MIMEDX GROUP, INC. - Quarter Report: 2020 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the

Quarterly Period Ended

March 31, 2020



☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____________________to______________________

Commission file number 001-35887

MIMEDX GROUP, INC.

(Exact name of registrant as specified in its charter)



Florida		26-2792552
(State or other jurisdiction of incorporation)		(I.R.S. Employer Identification Number)



1775 West Oak Commons Ct NE Marietta, GA		30062
(Address of principal executive offices)		(Zip Code)

(770) 651-9100

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ¨ No x

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ¨ No x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer o	Accelerated filer x	Non-accelerated filer o (Do not check if a smaller reporting company)	Smaller reporting company o	Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(A) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No x

There were 110,328,875 shares of the registrant’s common stock, par value $0.001 per share, outstanding as of June 25, 2020.

Table of Contents



Part I FINANCIAL INFORMATION
Item 1	Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets	6
	Condensed Consolidated Statements of Operations	7
	Condensed Consolidated Statements of Stockholders’ Equity	8
	Condensed Consolidated Statements of Cash Flows	9
	Notes to the Unaudited Condensed Consolidated Financial Statements	10
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
Item 3	Quantitative and Qualitative Disclosures About Market Risk	36
Item 4	Controls and Procedures	36
Part II OTHER INFORMATION
Item 1	Legal Proceedings	38
Item 1A	Risk Factors	38
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	38
Item 3	Defaults upon Senior Securities	38
Item 4	Mine Safety Disclosures	38
Item 5	Other Information	39
Item 6	Exhibits	40
Signatures		41

As used herein, the terms “MiMedx,” “the Company,” “we,” “our” and “us” refer to MiMedx Group, Inc., a Florida corporation, and its consolidated subsidiaries as a combined entity, except where it is clear that the terms mean only MiMedx Group, Inc.

Explanatory Note

As previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 (the “2018 Form 10-K”), the Company filed no periodic reports after October 2017 until the filing of the 2018 Form 10-K. In June 2018, following an investigation (the “Audit Committee Investigation”), the Audit Committee of the Company’s Board of Directors, with the concurrence of management, concluded that the Company’s previously issued consolidated financial statements and financial information relating to each of the fiscal years ended December 31, 2016, 2015, 2014, 2013 and 2012 and each of the interim periods within such years, along with the unaudited condensed consolidated financial statements included in the Company’s Quarterly Reports on Form 10-Q for the quarters ended March 31, 2017, June 30, 2017 and September 30, 2017 (collectively, the “Non-Reliance Periods”), would need to be restated (the “Restatement”) and could no longer be relied upon due to accounting irregularities regarding the recognition of revenue under generally accepted accounting principles in the United States of America (“GAAP”). The 2018 Form 10-K contained our audited consolidated statements of operations, stockholders’ equity and cash flows for the years ended December 31, 2018 and 2017, which had not previously been filed, and for the year ended December 31, 2016, which were restated from the consolidated financial statements previously filed in our Annual Report on Form 10-K for the year ended December 31, 2016. The 2018 Form 10-K also included our audited consolidated balance sheets as of December 31, 2018 and 2017.

The Company, the Board, and the Audit Committee devoted considerable resources, including the time and attention of the Company’s financial and accounting staff and management, to completing the 2018 Form 10-K, which was not filed until March 17, 2020. This delayed the completion and filing of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 (the “2019 Form 10-K”) and Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, both of which were filed on July 6, 2020.

Forward-Looking Statements

This Form 10-Q contains forward-looking statements. All statements relating to events or results that may occur in the future are forward-looking statements, including, without limitation, statements regarding the following:


•	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;


•	the effects of the adoption of new accounting standards on the Company’s financial position or results of operations;


•	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 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;


•	demographic and market trends;


•	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.

Forward-looking statements generally can be identified by words such as “expect,” “will,” “change,” “intend,” “seek,” “target,” “future,” “plan,” “continue,” “potential,” “possible,” “could,” “estimate,” “may,” “anticipate,” “to be” and similar expressions. These statements are based on numerous assumptions and involve known and unknown risks, uncertainties and other factors that could significantly affect the Company’s operations and may cause the Company’s actual actions, results, financial condition, performance or achievements to differ materially from any future actions, results, financial condition, performance or achievements expressed or implied by any such forward-looking statements. Factors that may cause such a difference include, without limitation, those discussed under the heading “Risk Factors” in the 2019 Form 10-K.

Unless required by law, the Company does not intend, and undertakes no obligation, to update or publicly release any revision to any forward-looking statements, whether as a result of the receipt of new information, the occurrence of subsequent events, a change in circumstances or otherwise. Each forward-looking statement contained in this Form 10-Q is specifically qualified in its entirety by the aforementioned factors. Readers are advised to carefully read this Form 10-Q in conjunction with the important disclaimers set forth above prior to reaching any conclusions or making any investment decisions and not to place undue reliance on forward-looking statements, which apply only as of the date of the filing of this Form 10-Q with the Securities and Exchange Commission (“SEC”).

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

MIMEDX GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)



	March 31, 2020 (unaudited)			December 31, 2019
ASSETS
Current assets:
Cash and cash equivalents	$	53,525		$	69,069
Accounts receivable, net	31,932			32,327
Inventory, net	9,247			9,104
Prepaid expenses	5,239			6,669
Income tax receivable	10,729			18
Other current assets	5,216			6,058
Total current assets	115,888			123,245
Property and equipment, net	11,833			12,328
Right of use asset	3,158			3,397
Goodwill	19,976			19,976
Intangible assets, net	7,581			7,777
Other assets	473			443
Total assets	$	158,909		$	167,166
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	9,756		$	8,710
Accrued compensation	17,116			21,302
Accrued expenses	30,661			32,161
Current portion of long term debt	3,750			3,750
Other current liabilities	2,416			1,399
Total current liabilities	63,699			67,322
Long term debt, net	61,637			61,906
Other liabilities	3,234			3,540
Total liabilities	$	128,570		$	132,768
Commitments and contingencies (Note 13)
Stockholders' equity:
Preferred stock; $.001 par value; 5,000,000 shares authorized; 0 issued and 0 outstanding at March 31, 2020 and 0 issued and 0 outstanding at December 31, 2019	$	—		$	—
Common stock; $.001 par value; 150,000,000 shares authorized; 112,703,926 issued and 110,540,860 outstanding at March 31, 2020 and 112,703,926 issued and 110,818,649 outstanding at December 31, 2019	113			113
Additional paid-in capital	149,765			147,231
Treasury stock at cost; 2,163,066 shares at March 31, 2020 and 1,885,277 shares at December 31, 2019	(12,578		)	(10,806		)
Accumulated deficit	(106,961		)	(102,140		)
Total stockholders' equity	30,339			34,398
Total liabilities and stockholders' equity	$	158,909		$	167,166

See notes to unaudited condensed consolidated financial statements

MIMEDX GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share data)

(unaudited)



	Three Months Ended March 31,
	2020			2019

Net sales	$	61,736		$	66,555
Cost of sales	10,025			7,418
Gross profit	51,711			59,137

Operating expenses:
Selling, general and administrative	46,942			50,862
Investigation, restatement and related	15,592			18,107
Research and development	2,650			2,902
Amortization of intangible assets	271			233
Impairment of intangible asset	—			446
Operating loss	$	(13,744	)	$	(13,413	)

Other income (expense), net
Interest (expense) income, net	(2,387		)	211
Other income (expense), net	6			(29		)

Loss before income tax provision	(16,125		)	(13,231		)
Income tax provision benefit (expense)	11,304			(42		)

Net loss	$	(4,821	)	$	(13,273	)

Net loss per common share - basic	$	(0.04	)	$	(0.12	)

Net loss per common share - diluted	$	(0.04	)	$	(0.12	)

Weighted average shares outstanding - basic	107,538,509			106,420,317

Weighted average shares outstanding - diluted	107,538,509			106,420,317

See notes to unaudited condensed consolidated financial statements

MIMEDX GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except share data)

(unaudited)



	Common Stock Issued			Additional Paid - in			Treasury Stock					Accumulated
	Shares	Amount		Capital			Shares		Amount			Deficit			Total
Balance at December 31, 2019	112,703,926	$	113	$	147,231		1,885,277		$	(10,806	)	$	(102,140	)	$	34,398
Share-based compensation expense	—	—		1,915			—		—			—			1,915
Exercise of stock options	—	—		(1,214		)	(170,300	)	1,512			—			298
Restricted stock shares canceled/forfeited	—	—		1,746			242,998		(1,746		)	—			—
Shares repurchased for tax withholding	—	—		87			205,091		(1,538		)	—			(1,451		)
Net loss	—	—		—			—		—			(4,821		)	(4,821		)
Balance at March 31, 2020	112,703,926	$	113	$	149,765		2,163,066		$	(12,578	)	$	(106,961	)	$	30,339



	Common Stock Issued			Additional Paid - in			Treasury Stock					Accumulated
	Shares	Amount		Capital			Shares		Amount			Deficit			Total
Balance at December 31, 2018	112,703,926	$	113	$	164,744		3,605,263		$	(38,642	)	$	(76,560	)	$	49,655
Share-based compensation expense	—	—		3,014			—		—			—			3,014
Issuance of restricted stock	—	—		(3,025		)	(251,305	)	3,025			—			—
Restricted stock shares canceled/forfeited	—	—		1,563			141,381		(1,563		)	—			—
Shares repurchased for tax withholding	—	—		—			336,674		(1,044		)	—			(1,044		)
Net loss	—	—		—			—		—			(13,273		)	(13,273		)
Balance at March 31, 2019	112,703,926	$	113	$	166,296		3,832,013		$	(38,224	)	$	(89,833	)	$	38,352

See notes to unaudited condensed consolidated financial statements

MIMEDX GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)



	Three Months Ended March 31,
	2020			2019
Cash flows from operating activities:
Net loss	$	(4,821	)	$	(13,273	)
Adjustments to reconcile net income to net cash from operating activities:
Share-based compensation	3,349			3,014
Depreciation	1,506			1,695
Amortization of intangible assets	271			233
Amortization of deferred financing costs and debt discount	668			—
Non-cash lease expenses	239			269
Loss on fixed asset disposal	—			1
Impairment of intangible assets	—			1,258
Increase (decrease) in cash resulting from changes in:
Accounts receivable	395			—
Inventory	(143		)	(442		)
Prepaid expenses	1,430			2,053
Income tax receivable	(10,711		)	(12		)
Other assets	812			(1,612		)
Accounts payable	1,046			(4,173		)
Accrued compensation	(4,186		)	(7,501		)
Accrued expenses	(2,845		)	3,895
Income taxes	—			—
Other liabilities	709			(665		)
Cash flows used in operating activities	(12,281		)	(15,260		)

Cash flows from investing activities:
Purchases of equipment	(1,011		)	(648		)
Principal payments from note receivable	—			389
Patent application costs	(75		)	(174		)
Cash flows used in investing activities	(1,086		)	(433		)

Cash flows from financing activities:
Proceeds from exercise of stock options	298			—
Stock repurchased for tax withholdings on vesting of restricted stock	(1,538		)	(1,044		)
Repayment of term loan	(937		)	—
Cash flows used in financing activities	(2,177		)	(1,044		)

Net change in cash	(15,544		)	(16,737		)

Cash and cash equivalents, beginning of period	69,069			45,118
Cash and cash equivalents, end of period	$	53,525		$	28,381

See notes to unaudited condensed consolidated financial statements

MIMEDX GROUP, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019


1.	Nature of Business

MiMedx Group, Inc. (together with its subsidiaries except where the context otherwise requires “MiMedx,” or the “Company”) is an advanced wound care and emerging therapeutic biologics company, developing and distributing human placental tissue allografts with patent-protected processes for multiple sectors of healthcare. The Company derives its products from human placental tissues processed using proprietary processing methodologies. The Company’s mission is to offer physicians products and tissues to help the body heal itself. MiMedx provides products in the wound care, burn, surgical, orthopedic, spine, sports medicine, ophthalmic and dental sectors of healthcare. All of the Company’s products are regulated by the United States Food and Drug Administration (“FDA”).

MiMedx is the leading supplier of human placental allografts, which are human tissues that are transplanted from one person (a donor) to another person (a recipient). The Company operates in one business segment, Regenerative Biomaterials, which includes the design, manufacture, and marketing of products for the wound care, burn, surgical, orthopedic, spine, sports medicine, ophthalmic and dental sectors of healthcare. The Company’s allograft product families include: the dHACM family with AmnioFix® and EpiFix® brands; the Umbilical family with EpiCord® and AmnioCord® brands; and the Placental Collagen family with AmnioFill™ brands. AmnioFix and EpiFix are tissue allografts derived from amnion and chorion layers of human placental membrane; EpiCord and AmnioCord are tissue allografts derived from umbilical cord tissue. AmnioFill is a placental connective tissue matrix, derived from the placental disc and other placental tissue.

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

Effect of COVID-19 Pandemic

The COVID-19 pandemic and governmental and societal responses thereto have affected the Company’s business, results of operations and financial condition. The continuation or additional waves of the outbreak of COVID-19 or the outbreak of other health epidemics could harm the Company’s operations and increase the Company’s costs and expenses in numerous ways. The ultimate impact of the COVID-19 pandemic is highly uncertain and subject to change. The Company does not yet know the full extent of delays or impacts on the business, clinical trials, healthcare systems or the global economy as a whole, or how long such effects will endure. The effects of the COVID-19 pandemic or other health epidemics could have an adverse impact on the Company’s business, results of operations and financial condition.

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) was signed into law. The CARES Act includes provisions relating to refundable payroll tax credits, deferment of the employer portion of certain payroll taxes, loans and grants to certain business, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. As a result of the CARES Act, the Company expects a federal tax refund of approximately $11.3 million and has recognized an income tax benefit of the same amount.


2.	Significant Accounting Policies

Please see Note 3 to the Company’s Consolidated Financial Statements included in the Company’s Form 10-K for the fiscal year ended December 31, 2019 (the “2019 Form 10-K”), filed with the Securities and Exchange Commission (“SEC”) on July 6, 2020 for a description of all significant accounting policies.

Basis of Presentation

The unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) from interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. Changes to GAAP are established by the Financial Accounting Standards Board (“FASB”) in the form of Accounting Standards Updates (“ASU’’) to the FASB’s Accounting Standards Codification (“ASC”). In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the results of operations for the periods presented have been included. Operating results for the three months ended March 31, 2020 and 2019, are not necessarily indicative of the results that may be expected for the fiscal year. The balance sheet at December 31, 2019, has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by GAAP for complete financial statements.

You should read these condensed consolidated financial statements together with the historical consolidated financial statements of the Company for the year ended December 31, 2019, included in the 2019 Form 10-K.

Use of Estimates

The consolidated financial statements have been prepared in accordance with GAAP. Conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported consolidated statements of operations during the reporting period. Actual results could differ from those estimates. Significant estimates include estimated useful lives and potential impairment of property and equipment and intangible assets, estimates for contingent liabilities, management’s assessment of the Company’s ability to continue as a going concern, estimates of fair value of share-based payments and valuation of deferred tax assets.

Principles of Consolidation

The consolidated financial statements include the accounts of MiMedx Group, Inc. and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated upon consolidation.

Cash and Cash Equivalents

Cash and cash equivalents include cash and Federal Deposit Insurance Corporation (“FDIC”) insured certificates of deposit held at various banks with an original maturity of three months or less.

Accounts Receivable

Accounts receivable represent amounts due from customers for which revenue has been recognized. Generally, the Company does not require collateral or any other security to support its receivables.

The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing receivables. The Company determines the allowance based on factors such as historical collection experience, customers’ current creditworthiness, customer concentrations, age of accounts receivable and general economic conditions that may affect customers’ ability to pay.

Notes Receivable

Notes receivable represent formal payment agreements with customers which generally arise in situations where amounts shipped and billed have aged significantly as well as the promissory note issued by Stability Biologics, LLC (“Stability”) as part of the divestiture of Stability in 2017. The promissory note from Stability was paid in full in the three months ended September 30, 2019. The Company’s notes receivable are included in other current and long-term assets in the accompanying condensed consolidated balance sheets and were valued taking into consideration cost of the market participant inputs, market conditions, liquidity, operating results and other qualitative factors.

Inventories

Inventories are valued at the lower of cost or net realizable value, using the first-in, first-out (“FIFO”) method. Inventory is tracked through raw material, work-in-process, and finished good stages as the product progresses through various production steps and stocking locations. Labor and overhead costs are absorbed through the various production processes until the work order closes. Historical yields and normal capacities are utilized in the calculation of production overhead rates. Reserves for inventory obsolescence are utilized to account for slow-moving inventory as well as inventory no longer needed due to diminished market demand.

Revenue Recognition

The Company sells its products primarily to individual customers and independent distributors (collectively referred to as “customers”). During the three months ended March 31, 2019, the Company’s control environment was such that it created uncertainty surrounding all of its customer arrangements, which required consideration related to the proper revenue recognition under the applicable literature. The control environment allowed for the existence of extra-contractual or undocumented terms or arrangements initiated by or agreed to by the Company and former members of Company management at the outset of the transactions (side agreements). Concessions were also agreed to subsequent to the initial sale (e.g. sales above established customer credit limits extended and unusually long payment terms, return or exchange rights, and contingent payment obligations) that called into question the ability to recognize revenue at the time that product was shipped to a customer. The applicable revenue

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

As a result, the Company’s application of the applicable revenue recognition guidance varies for the three months ended March 31, 2020 and 2019. Additionally, the Company changed its pattern of revenue recognition effective October 1, 2019. The application of the relevant revenue recognition guidance and the pattern of revenue recognition are further discussed below for each period presented.

Three Months Ended March 31, 2019

The Company follows ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”) which establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity’s contracts to provide goods or services to customers. The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied.

ASC 606 establishes a five-step model for revenue recognition. The first of these steps requires the identification of the contract as described in ASC 606-10-25-1. The specific criteria (the “Step 1 Criteria”) to this determination are as follows:


•	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 the three months ended March 31, 2019, the Company concluded that the first three of the above criteria were not met upon shipment of product to the customer, the fourth criterion had been met, and the Company acknowledges that there is a degree of uncertainty as to whether the last criterion above had been met. Although the parties to the contract may have approved the contract and purchase orders in writing, the Company concluded that upon shipment of products to the customer there is not sufficient evidence that its customers were committed to perform their obligations defined in the contract due to the existence of extra-contractual or undocumented terms or arrangements (e.g., regarding payment terms, right of return, etc.).

The Company’s inability to fulfill these criteria was due to uncertainties of contractual adjustments with customers created by a combination of an inappropriate tone at the top and extra-contractual arrangements. Consequently, the Company concluded that it did not meet the Step 1 Criteria upon shipment of the product. Subsequent to the shipment of product, uncertainties surrounding contractual adjustment were not resolved until either: (1) the customer returned the product prior to payment; or (2) the Company received payment from the customer. At that point, the Company determined that an accounting contract existed and the performance obligations of the Company to deliver product and the customer to pay for the product were satisfied. The Company determined the transaction price of its contracts to equal the amount of consideration received from customers less the amount expected to be refunded or credited to customers, which is recognized as a refund liability that is updated at the end of each reporting period for changes in circumstances. The refund liability is included within accrued expenses in the consolidated balance sheet.

Transition and the Three Months Ended March 31, 2020

The Company continued to assess contracts, new and existing, throughout 2019 to determine if the Step 1 Criteria noted above for the determination of a contract under ASC 606 were met for new contracts at the outset of a sales transaction (i.e., upon shipment of product) or for existing contracts at some point within 2019 when all the terms of the arrangement would have been known. Until the Step 1 Criteria had been met, revenue recognition continued to be deferred consistent with the assessment for the year ended December 31, 2018.

As further discussed above, the primary factors contributing to the determination in prior periods that the Step 1 Criteria had not been met were the inappropriate tone at the top and the existence of pervasive extra-contractual or undocumented terms or arrangements. These prior business practices and the lack of transparency surrounding them created a systemically implied right for customers to demand future, unknown performance by the Company. Although some of the former executives were employed by the Company only through June 2018, the Company determined that based on the impact of the prior tone at the top, the

continued internal sales force strategy and the existing customer base’s continued expectations (based on past practice), there would be flexibility with respect to arrangement terms even after delivery of the product so pervasive that all customer arrangements continued to be subject to uncertain modification of terms into 2019.

After identifying the primary factors contributing to the lack of knowledge regarding its customer contractual terms, the Company began implementing changes in mid-2018 to remediate the pervasive weaknesses in the control environment, followed by gradually implementing measures to empower its compliance, legal, and accounting departments, educating its sales force on appropriate business practices, and communicating its revised terms of sale to customers. The Company assessed its efforts throughout 2019 to determine when, if at any point, the factors contributing to the inability to satisfy the Step 1 Criteria were sufficiently addressed such that the Step 1 Criteria were met at the time of physical delivery to the customer. Determining when these conditions were effectively satisfied was a matter of judgment; however, the Company determined that adequate knowledge of the contractual arrangements with its customers did exist in 2019. Management did note that there is no single determinative change that overcame the pervasive challenges noted above, but rather an accumulation of efforts that taken together, resulted in sufficient knowledge of contractual relationships both internally within the Company and externally with its customers.

To address the tone at the top issues, the Company noted that proper remediation involved not only the removal of members of management that were setting an inappropriate tone but also the establishment of new management throughout the organization that emphasized a commitment to integrity, ethical values and transparency and have that reinforcement for a sustained period of time. The changes made to management positions throughout the organization and the resulting organization behavior changes were assessed to have been sufficiently addressed by mid-2019.

Therefore, beginning October 1, 2019, for all new customer arrangements, the Company determined adequate measures were in place to understand the terms of its contracts with customers. As such, beginning October 1, 2019, the Company concluded that the Step 1 Criteria would be met prior to shipment of product to the customer or implantation of the products on consignment.

For the remaining customer arrangements at September 30, 2019 (the “Remaining Contracts”), the Company concluded that due to the uncertainty that extracontractual arrangement 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 March 31, 2020, upon reassessment, the Company concluded that the Step 1 Criteria continued to not be met due to the same circumstances described above. The amount related to these Remaining Contracts at March 31, 2020 was $4.5 million.



	Amounts Invoiced and Not Collected			Deferred Cost of Sales
Amounts as of December 31, 2019	$	9,006		$	1,261
Revenue recognized related to amounts invoiced and not collected at September 30, 2019:
Cash collected during the three months ended March 31, 2020 related to the Remaining Contracts	(4,495		)	(629		)
Amounts as of March 31, 2020	$	4,511		$	632

As a result of the reassessment as of September 30, 2019, the Company also determined that, for approximately $10.3 million of existing contracts where payment had not been received, it was not probable that substantially all consideration would be collected. For these customer contracts, the Company continued to fail the Step 1 Criteria and, therefore, no revenue was recognized in 2019. Any collections during the three months ended March 31, 2020, as well as any future collections relating to these customer contracts, will be recorded as revenue at the time payment is received.

For all customer transactions concluded to meet the Step 1 Criteria, the Company then assessed the remaining criteria of ASC 606 to determine the proper timing of revenue recognition.

Under ASC 606, the Company recognizes revenue following the five-step model: (i) identify the contracts with a customer (the Step 1 Criteria); (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. As noted above, during the third quarter of 2019, the Company determined that they had met the Step 1 Criteria. The Company also determined that the performance obligation was met upon delivery of the product to the customer, or at the time the product is implanted for products on consignment, at which point the Company determined it will collect the consideration it is entitled to in exchange for the product transferred to the customer. As a result, the Company recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied, generally upon shipment of the product to the customer. The nature of the Company’s contracts gives rise

to certain types of variable consideration, including rebates and other discounts. The Company includes estimated amounts of variable consideration in the transaction price to the extent that it is probable there will not be a significant reversal of revenue. Estimates are based on historical or anticipated performance. The Company does have consignment agreements with several customers and distributors which allow the Company to better market its products by moving them closer to the end user. In these cases, the Company determined that it has fulfilled its performance obligation once control of the product has been delivered to the customer, which occurs simultaneously with the product being implanted.

The Company acts as the principal in all of its customer arrangements and therefore records revenue on a gross basis. Shipping is considered immaterial in the context of the overall customer arrangement, and damages or loss of goods in transit are rare. Therefore, shipping is not deemed a separately recognized performance obligation. The Company maintains a returns policy that allows its customers to return product that is consigned, damaged or non-conforming, ordered in error, or due to a recall. The estimate of the provision for returns is based upon historical experience with actual returns. The Company’s payment terms for customers are typically 30 to 60 days from receipt of title of the goods.

Subsequent to the Transition, the Company continued to defer the cost of sales for certain arrangements for which all revenue recognition criteria have not been met. These amounts were recorded within other current assets on the consolidated balance sheet in the amount of $0.6 million and $1.3 million as of March 31, 2020 and December 31, 2019, respectively.

GPO Fees

The Company sells to Group Purchasing Organization (“GPO”) members who transact directly with the Company at GPO-agreed pricing. GPOs are funded by administrative fees that are paid by the Company. These fees are set as a percentage of the purchase volume, which is typically 3% of sales made to the GPO members. The Company presents the administrative fees paid to GPOs as a reduction of revenues because the benefit received by the Company in exchange for the GPO fees is not sufficiently separable from the GPO member’s purchase of the Company’s products.

Cost of Sales

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

Leases

Effective January 1, 2019, the Company accounts for its leases under ASC 842, “Leases”. The Company determines if an arrangement is, or contains, a lease at inception. Right-of-use assets and the related liabilities result from operating leases were included in Right of use asset, Other current liabilities and Other liabilities, respectively, in the condensed consolidated balance sheets as of March 31, 2020 and December 31, 2019.

Operating lease assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease assets and liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term. The lease term used in the calculation includes options to extend or terminate the lease when the exercise of such options are reasonably certain. The Company uses the estimated incremental borrowing rate in determining the present value of lease payments. Variable components of the lease payments such as fair market value adjustments, utilities, and maintenance costs are expensed as incurred and not included in determining the present value of lease liabilities. As an accounting policy election, the Company excludes short-term leases having initial terms of 12 months or fewer. Lease expense is recognized on a straight-line basis over the lease term. See Note 6, “Leases” for further information regarding lease obligations.

Patent Costs

The Company incurs certain legal and related costs in connection with patent applications for tissue-based products and processes. The Company capitalizes such costs as patents in progress until a patent is obtained. When a patent is issued, the costs are amortized over the expected life of the patent to the extent that an economic benefit is anticipated from the resulting patent or alternative future use is available to the Company. If a patent is not obtained, costs are expensed. Patents are included in Intangible assets in the condensed consolidated balance sheet. The Company capitalized approximately $0.1 million and $0.2 million of patent costs during the first three months of 2020 and 2019, respectively.

Treasury Stock

The Company accounts for the purchase of treasury stock under the cost method. Treasury stock which is reissued for the exercise of option grants and the issuance of restricted stock grants is accounted for on a FIFO basis.

Recently Issued Accounting Standards Adopted by the Company

In February 2016, FASB issued ASU No. 2016-02, “Leases (Topic 842)”, which amended the guidance on accounting for leases. The FASB issued this update to increase transparency and comparability among organizations. This update requires the recognition of lease assets and lease liabilities on the balance sheet and the disclosure of key information about leasing arrangements. The Company adopted the ASU effective January 1, 2019 using the additional (optional) approach, in accordance with ASU 2018-11, “Leases (Topic 842): Targeted Improvements.” Upon adoption, the Company recorded a right of use asset of $4.3 million and a right of use liability of $5.2 million. The right of use asset, in its entirety, is included in Right of use assets, net on the condensed consolidated balance sheet. Right of use liabilities are included in Other current liabilities to the extent that such liabilities are expected to be settled within one year and Other liabilities to the extent that such obligations are due more than one year from the balance sheet date. The difference between the right of use asset and liability relates to rent credits which existed as of January 1, 2019. There was no effect on opening retained earnings at adoption.

In adopting the new lease standard, the Company elected the permitted package of practical expedients permitted, which allowed the Company to account for existing leases under their current classification, as well as omit any new costs classified as initial direct costs, under the new standard. See Note 6 for additional information on leases.

In February 2018, the FASB issued ASU No. 2018-02, “Income Statement - Reporting Comprehensive Income (Topic 220),” to address certain income tax effects in Accumulated Other Comprehensive Income (“AOCI”) resulting from the tax reform enacted in 2017. The amended guidance provides an option to reclassify tax effects within AOCI to retained earnings in the period in which the effect of the tax reform is recorded. The amendments were effective for fiscal years beginning after December 15, 2018, including interim periods. The Company adopted this ASU on January 1, 2019, which did not have any impact on the Company’s results of operations or financial condition as there were no balances in AOCI that are tax effected.

In June 2018, the FASB issued ASU 2018-07, “Compensation-Stock Compensation (Topic 718): Improvements to Non-employee Share-Based Payment Accounting” (“ASU 2018-07”), which simplifies the accounting for share-based payments to non-employees by aligning it with the accounting for share-based payments to employees, with certain exceptions. Under the new guidance, the measurement of equity-classified nonemployee awards will be fixed at the grant date. ASU 2018-07 is effective for interim and annual reporting periods beginning after December 15, 2018 and early adoption was permitted. The Company adopted the new standard on January 1, 2019. The adoption of ASU 2018-07 did not have a material impact on the Company’s consolidated financial statements and related disclosures.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” that introduces a new model for recognizing credit losses on financial instruments based on an estimate of current expected credit losses. This includes accounts receivable, trade receivables, loans, held-to-maturity debt securities, net investments in leases and certain off-balance sheet credit exposures. The guidance also modifies the impairment model for available-for-sale debt securities. The ASU is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2019. The Company adopted this ASU on January 1, 2020 using a modified retrospective transition method which requires a cumulative-effect adjustment to the opening balance of retained earnings to be recognized on the date of adoption with no change to financial results reported in prior periods. The cumulative effect adjustment recorded on January 1, 2020 is not material. The adoption of this ASU did not have a significant impact on the Company’s consolidated financial statements and related disclosures.

All other ASUs issued and not yet effective for the three months ended March 31, 2020, and through the date of this report, were assessed and determined to be either not applicable or are expected to have minimal impact on the Company’s financial position or results of operations.


3.	Liquidity and Capital Resources

Net Working Capital

As of March 31, 2020, the Company had approximately $53.5 million of cash and cash equivalents. The Company reported total current assets of approximately $115.9 million and current liabilities of approximately $63.7 million as of March 31, 2020.

Overall Liquidity and Capital Resources

The Company’s largest cash requirement for the three months ended March 31, 2020 was cash for general working capital needs and capital expenditures. The Company funded its cash requirements through its existing cash reserves, and the Term Loan that closed in June 2019. The Company believes that its anticipated cash from operating and financing activities and existing cash and

cash equivalents will enable the Company to meet its operational liquidity needs and fund its planned investing activities for the next year from the date these financial statements were available to be issued.

Issuance of $100 Million of Series B Convertible Preferred Stock

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

$75 Million Loan Facility with Hayfin

On June 30, 2020, the Company entered into a Loan Agreement with, among others, Hayfin Services LLP, an affiliate of Hayfin Capital Management LLP (the “Hayfin Loan Agreement”), which funded on July 2, 2020 (the “Hayfin Loan Transaction”) and provided the Company with a senior secured term loan in an aggregate amount of $50 million (the “Hayfin Term Loan”) and an additional $25 million delayed draw term loan (the “DD TL”) in the form of a committed but undrawn facility. The Hayfin Term Loan and the DD TL mature on July 2, 2025 (the “Maturity Date”). The Hayfin Term Loan and the DD TL have no fixed amortization (i.e. interest only through the Maturity Date).

Borrowings under the Hayfin Loan Agreement bear interest at a rate equal to LIBOR (subject to a floor of 1.5%) plus a margin of 6.75%. The margin will be eligible to step down to 6.5% or 6.0% based on future Total Net Leverage levels, as defined in the Hayfin Loan Agreement. The Company paid an upfront commitment fee of 2% of the aggregate of the Hayfin Term Loan and the DD TL. The DD TL is subject to an additional commitment fee of 1% of the amount undrawn.

The Hayfin Loan Agreement also contains certain affirmative covenants that impose certain reporting and/or performance obligations on the Company and its subsidiaries, including (i) Maximum Total Net Leverage of 5.0x through December 31, 2020, stepping down to 4.5x through June 30, 2021, and to 4.0x thereafter until the Maturity Date; (ii) Cap on Cash Netting for the purposes of calculating Total Net Leverage set at $10,000,000; (iii) DD TL Incurrence Covenant of 3.5x Total Net leverage, tested prior to any drawings under the DD TL; and (iv) Minimum Liquidity of $10,000,000, an at-all-times covenant tested monthly.

Repayment and Termination of BT Loan Agreement

On July 2, 2020, the Company repaid the remaining $72.0 million of principal and accrued interest of $0.1 million under the loan agreement, dated as of June 10, 2019, by and among the Company, the subsidiaries of the Company as guarantors party thereto from time to time, the lenders party thereto from time to time, and Blue Torch Finance LLC (“Blue Torch”), as administrative agent and collateral agent, as amended by that certain First Amendment thereto, dated as of April 22, 2020 (the “BT Loan Agreement”), and terminated the BT Loan Agreement. As a result of the early termination of the BT Loan Agreement, the Company also incurred a prepayment premium of $1.4 million, which it paid with a portion of the proceeds from the Preferred Stock Transaction and the Hayfin Loan Transaction, as described above.

For more information regarding the Preferred Stock Transaction, the Hayfin Loan Transaction, and the repayment of the BT Term Loan (as defined below) refer to Item 9B of the 2019 Form 10-K.


4.	Inventory

Inventory consisted of the following (in thousands):



	March 31, 2020			December 31, 2019
Raw materials	$	330		$	318
Work in process	3,913			4,299
Finished goods	5,587			5,206
Inventory, gross	9,830			9,823
Reserve for obsolescence	(583		)	(719		)
Inventory, net	$	9,247		$	9,104


5.	Property and Equipment

Property and equipment consisted of the following (in thousands):



	March 31, 2020			December 31, 2019
Leasehold improvements	$	5,321		$	5,321
Lab and clean room equipment	15,128			14,894
Furniture and office equipment	15,405			15,118
Construction in progress	1,463			972
Property and equipment, gross	37,317			36,305
Less accumulated depreciation	(25,484		)	(23,977		)
Property and equipment, net	$	11,833		$	12,328

Depreciation expense for the three months ended March 31, 2020 and 2019, was approximately $1.5 million and $1.7 million, respectively.


6.	Leases

As discussed in Note 2, on January 1, 2019, MiMedx adopted new guidance for the accounting and reporting of leases. The Company has operating leases primarily for corporate offices, vehicles, and certain equipment. Such leases do not require any contingent rental payments, impose any financial restrictions, or contain any residual value guarantees. The Company determines if an arrangement is or contains a lease at inception.

Under ASC 842 transition guidance, the Company has not elected the hindsight practical expedient to determine the lease term for existing leases, which permits companies to consider available information prior to the effective date of the new guidance as to the actual or likely exercise of options to extend or terminate the lease. Certain of the Company’s leases include renewal options and escalation clauses; renewal options have not been included in the calculation of the lease liabilities and right of use assets as the Company is not reasonably certain to exercise the options.

Lease expense for operating lease payments is recognized on a straight-line basis over the term of the lease. Operating lease assets and liabilities are recognized based on the present value of lease payments over the lease term. Since most of the Company’s leases do not have a readily determinable implicit discount rate, the Company uses its incremental borrowing rate to calculate the present value of lease payments. As a practical expedient, the Company has made an accounting policy election not to separate lease components from non-lease components in the event that the agreement contains both. The Company includes both the lease and non-lease components for purposes of calculating the right-of-use asset and related lease liability.

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

Operating lease cost was $0.4 million for the three months ended March 31, 2020 and was recorded in Selling, general, and administrative expenses. Interest on lease obligations was $0.1 million for the three months ended March 31, 2019 and was recorded in Selling, general, and administrative expenses. Cash paid for amounts included in the measurement of operating lease liabilities was $0.4 million at March 31, 2020. The amortization of leased assets was $0.2 million and $0.3 million for the three months ended March 31, 2020 and 2019, respectively.

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



		March 31, 2020			December 31, 2019
Assets
	Right of use asset	$	3,158		$	3,397

Liabilities
	Short term lease liability	$	1,195		$	1,168
	Long term lease liability	$	2,611		$	2,919

Weighted-average remaining lease term (years)		2.8			3.1
Weighted-average discount rate		11.5		%	11.5		%

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



Year ended December 31,	Maturities
2020 (excluding the three months ended March 31, 2020)	$	1,170
2021	1,528
2022	1,552
2023	195
2024	—
Thereafter	—
Total lease payments	4,445
Less: imputed interest	(639		)
	$	3,806


7.	Intangible Assets

Intangible assets are summarized as follows (in thousands):



	March 31, 2020							December 31, 2019
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Amortized intangible assets
Licenses	$	1,414	$	(1,234	)	$	180	$	1,414	$	(1,200	)	$	214
Patents and know how	9,108		(5,232		)	3,876		9,099		(5,070		)	4,029
Customer and supplier relationships	3,761		(2,485		)	1,276		3,761		(2,417		)	1,344
Non-compete agreements	120		(75		)	45		120		(68		)	52
Total amortized intangible assets	$	14,403	$	(9,026	)	$	5,377	$	14,394	$	(8,755	)	$	5,639

Unamortized intangible assets
Trade names and trademarks	$	1,008				$	1,008	$	1,008				$	1,008
Patents in process	1,196					1,196		1,130					1,130
Total intangible assets	$	16,607				$	7,581	$	16,532				$	7,777

Amortization expense for the three months ended March 31, 2020 and 2019, was approximately $0.3 million and $0.2 million, respectively.

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



Year ending December 31,	Estimated Amortization Expense
2020 (excluding the three months ended March 31, 2020)	$	739
2021	978
2022	955
2023	955
2024	955
Thereafter	795
	$	5,377


8.	Accrued Expenses

Accrued expenses include the following (in thousands):



	March 31, 2020		December 31, 2019
Legal costs	$	13,302	$	12,202
Settlement costs	5,931		5,931
Pricing adjustment settlement with Veterans Affairs	6,894		6,894
Estimated returns	1,567		2,581
External commissions	1,328		1,722
Accrued clinical trials	566		1,076
Other	1,073		1,755
Total	$	30,661	$	32,161


9.	Long-Term Debt

On June 10, 2019, the Company entered into the BT Loan Agreement, pursuant to which the full amount was borrowed and funded (the “BT Term Loan”). The proceeds from the BT Term Loan were used (i) for working capital and general corporate purposes and (ii) to pay transaction fees, costs and expenses incurred in connection with the BT Term Loan and the related transactions. The BT Term Loan would have matured on June 20, 2022 and was repayable in quarterly installments of $0.9 million; the balance was due on June 20, 2022. Blue Torch maintained a first-priority security interest in substantially all the Company’s assets. The BT Term Loan was issued net of the original issue discount of $2.3 million. The Company also incurred $6.7 million of deferred financing costs.

As of March 31, 2020, interest applicable to any borrowings under the BT Term Loan accrued at a rate equal to LIBOR plus a margin of 8.00% per annum. The BT Term Loan had an interest rate equal to 10.46% at the time the BT Loan Agreement was executed and an interest rate as of March 31, 2020 was 9.95%.

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


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

•

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

The BT Term Loan was amended on April 22, 2020 to, among other things, modify the financial covenants. See Note 15, “Subsequent Events,” of the consolidated financial statements.

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


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

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

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

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



	March 31, 2020					December 31, 2019
	Current portion		Long-term			Current portion		Long-term
Liability component - principal	$	3,750	$	68,438		$	3,750	$	69,375
Original issue discount	—		(1,723		)	—		(1,890		)
Deferred financing cost	—		(5,078		)	—		(5,579		)
Liability component - net carrying value	$	3,750	$	61,637		$	3,750	$	61,906

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



	For the Three Months Ended
	March 31, 2020
Interest expense - stated interest rate	$	1,840
Interest expense - amortization of original issue discount and costs	167
Interest expense - amortization of deferred financing costs	491
Total term loan interest expense	$	2,498

The future principal payments for the Company’s BT Term Loan as of March 31, 2020 were as follows (in thousands):



Year ending December 31,	Principal
2020 (excluding the three months ended March 31, 2020)	$	2,088
2021	3,750
2022	66,350
2023	—
2024	—
Thereafter	—
Total Long Term Debt	$	72,188

As of March 31, 2020, the fair value of the Company’s BT Term Loan was $62.7 million. This valuation was calculated based on a series of Level 2 and Level 3 inputs by calculating a discount rate based on the credit risk spread of debt instruments of a similar risk character in reference to U.S. Treasury instruments with identical securities, with an incremental risk premium for Company-specific risk factors. The remaining cash flows associated with the BT Term Loan were discounted to March 31, 2020 with this calculated discount rate to derive the fair value as of that date.

As described above in Note 3, “Liquidity and Capital Resources,” on July 2, 2020, a portion of the proceeds from the Preferred Stock Transaction and the Hayfin Loan Transaction were used to repay the outstanding balance of principal, accrued but unpaid

interest, and prepayment premium under the BT Loan Agreement. In connection with the repayment of the BT Term Loan, the Company terminated the BT Loan Agreement.

Additionally, on July 2, 2020, the Company borrowed an aggregate of $50 million pursuant to the Hayfin Loan Agreement, and obtained an additional committed but undrawn $25 million facility pursuant to the Hayfin Loan Agreement, as described above in Note 3, “Liquidity and Capital Resources.”


10.	Net Loss Per Share

Basic net loss per common share is computed using the weighted-average number of common shares outstanding during the period. Diluted net loss per common share is computed using the weighted-average number of common and dilutive common equivalent shares from stock options, restricted stock and warrants using the treasury stock method.

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



	Three Months Ended March 31,
	2020			2019
Net loss	$	(4,821	)	$	(13,273	)
Denominator for basic earnings per share - weighted average shares	107,538,509			106,420,317
Effect of dilutive securities: Stock options, restricted stock, and warrants outstanding(a)	2,706,804			803,487
Denominator for diluted earnings per share - weighted average shares adjusted for dilutive securities	107,538,509			106,420,317
Loss per common share - basic	$	(0.04	)	$	(0.12	)
Loss per common share - diluted	$	(0.04	)	$	(0.12	)

(a) Securities outstanding that are included in the computation above, utilizing the treasury stock method are as follows:



	Three Months Ended March 31,
	2020	2019
Outstanding Stock Options	919,555	609,292
Performance Based Awards	17,402	—
Restricted Stock Awards	1,769,847	194,195
	2,706,804	803,487


11.	Income Taxes

The effective tax rates for the Company of 70.1% and 0.3% for the three months ended March 31, 2020 and March 31, 2019, respectively includes the impact of discrete items of approximately $11.4 million in 2020 and $0 in 2019. As of March 31, 2020, the projected annual effective tax rate for 2020 is (0.6)%. The discrete items recorded for the three months ended March 31, 2020 are primarily related to modifications to the tax rules for carryback of net operating losses as a result of the CARES Act which are expected to result in a federal tax refund of approximately $11.3 million and an income tax benefit of the same amount. No benefit had been recognized with respect to the net operating losses due to a valuation allowance previously recorded.


12.	Supplemental Disclosure of Cash Flow and Non-Cash Investing and Financing Activities

Selected cash payments, receipts, and noncash activities are as follows (in thousands):



	Three Months Ended March 31,
	2020		2019
Cash paid for interest	$	1,840	$	1
Income taxes paid	6		46


13.	Contractual Commitments and Contingencies

Contractual Commitments

In addition to the leases noted under Note 6 “Leases,” the Company has commitments for meeting space. These leases expire over 3 to 3.5 years following March 31, 2020, and generally contain renewal options. The Company anticipates that most of these leases will be renewed or replaced upon expiration.

Rent expense for the three months ended March 31, 2020 and 2019, was approximately $0.3 million and $0.4 million, respectively, and is allocated among cost of sales, research and development, and selling, general and administrative expenses.

Separation and Transition Services Agreement of Edward J. Borkowski

On November 18, 2019, the Company entered into a Separation and Transition Services Agreement (“Separation Agreement”) with Edward J. Borkowski, under which Mr. Borkowski resigned as Executive Vice President and Interim Chief Financial Officer of the Company, as well as from any and all officer, director or other positions that he held with the Company and its affiliates, effective November 15, 2019. Pursuant to the Separation Agreement, Mr. Borkowski agreed to perform the duties of the Interim Chief Financial Officer with respect to the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 (the “2018 Form 10-K”) and assist with the transition of his duties as described in the Separation Agreement from November 15, 2019 through the earlier of the first business day following the Company’s filing of its 2018 Form 10-K with the SEC or December 31, 2019 (the “Transition Period”). From the end of the Transition Period until March 31, 2020, Mr. Borkowski agreed to provide services as may be requested by the Company with respect to matters related to the 2018 Form 10-K and the 2019 Form 10-K. The Company has paid Mr. Borkowski the full amount of $4.0 million as of July 6, 2020.

Litigation and Regulatory Matters

In the ordinary course of business, the Company and its subsidiaries are parties to numerous civil claims and lawsuits and subject to regulatory examinations, investigations, and requests for information. Some of these matters involve claims for substantial amounts. The Company’s experience has shown that the damages alleged by plaintiffs or claimants are often overstated, based on unsubstantiated legal theories, unsupported by facts, and/or bear no relation to the ultimate award that a court might grant. Additionally, the outcome of litigation and regulatory matters and the timing of ultimate resolution are inherently difficult to predict. These factors make it difficult for the Company to provide a meaningful estimate of the range of reasonably possible outcomes of claims in the aggregate or by individual claim. However, on a case-by-case basis, reserves are established for those legal claims in which it is probable that a loss will be incurred and the amount of such loss can be reasonably estimated. The Company's financial statements at March 31, 2020 reflect the Company's current best estimate of probable losses associated with these matters, including costs to comply with various settlement agreements, where applicable. The actual costs of resolving these claims may be substantially higher or lower than the amounts reserved. For more information regarding the Company’s legal proceedings, refer to the disclosure under Item 3, “Legal Proceedings” and Note 16, “Commitments and Contingencies” in the Company’s 2019 Form 10-K, which disclosure is incorporated herein by reference.

The following is a description of certain litigation and regulatory matters:

Shareholder Derivative Suits

On December 6, 2018, the United States District Court for the Northern District of Georgia entered an order consolidating three shareholder derivative actions (Evans v. Petit, et al. filed September 25, 2018, Georgalas v. Petit, et al. filed September 27, 2018, and Roloson v. Petit, et al. filed October 22, 2018) that had been filed in the Northern District of Georgia. On January 22, 2019, plaintiffs filed a verified consolidated shareholder derivative complaint. The consolidated action sets forth claims of breach of fiduciary duty, corporate waste and unjust enrichment against certain former officers, and certain current and former directors, of the Company: Parker H. Petit, William C. Taylor, Michael J. Senken, John E. Cranston, Alexandra O. Haden, Joseph G. Bleser, J. Terry Dewberry, Charles R. Evans, Larry W. Papasan, Luis A. Aguilar, Bruce L. Hack, Charles E. Koob, Neil S. Yeston and Christopher M. Cashman. The allegations generally involve claims that the defendants breached their fiduciary duties by causing or allowing the Company to misrepresent its financial statements as a result of improper revenue recognition. The Company filed a motion to stay on February 18, 2019, pending the completion of the investigation by the Company’s Special Litigation Committee. The Special Litigation Committee completed its investigation relating to this action and filed an executive summary of its findings with the Court on July 1, 2019. The parties (together with parties from the Hialeah derivative lawsuit, the Nix and Demaio derivative lawsuit, and the Murphy derivative lawsuit, each described below) held a mediation on February 11, 2020. Following continued discussions, on May 1, 2020, the parties notified the Court that plaintiffs and the Company had reached an agreement in principle to settle this consolidated derivative action, which settlement also encompasses all claims asserted in the Hialeah derivative lawsuit, the Nix and Demaio derivative lawsuit, and the Murphy derivative lawsuit. As of the date of the filing of this Form 10-Q, the

parties are drafting, and intend to file, a stipulation of settlement and motion seeking preliminary approval of the settlement.

On February 10, 2020, Charles Pike filed a shareholder derivative complaint in the United States District Court for the Southern District of Florida (Pike v. Petit, et al.). The complaint alleges claims for breaches of fiduciary duty against certain former officers, and certain current and former directors, of the Company: Parker H. Petit, William C. Taylor, Michael J. Senken, John E. Cranston, Charles R. Evans, Luis A. Aguilar, Joseph G. Bleser, J. Terry Dewberry, Bruce L. Hack, Charles E. Koob, Larry W. Papasan and Neil S. Yeston. Similar to the prior-filed actions discussed above, the allegations generally involve claims that the defendants breached their fiduciary duties by causing or allowing the Company to misrepresent its financial statements as a result of improper revenue recognition. On May 12, 2020, prior to the Company’s time to respond to the complaint, the plaintiff filed a notice of voluntary dismissal of this action without prejudice.

On February 18, 2020, Bruce Cassamajor filed a shareholder derivative complaint in the United States District Court for the Northern District of Florida (Cassamajor v. Petit, et al.). The complaint alleges claims for breaches of fiduciary duty against certain former officers, and certain current and former directors, of the Company: Parker H. Petit, William C. Taylor, Michael J. Senken, John E. Cranston, Charles R. Evans, Luis A. Aguilar, Joseph G. Bleser, J. Terry Dewberry, Bruce L. Hack, Charles E. Koob, Larry W. Papasan and Neil S. Yeston. Similar to the prior-filed actions discussed above, the allegations generally involve claims that the defendants breached their fiduciary duties by causing or allowing the Company to misrepresent its financial statements as a result of improper revenue recognition. On May 22, 2020, prior to service of the complaint, the plaintiff filed a notice of voluntary dismissal of this action without prejudice. On May 26, 2020, the court ordered this case to be dismissed for failure to serve process.

Securities Class Action

On January 16, 2019, the United States District Court for the Northern District of Georgia entered an order consolidating two purported securities class actions (MacPhee v. MiMedx Group, Inc., et al. filed February 23, 2018 and Kline v. MiMedx Group, Inc., et al. filed February 26, 2018). The order also appointed Carpenters Pension Fund of Illinois as lead plaintiff. On May 1, 2019, the lead plaintiff filed a consolidated amended complaint, naming as defendants the Company, Michael J. Senken, Parker H. Petit, William C. Taylor, Christopher M. Cashman and Cherry Bekaert & Holland LLP. The amended complaint (the “Securities Class Action Complaint”) alleged violations of Section 10(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), Rule 10b-5 promulgated thereunder and Section 20(a) of the Exchange Act. It asserted a class period of March 7, 2013 through June 29, 2018. Following the filing of motions to dismiss by the various defendants, the lead plaintiff was granted leave to file an amended complaint. The lead plaintiff filed its amended complaint against the Company, Michael Senken, Pete Petit, William Taylor, and Cherry Bekaert & Holland (Christopher Cashman was dropped as a defendant) on March 30, 2020; defendants filed motions to dismiss on May 29, 2020.

Investigations

United States Attorney’s Office for the Southern District of New York (“USAO-SDNY”) Investigation

The USAO-SDNY is conducting an investigation into, among other things, the Company’s recognition of revenue and practices with certain distributors and customers. The USAO-SDNY requested that the Company provide it with copies of all information the Company furnished to the SEC staff and made additional requests for information. The USAO-SDNY conducted interviews of various individuals, including employees and former employees of the Company. In November 2019, former executives Messrs. Petit and Taylor were indicted for securities fraud and conspiracy to commit securities fraud, to make false filings with the SEC, and to influence improperly the conduct of audits relating to alleged misconduct that resulted in inflated revenue figures for fiscal 2015. The Company is cooperating with the USAO-SDNY.

Department of Veterans’ Affairs Office of Inspector General (“VA-OIG”) and Civil Division of the Department of Justice (“DOJ-Civil”) Subpoenas and/or Investigations

VA-OIG has issued subpoenas to the Company seeking, among other things, information concerning the Company’s financial relationships with VA clinicians. DOJ-Civil has requested similar information. The Company has cooperated fully and produced responsive information to VA-OIG and DOJ-Civil. Periodically, VA-OIG has requested additional documents and information regarding payments to individual VA clinicians. Most recently, on June 3, 2020, the Company received a subpoena from the VA-OIG requesting information regarding the Company’s financial relationships and interactions with two healthcare providers at the VA Long Beach Healthcare System. The Company has continued to cooperate and respond to these requests.

As part of its cooperation, the Company provided documents in response to subpoenas concerning its relationship with three now former VA employees in South Carolina, who were ultimately indicted in May 2018. Among other things, the indictment referenced speaker fees paid by the Company to the former VA employees and other interactions between now former Company employees and the former VA employees. In January 2019, prosecution was deferred for 18 months to allow the three former VA employees to enter and complete a Pretrial Diversion Program, the completion of which would result in the dismissal of the indictment. As far as the Company is aware, two of the former VA employees have completed the program early and the indictment has been dismissed with respect to them. To date, no actions have been taken against the Company with respect to this matter.

United States Attorney’s Office for the Middle District of North Carolina (“USAO-MDNC”) Investigation

On January 9, 2020, the USAO-MDNC informed the Company that it is investigating the Company’s financial relationships with two former clinicians at the Durham VA Medical Center. The Company is cooperating with the investigation.

Qui Tam Actions

On January 19, 2017, a former employee of the Company filed a qui tam False Claims Act complaint in the United States District Court for the District of South Carolina (United States of America, ex rel. Jon Vitale v. MiMedx Group, Inc.) alleging that the Company’s donations to the patient assistance program, Patient Access Network Foundation, violated the Anti-Kickback Statute and resulted in submission of false claims to the government. The government declined to intervene and the complaint was unsealed on August 10, 2018. The Company filed a motion to dismiss on October 1, 2018. The Company’s motion to dismiss was granted in part and denied in part on May 15, 2019. The case is in discovery.

Former Employee Litigation

On November 19, 2018, the Company’s former Chief Financial Officer filed a complaint in the Superior Court for Cobb County, Georgia (Michael J. Senken v. MiMedx Group, Inc.) in which he claims that the Company has breached its obligations under the Company’s charter and bylaws to advance to him, and indemnify him for, his legal fees and costs that he incurred in connection with certain Company internal investigations and litigation. The Company filed its answer denying the plaintiff’s claims on April 19, 2019. To date, no deadlines have been established by the court.

On January 21, 2019, a former employee filed a complaint in the Fifth Judicial Circuit, Richland County, South Carolina (Jon Michael Vitale v. MiMedx Group, Inc. et. al.) against the Company alleging retaliation, defamation and unjust enrichment and seeking monetary damages. The former employee claims he was retaliated against after raising concerns related to insurance fraud and later defamed by comments concerning the indictments of three South Carolina VA employees. On February 19, 2019, the case was removed to the U.S. District Court for the District of South Carolina. The Company filed a motion to dismiss on April 8, 2019, which was denied by the Court. This case is in discovery.

In December 2019, MiMedx received notice of a complaint filed in July 2018 with the Occupational Safety and Health Administration (“OSHA”) section of the Department of Labor (“DOL”) by Thomas Tierney, a former Regional Sales Director, against MiMedx and the referenced individuals, Tierney v. MiMedx Group, Inc., Parker Petit, William Taylor, Christopher Cashman, Thornton Kuntz, Jr. and Alexandra Haden, DOL No. 4-5070-18-243. Mr. Tierney alleged that he was terminated from MiMedx in retaliation for reporting concerns about revenue recognition practices, compliance issues, and the corporate culture, in violation of the anti-retaliation provisions of the Sarbanes-Oxley Act. The parties settled this matter and OSHA dismissed the complaint on May 20, 2020.

Defamation Claims

On June 4, 2018, Sparrow Fund Management, LP (“Sparrow”) filed a complaint against the Company and Mr. Petit, including claims for defamation and civil conspiracy in the United States District Court for the Southern District of New York (Sparrow Fund Management, L.P. v. MiMedx Group, Inc. et. al.). The complaint seeks monetary damages and injunctive relief and alleges the defendants commenced a campaign to publicly discredit Sparrow by falsely claiming it was a short seller who engaged in illegal and criminal behavior by spreading false information in an attempt to manipulate the price of our Common Stock. On March 31, 2019, a judge granted defendants’ motions to dismiss in full, but allowed Sparrow the ability to file an amended complaint. The Magistrate has recommended Sparrow’s motion for leave to amend be granted in part and denied in part and the Judge adopted the Magistrate’s recommendation. Sparrow filed its amended complaint against MiMedx (Mr. Petit has been dropped from the lawsuit) on April 3, 2020 and the Company filed its answer. This case is in discovery.

On June 17, 2019, the principals of Viceroy Research (“Viceroy”), filed suit in the Circuit Court for the Seventeenth Judicial Circuit in Broward County, Florida (Fraser John Perring et. al. v. MiMedx Group, Inc. et. al.) against the Company and Mr. Petit, alleging defamation and malicious prosecution based on the defendants’ alleged campaign to publicly discredit Viceroy and the

lawsuit the Company previously filed against the plaintiffs, but which the Company subsequently dismissed without prejudice. On November 1, 2019, the Court granted Mr. Petit’s motion to dismiss on jurisdictional grounds, denied the Company’s motion to dismiss, and granted plaintiffs leave to file an amended complaint to address the deficiencies in its claims against Mr. Petit, which they did on November 21, 2019. The Company filed its answer on December 20, 2019.

Intellectual Property Litigation

The NuTech Action

On March 2, 2015, the Company filed a patent infringement lawsuit against NuTech Medical, Inc. (“NuTech”) and DCI Donor Services, Inc. (“DCI”) in the United States District Court for the Northern District of Alabama (MiMedx Group, Inc. v. NuTech Medical, Inc. et. al.). The Company has alleged that NuTech and DCI infringed and continue to infringe the Company’s patents through the manufacture, use, sale and/or offering of their tissue graft product. The Company has also asserted that NuTech knowingly and willfully made false and misleading representations about its products to customers and prospective customers. The Company is seeking permanent injunctive relief and unspecified damages. The case was stayed pending the restatement of the Company’s financial statements. Since the Company has completed its restatement, the case has resumed and discovery has recommenced.

The Osiris Action

On February 20, 2019, Osiris Therapeutics, Inc. (“Osiris”) refiled its trade secret and breach of contract action against the Company (which had been dismissed in a different forum) in the United States District Court for the Northern District of Georgia (Osiris Therapeutics, Inc. v. MiMedx Group, Inc.). Osiris has alleged that the Company acquired Stability, a former distributor of Osiris, in order to illegally obtain trade secrets. On February 24, 2020, the Court issued an order granting in part and denying in party MiMedx’s motion to dismiss. The Court dismissed Osiris’s claims for tortious interference, conspiracy to breach contract, unfair competition, and conspiracy to commit unfair competition. The Court denied MiMedx’s motion to dismiss with respect to the claim for breach of the contract between Osiris and Stability, finding that there is a question as to whether Osiris can maintain such a claim by piercing the corporate veil between MiMedx and its former subsidiary. If Osiris cannot pierce the corporate veil, the claim against MiMedx fails; if Osiris can pierce the corporate veil, the breach of contract claim must be brought in an arbitration proceeding. MiMedx did not move to dismiss Osiris’s claims for misappropriation of trade secrets and conspiracy to misappropriate trade secrets. MiMedx plans to defend against all remaining claims.

As of March 31, 2020, the Company has accrued approximately $12.8 million related to the legal proceedings discussed above. The Company has paid approximately $9.2 million to settle certain cases noted above.

Other Matters

Under the Florida Business Corporation Act and agreements with its current and former officers and directors, the Company is obligated to indemnify its current and former officers and directors who are made party to a proceeding, including a proceeding brought by or in the right of the corporation, with certain exceptions, and to advance expenses to defend such matters. The Company has already borne substantial costs to satisfy these indemnification and expense advance obligations and expects to continue to do so in the future.

In addition to the matters described above, the Company is a party to a variety of other legal matters that arise in the ordinary course of the Company’s business, none of which is deemed to be individually material at this time. Due to the inherent uncertainty of litigation, there can be no assurance that the resolution of any particular claim or proceeding would not have a material adverse effect on the Company’s business, results of operations, financial position or liquidity.


14.	Product Revenue Detail

MiMedx has two primary distribution channels: (1) direct to customers (healthcare professionals and/or facilities) (“Direct Customers”), and (2) sales through distributors (“Distributors”). For purposes of the required disclosure under ASC 606-10-50-5, the Company groups its customers into these two groups. This grouping by customer types does not constitute a basis for resource allocation but is information intended to provide the reader with ability to better understand how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors applicable to each customer type. These groupings also do not meet the criteria under ASC 280-10-50-1 to qualify as separate operating segments. The Company did not have significant foreign operations or a single external customer from which 10% or more of revenues were derived during the three months ended March 31, 2020 and 2019.

Below is a summary of net sales by each customer type (in thousands):



	Three Months Ended March 31,
	2020		2019

Direct Customers	$	59,896	$	64,542
Distributors	1,840		2,013
Total	$	61,736	$	66,555


15.	Subsequent Events

Paycheck Protection Program (PPP) Loan

On April 24, 2020, the Company received a $10.0 million loan under the Paycheck Protection Program (“PPP”). On May 11, 2020 the Company repaid the PPP loan.

BT Loan Agreement Amendment

On April 22, 2020, the Company agreed to terms for an amendment to its BT Loan Agreement with Blue Torch. The amendment provided for an increase in the maximum Total Leverage Ratio (as defined in the BT Loan Agreement), which was a quarterly test, for the remainder of 2020, and also provided for a reduction in the minimum Liquidity (as defined in the BT Loan Agreement) requirement from April 2020 through and including November 2020. Specifically, the maximum Total Leverage Ratio increased from 3.0 to 1 to 5.0 to 1 through December 31, 2020. The minimum Liquidity requirement was reduced from $40 million to $20 million for April and May 2020, and from $30 million to $20 million for June through November 2020. In connection with the amendment, the Company agreed to pay a one-time fee of approximately $0.7 million, added to the principal balance, and a 1 percentage point increase in the interest rate to LIBOR plus 9%.

Sublease

On April 1, 2020 the Company successfully subleased its industrial warehouse space that expires on May 31, 2023. The Company performed an asset recovery test comparing the sum of estimated undiscounted future cash flows attributable to the sublease to its carrying amount. The total undiscounted cash flows for the remaining lease term exceed the carrying amount of the asset, therefore there is no impairment.

Issuance of $100 Million of Series B Convertible Preferred Stock

On July 2, 2020, the Company issued $100 million of Series B Convertible Preferred Stock to an affiliate of EW Healthcare Partners and to certain affiliates of Hayfin Capital Management LLP pursuant to that certain Securities Purchase Agreement, as described above in Note 3, “Liquidity and Capital Resources.”

$75 Million Loan Facility with Hayfin

On July 2, 2020, the Company borrowed an aggregate of $50 million pursuant to the Hayfin Loan Agreement, and obtained an additional committed but undrawn $25 million facility pursuant to the Hayfin Loan Agreement, as described above in Note 3, “Liquidity and Capital Resources.”

Repayment and Termination of BT Loan Agreement

On July 2, 2020, the Company repaid the remaining principal of $72.0 million, accrued interest of $0.1 million, and prepayment penalty of $1.4 million under the BT Loan Agreement with a portion of the proceeds from the Preferred Stock Transaction and the Hayfin Loan Transaction, and terminated the BT Loan Agreement, each as described above in Note 3, “Liquidity and Capital Resources.”

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

MiMedx is an industry leader in advanced wound care and an emerging therapeutic biologics company, developing and distributing placental tissue allografts with patent-protected processes for multiple sectors of healthcare. We derive our products from human placental tissues processed using our proprietary processing methodologies, including the PURION® process. We employ aseptic processing techniques in addition to terminal sterilization to produce our allografts. MiMedx provides products in the wound care, burn, surgical, orthopedic, spine, sports medicine, ophthalmic, and dental sectors of healthcare. Our mission is to offer products and tissues to help the body heal itself. All of our products are regulated by the FDA.

MiMedx is the leading supplier of human placental allografts, which are human tissues that are transplanted from one person (a donor) to another person (a recipient). MiMedx has supplied over 1.9 million allografts, through both direct sales and consignment shipments. Our biomaterial platform technologies include AmnioFix®, EpiFix®, EpiCord®, AmnioCord® and AmnioFill®. AmnioFix and EpiFix are our tissue allografts derived from the amnion and chorion layers of the human placental membrane. EpiCord and AmnioCord are tissue allografts derived from umbilical cord tissue. AmnioFill is a placental connective tissue matrix derived from the placental disc and other placental tissue.

Our EpiFix and EpiCord product lines are promoted for external use, such as in advanced wound care applications, while our AmnioFix, AmnioCord and AmnioFill products are positioned for use in surgical applications, including lower extremity repair, plastic surgery, vascular surgery and multiple orthopedic repairs and reconstructions.

MiMedx has two primary distribution channels: (1) direct to customers (healthcare professionals and/or facilities); and (2) sales through distributors.

Trends in Our Business

Certain areas of our business suffered as a result of the issues identified in the Audit Committee Investigation

The results of the Audit Committee Investigation have caused us to incur significant legal fees, fines, and penalties. Additionally, the Company has incurred significant costs in connection with the associated Restatement. Negative publicity in the marketplace has created challenges for the Company in selling product to customers and retaining talented employees. All of these matters have caused the Company to incur significant costs and have negatively impacted our financial performance.

Demographic shifts are creating opportunities in the wound care space

The advanced wound care category is expected to continue growing due to certain demographic trends, including an aging population, increasing incidence of obesity and diabetes, and the associated higher susceptibility to non-healing chronic wounds. Furthermore, the increasing number of patients requiring advanced treatment represents a significant cost burden on the healthcare system. We expect that these shifts will benefit our business.

As we look for ways to achieve long-term competitive advantages, we plan to continue to invest in research & development

We continue to evaluate these opportunities in alignment with our focus on advanced wound care. We remain focused on advancing our BLA programs and are therefore aligning customer input, industry expertise, and additional resourcing toward seeking FDA approval for micronized dehydrated human amnion/chorion membrane (“dHACM”) for the potential indication to treat musculoskeletal degeneration across multiple indications. In addition, we expect to incur additional costs to achieve compliance with evolving regulatory standards.

Important Cautionary Statement

We caution the reader that actual results may differ materially from our expectations. Among the factors that could cause actual results to differ are: variances from our expectations or assumptions; changes in reimbursement policy from public and private insurers and health systems; the loss of a Group Purchasing Organization or Integrated Delivery Network; changes in purchasing behavior by government accounts; the loss of independent sales agents or distributors; the removal of any of our products from the market as a result of regulatory actions; the success of our marketing efforts; the fact that obtaining and maintaining the necessary regulatory approvals for certain of our products will be expensive and time consuming and may impede our ability to fully exploit our technologies; rapid technological change could cause our products to become obsolete and, if we do not enhance our product offerings through our research and development efforts, we may be unable to compete effectively; our ability to transition our manufacturing facilities into compliance with cGMP, advance our IND applications, complete our clinical trials and pursue BLAs for certain of our micronized products; the fact that our business is subject to continuing regulatory compliance by the FDA and other authorities, which is costly, and our failure to comply could result in adverse effects on our business, results of operations and financial condition; the fact that litigation and other matters relating to and arising out of the Investigation, including the accounting review of our previously issued consolidated financial statements and the audits of fiscal years 2018, 2017 and 2016, have been time consuming and expensive, and may result in additional expense; and the fact that our variable rate indebtedness under the Hayfin Term Loan (as defined below) subjects us to interest rate risk, which could result in higher expense in the event of increases in interest rates and adversely affect our business, financial condition, and results of operations.

Expected Impact of COVID-19 Pandemic

On March 11, 2020, the World Health Organization designated the outbreak of a novel strain of coronavirus (“COVID-19”) as a global pandemic. Governments and businesses around the world have taken unprecedented actions to mitigate the spread of COVID-19, including imposing restrictions on movement and travel such as quarantines and shelter-in-place requirements, and restricting or prohibiting outright some or all commercial and business activity, including the manufacture and distribution of certain goods and the provision of nonessential services. As of the end of the first half of 2020, significant uncertainty exists surrounding the efficacy of these measures to mitigate the spread of the virus, in addition to uncertainty surrounding timing and availability of a vaccine. The evolution of the outbreak, combined with these uncertainties, could result in the imposition of similar or greater restrictions for indefinite periods of time.

COVID-19 began to affect our operations during the three months ended March 31, 2020.

Sourcing and Manufacturing

We source the raw materials for our product from donors in hospitals. We have a large, geographically-diverse network of donor hospitals. We experienced interruptions to our access to some hospitals in some geographic areas beginning in the second half of March 2020. However, we have been successful in mitigating this disruption to our supply by adding additional donor hospitals, using third-party providers of donated placentas, and increasing efforts at hospitals that did not impose access limits. Additionally, in anticipation of expected disruptions, we ran manufacturing at levels greater than demand and have been successful in building our inventory of safety stock.

We process donated tissue in a sterile environment. However, the manufacturing space is a confined area where an affected employee might spread the virus to other employees despite the use of personal protective equipment required for this environment. We monitor our employees’ temperatures prior to entering our facilities and to date only two manufacturing employees and one sales representative have tested positive for the virus, each of whom was isolated from our workforce. Additionally, we required our non-manufacturing employees including our executives to work from home from March 13, 2020 until June 1, 2020, and we have continued to allow most employees flexibility in their work arrangements as a result of the pandemic. To date, and due to significant mitigation efforts, COVID-19 has had only a modest impact on our ability to source and manufacture our products.

Sales and Marketing

Our ability to sell our product has been hampered by the pandemic. Our sales force is spread across the country. In many areas, our sales force was excluded from hospitals and the offices of other health care providers. Additionally, many patients stayed away from hospitals and other medical facilities. This had an adverse effect on our revenues beginning late in the first quarter of 2020 and continuing into April. By mid-May, access to hospitals and healthcare providers by our sales force had been mostly restored, and we began to see significant numbers of patients’ return to hospitals and other healthcare providers, including for elective procedures. However, as of early July 2020, additional restrictions have been put in place in some areas of the country that again limit or postpone elective surgical procedures, and in particular, in areas of the country that contribute a larger portion of our sales. Future sales will depend on patients’ willingness to visit healthcare providers for care, and our sales force’s access to healthc

are providers. Also, the severity of the COVID-19 pandemic has been uneven across the country, and future waves of the outbreak of COVID-19 may have a greater impact on us than did the first wave depending on where infection rates are highest. We are not able to estimate COVID-19’s future effect on patient behavior and consequently future demand for our products. The COVID-19 pandemic and governmental and societal responses thereto have adversely affected our business, results of operations and financial condition, and the continuation of COVID-19 or the outbreak of other health epidemics could harm our business, results of operations, and financial condition. in the 2019 Form 10-K.

Selling and General Administrative Expenses

In response to these challenges, our management team initiated several actions. Most discretionary expenses such as travel were cancelled. We negotiated additional discounts with vendors. Merit salary increases scheduled for the second quarter of 2020 were deferred until the fourth quarter of 2020. Beginning on April 5, 2020, we reduced employees’ salaries, including those of senior executives, on a sliding scale with larger reductions applied to larger salaries. We intend for these reductions to last up to six months, and estimate that the combination of these efforts has saved the Company approximately $9.0 million through June 30, 2020. This has allowed us to reduce our expense base and reduce cash outlays, although we expect our margins to be temporarily reduced until sales return to normal levels. Nevertheless, at the end of the first quarter of 2020 and continuing into April, we saw a reduction in the amount of cash generated by the business. At May 31, 2020, our cash balance was $27.4 million, net of minimum balance covenants set forth in our Loan Agreement, dated as of June 10, 2019, by and among the Company, the subsidiaries of the Company as guarantors party thereto from time to time, the lenders party thereto from time to time, and Blue Torch Finance LLC (“Blue Torch”), as administrative agent and collateral agent, as amended by that certain First Amendment thereto, dated as of April 22, 2020 (the “BT Loan Agreement”).

Liquidity and Capital Resources

On April 22, 2020, we executed the First Amendment (the “Amendment”) to the BT Loan Agreement with Blue Torch. The Amendment provided for an increase in the maximum Total Leverage Ratio (as defined in the BT Loan Agreement), which is a quarterly test, for the remainder of 2020, and also provided for a reduction in the minimum Liquidity (as defined in the BT Loan Agreement) requirement from April 2020 through and including November 2020. Specifically, the maximum Total Leverage Ratio increased from 3 to 1 to 5 to 1 through December 31, 2020. The minimum Liquidity requirement was reduced from $40.0 million to $20.0 million for April and May 2020, and from $30.0 million to $20.0 million for June through November 2020. In connection with the Amendment, we agreed to pay a one-time fee (the “Amendment Fee”) of approximately $0.7 million, added to the principal balance, and a 1 percentage point increase in the interest rate to LIBOR plus 9%.

In addition, the Amendment loosened restrictions on our ability to borrow additional funds; enabling us to borrow up to $10 million under the Paycheck Protection Program (the “PPP Loan”) offered by the U.S. Small Business Administration under the Coronavirus Aid, Relief, and Economic Security Act. We applied for the PPP Loan prior to obtaining the aforementioned amendment to the BT Loan Agreement, and received the proceeds of the PPP Loan on April 24, 2020.

On May 8, 2020, we received a letter from the U.S. House of Representatives’ Committee on Oversight and Reform’s Select Subcommittee on the Coronavirus Crisis requesting that we return the proceeds of the PPP Loan so that the funds earmarked under the program could be used by smaller companies with more limited access to the capital markets. We repaid the PPP Loan in full on May 11, 2020.

Reserves and Financial Estimates

We do not expect that there be significant changes in judgments in determining the fair value of other assets measured in accordance with U.S. GAAP. As a result of the pandemic, we do not expect to incur any material impairments (e.g., with respect to goodwill, intangible assets, long-lived assets, right of use assets, investment securities), increases in allowances for credit losses, restructuring charges, other expenses, or changes in accounting judgments that have had or are reasonably likely to have a material impact on your financial statements, although we expect our days sales outstanding, post revenue recognition transition discussed in the “Critical Accounting Policies” below, to increase modestly as a result of patient behavior.

The uncertain future impacts of COVID-19 make it difficult for us to forecast future results.

Financial Reporting Systems and Internal Controls

We have invested in technology to allow our office staff to work remotely. As a result, we do not expect the pandemic to have a material adverse effect on our financial reporting systems, internal controls over financial reporting and disclosure controls and procedures, although we have experienced delays when working with third parties who do not have remote access to our systems or whose procedures require them to review certain physical records.

Recent Developments

Appointment of New Officers

On March 19, 2020, we announced that our Board of Directors appointed Peter M. Carlson as Chief Financial Officer of the Company, effective March 18, 2020. He succeeded Edward J. Borkowski, who served as Executive Vice President and Interim Chief Financial Officer from June 6, 2018 through November 15, 2019 and as acting Chief Financial Officer from November 18, 2019 through March 17, 2020.

On May 5, 2020, we announced that we had appointed William L. Phelan as Senior Vice President and Chief Accounting Officer of the Company, effective May 1, 2020.

BT Loan Agreement Amendment

On April 22, 2020, as described above, the BT Loan Agreement was amended to provide for an increase in the maximum Total Leverage Ratio and a reduction in the minimum Liquidity covenant. In connection with the amendment, we agreed to pay a one-time fee of approximately $0.7 million, added to the principal balance, and a 1 percentage point increase in the interest rate to LIBOR plus 9%.

Financing Transactions

On July 2, 2020, the Company issued $100 million of its Series B Convertible Preferred Stock, par value $.001 per share, (the “Series B Preferred Stock”) to an affiliate of EW Healthcare Partners and to certain funds managed by Hayfin Capital Management LLP, pursuant to the Securities Purchase Agreement with Falcon Fund 2 Holding Company, L.P., an affiliate of EW Healthcare Partners, and certain funds managed by Hayfin Capital Management LLP, dated as of June 30, 2020 (the “Securities Purchase Agreement”), for an aggregate purchase price of $100 million (the “Preferred Stock Transaction”). Also on July 2, 2020, the Company borrowed an aggregate of $50 million and obtained an additional committed but undrawn $25 million facility pursuant to the Loan Agreement with, among others, Hayfin Services LLP, an affiliate of Hayfin Capital Management LLP (the “Hayfin Loan Agreement”), which funded on July 2, 2020 (the “Hayfin Loan Transaction”) and that provided the Company with a senior secured term loan in an aggregate amount of $50 million (the “Hayfin Term Loan”) and an additional $25 million delayed draw term loan (the “DD TL”) in the form of a committed but undrawn facility. The Company used a portion of the proceeds of the Preferred Stock Transaction and the Hayfin Loan Transaction to repay the outstanding principal balance of $72.0 million, accrued interest and fees of $0.1 million, and prepayment penalty of $1.4 million under the BT Loan Agreement. The Company also terminated the BT Loan Agreement. For further information regarding the Preferred Stock Transaction, the Hayfin Loan Transaction and the termination of the BT Loan Agreement, see Note 3, “Liquidity and Capital Resources” in this Form 10-Q and Item 9B in the 2019 Form 10-K.

Results of Operations Comparison of the Three Months Ended March 31, 2020, to the Three Months Ended March 31, 2019



	Three Months Ended March 31,
	(in thousands)
	2020			2019			$ Change			% Change
Net Sales	$	61,736		$	66,555		$	(4,819	)	(7.2	)%
Gross profit	51,711			59,137			(7,426		)	(12.6	)%
Selling, general and administrative	46,942			50,862			(3,920		)	(7.7	)%
Investigation, restatement and related	15,592			18,107			(2,515		)	(13.9	)%
Research and development	2,650			2,902			(252		)	(8.7	)%
Amortization of intangible assets	271			233			38			16.3	%
Impairment of intangible assets	—			446			(446		)	(100.0	)%
Interest (expense) income, net	(2,387		)	211			(2,598		)	(1,231.3	)%
Other income (expense), net	6			(29		)	35			(120.7	)%
Income tax provision expense	11,304			(42		)	11,346			(27,014.3	)%
Net loss	$	(4,821	)	$	(13,273	)	$	8,452		63.7	%

Net Sales

Net sales for the quarter ended March 31, 2020 were $61.7 million, primarily recognized on an “as-shipped” basis, a 7.2% decrease over the quarter ended March 31, 2019 revenue of $66.6 million, recognized on a “cash-receipts” basis. See Note 2, “Significant Accounting Policies,” for more information on our revenue recognition methodologies. This decrease is due to lower shipment levels in the last half of March 2020, reflecting the impact of the COVID-19 global pandemic. This effect is further discussed below.

Gross Profit Margin

Gross profit margin in the first quarter of 2020 was 84% as compared to 89% in the first quarter of 2019. The gross profit margin decrease reflects the cost of higher quality standards of cGMP and investments in our Biologic License Application (“BLA”) programs in the first quarter of 2020 compared to the first quarter of 2019.

Selling, General and Administrative Expenses

Selling, General and Administrative expenses for the first quarter of 2020 decreased approximately $3.9 million, or 7.7%, to $46.9 million compared to $50.9 million for the first quarter of 2019. The decrease was primarily related to a reduction in legal fees related to normal course of business matters, and a decrease in discretionary expenses as the Company implemented safety and costs-containment measures to mitigate the impact to the business from COVID-19. This was partially offset by an increase in severance expense related to the sales organizational realignment in January 2020.

Investigation, Restatement, and Related Expenses

Investigation, restatement and related expense for the first quarter of 2020 decreased approximately $2.5 million, or 13.9%, to $15.6 million compared to $18.1 million for the first quarter of 2019. The decrease was primarily related to a reduction in investigation and litigation costs, as the Audit Committee Investigation concluded in May 2019.

Research and Development Expenses

Our research and development expenses decreased approximately $0.3 million, or 8.7%, to $2.7 million in the first quarter of 2020, compared to approximately $2.9 million in the first quarter of 2019. The decrease is primarily due to year-over-year decreases in clinical trial activities as well as decreased patient visit activity brought upon by the COVID-19 pandemic.

Amortization of Intangible Assets

Amortization expense related to intangible assets remained flat for the first quarter of 2020 compared to the first quarter of 2019.

Impairment of Intangible Assets

The impairment of intangible assets of $0.4 million was due to the impairment of certain customer relationship intangible assets in the three months ended March 31, 2019 related to the divestiture of Stability in 2017.

Interest (Expense) Income, Net

Interest (expense) income, net increased approximately $2.6 million or 1,231.3%, to $(2.4) million in the first quarter of 2020, compared to $0.2 million for the first quarter of 2019. This increase was due to the interest on the loan under the BT Loan Agreement (the “BT Term Loan”).

Other Income (Expense), Net

Other income (expense), net remained relatively flat for the first quarter of 2020 compared to the first quarter of 2019.

Income Tax Provision (Expense) Benefit

The effective tax rates for the Company were 70.1% and (0.3)% for the three months ended March 31, 2020 and March 31, 2019, respectively. The change in the effective tax rate was primarily due to the impact of the federal net operating loss carrybacks permitted under the CARES Act resulting in a significant income tax benefit during the first quarter of 2020.

Liquidity and Capital Resources

Our business requires capital for its operating activities, including costs associated with the sale of product through direct and indirect sales channels, the conduct of research and development activities, compliance costs, and legal and consulting fees in connection with ongoing litigation and other matters. We generally fund our operating capital requirements through our operating activities, cash reserves and, since June 2019, proceeds from term loans. We expect to use capital in the near and medium term to implement our priorities, including for capital investments, steps to complete achievement of cGMP compliance, advancement of our IND applications, pursuit of BLAs for certain of our micronized products, and settlements of certain legal matters.

As of March 31, 2020, the Company had approximately $53.5 million of cash and cash equivalents. The Company reported total current assets of approximately $115.9 million and total current liabilities of approximately $63.7 million at March 31, 2020, which represents a current ratio of 1.8 as of March 31, 2020.

We have funded our cash requirements, including for our operating activities and for the Investigation and Restatement, through existing cash reserves and from operating activities and the term loans described below. In addition, on July 2, 2020, we issued $100 million of our Series B Preferred Stock to an affiliate of EW Healthcare Partners and to certain funds managed by Hayfin Capital Management LLP pursuant to the Securities Purchase Agreement for an aggregate purchase price of $100,000,000.

The Company is currently paying its obligations in the normal course of business. We believe that, due to the Preferred Stock Transaction and the Hayfin Loan Agreement (which provides for significantly less restrictive financial covenants than the BT Loan Agreement), our anticipated cash from operating activities, existing cash, and cash equivalents will enable us to meet our operational liquidity needs.

We expect to incur additional costs in connection with efforts to enhance our cGMP compliant manufacturing capabilities and toward the completion of the BLA process. This includes development and enhancement of production processes, procedures, tests and assays, and it requires extensive validation work. It can also involve the procurement and installation of new production or lab equipment. These efforts also require human capital, expertise and resources.

We anticipate cash requirements related to the following items within one year from the date of the filing of this Form 10-Q:


•	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 cGMP.

Following the Preferred Stock Transaction, the Hayfin Loan Transaction, and the repayment and termination of the BT Loan Agreement, as discussed below and in Note 3, “Liquidity and Capital Resources,” we analyzed our ability to address the aforementioned commitments and potential liabilities while remaining compliant with the financial covenants set forth in the Hayfin Loan Agreement for the 12 months extending from the date of the filing of this Form 10-Q. Based on this analysis, and in combination with existing cash on hand, we expect to meet all obligations as they come due without violating the financial covenants set forth by the Hayfin Loan Agreement, as discussed below.

BT Term Loan

On June 10, 2019, we entered into the BT Loan Agreement to borrow funds with a face value of $75.0 million, the full amount of which was borrowed and funded. The proceeds from the BT Term Loan were used (i) for working capital and general corporate purposes and (ii) to pay transaction fees, costs and expenses incurred in connection with the BT Term Loan and the related transactions. On April 22, 2020, the BT Loan Agreement was amended to provide for an increase in the maximum Total Leverage Ratio and a reduction in the minimum Liquidity covenant. In connection with the amendment, the Company agreed to pay a one-time fee of approximately $0.7 million, added to the principal balance, and a 1 percentage point increase in the interest rate to LIBOR plus 9%. See Note 9, “Long-Term Debt,” for more information regarding the terms of the BT Term Loan and the amendment thereto.

Hayfin Term Loan; Preferred Stock Transaction; Termination of BT Term Loan

On July 2, 2020, the Company issued $100 million of Series B Preferred Stock to an affiliate of EW Healthcare Partners and to certain funds managed by Hayfin Capital Management LLP, pursuant to the Securities Purchase Agreement, for an aggregate purchase price of $100 million. Also on July 2, 2020, the Company borrowed an aggregate of $50 million and obtained an additional committed but undrawn $25 million facility pursuant to the Hayfin Loan Agreement. The Company used a portion of the proceeds

of the Preferred Stock Transaction and the Hayfin Loan Transaction to repay the outstanding principal balance of $72.0 million, accrued interest and fees of $0.1 million, and prepayment penalty of $1.4 million under the BT Loan Agreement. The Company also terminated the BT Loan Agreement. For further information regarding the Preferred Stock Transaction, the Hayfin Loan Transaction (including certain terms of the Hayfin Loan Agreement) and the termination of the BT Loan Agreement, see Note 3, “Liquidity and Capital Resources.”

Share Repurchases

During the three months ended March 31, 2020, the Company repurchased 205,091 shares surrendered by employees to satisfy tax withholding obligations upon vesting of restricted stock. Other than these, the Company did not repurchase any shares of its common stock during the three months ended March 31, 2020.

The timing and amount of future repurchases, if any, will depend upon the Company’s stock price, economic and market conditions, regulatory requirements, and other corporate considerations. The Company may initiate, suspend or discontinue purchases under the stock repurchase program at any time.

Contingencies

See Note 13 to our Condensed Consolidated Financial Statements in Part I, Item 1 herein.

Contractual Obligations

For the three months ended March 31, 2020 there were no significant changes to our operating lease obligations from those disclosed in the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2019 Form 10-K.

Discussion of Cash Flows

Net cash used in operations during the three months ended March 31, 2020 decreased approximately $3.0 million to approximately $12.3 million, compared to $15.3 million from operating activities for the three months ended March 31, 2019, primarily attributable to decreases in selling, general and administrative expenses between periods.

Net cash used in investing activities during the three months ended March 31, 2020 increased to approximately $1.1 million, compared to approximately $0.4 million for 2019. Cash used in investing activities for the three months ended March 31, 2020 included equipment purchases of $1.0 million compared to $0.6 million for the three months ended March 31, 2019.

Net cash used in financing activities during the three months ended March 31, 2020 increased approximately $1.2 million to $2.2 million compared to $1.0 million of cash used during the three months ended March 31, 2019. Cash used in financing activities during the three months ended March 31, 2020 included approximately $0.9 million of BT Term Loan payments and an increase in stock repurchases for tax withholdings of $0.5 million partially offset by proceeds from the exercise of stock options of $0.3 million.

Non-GAAP Financial Measures

In addition to our GAAP results, we provide certain Non-GAAP metrics including Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) and Adjusted EBITDA. We believe that the presentation of these measures provides important supplemental information to management and investors regarding our performance. These measurements are not a substitute for GAAP measurements, and the manner in which we calculate Adjusted EBITDA may not be identical to the manner in which other companies calculate adjusted EBITDA. We use these Non-GAAP measures as aids in monitoring our on-going financial performance from quarter-to-quarter and year-to-year on a regular basis and for benchmarking against comparable companies.

EBITDA is intended to provide a measure of the Company’s operating performance as it eliminates the effects of financing and capital expenditures. EBITDA consists of GAAP net income (loss) excluding: (i) depreciation, (ii) amortization of intangibles, (iii) interest expense (income) and (iv) income tax provision.

Adjusted EBITDA is intended to provide an enduring, normalized view of EBITDA and our broader business operations that we expect to experience on an ongoing basis by removing items which may be irregular, one-time, or non-recurring from EBITDA; most significantly those expenses related to the Audit Committee Investigation and Restatement. This enables us to identify underlying trends in our business that could otherwise be masked by such items.

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

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



	Three Months Ended March 31,
	2020			2019
Net loss	$	(4,821	)	$	(13,273	)

Non-GAAP Adjustments:
Depreciation expense	1,506			1,695
Amortization of intangible assets	271			233
Interest expense (income), net	2,387			(211		)
Income tax provision (benefit) expense	(11,304		)	42
EBITDA	(11,961		)	(11,514		)

Additional Non-GAAP Adjustments:
Costs incurred in connection with Audit Committee Investigation and Restatement	15,592			18,107
Effect of change in revenue recognition	(3,866		)	—
Impairment of intangible assets	—			1,258
Share-based compensation	3,349			3,014
Adjusted EBITDA	3,114			10,865

Critical Accounting Policies

In preparing financial statements, we follow GAAP, which requires us to make certain estimates and apply judgments that affect our financial position and results of operations. We regularly review our accounting policies and financial information disclosures. A summary of significant accounting policies that require the use of estimates and judgments in preparing the financial statements was provided in the 2019 Form 10-K. During the quarter covered by this report, there were no material changes to the accounting policies and assumptions previously disclosed, except as disclosed in Note 2 to the condensed consolidated financial statements contained herein.

Recent Accounting Pronouncements

For the effect of recent accounting pronouncements, see Note 2 to the condensed consolidated financial statements contained herein.

Off-Balance Sheet Arrangements

The Company has no off-balance sheet arrangements.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Based on our lack of market risk sensitive instruments outstanding at March 31, 2020, we have determined that there was no material market risk exposure to our consolidated financial position, results of operations or cash flows as of such date.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Management maintains a set of disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), to allow for timely decisions regarding required disclosure.

An evaluation of the effectiveness of the design and operation of our disclosure controls and procedures was performed under the supervision and with the participation of our management, including our CEO and CFO. As a result of this evaluation, our CEO and CFO concluded that our disclosure controls and procedures were not effective as of March 31, 2020 because of certain material weaknesses in internal control over financial reporting, as described in Item 9A, “Controls and Procedures” of our 2019 Form 10-K.

Changes in Internal Control over Financial Reporting

Under Exchange Act Rules 13a-15(d) and 15d-15(d), management is required to evaluate, with the participation of our principal executive officer and principal financial officer, any changes in internal control over financial reporting that occurred during each fiscal quarter that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Other than as disclosed under “Remediation Efforts to Address Material Weaknesses in Internal Control over Financial Reporting” below, there were no changes in our internal control over financial reporting during the quarter ended March 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Additionally, we have not experienced any material impact to our internal controls over financial reporting from the COVID-19 pandemic despite the fact that most of our employees are working remotely due to the COVID-19 pandemic. We are regularly monitoring and assessing the impact of COVID-19 and the related remote working situation on our internal controls to minimize the impact on the design and operating effectiveness of internal controls.

Remediation Efforts to Address Material Weaknesses in Internal Control Over Financial Reporting

As discussed in Item 9A, "Controls and Procedures" of our 2019 Form 10-K, we identified unremediated material weaknesses related to the Control Environment and Control Activities elements established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the "COSO framework" ) as of December 31, 2019. Prior to December 31, 2019, we designed and implemented new controls specific to our information and technology system to remediate identified material weaknesses, specifically, management performed a comprehensive review of permissions and profiles within each information technology (“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. 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. Due to the timing of the design and implementation of these controls during the fourth quarter of 2019, however, there was insufficient time to consistently execute against their design as of December 31, 2019. During the first quarter of 2020, we executed the newly designed controls specific to the IT system. We will continue to evaluate the results of our control assessments and testing procedures to determine whether the new controls have been designed appropriately and are operating effectively, and whether the material weakness has been remediated. We expect that our remediation efforts will continue for all identified material weaknesses through 2020 as described in our remediation plan and status in Item 9A, “Controls and Procedures” of our 2019 Form 10-K, with the goal to fully remediate the material weaknesses during 2020.

Inherent Limitation on the Effectiveness of Internal Controls

The effectiveness of any system of internal control over financial reporting is subject to inherent limitations, including the exercise of judgment in designing, implementing, operating, and evaluating the controls and procedures, and the inability to eliminate misconduct completely. Accordingly, any system of internal control over financial reporting can only provide reasonable, not

absolute, assurance that its objectives will be met. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. We intend to continue to monitor and upgrade our internal controls as necessary or appropriate for our business, but we cannot assure that such improvements will be sufficient to provide us with effective internal control over financial reporting in 2020 or future periods.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

For information regarding our material pending legal proceedings, see the disclosure in Note 13, “Contractual Commitments and Contingencies - Litigation and Regulatory Matters” of this Form 10-Q, which is incorporated herein by reference.

Item 1A. Risk Factors

There have been no material changes to the risk factors discussed in Part I, Item 1A., “Risk Factors” of the Company’s 2019 Form 10-K. These factors could materially and adversely affect the Company’s business, financial condition, and results of operations, and should be carefully considered. However, these are not the only risks facing the Company. Additional risks and uncertainties not currently known, or that the Company currently deems to be immaterial, also may adversely affect the Company’s business, financial condition, and results of operations.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(a) None.

(b) None.

The following table sets forth information regarding the purchases of the Company’s equity securities made by or on behalf of the Company or any affiliated purchaser (as defined in Exchange Act Rule 10b-18) during the three month period ended March 31, 2020:



	Total number of shares purchased^(a)	Average price paid per share		Total number of shares purchased under publicly announced plan	Approximate dollar value of shares that may yet be purchased under plans or programs
Total amount remaining December 31, 2019					$	—

January 1 - January 31, 2020	5,340	$	7.56	—	$	—

February 1 - February 28, 2020	199,193	$	7.50	—	$	—

March 1 - March 31, 2020	558	$	6.55	—	$	—

Total for the quarter	205,091	$	7.50	—

^(a) Shares repurchased during the quarter include only shares surrendered by employees to satisfy tax withholding obligations upon vesting of restricted stock.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits



Exhibit Number		Description
3.1		Articles of Incorporation, together with Articles of Amendment effective each of May 14, 2010; August 8, 2012, November 8, 2012; and May 15, 2015 (incorporated by reference to Exhibit 3.1 to the Registrant’s Form 10-K filed on March 1, 2017).
3.2		Articles of Amendment to the Articles of Incorporation effective November 6, 2018 (incorporated by reference to Exhibit 3.1 to the Registrant’s Form 8-A filed on November 7, 2018).
3.3		Bylaws of MiMedx Group, Inc., as amended and restated as of October 3, 2018 (incorporated by reference to Exhibit 3.1 to the Registrant’s Form 8-K filed on October 4, 2018).
3.4#		Articles of Amendment to the Articles of Incorporation of MiMedx Group, Inc., effective July 1, 2020.
10.2*		First Amendment, dated as of April 22, 2020, to Loan Agreement, dated June 10, 2019, by and between MiMedx Group, Inc., the other guarantors party thereto, the lenders party thereto and Blue Torch Finance LLC, as administrative agent and collateral agent (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed April 27, 2020).
31.1 #		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 #		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 #		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 #		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document



*	Schedules and exhibits omitted pursuant to Item 601(b)(2) of Regulation S-K. MiMedx agrees to furnish a copy of any omitted schedule or exhibit to the SEC upon request.

#	Filed herewith

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



July 6, 2020	MIMEDX GROUP, INC.

	By:	/s/ Peter M. Carlson
		Peter M. Carlson
		Chief Financial Officer and Principal Financial Officer