined the Company. With respect to two promised restricted stock grants, the agreement provided that he would receive a lump sum payment of $750,000 if one grant was not made before his termination, and another lump sum payment of $750,000 if one-third of the other grant did not vest before his termination. As of December 31, 2018, the Company had not made either grant.

(6)

On August 12, 2019, Ms. Haden resigned from her position as General Counsel and Secretary of the Company. On August 27, 2019, the Company and Ms. Haden entered into a consulting agreement, pursuant to which Ms. Haden will provide up to 40 hours of consulting services per month through February 29, 2020 and has executed a release of claims in favor of the Company and its affiliates. The Company will compensate Ms. Haden at the rate of $8,000 per month and will provide nine months’ severance ($476,250).

(7)	On September 16, 2019, the Company notified Mr. Landy that the position of Chief Strategy Officer was eliminated on such date.

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(1)	The following directors had stock options outstanding as of December 31, 2018: Bleser, Dewberry and Hack—each with 110,000; Papasan—87,000; Koob—75,000; and Evans and Yeston—each with 60,000. The following directors had stock unvested restricted stock outstanding as of December 31, 2018: Aguilar—14,574.

(2)	Mr. Aguilar resigned from the Board on September 19, 2019.

(3)	Mr. Bleser's and Mr. Hack's terms expired at the 2018 Annual Meeting.

(4)	Mr. Papasan resigned from the Board following the 2018 Annual Meeting on June 17, 2019.

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(1)	The beneficial ownership set forth in the table is determined in accordance with SEC rules. The percentage of beneficial ownership is based on 110,545,275 shares of Company common stock outstanding on March 3, 2020, plus 2,643,882 share deemed outstanding pursuant to Rule 13d-3 under the Exchange Act.

(2)

On May 30, 2019, Prescience Investment Group, LLC filed an amendment to its Schedule 13D indicating shared voting power and dispositive power over 7,618,335 shares, shared voting power and dispositive power over 4,888,652 shares by Prescience Partners, LP, shared voting power and dispositive power over 1,845,539 shares by Prescience Point Special Opportunity LP, and shared voting power and dispositive power over 6,734,191 shares by Prescience Capital, LLC. The address for Prescience Investment Group, LLC is 1670 Lobdell Avenue, Suite 200, Baton Rouge, LA 70806.

(3)	According to the most recent Schedule 13G filed with the SEC on January 31, 2019, Group One Trading, LP had sole voting and dispositive power with respect to 6,379,103 shares. The address for Group One Trading, LP is 440 South LaSalle St, Ste. 3232, Chicago, IL 60605.

(4)	Does not includes restricted stock units granted on October 22, 2019 with a value of $225,000 which will be settled in common stock based on a stock price determined after the 2019 annual meeting of shareholders and after the Company becomes current in its reporting obligations.

(5)	Mr. Borkowski resigned as Executive Vice President and Interim Chief Financial Officer effective November 15, 2019. He continues to serve as principal financial officer and principal accounting officer.

(6)	Mr. Carlson joined the Company as Executive Vice President, Finance, on December 16, 2019.

(7)	Mr. Coles served as Interim Chief Executive Officer until May 13, 2019.

(8)	Includes 60,000 shares issuable upon the exercise of options.

(9)	Does not includes restricted stock units granted on October 22, 2019 with a value of $175,000 which will be settled in common stock based on a stock price determined after the 2019 annual meeting of shareholders and after the Company becomes current in its reporting obligations.

(10)	Includes 60,000 shares issuable upon the exercise of options.

(11)	Includes 44,558 shares of restricted stock subject to forfeiture.

(12)	On July 31, 2019, Alexandra O. Haden resigned as General Counsel and Secretary effective August 12, 2019. Includes 53,201 shares of unvested restricted stock, 3,300 shares owned by Ms. Haden’s spouse and 100,350 shares issuable upon the exercise of options.

(13)	Mr. Hulse joined the Company as General Counsel on December 2, 2019.

(14)	Includes 1,375,627 shares held by a trust and 60,000 shares issuable upon the exercise of options.

(15)	The Company eliminated Mr. Landy's position of Chief Strategy Officer effective September 16, 2019.

(16)	Based on the Schedule 14A filed by the Petit Group on April 11, 2019. Mr. Petit resigned as Chief Executive Officer effective June 30, 2018. Mr. Petit’s address is 1650 Cox Road, Roswell, Georgia 30075.

(17)	Mr. Senken resigned as Chief Financial Officer effective June 6, 2018. Number of shares based solely on record ownership, and includes 50,000 shares jointly owned by Mr. Senken's spouse. Mr. Senken’s address is 145 Inwood Terrace, Roswell, GA 30075.

(18)	Includes 60,000 shares issuable upon the exercise of options.

(19)	Represents the ownership of only those persons currently serving as a director or executive officer of the Company.

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•	Whether the terms of the transaction are fair to the Company and at least as favorable to the Company as would apply if the transaction did not involve a related party;

•	Whether there are demonstrable business reasons for the Company to enter into the transaction;

•	Whether the transaction would impair the independence of an outside director; and

•	Whether the transaction would present an improper conflict of interest for any director or executive officer, taking into account the size of the transaction, the direct or indirect nature of the related party’s interest in the transaction and the ongoing nature of any proposed relationship, and any other factors the Audit Committee deems relevant.

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(1)	The Company engaged BDO in 2019 to audit its financial statements for years ended December 31, 2018, 2017, and 2016. Total fees incurred by BDO are estimated to be $7.3 million and were and apportioned equally to each of the three years. The Company paid or incurred these fees in 2019.

(2)	This category includes fees for the audit of the Company’s annual financial statements and review of financial statements included in its quarterly reports on Form 10-Q.

(3)	This relates to BDO’s audit of the Company’s 401(k) plan.

(a)	Documents filed as part of this report:

(1)	Financial Statements

(2)	Financial Statement Schedule:

(3)	Exhibits

(b)	Exhibits

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