MIMEDX GROUP, INC. - Annual Report: 2019 (Form 10-K)

---

---

---

•	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 our existing and planned investigative new drug application and pre-market approval requirements, the design and success of our clinical trials and pursuit of Biological License Applications (“BLAs”) for certain products;

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

•	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 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 Securities and Exchange Commission (the "SEC") reporting obligations;

•	our ability to relist our common stock, par value $0.001 per share (the “Common Stock”) on The Nasdaq Capital Market;

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

•	ongoing and future effects arising from the COVID-19 pandemic, and our responses intended to mitigate such effects;

•	demographic and market trends;

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

•	our expectations regarding research and development costs, including those arising from filing additional investigative new drug applications and pursuing new BLAs;

•	our expectations regarding the cost savings and effects resulting from reductions in employee salaries; and

•	our ability to compete effectively.

---

---

---

---

---

•	AmnioFix sheet form is used in a variety of surgical wound repair and internal surgical procedures. It is primarily used in lower extremity repair, spine, orthopedic, sports medicine, gastrointestinal, urologic, and other general surgery applications.

•

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 clinical studies underway to support INDs: plantar fasciitis, Achilles tendonitis and knee osteoarthritis. We currently are in Phase 3 for plantar fasciitis and Achilles tendonitis and in Phase 2B for knee osteoarthritis.

---

---

---

---

---

---

•	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.

---

---

•	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 and its dosage (as applicable) 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.

---

---

---

•

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.”

---

•

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.

•

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 approval, 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 approval, 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 with federal employees at our various government accounts (e.g., Department of Defense (“DoD”), VA, etc.) and impose a number of limitations on such interactions.

•	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.

---

---

---

•	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.

---

---

---

---

•	their lack of experience with advanced therapeutics, such as our placenta based allografts;

•	lack of evidence supporting additional patient benefits of advanced therapeutics, such as our placenta-based allografts, 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.

---

---

•	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 transaction(s); and

•	be unable to succeed in the marketplace with the transaction(s).

---

---

---

•	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.

---

---

---

---

•	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;

•

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.

---

---

---

•	any changes to the rights, preferences, or privileges of the Series B Preferred Stock;

•	amendments or restatements of any organizational document of the Company or its subsidiaries in a manner that materially, adversely, and disproportionately affects the rights, preferences, and privileges of the Series B Preferred Stock as compared to our Common Stock;

•	the authorization or creation of any class or series of senior or parity equity securities;

•	the declaration of any dividends or any other distributions, or the repurchase or redemption, of any equity securities of the Company ranking junior to or on parity with the Series B Preferred Stock (subject to certain exceptions);

---

•	prior to January 2, 2023, the sale, transfer, or other disposition of any assets, business, or operations for $25 million or more (other than sales of inventory in the ordinary course of business), or the purchase or acquisition of any assets, business, or operations for $75 million or more;

•

prior to January 2, 2023, the merger or consolidation of the Company unless either (x) the surviving company will have no class of equity securities ranking superior to or on parity with the Series B Preferred Stock or (y) the holders of shares of the Series B Preferred Stock will receive in connection therewith consideration per share of Series B Preferred Stock valued at 200% or more of the purchase price per share of $1,000;

•	prior to January 2, 2023, commencing a voluntary case under any applicable bankruptcy, insolvency, or other similar law or consenting to the entry of an order for relief in an involuntary case under any such law, or effectuating any general assignment for the benefit of creditors; and

•	prior to January 2, 2023, entering into any settlement agreement regarding the Company’s securities class action litigation.

---

•	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;

•	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 FSS, 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.

---

•	allow directors to take other stakeholders into account in discharging their duties;

•	a requirement that certain transactions with a shareholder of 10% or more ownership must be approved by the affirmative vote of two-thirds of the other shareholders unless approved by a majority of the disinterested directors or certain fair price requirements are met; and

•	voting rights acquired by a shareholder at ownership levels at or above one-fifth, one-third and a majority of voting power are denied unless authorized by the Board prior to such acquisition or by a majority of the other shareholders (excluding interested shares (as defined in the FBCA)).

---

---

---

---

---

---

---

---

---

•	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 $66.5 million in 2019 as compared with $51.3 million in 2018;

•	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 4 “Stability Biologics, LLC.”

---

---

---

---

---

---

•	The parties to the contract have approved the contract (in writing, orally, or in accordance with other customary business practices) and are committed to perform their respective obligations;

•	The entity can identify each party’s rights regarding the goods or services to be transferred; and

•	The entity can identify the payment terms for the goods or services to be transferred.

•	The contract has commercial substance.

•	It is probable that the entity will collect substantially all of the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer.

---

---

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

•

For the remaining customer arrangements (the “Remaining Contracts”), we concluded that, due to the uncertainty that extracontractual arrangements may continue, the Step 1 Criteria would not be satisfied until we receive payment from the customer. At that point, we determined that an accounting contract would exist and our performance obligations to deliver product to the customer to pay for the product would be satisfied. As of December 31, 2019, upon reassessment, we concluded that the Step 1 Criteria continued to not be met due to the same circumstances described above for these contracts.

---

---

---

---

---

---

---

•	The Investigation was completed in 2019 and we do not expect to incur these costs going forward.

•	Restatement costs are third-party service costs related to compiling, completing and auditing the financial statements included in the 2018 Form 10-K and in this filing, and thus we expect to incur these costs in the first half of 2020.

•	Litigation fees increased by $11.6 million year over year from $14.6 million for 2018 compared to $26.2 million for 2019 due to the increase in settlement disputes and near-term contingencies related to the internal investigation; we expect to continue incurring these costs in the future as we address our contingent liabilities.

•	Consulting costs in 2019 related to staff augmentation for restatement activities and advisory services related to financial reporting, internal controls, and the 2019 proxy contests. We continued to incur such costs in 2020 to assist with our effort to become current with our SEC financial reporting requirements.

•	We may incur settlement costs in the future as we resolve contingent liabilities; see Note 16, “Commitments and Contingencies.”

---

---

---

•	lawsuits or potential settlements for which we are not able to estimate a loss;

---

•	private securities lawsuits, for which we are currently not able to estimate a loss and for which it is unclear whether we would be indemnified under various insurance policies; 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 four consecutive fiscal quarters. Our total leverage ratio was 1.7 times at December 31, 2019, a cushion of 1.3 times.

•

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 BT 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, and our cash on hand was $53.5 million as of March 31, 2020.

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

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

---

•

We expect to continue to incur costs to indemnify former officers and directors in legal proceedings against them. The Company has already borne substantial costs to satisfy these indemnification and expense advancement obligations and expects to continue to do so in the future. We may need to increase these expenditures if we experience further delays in trial dates or other proceedings and our ability to recovery any of these advanced costs in the future is uncertain. See Note 16, “Commitments and Contingencies.”

•

We need to continue to invest in our manufacturing establishments to bring them into compliance with cGMP for production for our micronized products. We are also pursuing opportunities to partner with a contract manufacturing organization. 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. See Item 1A. – “Risk Factors” under the heading “To the extent our products do not qualify for regulation as human cells, tissues and cellular and tissue-based products solely under Section 361 of the Public Health Service Act, this could result in removal of the applicable products from the market, would make the introduction of new tissue products more expensive and would significantly delay the expansion of our tissue product offerings and subject us to additional post-market regulatory requirements.”

•

The clinical program to support our BLAs 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 FDA’s quality expectations. See Item 1A - Risk Factors - “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.”

---

•	We may become obligated to make payment in respect of certain contingent obligations in addition to our indemnity obligations to former officers and directors.

•

We are exposed to potential liabilities and reputational risk associated with litigation, regulatory proceedings, and government enforcement actions. See Item 3, “Legal Proceedings” and 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.”

•	Our customers have experienced, and may continue to experience, restrictions in their access to hospitals and ability to access other healthcare providers, particularly for elective procedures.

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

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

---

•	Because our sales are not evenly spread across the United States, to the extent that areas most impacted by COVID-19 are those where we have more of our sales, the pandemic will have a greater adverse impact on our revenues.

•	The ultimate impact of the COVID-19 pandemic is highly uncertain and subject to change, and we do not yet know the full extent of delays or impacts on our business, or how long such effects will endure.

---

---

---

---

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

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

---

---

---

---

---

---

---

1.	Nature of Business

2.	Liquidity and Capital Resources

•	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; and

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

---

---

---

---

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 2017, although the Company may have created a legal contract upon the execution of a contract and/or fulfillment of a purchase order, the lack of clarity around the final terms of the arrangement due to the pervasive side agreements with customers precluded the Company’s sales transactions from meeting this criterion upon shipment of product. Therefore, even though there may have been a legal contract governing the arrangement (which typically would indicate persuasive evidence of an arrangement), the Company’s selling and collection practices amended the stated contract terms. After considering these factors, the Company concluded that persuasive evidence of an arrangement did not exist upon shipment of product.

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

---

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 precluded the price of the Company’s sales transactions from being fixed or determinable upon shipment of product:

•	Offering customers an unconditional right of return,

•	Offering extended payment terms to customers, and

•	A history of exceeding established credit limits for customers.

4.

Collectibility is reasonably assured - At the time of transfer of physical possession to the customer, collectibility of the sales was questionable. The Company determined that the customers’ intention to pay amounts when due was uncertain in light of the conflicting messages customers received with respect to the payment terms, rights of return and lack of adherence to credit limits. Although the Company did have processes in place to establish credit limits, evidence indicated that those credit limits were overridden by certain sales personnel and members of management. The Company recovered the majority of its billings made in 2017 with insignificant write-offs recorded; however, a significant amount of these billings were collected well after payment was due under the contractual terms. Furthermore, the quantitative and qualitative evidence gathered by the Company raised considerable doubt as to the collectibility of its billings at the time of shipment, but this evidence was not persuasive enough for the Company to reach a conclusion as to whether collectibility was reasonably assured.

---

•	The parties to the contract have approved the contract (in writing, orally, or in accordance with other customary business practices) and are committed to perform their respective obligations;

•	The entity can identify each party’s rights regarding the goods or services to be transferred; and

•	The entity can identify the payment terms for the goods or services to be transferred.

•	The contract has commercial substance.

•	It is probable that the entity will collect substantially all of the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer.

---

---

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

•

For the remaining customer arrangements (the “Remaining Contracts”), the Company concluded that due to the uncertainty that extracontractual arrangements may continue the Step 1 Criteria would not be satisfied until the Company receives payment from the customer. At that point, the Company determined that an accounting contract would exist and the performance obligations of the Company to deliver product and the customer to pay for the product would be satisfied. As of December 31, 2019, upon reassessment, the Company concluded that the Step 1 Criteria continued to not be met due to the same circumstances described above.

---

---

---

---

•	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.

---

4.	Stability Biologics, LLC

---

---

7.	Leases

---

---

9.	Accrued Expenses

---

10.	Long Term Debt

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

•

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

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

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

---

---

---

---

---

---

---

---

---

---

---

---

---

---

---

18.	Related Party Transactions

19.	Restructuring

---

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

21.	Subsequent Events

---

---

---

---

•

Information Technology General Controls (ITGC’s) for certain information technology systems and other ITGCs did not operate effectively for a sufficient period of time for the Company to rely on the accuracy and completeness of information on which certain business process controls (automated and manual) are dependent. As a result, it is possible that the Company’s business process controls that depend on the accuracy and completeness of data or financial reports generated by the information technology system could be adversely affected due to the lack of operating effectiveness of ITGC’s.

•	There was a lack of robust, established and documented accounting policies and insufficiently detailed Company procedures to ensure controls operated as designed and policies were applied effectively to ensure material transactions were recorded in the financial statements.

•	The Company did not have adequate management documentation around the completeness and accuracy of data material to financial reporting of certain transactions including revenue recognition and completeness of inventory.

•	The Company, for certain processes, did not maintain adequate controls around segregation of duties within the revenue process. Other application controls related to revenue were not evaluated because of ineffective ITGCs or failed due to inadequate evidentiary matter or controls did not operate in a consistent manner during the year ended December 31, 2019.

•	The Company did not design and maintain adequate controls to ensure that accounting for income tax provisions were appropriately recorded in accordance with GAAP.

•	The Company did not have adequate staffing resources to properly perform review of certain accounting determinations, including (but not limited to) the following: review of significant assumptions for stock-based compensation expense, timely review of consignment inventory, the review of significant assumptions used to estimate accrued expenses.

•

The Company did not design and maintain adequate controls over the inventory process and related accounting assumptions, to ensure that accounting determinations related to inventory appropriately considered and recorded in accordance with GAAP, that the inventory balance was complete and accurate and that disclosures related to the inventory balance were appropriately reflected within the financial statements.

•	The Company’s controls over financial close and reporting did not operate effectively for a sufficient period of time to meet a variety of its financial reporting objectives which exposed the financial statements to potential for disclosure that did not meet the requirements of GAAP.

---

---

•	The Compliance function, led by the SVP and Chief Compliance Officer, has conducted several enterprise-wide risk assessments since 2018.  The results of those audits have been shared with the Ethics and Compliance Committee initially and regular updates have been provided on the Company’s risk assessment program.

•

Management developed a process to prepare and did prepare an annual comprehensive fraud risk assessment designed to evaluate risks related to fraudulent financial reporting, management override, potential loss of assets, and corruption. The methodology adopted within this assessment is designed to evaluate the impact and likelihood of various fraud risks susceptible to the Company. Such risks, if relevant, are then mapped to controls within the current risk environment.

•	Management developed a set of controls 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.

•

The Company established a Disclosure Committee comprised of senior management representatives from all relevant departments within the organization. Members of this committee were and are responsible for reviewing quarterly and annual SEC filings to ensure that the disclosures within the filings are reflective of the knowledge of the Company and the Company’s operations that each member of the committee brings to the review process. The members of the committee met prior to each filing to discuss the completeness and accuracy of the document being filed, if applicable, suggest

---

•	The Company designed and implemented a variety of new controls, including monthly operational meetings amongst senior management that are attended by members of the accounting department, to ensure 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. If a significant triggering event occurs, the Company evaluates the key control activities related to the transaction or activity and determines that the related controls are within the scope of the Sarbanes-Oxley compliance program.

•	Management conducted required internal training courses over Sarbanes-Oxley regulations, the Company's internal control over financial reporting program and documentation evidencing the operation of controls for Company personnel and management involved in the execution of controls.

•	Management developed a regular cadence for reporting the results of control testing to the board of directors of the Company.

•

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.

•	Established its Internal Audit Department, led by a VP of Internal Audit under the direction of the audit committee. The Internal Audit Department identified and hired internal resources with the appropriate level of competency, who are tasked with continually evaluating and monitoring the effectiveness of the Company's internal controls over financial reporting.

•	Management established a framework for identifying, communicating and remediating internal control deficiencies, which includes appropriate escalation of issues to appropriate stakeholders in the internal control framework and communication of remediation status, as relevant, to the board of directors on a regular basis.

•

Management led required 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 were facilitated by the CAO, 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.

---

---

---

---

---

---

---

---

---

---

---

•	Timothy R. Wright. Mr. Wright joined MiMedx as Chief Executive Officer on May 13, 2019.

•	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. We paid Alvarez & Marsal for Mr. Cole’s services, as described below under “Agreements with Our Executive Officers-Agreement with Alvarez & Marsal to Employ Mr. Coles.”

•

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. Subsequently, he served as Acting Chief Financial Officer through March 17, 2020 pursuant to a Separation and Transition Services Agreement, as described below under “Agreements with Our Executive Officers - Agreement with Mr. Borkowski.”

•	Peter M. Carlson. Mr. Carlson joined the Company as Executive Vice President - Finance in December 2019. He became Chief Financial Officer in March 2020.

•	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 (which terminated his employment).

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

---

---

(1)	During 2019, in recognition of Mr. Borkowski’s assumption of the duties of Interim Chief Financial Officer, the Board increased Mr. Borkowski’s base salary to $600,000. The Board also increased Mr. Landy’s base salary to $455,000 and Mr. Turner’s to $355,000 during 2019 following their assumption of increased responsibilities.

(1)	The Company made payments to Mr. Borkowski pursuant to Separation and Transition Services Agreement in lieu of, among other things, his annual incentive.

(2)	Mr. Carlson joined the Company effective December 16, 2019 and therefore was not eligible for an annual incentive for 2019.

(3)	The Company eliminated Mr. Landy’s role during 2019 and made payments to him in 2020 equal to one times his base salary and target annual incentive.

•	a rapidly changing financial forecast following adverse insurance coverage decisions relating to the Company’s products in late 2018 and the reduction in force in December 2018;

•	the failure to complete the audit of the financial statements for the year ended December 31, 2018, which also affected the Company’s ability to establish meaningful quantitative goals for 2019;

•	the adoption of a new strategic plan which addressed the changing regulatory landscape for several of the Company’s products and investments related to future BLA products; and

---

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

---

---

---

---

---

---

(1)	The Board appointed Mr. Wright as Chief Executive Officer effective May 13, 2019.

(2)	Mr. Coles served as Interim Chief Executive Officer from July 2, 2018 until May 12, 2019. The Company paid his employer, A&M, $908,663 and $1,147,751 for Mr. Coles’ services in 2019 and 2018, respectively.

(3)	Mr. Borkowski served as Interim Chief Financial Officer from June 6, 2018 until his resignation effective November 15, 2019. Subsequently, he served as Acting Chief Financial Officer.

(4)	The Board appointed Mr. Carlson EVP - Finance effective December 16, 2019. The Company later named Mr. Carlson Chief Financial Officer effective March 18, 2020.

(5)	Mr. Landy served as Executive Vice President and Chief Strategy Officer from December 5, 2018 until the Company eliminated this position on September 16, 2019.

(6)	Reflects a one-time $500,000 cash signing bonus. Messrs. Wright and Turner also received discretionary bonuses in 2020 in lieu of their 2019 annual incentive in the amounts of $720,000 and $136,320, respectively.

(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.

(8)

Represents the following amounts: (a) commuting expenses: Wright - $18,135; Borkowski - $43,733; (b) reimbursement for travel expenses for their spouses to attend certain work-related events: Borkowski - $5,098; Landy - $3,924; (c) severance: Borkowski - $4,000,000 (including $2,250,000 to be paid to him or on his behalf in 2020); Landy - $687,750 (paid in 2020); (c) 401(k) match: Wright - $1,442; Borkowski - $4,659; Turner - $6,059; and (d) tax gross-up on commuting expenses: Wright $7,662; Borkowski $42,441. Does not include $2,250,000 paid to Mr. Borkowski in 2020 pursuant to the Separation and Transition Services Agreement between the Company and him. See “Compensation, Discussion & Analysis - Agreements with Mr. Borkowski, above.”

---

(1)	The Board never formally approved the annual incentive plan in 2019. Refer to discussion of “annual incentive plan” in the Compensation Discussion & Analysis, above.

(2)	Represents restricted stock awards granted under the 2016 Plan. The shares of restricted stock generally 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.”

(4)	As discussed under “Compensation Discussion and Analysis,” Messrs. Landy and Borkowski forfeited all unvested restricted stock held by them upon the termination of their employment during 2019.

(5)	Represents performance-based restricted stock units.

---

(1)	Calculated based on a closing stock price of $7.58 per share on December 31, 2019.

(2)	A portion vested on June 7, 2020, and the remaining balance is scheduled to vest on June 7, 2021 and 2022.

(3)	Reflects (a) a time-vested restricted stock grant with a value of $350,000 which vests pro rata annually over three years on December 16, 2020, 2021, and 2022; and (b) a performance-vested restricted stock unit grant with a value of $1,000,000, which vests upon the achievement of each of four discrete performance goals.

(4)	The remaining balance vested on February 22, 2020.

(5)	The remaining balance is scheduled to vest on February 22, 2021.

(6)	The remaining balance is scheduled to vest in two installments on December 11, 2020 and 2021.

(7)	A portion vested on April 26, 2020, and the remaining balance is scheduled to vest in on April 26, 2021 and 2022.

(1)	Represents the number of shares acquired on vesting multiplied by the closing price of Common Stock on the vesting date.

---

---

(1)	Includes (a) annual base salary as of December 31, 2019, plus (b) annual targeted bonus for the year ended December 31, 2019, 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 unvested restricted stock based on the December 31, 2019 stock price, the vesting of which is deemed accelerated to December 31, 2019.

(5)	If the Participant’s employment with the Company terminated on account of the Participant’s death or disability, the shares shall become vested and non-forfeitable on termination of the Participant’s employment with the Company on account of the Participant’s death or disability.

(6)	Mr. Landy’s employment actually terminated on September 16, 2009 when the Company eliminated his position.

---

---

1.

The following directors had stock options outstanding as of December 31, 2019: Papasan - 87,000; Koob - 75,000; and Bleser, Dewberry, Evans, Hack, Koob, and Yeston—each with 60,000. In addition, on December 31, 2019 each of Messrs. Barry, Bierman, and Newton, and Ms. Behrens, had restricted stock units with a value of $225,000, and each of Messrs. Dewberry, Evans, Koob and Yeston had restricted stock units with a value of $175,000.

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

3.	The terms of Mr. Bleser and Mr. Hack expired on June 17, 2019 following the 2018 Annual Meeting.

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

5.	Reflects incremental fair value of options as a result of modifications effective on June 13, 2019: Bleser - $89,437; Dewberry - $82,019; Hack $89,437; Papasan $105,073; Evans, Koob and Yeston - $0.

6.	Reflects grant of $175,000 restricted stock unit award to all directors serving after June 17, 2019.

7.	Reflects grant of $50,000 restricted stock unit award to new directors.

8.	Mr. Yeston serves as the Science and Research liaison to the Board and as the Chairman of the ad hoc special litigation committee.

---

(a)

Represents shares of Common Stock issuable upon conversion of 90,000 shares of Series B Preferred Stock owned by Falcon Fund 2 Holding Company, L.P., a partnership controlled by EW Healthcare Partners. EW Healthcare Partners Fund 2-UGP, LLC, the general partner of Falcon Fund 2 Holding Company, L.P., may also be deemed to have sole voting and investment power with respect to such shares of Common Stock. EW Healthcare Partners Fund 2-UGP, LLC disclaims beneficial ownership of such shares of Common Stock except to the extent of its pecuniary interest therein. Martin P. Sutter, Scott Barry, Ronald W. Eastman, Petri Vainio and Steve Wiggins are each a manager and collectively the managers of EW Healthcare Partners Fund 2-UGP, LLC. Each of the managers may be deemed to exercise shared voting and investment power with respect to such shares. Each manager disclaims beneficial ownership of such shares of Common Stock except to the extent of his pecuniary interest therein. Martin P. Sutter is a member of the Company’s Board of Directors. The principal address of the EW Healthcare Partners entities and each of the managers is 21 Waterway Avenue, Suite 225, The Woodlands, Texas 77380.

(b)

Each holder of Series B Preferred Stock (each a “Holder” and collectively, the “Holders”) will have the right, at its option, to convert its Series B Preferred Stock, in whole or in part, into a number of fully paid and non-assessable shares of Common Stock equal to the Purchase Price Per Share, plus any accrued and unpaid dividends, at the conversion price. For purposes of this table the conversion price is presumed to be $3.85. No Holder may convert its shares of Series B Preferred Stock into shares of Common Stock if such conversion would result in the Holder, together with its affiliates, holding more than 19.9% of the votes entitled to be cast at any stockholders meeting or beneficially owning in excess of 19.9% of then-outstanding shares of Common Stock.

(c)

Subject to certain exceptions, each share of Series B Preferred Stock is entitled to be voted on by the Holders and will vote on an as-converted basis as a single class with the Common Stock, subject to certain limitations on voting set forth in the related Articles of Amendment. Percentage ownership set forth in the table is based on 110,328,875 shares of Common Stock outstanding on June 25, 2020, plus 2,359,043 shares deemed outstanding pursuant to Rule 13d-3 under the Exchange Act, which includes 25,022,299 shares of Common Stock to be issued upon conversion of the Series B Stock.

---

(1)

The beneficial ownership set forth in the table is determined in accordance with SEC rules. The percentage of beneficial ownership is based on 110,328,875 shares of Common Stock outstanding on June 25, 2020, plus 2,359,043 shares deemed outstanding pursuant to Rule 13d-3 under the Exchange Act and 25,974,026 shares deemed outstanding upon conversion of the Company’s Series B Preferred Stock at $3.85 per share. See notes (b) and (c), above.

(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 include 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)	Reflects beneficial ownership of shares held by the Richard and Susan Barry Family Trust.

(6)	Mr. Borkowski resigned as Executive Vice President and Interim Chief Financial Officer effective November 15, 2019.

(7)	Mr. Carlson joined the Company as Executive Vice President, Finance, on December 16, 2019. Does not include 140,844 restricted stock units granted on December 16, 2019 that will vest based upon the achievement of certain performance criteria.

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

---

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

(10)	Does not include 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.

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

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

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

(14)	Does not include restricted stock units granted on February 18, 2020 with a value of $284,000 which will be settled in Common Stock based on a stock price determined after the Company becomes current in its reporting obligations.

(15)	Does not include restricted stock units granted on February 18, 2020 with a value of $3,375,000 which will be settled in Common Stock based on a stock price determined after the Company becomes current in its reporting obligations.

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

(17)

For purposes of this table all shares of Series B Preferred Stock are deemed to have converted to Common Stock at $3.85 per share. Effective July 2, 2020, pursuant to the terms of the Purchase Agreement and the Preferred Stock Amendment, the Company increased the size of the Board of Directors and appointed Martin P. Sutter and William A. Hawkins III to serve as Preferred Directors. Mr. Sutter is deemed to own beneficially shares controlled by EW Healthcare Partners. See notes (b), (c) and (1), above. No Holder may convert its shares of Series B Preferred Stock into shares of Common Stock if such conversion would result in the Holder, together with its affiliates, holding more than 19.9% of the votes entitled to be cast at any stockholders meeting or beneficially owning in excess of 19.9% of then-outstanding shares of Common Stock.

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

---

•	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.

---

(1)	The Company engaged BDO in May 2019 to audit its financial statements for the years ended December 31, 2018, 2017, and 2016. Total fees incurred by BDO were $7.3 million and were apportioned equally to each of the three years for the purposes of this tabular presentation. 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

---

---

---

---