Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

MiMedx is an industry leader in utilizing birth tissue as a platform for regenerative medicine, developing and distributing placental tissue allografts with patent-protected, proprietary processes for multiple sectors of healthcare. As a pioneer in placental biologics, we have both a core business, focused on addressing the needs of patients with acute and chronic non-healing wounds, and a promising late-stage pipeline targeted at decreasing pain and improving function for patients with degenerative musculoskeletal conditions. We derive our products from human placental tissues and process these tissues using our proprietary processing methods, including the PURION® process. We employ Current Good Tissue Practices, Current Good Manufacturing Practices, and terminal sterilization to produce our allografts. MiMedx provides products primarily in the wound care, burn, surgical, and non-operative sports medicine sectors of healthcare. All of our products are regulated by the FDA.

MiMedx is a leading supplier of human placental allografts, which are human tissues that are derived from one person (the donor) and used to produce therapies to treat another person (the recipient). MiMedx has supplied over two million allografts, through both direct and consignment shipments. Our 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 particulate product comprised of placental connective tissue matrix, derived from the placental disc and placental membranes.

Our EpiFix and EpiCord sheet product lines are promoted for external use, such as in advanced wound care applications, while our AmnioFix, AmnioCord and AmnioFill products are positioned for 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.

This discussion, which presents our results for the fiscal years ended December 31, 2020 and December 31, 2019, should be read in conjunction with our Consolidated Financial Statements and the accompanying notes. Also please refer to Item 1 — Business and Item 1A — Risk Factors, which include detailed discussions of various items impacting the Company's business, results of operations and financial condition. We intend for this discussion to provide the reader with information that will assist in understanding our financial statements, the changes in certain key items in those financial statements from period to period and the primary factors that accounted for those changes. We also discuss certain performance metrics that management uses to assess the Company's performance. Further information on the factors that can affect our operating results can be found in Part I under the caption “Important Cautionary Statement Regarding Forward-Looking Statements.”

Trends in Our Business

Our recent operating results have been burdened by the incurrence of significant legal expenses

Our prior results were adversely impacted by costs related to the Audit Committee Investigation and the Restatement. We do not expect any further direct costs related those matters, but we have incurred and may potentially continue to incur legal expenses to indemnify certain former members of the Company’s management team in certain criminal and civil proceedings, as well as legal costs and penalties to settle ongoing matters involving the Company itself. In January 2021, following the conviction of our former CEO and our former Chief Operating Officer (the “Convicted Former Officers”) for securities fraud and conspiracy to commit securities fraud, respectively, the Company filed suit seeking (1) a declaratory judgment that the Company has no further obligation to advance expenses to the Convicted Former Officers, (2) a refund of certain amounts previously advanced to the Convicted Former Officers, and (3) certain legal fees and expenses. See Item 3, “Legal Proceedings.”

Our recent operating results were adversely affected by the impact of the COVID-19 Pandemic

Restrictions on access to hospital and health care provider facilities, decreases in elective procedures, and cost savings measures implemented by hospitals in response to the COVID-19 pandemic adversely affected our revenues, results of operations, and financial condition. In certain areas, local or regional surges of COVID-19 have continued. See “Expected Impact of COVID-19 Pandemic,” below.

Demographic shifts are creating opportunities in the advanced wound care and musculoskeletal sectors

The sectors where our products are used are expected to continue growing due to certain demographic trends. Within the advanced wound care sector, there is significant unmet patient need, due to an aging population, an increasing incidence of obesity and diabetes, and other contributing comorbidities that result in higher susceptibility to non-healing chronic wounds. These demographics extend into the musculoskeletal sector as well, and 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

The Company is also focused on advancing our late-stage pipeline and accelerating efforts toward seeking FDA approval for AmnioFix Injectable, or mdHACM, to treat musculoskeletal degeneration across multiple indications. As a significant area of focus and investment for MiMedx, we are progressing clinical, manufacturing, and quality initiatives, in support of mdHACM as a biologic with broad potential across a range of large and growing clinical indications. In parallel, we are continuing to proactively communicate with the FDA. We are preparing to request and schedule End-of-Phase meetings with the FDA to review our progress with ongoing clinical trials, and outline the proposed next steps, including plans to accelerate a Phase 3 clinical trial for knee osteoarthritis. Also, our planned investments in Research and Development throughout 2021 are designed to advance our late-stage pipeline and support our core market growth objectives. We intend to publish additional peer-reviewed clinical, scientific and economic data that further reinforce the differentiation of our products and expand the utility of the Company’s placentally-derived products in other clinical applications throughout the care continuum. In addition, we are enhancing business and product development efforts, targeting new applications and potential products that fit within our framework of innovative technologies backed by rigorous science, that elevate the standard of care.

Impact of COVID-19 Pandemic

On March 11, 2020, the World Health Organization designated the outbreak of a novel strain of coronavirus 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 2020, many governments and businesses have relaxed these measures. In addition, the FDA has approved two vaccines with proven efficacy for use by the general public; although, as of the issuance of this report, availability of the vaccine is restricted to certain populations.

Despite these developments, it remains uncertain whether governments and businesses will reimpose similar or greater restrictions or other measures to mitigate the spread of the virus, the rate at which the vaccine will become available to the general population, the potential impact of additional variants of the virus, the amount, timing, and extent of additional fiscal relief or stimulus, and the timing and extent society will return to a pre-pandemic way of life.

The COVID-19 pandemic began affecting us late in the first quarter of 2020 and affected our operations for the remainder of the year.

Sourcing and Manufacturing

We source the raw materials for our product from donors in hospitals. We have a large, nation-wide 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 were successful in mitigating this disruption to our supply by adding additional donor hospitals, increasing efforts at hospitals, and by using third-party providers of donated placentas, that did not impose access limits. Additionally, in anticipation of expected disruptions, we ran manufacturing at levels greater than demand and were 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. Additionally, we required our non-manufacturing employees including our executives to work from home from March 13, 2020 until June 1, 2020, and again beginning July 12, 2020 through April 21, 2021, though this timeline may be further extended. To the extent that employees do need to enter the facility, we monitor our employees’ temperatures prior to entering our facilities and ask if they are exhibiting any symptoms of COVID-19. 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 products has been hampered by the COVID-19 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. However, 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. This trend continued into the third and fourth quarters of 2020, where we saw net sales generally consistent with the comparable periods from 2019 on an “as-shipped” basis. In certain areas, local or regional surges of COVID-19 have continued, and future sales will depend on patients’ willingness and ability to visit healthcare providers for care, and our sales force’s access to healthcare providers. The timing, impact, and response to the pandemic has been uneven across the country. Subsequent waves may have a greater impact than did the first wave depending on a myriad of factors, including, but not limited to the availability and efficacy of vaccines, the emergence and severity of new variants of the virus, infection rates, mitigation efforts, and societal response. We are not able to estimate the future effect of COVID-19 on patient behavior and consequently future demand or the ability of providers to pay for our products. See Item 1A. - Risk Factors - 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 the pandemic or the outbreak of other health epidemics could harm our business, results of operations, and financial condition.

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. The salary reductions ended June 28, 2020. We estimate that the combination of these efforts have saved the Company approximately $17 million through December 31, 2020.

Liquidity and Capital Resources

On June 30, 2020, we entered into a Loan Agreement with, among others, Hayfin Services, LLP, an affiliate of Hayfin Capital Management LLP, which was funded on July 2, 2020 and provided us with a senior secured term loan in an aggregate amount of $50 million and an additional delayed draw term loan in the form of a committed but undrawn facility. In addition, on July 2, 2020, we issued shares 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 (collectively, the “Financing Transactions”). The proceeds from these transactions were used to:

(1) refinance, in whole, the outstanding indebtedness under the Loan Agreement, dated as of June 10, 2019, among us, the lenders and Blue Torch Finance LLC as administrative agent and collateral agent for such lenders,

(2) pay fees and expenses incurred with certain financing transactions, and

(3) finance the working capital, capital expenditures, and other general corporate obligations of the Company.

In large part due to the Financing Transactions, we have $95.8 million of cash and cash equivalents and $101.5 million of working capital as of December 31, 2020. Despite the uncertainty brought upon by the COVID-19 pandemic, we believe that our current cash balance, in concert with cash flows from operations, as well as $25 million available on the delayed draw term loan, will be sufficient to cover our obligations for twelve months from the filing of this Form 10-K.

As noted above, the COVID-19 pandemic has affected our operations and may continue to negatively affect our operations. It is possible that, as a result of a deterioration of our operations, we may breach one or more of the financial covenants specified within our term loan agreements. Such a circumstance would constitute an event of default and could allow our lenders to call outstanding loans and require us to repay the outstanding principal balance, accrued interest, and prepayment premium immediately. Absent this circumstance, our lenders may require us to pay a higher interest rate on our debt so long as we remain in default on our loan agreements. Either circumstance could impact our cash flows or liquidity.

The COVID-19 pandemic and governmental and societal responses thereto may cause a deterioration of debt and equity markets, limiting our ability to access capital should the need arise. If we do seek additional financing through the capital markets, it is possible that the terms of such agreements may be less favorable than the terms of our existing term loan

agreements. This could be the result of factors specific to our operations or systemic to the capital markets brought upon by the COVID-19 pandemic.

Refer to discussion in the Liquidity and Capital Resources section below for additional information regarding the Financing Transactions.

Reserves and Financial Estimates

We do not expect that there will be significant changes in judgments in determining the fair value of other assets measured in accordance with U.S. GAAP. We do not expect to incur any material impairments (e.g., with respect to goodwill, intangible assets, long-lived assets, fixed assets, or right of use assets) as a direct result of the pandemic, 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 our 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.

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 Events

SEC Matters and Corporate Matters

On March 17, 2020, we filed our annual report for the year ended December 31, 2018 which included restated financial statements. On July 6, 2020, we filed our annual report for the year ended December 31, 2019, three quarterly reports for 2019, and our quarterly report for the period ended March 31, 2020. By doing so, we became current in our periodic reporting obligations with the SEC.

We also held our 2019 annual meeting of shareholders on August 31, 2020 and our 2020 annual meeting of shareholders on November 20, 2020.

Relisting of Common Stock and Related Matters

On November 4, 2020, The Nasdaq Stock Market LLC (“Nasdaq”) relisted our common stock (“Common Stock”). Previously, Nasdaq had suspended our Common Stock from trading on November 8, 2018 and subsequently delisted our Common Stock effective March 8, 2019 due to our failure to remain current in our SEC reporting obligations.

Additionsto our Management and Board of Directors

Since June 2018, most of our executive leadership team has changed.

•The Board appointed Timothy R. Wright as Chief Executive Officer, effective as of May 13, 2019.

•On December 2, 2019, William “Butch” Hulse IV joined the Company as General Counsel and Secretary.

•Effective March 18, 2020, the Board appointed Peter M. Carlson as Chief Financial Officer.

•On May 1, 2020 the Board appointed William L. Phelan as Chief Accounting Officer.

•On July 28, 2020, the Board appointed Rohit Kashyap, Ph.D. Executive Vice President and Chief Commercial Officer.

•On August 10, 2020, the Board appointed Robert B. Stein, M.D., Ph.D. Executive Vice President, Research and Development.

In addition, we welcomed four new directors to our Board of Directors in 2020. Pursuant to the Preferred Stock Transaction described below, we increased the size of our Board of Directors, and Martin P. Sutter and William A. Hawkins III were appointed to serve as Preferred Directors effective July 2, 2020. At the 2020 Annual Meeting held on November 20, 2020, shareholders elected Dr. Michael Giuliani and Dr. Cato Laurencin to the Board. Also, Dr. Phyllis Gardner will join the Board effective immediately following the filing of this report. As a result, all of our current directors have joined the Board as new members since May 2019.

Financing Transactions

On July 2, 2020, we issued shares of our 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 the Securities Purchase Agreement, dated as of June 30, 2020 (the “Securities Purchase Agreement”), for an aggregate purchase price of $100 million (the “Preferred Stock Transaction”). On July 2, 2020, we also borrowed an aggregate of $50 million pursuant to the loan agreement, dated as of June 30, 2020 (the “Hayfin Loan Agreement”), by and among the MiMedx Group, Inc., certain of our subsidiaries, Hayfin Services LLP and other funds managed by Hayfin Capital Management LLP, and obtained an additional committed but undrawn $25 million facility pursuant to the Hayfin Loan Agreement (collectively, the “Hayfin Loan Transaction”). A significant portion of the proceeds from these transactions was used to repay the outstanding balance of principal and accrued but unpaid interest, and prepayment premium, under existing indebtedness. For further information regarding the Preferred Stock Transaction, see Item 8, Note 10 “Equity.” For further information regarding the Hayfin Loan Agreement and the repayment of our prior indebtedness, see Item 8, Note 8 “Long-Term Debt.”

Government Investigations and Litigation

On April 6, 2020, we announced that we had finalized a settlement with the Department of Justice (the “DOJ”), resolving an investigation concerning the accuracy of commercial pricing disclosures to the United States Department of Veterans Affairs (the “VA”) for one of our products in connection with our Federal Supply Schedule contract, and a related qui tam action filed in Minnesota. We self-disclosed the matter to the VA Office of Inspector General (VA-OIG) in November 2018, prior to our knowledge of the qui tam suit or any underlying government investigation and, as the DOJ acknowledged in the settlement agreement, we cooperated with the government’s investigation into the matter. Without admitting the allegations, we agreed to pay $6.5 million to the DOJ to resolve the matter. Previously, we disclosed that we had accrued an amount to cover the settlement and anticipated related expenses in our annual report on Form 10-K for the year ended December 31, 2018.

On January 11, 2021, we provided an update regarding the United States Attorney’s Office for the Southern District of New York (“USAO-SDNY”) Investigation into, among other things, our recognition of revenue and practices with certain distributors and customers. The USAO-SDNY recently advised us, based on the USAO-SDNY’s current understanding of facts, that it does not intend to pursue further action or remedies against us.

On September 9, 2020, we reached a settlement of 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 December 21, 2020, the Court approved the settlement.

Pursuant to the Florida Business Corporation Act and indemnification agreements with its former Chairman and CEO, Parker H. “Pete” Petit, and former COO, William Taylor, the Company has advanced defense costs to Petit and Taylor in connection with certain legal proceedings arising from their corporate status as former directors and officers of the Company. Following the jury verdict against Petit for securities fraud and Taylor for conspiracy to commit securities fraud, on January 12, 2021, the Company filed suit in the Eleventh Judicial Circuit of Florida in and for Miami-Dade County (MiMedx Group, Inc. v. Petit and Taylor) seeking (1) a declaratory judgment that a conviction of Petit and Taylor means the Company has no further obligation to indemnify or advance expenses to them, (2) reimbursement of amounts previously advanced to Petit and Taylor, and (3) any other relief deemed just and proper by the court. Given the inherent difficulty of predicting the outcome of litigation, the Company cannot estimate recoveries, ranges of recoveries, losses or ranges of losses in these proceedings, nor can it predict whether it may be required to continue to indemnify or advance defense costs to Petit and Taylor.

For more information see the discussion included in Item 8 -- Note 14, “Commitments and Contingencies.”

Critical Accounting Policies

We believe that of our significant accounting policies, which are described in Note 2 “Significant Accounting Policies” to our consolidated financial statements appearing elsewhere in this report, the following accounting policies involve a greater degree of judgment and complexity.

Revenue Recognition

Current Policy

We sell our products primarily to two classes of customers: individual customers and independent distributors. Customers obtain and use products either through ship and bill sales or consignment arrangements. Under ship and bill arrangements, we retain possession of the product until the customer submits an order. Upon approval of the sales order, we ship product to the customer and invoice them for the product sold. Under consignment arrangements, the customer takes possession of the product, but we retain title until the implantation, or application of our product to the end user.

Subsequent to the Transition (as defined below) and including for all of the year ended December 31, 2020, we recognized revenue as performance obligations were fulfilled; which occurs upon the shipment of product to the customers for ship and bill orders or upon implantation for consignment sales. All revenue is recognized at a point in time.

Revenue is recognized based on the consideration we expect to receive from the sale. This consists of the gross selling price of the product, less any discounts or rebates (collectively, “Deductions” or “sales deductions”). Gross selling price is a standard we set for all customers, unless a contract governing the sale provides for a specified price. Sales deductions are specified in individual contracts with customers and generally achieved based on total sales during a specified period. We estimate the total sales deductions which a specific customer will achieve over the relevant term and apply the deductions to sales as they are made throughout the period. Rebates owed to customers are accrued and recorded in accrued expenses on the consolidated balance sheets.

We act as the principal in all of our customer arrangements and therefore record 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 and we have elected to treat shipping costs as activities to fulfill the promise to transfer the product. We maintain a returns policy that allows our 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 given consideration to any changes in historical periods presented. Our payment terms for customers are typically 30 to 60 days from receipt of title of the goods.

In addition to the above revenue recognition policy, we recognize revenue associated with the Remaining Contracts (as defined below) upon cash receipt. The Remaining Contracts represent contracts for which all of the criteria necessary for revenue recognition were not met at the time of shipment and that such criteria would not be met until ultimate collection of such sales. A summary of amounts collected and recorded as net sales for the years ended December 31, 2020 and 2019, as well as amounts still outstanding as of those dates, are as follows (amounts in thousands):

Amounts Invoiced and Not Collected Deferred Cost of Sales

Previous Revenue Recognition Policy and Transition

In 2018, and into part of 2019, our control environment was such that it created uncertainty surrounding all of our 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 us and former members of our 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.

We changed our pattern of revenue recognition effective October 1, 2019. As a result, our pattern of revenue recognition varies between the years ended December 31, 2020, 2019, and 2018. The application of the relevant revenue recognition guidance and the pattern of revenue recognition are further discussed below for each period presented.

Fiscal Year Ended December 31, 2018

We adopted ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”),on January 1, 2018 by using the modified retrospective method. ASC 606 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 under the relevant criteria. We assessed the impact of the ASC 606 guidance by reviewing customer contracts and accounting policies and practices to identify differences, including identification of the contract and the evaluation of our performance obligations, transaction price, customer payments, transfer of control and principal versus agent considerations.

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.

We concluded that the first three of the above criteria were not met upon shipment of product to the customer, the fourth criteria had been met and we acknowledge that there was a degree of uncertainty as to whether last criteria above had been met. Although the parties to the contract may have approved the contract and purchase orders in writing, we concluded that, upon shipment of products to the customer, there was not sufficient evidence that our 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.). We could not reliably identify each party’s rights regarding the products to be transferred upon shipment of those products to customers.

We determined the transaction price of our 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 our consolidated balance sheet.

Fiscal Year Ended December 31, 2019 and Transition

We continued to assess new and existing contracts 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 it was determined if the Step 1 Criteria had been met, revenue recognition continued to be deferred consistent with the assessment for the year ended December 31, 2018.

only through June 2018, we 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 our customer contractual terms, we began implementing changes in mid-2018 to remediate the pervasive weaknesses in the control environment, followed by gradually implementing measures to empower our compliance, legal, and accounting departments; educate our sales force on appropriate business practices; and communicate our revised terms of sale to customers. We assessed our 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, we determined that adequate knowledge of the contractual arrangements with our customers did exist in 2019 for new and certain existing arrangements. We 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 and externally with our customers.

To address the tone at the top issues, we noted that proper remediation involved not only the removal of members of management who 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 organizational behavior changes were assessed to have been sufficiently addressed by the end of the second quarter of 2019.

To determine when we had either eliminated or had sufficient knowledge to identify any extra-contractual arrangements, we noted that a key factor contributing to our historical lack of visibility into the arrangements with our customers was the failure to adhere to credit limits, payment terms and return policies. The establishment of additional controls and the emphasis on adherence to our existing policies and controls was an iterative process that continued through the first two quarters of 2019. Additional factors contributing to the increased visibility into our contractual arrangements involved further education and training of the sales personnel regarding our terms and conditions as well as monitoring of the sales personnel and customers for compliance with the contractual arrangements. We implemented a disciplined approach to educating the sales personnel regarding the prior practices that were considered unacceptable, ensuring they were knowledgeable regarding current terms and conditions and implementing an open dialogue with the credit and collections department. Monitoring of the customer base was accomplished through a variety of measures including, but not limited to, analysis of payments made within the original terms, levels of returns post-shipment, and various continued communication with the customer account representatives by members of our credit and collections department. During the third quarter of 2019, management determined that these efforts with the sales personnel and the external customers had been in place for a sufficient period of time to provide us an understanding of its contractual arrangements with customers.

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

We also reassessed whether the Step 1 Criteria had been met for all shipments of product where payment had not been received as of September 30, 2019. While the measures summarized above provided significant evidence necessary to understand the terms of our contractual arrangements with our customers, certain of these customers continued to exhibit behaviors that resulted in extended periods until cash collection. Such delays in collection suggested that uncertainty regarding extra-contractual arrangements may continue, particularly as it relates to payment terms. As a result, we concluded the following for any existing arrangements, which remained unpaid at September 30, 2019.

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

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

We continued to record the deferred cost of sales on the arrangements that failed the Step 1 Criteria where collectibility was reasonably assured and will recognize the costs when the related revenue is recognized. We also continued to offset deferred revenue with the associated accounts receivable obligations for these arrangements that continued to fail the Step 1 Criteria.

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

Under ASC 606, we recognize revenue following the five-step model: (i) identify the contract 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, beginning October 1, 2019, we determined that we had met the Step 1 Criteria for new and certain existing arrangements. We 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 we determined we will collect the consideration we are entitled to in exchange for the product transferred to the customer. As a result, we recognize 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 our contracts gives rise to certain types of variable consideration, including rebates and other discounts. We include 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 and represent our best judgment at the time of sale. We have consignment agreements with several customers and distributors which allow us to better market our products by moving them closer to the end user. We determined that we have fulfilled our performance obligation once control of the product has been delivered to the customer, which occurs simultaneously with the product being implanted.

Impairment of Goodwill and Indefinite-Lived Intangible Assets

Goodwill represents the excess of purchase price over the fair value of net assets of acquired businesses. We assess the recoverability of our goodwill at least annually on September 30, or more frequently whenever events or substantive changes in circumstances indicate that it is more likely than not that goodwill is impaired. In performing the goodwill impairment test, we evaluate qualitative factors to determine the existence of impairment. If the qualitative factors indicate that it is more likely than not that the carrying value of the reporting unit exceeds its fair value, we proceed to a quantitative test to measure the existence and amount of goodwill impairment. We may also choose to bypass the qualitative assessment and proceed directly to the quantitative analysis.

At present, we have one reporting unit.

In performing the quantitative test, impairment loss is recorded to the extent that the carrying value of the reporting unit exceeds the assessed fair value of the reporting unit, not to exceed goodwill allocated to that reporting unit. No impairment is recognized if fair value is determined to exceed carrying value. We determine the fair value utilizing the income and market approaches. Under the income approach, we assess fair value using the present value of future cash flows. These future cash flows are derived from revenue, cost savings, tax deductions, and proceeds from a hypothetical disposition. Value indications are developed by discounting expected cash flows to their present value at a risk-adjusted weighted average cost of capital using the capitalization of market comparable companies. The weighted average cost of capital is rooted in the risk-free rate of a US Treasury with a similar maturity to the time period evaluated, credit risk adjustments, relevant equity risk premia, our incremental borrowing rate, and the prevailing marginal income tax rate. Under the market approach, we use our market capitalization, which is calculated by taking our share price times the number of outstanding common shares plus the value of Series B Convertible Preferred Stock outstanding. Our estimates associated with the goodwill impairment test are considered critical due to the amount of goodwill recorded on our consolidated balance sheets and the judgment required in determining fair value, including projected future cash flows.

Acquired indefinite-lived intangible assets are tested for impairment annually on September 30 or whenever events or changes in circumstances indicate that the carrying amount of an intangible asset may exceed fair value. Our impairment reviews are based on an estimated future cash flow approach that requires significant judgment with respect to future revenue and expense growth estimates. Our estimates consistent with business plans and a market participant view of the assets being evaluated. Actual results may differ from the estimates used in these analyses.

For the goodwill impairment test performed on September 30, 2020, we performed a quantitative test for its reporting unit, concluding that the fair value exceeded the carrying value. Therefore, no goodwill impairment was recognized related to this test.

There were no recorded impairment losses related to goodwill in 2020, 2019, or 2018. The Company recorded impairment losses related to our indefinite-lived intangible assets of $0, $0.8 million, and $0 related to the abandonment of patents in process during 2020, 2019, and 2018, respectively.

Share-based Compensation

We grant share-based awards to employees and members of our Board of Directors (the “Board”) and non-employee consultants. Awards to employees and the Board are generally made annually as well as at certain points of time throughout the year at the discretion of the Board. Awards to non-employee consultants are rare, occurring most recently in February 2018. Such awards are recognized as share-based payment expense over the requisite service or vesting period, to the extent such awards are expected to vest in accordance with FASB ASC Topic 718 “Compensation—Stock Compensation.” The amount of expense to be recognized is determined by the fair value of the award using inputs available as of the grant date.

The fair value of restricted common stock is the value of common stock on the grant date. The fair value of stock option grants is estimated using the Black-Scholes option pricing model. Use of the valuation model requires us to make certain assumptions with respect to selected model inputs. We use the simplified method for share-based compensation to estimate the expected term. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for the estimated option expected term. We estimate volatility using a blend of our own historical stock price volatility as well as that of market-comparable publicly-traded peer companies. We routinely review our calculation of volatility for potential changes in future volatility, our life cycle, our peer group, and other factors. Finally, we use an expected dividend yield of zero; we do not pay cash dividends on our common stock and do not expect to pay any cash dividends on our common stock in the foreseeable future.

For awards with service-based vesting conditions only, we recognize share-based compensation expense on a straight-line basis over the requisite service or vesting period. For awards with service- and performance-based vesting conditions, we recognize stock-based compensation expense using the graded vesting method over the requisite service period beginning in the period in which the awards are deemed probable to vest, to the extent such awards are probable to vest. We recognize the cumulative effect of changes in the probability outcomes in the period in which the changes occur.

Income Taxes

Our income tax expense, deferred tax assets and liabilities, and liabilities for unrecognized tax benefits reflect management’s best assessment of estimated current and future taxes to be paid. We are subject to income taxes in the United States, including numerous state jurisdictions.

Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, which will result in taxable or deductible amounts in the future. In evaluating our ability to recover our deferred tax assets within the jurisdiction from which they arise, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies, and results of recent operations. In projecting future taxable income, we begin with historical results adjusted for the results of discontinued operations and incorporate assumptions about the amount of future state, federal, and foreign pretax operating income adjusted for items that do not have tax consequences. The assumptions about future taxable income require significant judgment and are consistent with the plans and estimates we are using to manage the underlying businesses. In evaluating the objective evidence that historical results provide, we consider three years of cumulative operating income (loss). We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

We recognize deferred tax assets to the extent that we believe these assets are more likely than not to be realized. If we determine that we would be able to realize our deferred tax assets in the future in excess of their net recorded amount, we would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.

The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations both for U.S. federal income tax purposes and across numerous state jurisdictions. ASC Topic 740 (“ASC 740”) states that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, on the basis of the technical merits. We (1) record unrecognized tax benefits as liabilities in accordance with ASC 740, and (2) adjust these liabilities when our judgment changes as a result of the evaluation of new information not previously available. Because of the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the unrecognized tax benefit liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which new information is available.

We record uncertain tax positions in accordance with ASC 740 on the basis of a two-step process whereby (1) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position, and (2) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.

We recognize interest and penalties related to unrecognized tax benefits within the income tax expense line in the accompanying Consolidated Statement of Operations. Accrued interest and penalties, if any, are included within the related tax liability line in the consolidated balance sheet.

As of December 31, 2020 and 2019, we had a valuation allowance recorded of $35.6 million and $30.6 million, respectively, against our net deferred tax assets. These amounts represent full valuation allowances against our net deferred tax assets.

To the extent we determine that, based on the weight of available evidence, all or a portion of our valuation allowance is no longer necessary, we will recognize an income tax benefit in the period such determination is made for the reversal of the valuation allowance. If management determines that, based on the weight of available evidence, it is more-likely-than-not that all or a portion of the net deferred tax assets will not be realized, we will maintain our valuation allowance and not record additional tax benefits in future years.

Contingencies

We are subject to various patent challenges, product liability claims, government investigations and other legal proceedings in the ordinary course of business. Material legal proceedings are discussed in Item 8, Note 14, “Commitments and Contingencies.” Contingent accruals and legal settlements are recorded in the consolidated statements of operations as litigation-related and other contingencies when we determine that a loss is both probable and reasonably estimable. Legal fees and other expenses related to litigation are expensed as incurred and included in selling, general and administrative expenses in the consolidated statements of operations.

Due to the fact that legal proceedings and other contingencies are inherently unpredictable, our estimates of the probability and amount of any such liabilities involve significant judgment regarding future events. The factors we consider in developing our liabilities for legal proceedings include the merits and jurisdiction of the proceeding, the nature and the number of other similar current and past proceedings, the nature of the product and the current assessment of the science subject to the proceeding, if applicable, and the likelihood of the conditions of settlement being met.

In order to evaluate whether a claim is probable of loss, we may rely on certain information about the claim. Without access to and review of such information, we may not be in a position to determine whether a loss is probable. Further, the timing and extent to which we obtain any such information, and our evaluation thereof, is often impacted by factors outside of our control including, without limitation, the normal cadence of the litigation process and the provision of claim information to us by opposing counsel. The amount of our liabilities for legal proceedings may change as we receive additional information and/or become aware of additional asserted or unasserted claims. Additionally, there is a possibility that we will suffer adverse decisions or verdicts of substantial amounts or that we will enter into additional monetary settlements, either of which could be in excess of amounts previously accrued for. Any changes to our liabilities for legal proceedings could have a material adverse effect on our business, financial condition, results of operations and cash flows.

As of December 31, 2020, our reserve for loss contingencies totaled $10.0 million related to the legal proceedings discussed in Note 14, “Commitments and Contingencies”. Although we believe there is a reasonable possibility that a loss in excess of the amount recognized exists, we are unable to estimate the possible loss or range of loss in excess of the amount recognized at this time.

Recently Adopted Accounting Pronouncements

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

Components of and Key Factors Influencing Our Results of Operations

In assessing the performance of our business, we consider a variety of performance and financial measures. We believe the items discussed below provide insight into the factors that affect these key measures.

Revenue

The majority of our revenues are generated by wound care applications. We have two distribution channels: (1) direct to customers and (2) sales through distributors. Each distribution channel can be further disaggregated between sales to federal customers and non-federal customers.

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

Cost of goods sold and gross profit

Cost of goods sold includes product testing costs, quality assurance costs, personnel costs, manufacturing costs, raw materials and product costs, and facility costs associated with our manufacturing and warehouse facilities. Fluctuations in our cost of goods sold correspond with the fluctuations in sales units driven by the changes in our sales force and sales territories, product portfolio offerings and the number of facilities that offer our products.

Gross profit is calculated as net revenue less cost of goods sold. Our gross profit is affected by product and geographic sales mix, realized pricing of our products, the efficiency of our manufacturing operations and the costs of materials used to make our products. Regulatory actions, including with respect to reimbursement for our products, may require costly expenditures or result in pricing pressure, and may decrease our gross profit and gross margin.

Selling, general and administrative expenses

Selling, general and administrative expenses include personnel costs, commissions, incentive compensation, customer support, administrative and labor costs, insurance, professional fees, depreciation, and bad debt expense. We expect our selling, general and administrative expenses to fluctuate based on revenue fluctuations, geographic changes and any changes to the size of our sales and marketing forces.

Research and development expenses

Research and development expenses relate to our investments in improvements to our manufacturing processes (including additional costs to transition our manufacturing establishments into compliance with CGMP for commercial production), product enhancements, and additional investments in our product pipeline and platforms. Our research and development costs also include expenses such as clinical trial and regulatory costs.

We expense research and development costs as incurred. Our research and development expenses fluctuate from period to period primarily based on the ongoing improvement to our manufacturing processes and product enhancements. We expect that these costs will increase in the near term as we continue to transition our manufacturing facilities into compliance with CGMP, advance our IND applications, and pursue BLAs for certain of our micronized products.

Results of Operations for 2020 Compared to 2019

Year Ended December 31,

(in thousands)

Net Sales

We recorded revenue for the year ended December 31, 2020 of $248.2 million, a decrease of $51.0 million or 17.0% over 2019 revenue of $299.3 million. The decrease primarily resulted from a change in revenue recognition for sales, discussed below, and access restrictions, decreases in elective procedures, and cost savings measures implemented by hospitals, primarily brought upon by the COVID-19 pandemic. As discussed in the “Critical Accounting Policies” section above, we assessed our sales arrangements with customers during 2019 beginning with the definition of a contract under ASC 606 at the time of shipment of goods to the customer or upon the delivery of such goods if so stipulated by the terms of sale. Based on this assessment, we recognized revenue in 2019 related to the Transition and collections from the Remaining Contracts, totaling approximately $29.6 million. Collections on the Remaining Contracts during the year ended December 31, 2020 totaled $7.8 million.

Excluding these impacts, Adjusted Net Sales were $240.5 million, compared to $269.7 million, a decrease of 11% principally driven by the impacts of the Pandemic noted earlier. Adjusted Net Sales is a Non-GAAP financial metric intended to remove the effects of the Transition. Refer to the section “Non-GAAP Financial Metrics” below for more information.

We expect adjusted net sales in 2021 to increase at least 10% over our reported adjusted net sales the prior year, assuming we are able to sell our micronized, particulate, and umbilical cord products for the full year. However, the FDA may determine that our micronized, particulate, and/or umbilical cord-derived products do not qualify for regulation as human cells, tissues and cellular, and tissue-based products solely under Section 361 of the Public Health Service Act, and could require us to remove them from the market immediately. As an example, if our micronized and particulate products are required to be removed from the market following the end of the period of enforcement discretion, currently anticipated for May 31, 2021, we estimate the impact on our expected 2021 net sales could be in the range of $20 million to $25 million. Such a decision by the FDA could have a negative impact on our expected net sales. See Item 1A - Risk Factors - “To the extent our products do not qualify for regulation as human cells, tissues and cellular and tissue-based products solely under Section 361 of the Public Health Service Act, this could result in removal of the applicable products from the market, would make the introduction of some new tissue products more expensive and could significantly delay the expansion of our tissue product offerings and subject us to additional post-market regulatory requirements.” Our sales of micronized and particulate products for all uses was $32.8 million, 42.4 million, and $68.4 million, respectively, in 2020, 2019, and 2018. Our sales of umbilical cord-derived products were $16.6 million, $17.9 million, and $14.7 million, respectively, in 2020, 2019, and 2018. Further, because we cannot predict the impact of COVID-19 in 2021, our estimate for 2021 net sales assumes no restrictions on our ability to access hospitals, healthcare provider facilities and other places where we sell our products.

Gross Margin

Gross margin in 2020 was 84.2%, compared to 85.6% in 2019. The decrease in gross margin was driven by costs incurred to meet higher quality standards of CGMP, which we started incurring in the second half of 2019.

Selling, General and Administrative Expenses

Selling, General and Administrative (“SG&A”) expense for 2020 decreased approximately $17.2 million, or 8.7%, to $181.0 million, compared to $198.2 million for 2019. The decrease in SG&A expense was driven by an $11 million decrease in compensation, which includes salaries, benefits, commissions, and bonus, as well as a $4 million decrease in travel and entertainment in 2020 compared to 2019. These effects were, at least in part, driven by our response to the COVID-19 pandemic, in which we temporarily reduced salaries and other expenses. In addition, we incurred lower commission expenses in 2020 than in 2019, primarily the result of a reduction in sales. The remaining variance is primarily the result of a reduction in legal, consulting, and accounting expenses. In 2021, we expect compensation expense to increase as a result of additional sales and medical education employees.

Investigation, Restatement and Related Expenses

Investigation, restatement, and related expenses decreased by $7.0 million, or 10.6% to $59.5 million for 2020 compared to $66.5 million for 2019. The decrease resulted from fewer fees related to the Investigation and restatement in 2020 compared to 2019, offset by increases in legal fees incurred in connection with indemnification arrangements.

We expect to continue to incur litigation costs moving forward, but expect a significant reduction in Investigation, restatement, and related expenses year over year, other than costs to resolve the securities class action, the amount and timing of which are highly uncertain. See Note 14, “Commitments and Contingencies.”

Research and Development Expenses

Our research and development expenses increased approximately $0.6 million, or 5.2%, to $11.7 million in 2020, compared to $11.1 million in the prior year. The increase is primarily due to year-over-year increases in consulting fees related to our clinical trial efforts. We anticipate as much as a three-fold increase in research and development expense for 2021, as we plan to file additional INDs and continue working towards the filing of our BLAs, although this amount is partially dependent on whether the interim results from our ongoing IND clinical trials merit further investment.

Amortization of Intangible Assets

Amortization expense related to intangible assets remained relatively consistent for 2020 as compared 2019. We expect amortization expense to decrease in 2021 and beyond because of the impairment of intangible assets recorded in 2020.

Impairment of Intangible Assets

Impairment of intangible assets of $1.0 million was recorded in 2020 related to the impairment of customer relationships acquired as part of the acquisition of Surgical Biologics, LLC in 2011. Impairment of intangible assets of $0.4 million was recorded in 2019 related to the impairment of customer relationships that were part of the divestiture of Stability in 2017.

Loss on Extinguishment of Debt

Loss on extinguishment of debt of $8.2 million was recorded in 2020. The following items, all of which related to the repayment and termination of our loan agreement with Blue Torch Financial, LLC (the “BT Term Loan”), comprise this activity (amounts in thousands):

Unamortized deferred financing costs $ 4,528

Unamortized original issue discount 1,538

Unamortized amendment fee 671

Prepayment premium 1,439

Other fees 25

Loss on extinguishment of debt $ 8,201

Interest Expense, net

Interest expense, net increased by $3.2 million to $7.9 million during the year ended December 31, 2020 from $4.7 million during the year ended December 31, 2019. We incurred interest on the BT Term Loan through July 2, 2020 and interest on the Hayfin Term Loan from that point forward. For 2019, we did not have interest-bearing debt until we borrowed funds on the BT Term Loan in June 2019. We expect interest expense to decrease in 2021 compared to 2020. The extent of this decrease will be

contingent upon whether we elect to draw the additional $25 million allowed under the delayed draw term loan. This decrease is primarily the result of a lower interest rate on the Hayfin Term Loan compared to the BT Term Loan, combined with a reduction in deferred financing costs and original issue discount to be amortized over the year.

Other (Expense) Income, Net

Other income, net of $0.3 million during 2019, reflects amounts received in connection with a legal settlement. Other expense, net during 2020 was immaterial.

Income Taxes

The effective tax rate for 2020 was 19.9% on pre-tax book loss of $61.5 million, primarily reflecting a current tax benefit associated with the carryback of federal net operating losses, as permitted by the CARES Act. Such net operating losses were previously offset by a valuation allowance, which was released during 2020.

Results of Operations for 2019 Compared to 2018

Year Ended December 31,

(in thousands)

Net Sales

We recorded revenue for the year ended December 31, 2019 of $299.3 million, a decrease of $59.9 million or 16.7% over 2018 revenue of $359.1 million. As discussed in the “Critical Accounting Policies” section above, the Company assessed its sales arrangements with customers during 2019 beginning with the definition of a contract under ASC 606 at the time of shipment of goods to the customer or upon the delivery of such goods if so stipulated by the terms of sale. Based on this assessment, the Company recognized revenue from a revenue benefit in the third quarter of 2019 related to the Transition and collections from the Remaining Customers during the fourth quarter of 2019 totaling approximately $29.6 million. Excluding this benefit related to the method in which the Company recognizes revenue, the decrease primarily resulted from unfavorable insurance coverage developments, which resulted in a decrease in the number of units sold. Additionally, approximately one-half of the reduction of the Company’s workforce announced in December 2018 and completed through 2019 were sales personnel that resulted in fewer visits to customers. Further, both the negative publicity resulting from the Audit Committee Investigation and discontinuing the OrthoFlo and AmnioFix Sports Medicine product lines adversely affected revenues.

Gross Margin

Gross margin in 2019 was 85.6%, as compared to 89.9% in 2018. The gross margin decrease reflects fixed overhead costs being spread over lower production levels, increased costs of production related to the higher quality standards of CGMP. We implemented an electronic batch record system late in 2019.

Selling, General and Administrative Expenses

Selling, General and Administrative expense for 2019 decreased approximately $60.3 million, or 23.3%, to $198.2 million, compared to $258.5 million for 2018.

Sales and Marketing expense included in SG&A decreased by $33.1 million, or 19.8%, to $134.2 million for 2019 compared to $167.3 million for 2018. The decrease was primarily due to the reduction in the workforce discussed below and lower commissions from the reduction in net sales discussed above.

General and administrative (“G&A”) expense included in SG&A decreased by $27.2 million, or 29.9%, to $64.0 million for 2019 compared to $91.2 million for 2018. The decrease was largely due to the completion of the Investigation in May 2019 and was partially offset by costs in 2019 related to the two proxy contests in connection with the 2018 annual meeting of shareholders. The decrease in total G&A was also due to the reduction of our workforce announced in December 2018 by approximately 240 full-time employees, or 24% of our total workforce, of which about half were sales force personnel.

Share-based compensation included in SG&A for the years ended December 31, 2019 and 2018, was approximately $11.3 million and $13.5 million, respectively, a decrease of approximately $2.2 million, or 16.0%. The decrease was primarily due to the reduction in the workforce discussed above.

Investigation, Restatement and Related Expenses

Investigation, restatement, and related expenses increased by $15.2 million, or 29.6% to $66.5 million for 2019 compared to $51.3 million for 2018. The increase in 2019 as compared to 2018 primarily resulted from an increase in restatement, litigation, consulting fees and settlements of $21.7 million partially offset by a decrease in investigation fees of $6.5 million.

•The Investigation was completed in 2019.

•Restatement costs are third-party service costs related to compiling, completing and auditing the financial statements included in the 2018 Form 10-K and in this filing.

•Litigation fees increased by $11.6 million year over year from $14.6 million for 2018 compared to $26.2 million for 2019 due to the increase in settlement disputes and near-term contingencies related to the internal investigation.

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

Research and Development Expenses

Our research and development expenses decreased approximately $4.6 million, or 29.3%, to $11.1 million in 2019, compared to $15.8 million in the prior year. The decrease is primarily due to year-over-year decreases in clinical trial activities, the reductions in personnel due to the Company’s reduction in workforce as well as the decision to significantly reduce animal studies.

Amortization of Intangible Assets

Amortization expense related to intangible assets remained relatively consistent for 2019 as compared 2018.

Impairment of Intangible Assets

Impairment of intangible assets of $0.4 million for 2019 related to the impairment of customer relationships that were part of the divestiture of Stability in 2017.

Interest (Expense) Income, net

Interest (expense) income, net increased by $5.2 million to $(4.7) million during the year ended December 31, 2019 from $0.5 million during the year ended December 31, 2018. This increase was due to the interest on our borrowings under the BT Loan Agreement entered into on June 10, 2019.

Other Income, Net

Other income, net of $0.3 million during the year ended December 31, 2019 reflects a settlement payment received for patent infringement case.

Income Taxes

The effective tax rate for 2019 was 0.0% on pre-tax book loss of $25.6 million, reflecting the lack of current tax expense due to our net loss position and the offset of deferred tax benefits by the corresponding adjustment to the valuation allowance. During 2019, a valuation allowance was recorded against current year losses resulting in effectively no tax expense or benefit. The effective tax rate in 2018 of (782.6)%, based on pre-tax book loss of $3.4 million, reflects the increase in the valuation allowance.

Contractual Obligations

Contractual obligations associated with ongoing business activities are expected to result in cash payments in future periods. The table below summarizes the amounts and estimated timing of these future cash payments as of December 31, 2020 (in thousands):

Less than

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

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

In addition, holders of our Series B Preferred Stock are entitled to cumulative dividends at a rate of 4.0% per annum prior to the quarterly dividend payment ending on June 30, 2021, and a 6.0% cumulative dividend per annum thereafter. Dividends are declared at the sole discretion of our board of directors. Dividends, if declared, are paid in cash at the end of each quarter based on dividend amounts that accumulate beginning on the last payment date through the day prior to the end of each quarter. In lieu of paying a dividend in cash, we may elect to accrue the dividend owed to shareholders. Accrued dividend balances, themselves, accumulate dividends at the prevailing dividend rate for each dividend period for which they are outstanding. If prior to the payment of accrued dividends, the holders of the Series B Preferred Stock exercise their conversion rights, or the automatic conversion feature of the Series B Preferred Stock is triggered, in each case with respect to any outstanding shares of Series B Preferred Stock, such holders are entitled to receive common shares equal to the accrued but unpaid dividend balance divided by $3.85. In addition, the holders may require the Company to redeem the Series B Preferred Stock for the initial purchase price plus any accrued dividends in the event of a change in control.

We have not declared or paid any cash dividends on our Series B Convertible Preferred Stock since the issuance of such shares. Dividends in arrears as of December 31, 2020 were approximately $2.0 million. Assuming we do not declare or pay a cash dividend, the holders do not exercise their option to convert, and the other conversion or redemption features are not triggered, we would accrue approximately $5.2 million of dividends in 2021, $13.5 million in aggregate in 1-3 years, and $15.3 million in aggregate in 3-5 years.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Liquidity and Capital Resources

We require capital for our operating activities, including costs associated with the sale of product through direct and indirect sales channels, the conduct of 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 proceeds from certain financing activities. We expect to use capital in the near and medium term to implement our current business priorities, including advancement of our IND applications, pursuit of BLAs for certain of our micronized products, settlements of certain legal matters, capital investments, and potential obligations under indemnification agreements with certain former members of management.

We have funded our cash requirements, including for our operating activities through existing cash reserves and from operating activities and the term loans described below under “Term Loans.” In addition, on July 2, 2020, we issued shares 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.

As of December 31, 2020, the Company had $95.8 million of cash and cash equivalents.

Our net working capital at December 31, 2020, increased $45.5 million to $101.5 million from $55.9 million at December 31, 2019. The increase in working capital was primarily due to net proceeds resulting from the Financing Transactions on July 2, 2020. Our current ratio (current assets divided by current liabilities) was 2.7 to 1 as of December 31, 2020 and 1.8 to 1 as of December 31, 2019.

The Company is currently paying its obligations in the normal course of business. We believe that our anticipated cash from operating activities and existing cash and cash equivalents will enable us to meet our operational liquidity needs for the twelve months following the filing date of this Form 10-K.

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.

Additionally, as discussed in Note 14, “Commitments and Contingencies,” of the Consolidated Financial Statements, we anticipate cash requirements related to the following items within one year from the date of the filing of this Form 10-K:

•lawsuits or potential settlements for which we are not able to estimate a loss, or for which our ultimate our estimate for loss. In addition, it is uncertain if we would be entitled to indemnification from our insurance providers;

•indemnification agreements involving certain former members of our management team;

•investments and other expenditures required to advance our INDs and BLAs.

We have analyzed our ability to address aforementioned commitments and potential liabilities for the 12 months extending from the date of the filing of this 2020 Form 10-K. We believe it is probable that we will meet all obligations as they come due.

Term Loans

On June 30, 2020, we entered into a Loan Agreement with, among others, Hayfin Services, LLP, (“Hayfin”) an affiliate of Hayfin Capital Management LLP (the “Hayfin Loan Agreement”), which was funded (the “Hayfin Loan Transaction”) on July 2, 2020 (the “Closing Date”) and provided us with a senior secured term loan in an aggregate amount of $50 million (the “Term Loan”) and an additional delayed draw term loan (the “DD TL”, collectively, the “Credit Facilities”) in the form of a committed but undrawn facility in an amount not to exceed $25 million. The Term Loan and the DD TL both mature on June 30, 2025 (the “Maturity Date”). Interest is payable on the Term Loan and the DD TL for balances outstanding quarterly through the Maturity Date. No principal payments on either the Term Loan or the DD TL are due and payable until the Maturity Date.

The Term Loan and DD TL, which are senior secured obligations, were sold shares of our Series B Convertible Preferred Stock (as defined and described in Note 10, “Equity”) for an aggregate amount of $100 million in order to:

(1) refinance, in whole, the outstanding indebtedness (the “Refinancing”) under the Loan Agreement, dated as of June 10, 2019 (as amended and restated, the “BT Term Loan Agreement”), among us, the lenders and Blue Torch Finance LLC as administrative agent and collateral agent for such lenders,

(2) pay fees and expenses incurred with certain financing transactions, and

(3) finance the working capital, capital expenditures, and other general corporate obligations of the Company.

The interest rate applicable to any borrowings under the Term Loan is equal to LIBOR (subject to a floor of 1.5%) plus a margin of 6.75% per annum. If LIBOR is unavailable, the loan will carry interest at the greatest of the Prime Rate, the Federal Funds Rate plus 0.5% per annum, and 2.5%, plus the margin of 6.75%.

After December 31, 2020, the margin on the interest rate is eligible for a reduction; as follows:

•6.75% per annum if the Total Net Leverage Ratio (as defined in the Hayfin Loan Agreement) is greater than 2.0x,

•6.5% per annum if the Total Net Leverage Ratio is less than 2.0x but greater than or equal to 1.0x, or

•6.0% per annum if the Total Net Leverage Ratio is less than 1.0x.

At December 31, 2020, the Total Net Leverage Ratio was 3.1x. At issuance, and as of December 31, 2020, the Term Loan carried an interest rate of 8.3%. An additional 3.0% margin is applied to the interest rate in the event of default as defined by the Hayfin Term Loan Agreement.

The Credit Facilities contain financial covenants requiring the Company, on a consolidated basis, to maintain the following:

•Maximum Total Net Leverage Ratio of 5.0x through the quarter ended December 31, 2020, reduced to 4.5x through the quarter ending June 30, 2021, further reduced to 4.0x thereafter for the life of the loans, required to be calculated on a quarterly basis. At December 31, 2020, the Total Net Leverage Ratio was 3.1x.

•Delayed Draw Term Loan Incurrence Covenant (as defined in the Hayfin Loan Agreement) of 3.5x Total Net Leverage, tested prior to any drawings under the DD TL. At December 31, 2020, the Total Net Leverage Ratio was 3.1x.

•Minimum Liquidity (as defined in the Hayfin Term Loan Agreement) of $10 million, an at-all-times financial covenant, tested monthly. As of December 31, 2020, the Company had approximately $95.8 million of cash and cash equivalents.

The Credit Facilities also specify that any prepayment of the loan, voluntary or mandatory, as defined in the Term Loan Agreement, subjects us to a prepayment premium applicable as of the date of the prepayment:

•On or before the first anniversary of the Closing Date:

◦A make-whole premium, equal to the greater of:

▪5% of the principal balance repaid,

▪102% of the principal balance plus interest that would have been accrued from the repayment date to 12 months following the Closing Date.

•After the first anniversary of the Closing Date but on or before the second anniversary of the Closing Date: 2% of the principal balance repaid.

•After the second anniversary of the Closing Date but on or before the third anniversary of the Closing Date: 1% of the principal balance repaid.

•After the third anniversary of the Closing Date: 0% of the principal balance repaid.

The Loan Agreement also includes certain negative covenants 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 Credit Facilities may be accelerated or the lenders’ commitments terminated. The mandatory prepayments are also required in the event of a change in control, incurring other indebtedness, certain proceeds from disposal of assets and insured casualty event.

Beginning with the fiscal year ending December 31, 2021, we are required to prepay the outstanding loans based on the percentage of Excess Cash Flow (as defined in the Hayfin Loan Agreement), if such is generated, with the percentage determined based on the Total Net Leverage thresholds.

Series B Convertible Preferred Stock

On July 2, 2020, we issued shares of our 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 (individually, the “Holder”, collectively the “Holders”) 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, dated as of June 30, 2020 (the “Securities Purchase Agreement”), for an aggregate purchase price of $100 million (the “Preferred Stock Transaction”).

The Series B Preferred Stock pays a 4.0% cumulative dividend per annum prior to the quarterly dividend payment ending on June 30, 2021, and a 6.0% cumulative dividend per annum thereafter. Dividends are declared at the sole discretion of our board of directors. Dividends, if declared, are paid in cash at the end of each quarter based on dividend amounts that accumulate beginning on the last payment date through the day prior to the end of each quarter. In lieu of paying a dividend in cash, we may elect to accrue the dividend owed to shareholders. Accrued dividend balances accumulate dividends at the prevailing dividend rate for each dividend period for which they are outstanding.

Each share of Series B Preferred Stock, including any accrued and unpaid dividends, is convertible into our common stock at any time at the option of the Holder at a conversion price of $3.85 per common share, or 259.74 common shares for each Series B Preferred Share prior to any accrued and unpaid dividends. The Series B Preferred Stock, including any accrued and unpaid dividends, automatically converts into common stock at any time after the third anniversary of the issuance date, provided that the common stock has traded at 200% or more of the conversion price (i) for 20 out of 30 consecutive trading days and (ii) on such date of conversion.

If we undergo a change of control, we will have the option to repurchase some or all of the then-outstanding shares of Series B Preferred Stock for cash in an amount equal to the liquidation preference, subject to the rights of the Holders of the Series B Preferred Stock in connection with such change in control. If we do not exercise such repurchase right, Holders of the Series B Preferred Stock will have the option to (1) require us to repurchase any or all of our then-outstanding shares of Series B Preferred Stock for cash in an amount equal to the liquidation preference or (2) convert the Series B Preferred Stock, including accrued and unpaid dividends into common stock and receive its pro rata consideration thereunder.

We have not declared or paid any cash dividends on our Series B Convertible Preferred Stock since issuance. Dividends in arrears as of December 31, 2020 was $2.0 million.

Liquidity Considerations

Our net sales declined 17% in 2020 compared to 2019. In addition, all of our revenues from micronized products and AmnioFill, which accounted for $32.8 million, $42.4 million, and $68.4 million, and umbilical cord-derived products, which accounted for $16.6 million, $17.9 million, and $14.7 million, of our net sales for the years ended December 31, 2020, 2019, and 2018, respectively, are at risk upon the expiration of the FDA’s enforcement discretion, which is scheduled to expire on May 31, 2021. See Item 1A - Risk Factors - “To the extent our products do not qualify for regulation as human cells, tissues and cellular and tissue-based products solely under Section 361 of the Public Health Service Act, this could result in removal of the applicable products from the market, would make the introduction of some new tissue products more expensive and could significantly delay the expansion of our tissue product offerings and subject us to additional post-market regulatory requirements.”

Further, our liquidity is challenged by expected costs, investments in clinical trials to support BLAs, and contingent liabilities:

•We need to continue to invest in our manufacturing establishments to bring them into compliance with CGMP for production for our micronized products. The transition process includes development and enhancement of production processes, procedures, test and assays, and it requires extensive validation work. It can also involve the procurement and installation of new production or lab equipment. These efforts require human capital, expertise and resources. See Item 1A. – “Risk Factors” under the heading “To the extent our products do not qualify for regulation as human cells, tissues and cellular and tissue-based products solely under Section 361 of the Public Health Service Act, this could result in removal of the applicable products from the market, would make the introduction of some new tissue products more expensive and could significantly delay the expansion of our tissue product offerings and subject us to additional post-market regulatory requirements.”

•The clinical program to support our BLAs will involve substantial cost. Products subject to the FDA’s BLA requirements must comply with a range of pre- and post-market provisions. Pre-market compliance includes the conduct of clinical trials in support of BLA approval, the development and submission of a BLA, and the production of product for use in the clinical trials that meets FDA’s quality expectations. See Item 1A - Risk Factors - “Obtaining

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

•We are exposed to potential liabilities and reputational risk associated with litigation, regulatory proceedings, and government enforcement actions. See Item 3, “Legal Proceedings” and Note 14, “Commitments and Contingencies” and Item 1A. - Risk Factors - “We are currently, and may in the future be, subject to substantial litigation and ongoing investigations that could cause us to incur significant legal expenses and result in harm to our business.”

•We may become obligated to make payments in respect of our indemnity obligations to former officers and directors.

We are subject to financial covenants in the Hayfin Term Loan Agreement, including a $10 million minimum liquidity covenant. A breach of a financial covenant in the Hayfin Term Loan Agreement, if uncured or unable to be cured, would likely result in an event of default that could trigger the lender’s remedies, including acceleration of the entire principal balance of the loan as well as any prepayment premiums specified in the Hayfin Term Loan Agreement.

While we currently have sufficient cash to repay all such amounts in an event of default, we may require alternative financing to cover other obligations. Even if alternative financing were available in an event of default under the Hayfin Term Loan Agreement, it might be on unfavorable terms, and the interest rate charged on any new borrowings may be substantially higher than the interest rate under the Hayfin Term Loan Agreement, thus adversely affecting our cash flows, liquidity, and results of operations. Acceleration of the repayment of the loan pursuant to the terms of the Hayfin Term Loan Agreement, in combination with the Company’s current commitments and contingent liabilities, also could have cast doubt on our ability to continue as a going concern.

Moreover, as noted above, ourrevenues for 2020 decreased when compared to revenues for 2019. The COVID-19 pandemic has made and may continue to make it difficult to predict future revenues in the near term, and there is no assurance that the COVID-19 pandemic will not continue to adversely affect revenue in 2021. More specifically:

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

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

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

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

•While vaccines have been approved by the FDA, the extent and speed with which the vaccine is available to the general population, as well as the general willingness to accept the vaccine when available, could influence the availability of elective procedures and, potentially, demand for our product.

•The ultimate impact of the COVID-19 pandemic is highly uncertain. The duration and magnitude of these impacts on our business is uncertain.

Discussion of Cash Flows

Operating Activities

During the year ended December 31, 2020, net cash used in operating activities decreased $9.1 million to $30.3 million compared to $39.4 million for the year ended December 31, 2019. The decrease in cash used was primarily attributable to year-over-year reductions in operating expenses, including those incurred in connection with the Audit Committee Investigation and related Restatement. These effects were offset by legal settlement payouts, severance payouts to former executives, and interest payments on our various loan agreements.

During the year ended December 31, 2019, net cash (used in) provided by operations decreased approximately $75.2 million to $(39.4) million, compared to $35.8 million for the year ended December 31, 2018. This decrease was primarily attributable to the effect of the change in revenue recognition policy of $17.4 million, an increase in accounts receivable of $10.9 million, as well as the $20.1 million decrease in cash related to the change in other balance sheet accounts in 2019.

Investing Activities

During the year ended December 31, 2020, net cash (used in) provided by investing activities was $(4.6) million of cash used compared to $0.5 million of cash provided for the year ended December 31, 2019. Cash provided by investing activities in 2019 was driven by principal received on a note receivable from Stability, LLC for $2.7 million. Exclusive of this activity, the change was driven by year-over-year increases in capital expenditures of $2.5 million. The remaining difference is the result of year-over-year decreases in cash paid for patent application costs.

During the year ended December 31, 2019, net cash provided by (used in) investing activities increased approximately $9.7 million to $0.5 million provided by investing activities compared to $9.2 million of cash used in investing activities for the year ended December 31, 2018 due to the repayment of the note receivable from Stability, partially offset by a significant reduction in the equipment purchased during 2019.

Financing Activities

During the year ended December 31, 2020, net cash provided by financing activities was approximately $61.6 million a decrease of $1.3 million compared to $62.9 million for the year ended December 31, 2019. Activity in 2020 was driven by the sale of our Series B Convertible Preferred Stock, for which we received proceeds of $92.5 million, net of stock issuance costs. In addition, we received net proceeds on the borrowing of our Hayfin Term Loan of $46.3 million, net of deferred financing costs and original issue discount. These proceeds were used to repay the outstanding principal and prepayment premium on our BT Term Loan of $73.4 million.

By comparison, activity in 2019 was driven by proceeds from our BT Term Loan of $66.1 million, net of deferred financing costs and original issue discount.

The remaining variance was driven by year-over-year increases in the cash paid for shares repurchased ($0.9 million), offset by increases in proceeds from option exercises ($0.3 million).

During the year ended December 31, 2019, net cash flows provided by (used for) financing activities was approximately $62.9 million compared to $(8.9) million during the year ended December 31, 2018. The increase was primarily due to the BT Term Loan borrowing of $75.0 million in June 2019 partially offset by the deferred financing costs on the BT Term Loan and shares repurchased for tax withholdings on restricted shares. During 2019, the Company repurchased 429,918 shares of Common Stock surrendered by employees to satisfy tax withholding obligations upon vesting of restricted stock. The Company did not otherwise repurchase any shares of our Common Stock during 2019.

Non-GAAP Financial Measures

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

Adjusted Net Sales

We provide Adjusted Net Sales to facilitate comparisons of sales between periods in which the method used to calculate our reported net sales varied. Specifically those reported prior to and after the Transition, included revenue recognized on a cash basis and an “as-shipped” basis in the same period. Refer to Note 2, “Significant Accounting Policies,” of the consolidated financial statements for additional details regarding the Transition. Adjusted Net Sales provides comparative assessments of our revenue and assists in evaluating our sales performance. Adjusted Net Sales consists of GAAP net sales less the effects of the Transition. For 2019, this includes the Transition Adjustment and cash received from the Remaining Contracts. For 2020, this reflects cash received from the Remaining Contracts. A reconciliation of GAAP net sales to Adjusted Net Sales is provided in the table below (in thousands):

Year ended December 31,

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

EBITDA and Adjusted EBITDA

We provide EBITDA and Adjusted EBITDA to facilitate comparisons to results of other 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 loss excluding: (i) depreciation, (ii) amortization of intangibles, (iii) interest expense (income), (iv) loss on extinguishment of debt, and (v) income tax provision.

Adjusted EBITDA is intended to provide an enduring, normalized view of EBITDA and our broader business operations that we expect to experience on an ongoing basis by removing from EBITDA certain items which may be irregular, one-time, non-cash items not excluded when calculating EBITDA, or non-recurring; 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) loss on extinguishment of debt, (v) income tax provision, (vi) costs incurred in connection with Audit Committee Investigation and Restatement, (vii) the effect of the change in revenue recognition on net income, (viii) share-based compensation, and (ix) impairment of intangible assets.

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

Years ended December 31,

Non-GAAP Adjustments:

Loss on extinguishment of debt 8,201 — —

Income tax provision (benefit) expense, net (12,259) (5) 26,582

Additional Non-GAAP Adjustments:

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

Impairment of intangible assets 1,027 1,258 —

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Based on our lack of market risk sensitive instruments outstanding at December 31, 2020, we have determined that we had no material market risk exposure as of such date.

Item 8. Financial Statements and Supplementary Data

Index to Financial Statements

Reports of Independent Registered Public Accounting Firm F- 2

Consolidated Balance Sheets – As of December 31, 2020 and 2019 F- 6

Notes to Consolidated Financial Statements F- 11

Schedule II - Valuation and Qualifying Accounts F- 46

F- 1

Report of Independent Registered Public Accounting Firm

Stockholders and Board of Directors

MiMedx Group, Inc.

Marietta, Georgia

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of MiMedx Group, Inc. (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of operations, stockholders’ (deficit) equity, and cash flows for each of the three years in the period ended December 31, 2020, and the related notes and schedule (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated March 8, 2021 expressed an adverse opinion thereon.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.

Evaluation of the audit evidence for revenue recognition

The Company recorded consolidated net sales of $248.2 million for the year ended December 31, 2020. As more fully described in Note 2 to the consolidated financial statements, during 2018 and into part of 2019, the Company’s control environment was such that it created uncertainty surrounding all of its customer arrangements. 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). 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, the Company concluded that the Step 1 Criteria (identify the contracts with a customer) for revenue recognition would be met prior to shipment of product to the customer or implantation of the products on consignment.

F-2

We identified the evaluation of the sufficiency of audit evidence over revenue recognition as a critical audit matter. Evaluating the sufficiency of audit evidence required especially challenging auditor judgment to determine that extracontractual arrangements or side agreements did not exist at the onset of the transaction and that fictitious customer purchase orders were not entered into the system by sales personnel.

The primary procedures we performed to address this critical audit matter included:

•Testing the design and operating effectiveness of internal controls over the Company’s revenue processes, including controls over management’s review of the Step 1 Criteria.

•Testing the existence of revenue by selecting a sample of revenue transactions and comparing the amounts recorded for consistency with the underlying documentation, including the customer contract, purchase order, sales invoice, third party shipping documents, support documenting the implantation date (for consignment revenue), authorized pricing tables and customer payment support.

•Obtaining the monthly sales returns information recorded during 2020 to determine whether any unauthorized side agreements existed.

•Obtaining the January and February 2021 sales returns information to determine the completeness of the sales returns and associated credit memos.

•Performing data analytics over revenue transactions (excluding consignment and cash basis revenue) during the year ensuring a match of the sales order, sales invoice, shipping documents and payment support and investigating any items that did not agree.

/s/ BDO USA, LLP

We have served as the Company's auditor since 2019.

Atlanta, Georgia

March 8, 2021

F-3

Report of Independent Registered Public Accounting Firm

Stockholders and Board of Directors

MiMedx Group, Inc.

Marietta, Georgia

Opinion on Internal Control over Financial Reporting

We have audited MiMedx Group, Inc.’s (the “Company’s”) internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). In our opinion, the Company did not maintain, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on the COSO criteria.

We do not express an opinion or any other form of assurance on management’s statement referring to any corrective actions taken by the Company after the date of management’s assessment.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of the Company as of December 31, 2020 and 2019, the related consolidated statements of operations, stockholders’ (deficit) equity, and cash flows for each of the three years in the period ended December 31, 2020, and the related notes and schedule (collectively referred to as “the financial statements”)” and our report dated March 8, 2021 expressed an unqualified opinion thereon.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Item 9A, Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weaknesses have been identified and described in management’s assessment:

•Failure to design, implement and maintain controls over financial reporting, revenue, income taxes, inventory, procure-to-pay, financial forecasting, goodwill impairment testing and going concern.

These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2020 financial statements, and this report does not affect our report dated March 8, 2021 on those financial statements.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

F-4

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, 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.

/s/ BDO USA, LLP

Atlanta, Georgia

March 8, 2021

F-5

MIMEDX GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

December 31,

ASSETS

Current assets:

LIABILITIES, CONVERTIBLE PREFERRED STOCK, AND STOCKHOLDERS’ (DEFICIT) EQUITY

Current liabilities:

Current portion of long term debt — 3,750

Commitments and contingencies (Note 14)

Stockholders’ (deficit) equity:

Total stockholders’ (deficit) equity (150) 34,398

See notes to the consolidated financial statements.

F-6

MIMEDX GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share data)

Years Ended December 31,

Operating expenses:

Impairment of intangible assets 1,027 446 —

Other (expense) income

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

Other (expense) income, net (3) 283 —

Income tax provision benefit (expense) 12,259 5 (26,582)

Net loss per common share - basic $ (0.77) $ (0.24) $ (0.28)

Net loss per common share - diluted $ (0.77) $ (0.24) $ (0.28)

See notes to the consolidated financial statements.

F-7

MIMEDX GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ (DEFICIT) EQUITY

(in thousands, except share data)

Common Stock AdditionalPaid-in Treasury Stock Accumulated

Shares Amount Capital Shares Amount Deficit Total

Share-based compensation expense — — 14,768 — — — 14,768

Share-based compensation expense — — 11,689 — — — 11,689

Issuance of Series B Convertible Preferred Stock — — 32,954 — — — 32,954

Share-based compensation expense — — 15,733 — — — 15,733

Restricted stock cancellation / forfeited — — 3,363 425,388 (3,363) — —

See notes to the consolidated financial statements.

F-8

MIMEDX GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

Years Ended December 31,

Cash flows from operating activities:

Effect of change in revenue recognition — (17,382) —

Loss on extinguishment of debt 8,201 — —

Amortization of deferred financing costs and debt discount 2,276 1,431 137

Impairment of intangible assets 1,027 1,258 —

Non cash lease expenses 983 947 —

Accretion of asset retirement obligation 10 — —

Loss on fixed asset disposal 1 318 —

Amortization of discount on notes receivable — — (190)

Change in deferred income taxes — — 25,541

Increase (decrease) in cash resulting from changes in:

Cash flows from investing activities:

Principal payments from note receivable — 2,722 778

Proceeds from property and equipment sale — — 30

Net cash flows (used in) provided by investing activities (4,555) 504 (9,220)

Cash flows from financing activities:

Proceeds from sale of Series B convertible preferred stock 100,000 — —

Stock issuance costs (7,470) — —

Deferred financing costs (3,235) (6,650) —

Prepayment premium on early repayment of term loan (1,439) — —

F-9

Proceeds from exercise of stock options 411 108 3,555

Stock repurchase under repurchase plan — — (7,572)

Payments under capital lease obligations — — (3)

Net cash flows provided by (used in) financing activities 61,561 62,859 (8,934)

See notes to the consolidated financial statements.

F-10

MIMEDX GROUP, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1.Nature of Business

MiMedx Group, Inc. (together with its subsidiaries, except where the context otherwise requires, “MiMedx,” or the “Company”) is an industry leader in utilizing birth tissue as a platform for regenerative medicine, developing and distributing placental tissue allografts with patent-protected, proprietary processes for multiple sectors of healthcare. As a pioneer in placental biologics, we have both a core business, focused on addressing the needs of patients with acute and chronic non-healing wounds, and a promising late-stage pipeline targeted at decreasing pain and improving function for patients with degenerative musculoskeletal conditions. We derive our products from human placental tissues and process these tissues using our proprietary processing methods, including the PURION® process. We employ Current Good Tissue Practices, Current Good Manufacturing Practices, and terminal sterilization to produce our allografts. MiMedx provides products primarily in the wound care, burn, surgical, and non-operative sports medicine sectors of healthcare. All of our products are regulated by the FDA.

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

Effect of the COVID-19 Pandemic

On March 11, 2020, the World Health Organization designated the outbreak of a novel strain of coronavirus as a global pandemic (the “Pandemic” or “COVID-19 Pandemic”). The COVID-19 pandemic and associated governmental and societal responses have affected the Company’s business, results of operations and financial condition. The continuation or additional waves of the outbreak of the COVID-19 pandemic or the outbreak of other health epidemics could harm the Company’s operations, hinder the Company’s ability to generate revenue, or increase the Company’s costs and expenses. The ultimate impact of the pandemic is highly uncertain. As a result of the pandemic, the Company has experienced delays and impacts on the business and clinical trials. It is uncertain the extent and how long the pandemic will affect the healthcare system and the global economy as a whole. The effects of the pandemic or other health epidemics could continue to have an adverse impact on the Company’s business, results of operations, and financial condition in the future.

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 businesses, 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. Certain of these provisions were extended or expanded as a result of the Consolidated Appropriations Act, 2021, which was signed into law on December 27, 2020. As a result of these laws, the Company recorded a federal tax benefit of approximately $11.3 million due to the release of a previously-recorded valuation allowance. Of this amount, the Company received $1.2 million during the year ended December 31, 2020. The remaining $10.1 million is recorded as part of income tax receivable on the consolidated balance sheet as of December 31, 2020.

2. Significant Accounting Policies

Use of Estimates

The consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States of America (“U.S.”). Generally accepted accounting principles require 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, goodwill and intangible assets, estimates of loss for contingent liabilities, estimate of allowance for doubtful accounts, management’s assessment of the Company’s ability to continue as a going concern, estimate 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.

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Segment Reporting

Accounting Standards Codification (“ASC”) 280, “Segment Reporting” requires the use of the “management approach” model for segment reporting. The management approach model is based on the way a company’s chief operating decision-maker organizes segments within the Company for which separate discrete financial information is available regarding resource allocation and assessing performance. The Company has determined it operates as one operating segment.

Market Concentrations and Credit Risk

The Company places its cash and cash equivalents on deposit with U.S.-based financial institutions. The U.S. Federal Deposit Insurance Corporation (“FDIC”) provides insurance coverage for deposits up to $250,000 for substantially all depository accounts. As of December 31, 2020 and 2019, the Company had cash and cash equivalents of approximately $95.1 million and $68.4 million, respectively, in excess of the insured amounts in four depository institutions.

Cash and Cash Equivalents

Cash and cash equivalents include cash held at various banks. The Company considers all highly-liquid investments purchased with an original maturity of three months or less at the date of purchase and money market mutual funds to be cash equivalents.

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.

Bad debt expense and the allowance for doubtful accounts are based on historical trends and current expectations for credit losses. The Company’s policy to reserve for potential bad debts is based on the aging of the individual receivables as well as customer-specific qualitative factors, such as bankruptcy proceedings. The Company manages credit risk by routinely performing credit checks on customers prior to sales. The individual receivables are written-off after all reasonable efforts to collect the funds have been made. Actual write-offs may differ from the amounts reserved.

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 goods stages as the product progresses through various production steps and stocking locations. Labor and overhead costs are absorbed through the various production processes up to when 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 demand.

Property and Equipment

Property and equipment are recorded at cost and depreciated on a straight-line method over their estimated useful lives, principally three to seven years. Leasehold improvements are depreciated on a straight-line method over the shorter of the estimated useful lives or the lease term.

Asset Retirement Obligations

The Company records obligations associated with the retirement of tangible long-lived assets and right of use assets and the associated asset retirement costs in accordance with authoritative guidance on asset retirement obligations. The Company reviews legal obligations associated with the retirement of long-lived assets that result from contractual obligations or the acquisition, construction, development and/or normal use of the assets. If it is determined that a legal obligation exists, regardless of whether the obligation is conditional on a future event, the fair value of the liability for an asset retirement obligation is recognized in the period in which it is incurred, if a reasonable estimate of fair value can be made. The fair value is calculated as the estimate of the expected cash outflow to satisfy the legal obligation discounted to present value using the Company’s incremental borrowing rate. At such point in time, an asset and liability are recorded for the amount of the expected liability. The asset amount is depreciated, straight-line over the life of the underlying asset, while the liability is accreted to the amount of the expected outflow through selling, general and administrative expense using the effective interest method.

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Impairment of Long-lived Assets

The Company evaluates the recoverability of its long-lived assets (property, equipment, and intangible assets with finite lives) whenever adverse events or changes in business climate indicate that the expected undiscounted future cash flows from the related assets may be less than their carrying amounts. When a situation determines that it is more likely than not that an asset is not recoverable, the Company estimates cash flows expected to be derived from the continuing use and eventual disposition of the asset. If the sum of those cash flows, not discounted to present value, does not exceed the net book value of the asset, the Company estimates the fair value of the asset. Impairment loss is recorded to the extent that the net book value exceeds the fair value of the asset.

Impairment reviews are based on an estimated future cash flow approach that requires significant judgment with respect to future revenue and expense growth rates, selection of appropriate discount rate, asset groupings, and other assumptions and estimates. The Company uses estimates that are consistent with its business plans and a market participant view of the assets being evaluated. Actual results may differ from these estimates.

The Company recorded impairment losses on amortizable intangible assets of $1.0 million, $0.5 million, and $0 in in 2020, 2019, and 2018, respectively. The Company recorded no impairment losses with respect to its property and equipment in those periods.

Goodwill and Indefinite-lived Intangible Assets

Goodwill represents the excess of purchase price over the fair value of net assets of acquired businesses. The Company assesses the recoverability of its goodwill at least annually on September 30, or more frequently whenever events or substantive changes in circumstances indicate that it is more likely than not that goodwill is impaired. In performing the goodwill impairment test, the Company assesses qualitative factors to determine the existence of impairment. If the qualitative factors indicate that it is more likely than not that the carrying value of the reporting unit exceeds its fair value, the Company proceeds to a quantitative test to measure the existence and amount of goodwill impairment. The Company may also choose to bypass the qualitative assessment and proceed directly to the quantitative analysis.

At present, the Company has one reporting unit.

In performing the quantitative test, impairment loss is recorded to the extent that the carrying value of the reporting unit exceeds the assessed fair value of the reporting unit, not to exceed goodwill allocated to that reporting unit. No impairment is recognized if fair value is determined to exceed carrying value. The Company determines the fair value utilizing the income and market approaches. Under the income approach, the fair value of the Company is the present value of its future cash flows. These future cash flows are derived from revenue, cost savings, tax deductions, working capital flows, capital expenditures, and other projected sources and uses of cash. Value indications are developed by discounting expected cash flows to their present value at a risk-adjusted weighted average cost of capital using the capitalization of market comparable companies. The weighted average cost of capital is rooted in the risk-free rate of a U.S. Treasury with a similar maturity to the time period evaluated, credit risk specific to the Company, relevant equity risk premia, the incremental borrowing rate for the Company, and the prevailing marginal income tax rate. Under the market approach, the Company uses its market capitalization, which is calculated by taking the Company’s share price times the number of outstanding common shares plus the value of Convertible preferred stock Series B outstanding. The Company’s estimates associated with the goodwill impairment test are considered critical due to the amount of goodwill recorded on its consolidated balance sheets and the judgment required in determining fair value, including projected future cash flows.

Acquired indefinite-lived intangible assets are tested for impairment annually on September 30 or whenever events or changes in circumstances indicate that the carrying amount of an intangible asset may not be recoverable. The Company’s impairment reviews are based on an estimated future cash flow approach that requires significant judgment with respect to future revenue and expense growth estimates. The Company uses estimates consistent with business plans and a market participant view of the assets being evaluated. Actual results may differ from the estimates used in these analyses.

For the goodwill impairment test performed on September 30, 2020, the Company performed a quantitative test for its reporting unit, concluding that the fair value exceeded the carrying value. Therefore, no goodwill impairment was recognized related to this test.

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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 to be 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. The Company capitalized $0.3 million, $0.5 million, and $0.6 million of patent costs for the years ended December 31, 2020, 2019, and 2018, respectively.

Lease Obligations

The Company determines if a contract is, or contains, a lease at inception. Right of use assets and the related liabilities resulting from operating leases were included in Right of use asset, Other current liabilities, and Other liabilities, respectively, in the consolidated balance sheets as of December 31, 2020 and 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. 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 determined using the rate of interest that the Company would have to pay on collateralized or secured borrowing over a similar term. 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. The lease term and applicable payments include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. As an accounting policy election, the Company does not capitalize leases having initial terms of 12 months or fewer. Lease expense is recognized on a straight-line basis over the lease term. 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 continues to account for leases in financial statements prior to January 1, 2019 under ASC 840. See Note 5, “Leases” for further information regarding lease obligations.

Contingencies

The Company is or has been subject to various patent challenges, product liability claims, government investigations, former employee matters, and other legal proceedings, see Note 14, “Commitments and Contingencies.” Legal fees and other expenses related to litigation are expensed as incurred and included in selling, general and administrative expenses in the consolidated statements of operations. The Company records an accrual for legal settlements and other contingencies in the consolidated financial statements when the Company determines that a loss is both probable and reasonably estimable. The Company discloses all ongoing legal matters for which a loss is probable, regardless of whether an estimate can be reasonably determined.

Due to the fact that legal proceedings and other contingencies are inherently unpredictable, the Company’s estimates of the probability and amount of any such liabilities involve significant judgment regarding future events. The actual costs of resolving a claim may be substantially different from the amount of reserve the Company recorded. The Company records a receivable from its product liability insurance carriers only when the resolution of any dispute has been reached and realization of the amounts equal to the potential claim for recovery is considered probable. Any recovery of an amount in excess of the related recorded contingent loss will be recognized only when all contingencies relating to recovery have been resolved.

Revenue Recognition

Current Policy

The Company sells its products primarily to individual customers and independent distributors (collectively referred to as “customers”). Customers obtain and use products either through ship and bill sales or consignment arrangements. Under ship and bill arrangements, the Company retains possession of the product until the customer submits an order. Upon approval of the sales order, the Company ships product to the customer and invoices them for the product sold. Under consignment arrangements, the customer takes possession of the product, but the Company retains title until the implantation, or application of the Company’s product to the end user.

Subsequent to the Transition (as defined below) and including all of the year ended December 31, 2020, the Company recognizes revenue as performance obligations are fulfilled; which occurs upon the shipment of product to the customers for ship and bill orders or upon implantation for consignment sales.

Revenue is recognized based on the consideration the Company expects to receive from the sale. This consists of the gross selling price of the product, less any discounts or rebates (collectively, “deductions” or “sales deductions”). Gross selling price

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is a standard set by the Company for all customers unless a contract governing the sale provides for a specified price. Sales deductions are specified in individual contracts with customers and generally achieved based on total sales during a specified period. The Company estimates the total sales deductions which a specific customer will achieve over the relevant term and applies the reduction to sales as they are made throughout the period. Rebates owed to customers are accrued and recorded in accrued expenses on the consolidated balance sheets.

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 and the Company has elected to treat shipping costs as activities to fulfill the promise to transfer the product. 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 given consideration to any changes in historical periods presented. The Company’s payment terms for customers are typically 30 to 60 days from receipt of title of the goods.

In addition to the above revenue recognition policy, the Company recognizes revenue associated with the Remaining Contracts (as defined below) upon cash receipt. The Remaining Contracts represent contracts for which all of the criteria necessary for revenue recognition were not met at the time of shipment and that such criteria would not be met until ultimate collection of such sales. A summary of amounts collected and recorded as net sales for the years ended December 31, 2020 and 2019, as well as amounts still outstanding as of those dates, are as follows (amounts in thousands):

Amounts Invoiced and Not Collected Deferred Cost of Sales

Previous Revenue Recognition Policy and Transition

In 2018, and into part of 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.

The Company changed its pattern of revenue recognition effective October 1, 2019. As a result, the Company’s pattern of revenue recognition varies between the years ended December 31, 2020, 2019, and 2018. The application of the relevant revenue recognition guidance and the pattern of revenue recognition are further discussed below for each period presented.

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Fiscal Year Ended December 31, 2018

The Company adopted ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”),on January 1, 2018 by using the modified retrospective method. ASC 606 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. The Company assessed the impact of the ASC 606 guidance by reviewing customer contracts and accounting policies and practices to identify differences, including identification of the contract and the evaluation of the Company’s performance obligations, transaction price, customer payments, transfer of control and principal versus agent considerations.

•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;

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

•The contract has commercial substance; and

•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.

The Company concluded that the first three of the above criteria were not met upon shipment of product to the customer, the fourth criteria had been met and the Company acknowledges that there is a degree of uncertainty as to whether last criteria 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 was 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 could not reliably identify each party’s rights regarding the products to be transferred upon shipment of those products to customers. The Company’s sales personnel continued to make side agreements with customers which directly conflicted with the explicitly stated terms of sale. These side agreements created significant ambiguity around the rights and obligations of both parties involved in the transaction. This practice continued to result in extended payment terms and returns occurring long after the original sale was made. The Company’s business practices created an implied right for the customer to demand future, unknown, performance by the Company. As a result, each party (and, in particular, the Company) could not at the time of product shipment adequately determine its rights regarding the good transferred as required by ASC 606-10-25-1. Upon shipment of product to the customer, the Company could not reliably identify the payment terms for the products it sold to customers. Although the written payment terms were known to both parties, the Company’s pervasive business practices (e.g., informal and undocumented side agreements) overrode the written payment terms and often resulted in extensions of the terms for payment. The Company’s contracts did appear to have commercial substance (i.e., the risk, timing, or amount of the Company’s future cash flows was expected to change as a result of the contract) upon fulfillment of a purchase order, as most fulfillments have eventually resulted in the Company receiving cash. Therefore, the Company concluded that this criterion appears to be met upon shipment of product to customers (i.e., fulfillment of the purchase order).

The probability that the Company would collect the consideration to which it was entitled in exchange for products shipped to the customer was questionable. In evaluating whether the collectibility of an amount of consideration was probable, the Company considered the customer’s ability and intention to pay that amount of consideration when it was due. Historically, the customers’ intention to pay amounts when due was uncertain in light of the conflicting messages customers received with respect to the payment terms and rights of return and lack of adherence to credit limits. The assessment in ASC 606 is based on whether the customer has the ability and intention to pay for the product being delivered by the Company. Assessment of a customer’s ability to pay is typically done through a credit check process and the establishment of a credit limit for each customer by the Company’s accounts receivable team. Although the Company did have a process in place to establish credit limits, the evidence previously mentioned indicates that those credit limits were routinely overridden by certain sales personnel and members of management. Despite these overrides, the Company recovered the majority of its billings made in 2018. Furthermore, the quantitative and qualitative evidence gathered by the Company raised considerable doubt as to the collectibility of its billings at the time of shipment, but this evidence was not persuasive enough for the Company to conclude

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that collectibility was not probable. As a result of the considerations outlined above, the Company determined that it did not meet the criteria necessary for its revenue arrangements to qualify as “contracts” under the requirements of ASC 606 (i.e., these arrangements did not pass the Step 1 Criteria of the revenue recognition model).

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, as of the date of the Company’s adoption of ASC 606 effective January 1, 2018 and for the remainder of the year ended December 31, 2018, the Company concluded that it did not meet the Step 1 Criteria upon physical delivery of the product. Subsequent to the delivery 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 was included within accrued expenses in the consolidated balance sheet as of December 31, 2018.

The Company considered how to account for costs associated with the delivered products of the contract for which revenue has been deferred, which is whether to match the related costs of sales expense with revenue or recognize expense upon shipment. In making this assessment, the Company considered the financial viability of its distributors and customers based on their creditworthiness to determine if collectibility of amounts sufficient to realize the costs of the products shipped was reasonably assured at the time of shipment. As the Company determined that there was a probable economic benefit associated with sales transactions, the Company deferred the cost of sales until the revenue was recognized for the year ended December 31, 2018.

The Company also continued to offset deferred revenue with the associated accounts receivable obligations in connection with the sales of products to its customers. The amount shipped and billed but not recorded as revenue was $51.0 million for the year ended December 31, 2018.

Fiscal Year Ended December 31, 2019 and Transition

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 it was determined if 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 for new and certain existing arrangements. Management did note that there is no single, definitive 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.

MDXG US Equity

MDXG · 10-K · period ended 2020-12-31

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Item 8. Financial Statements and Supplementary Data

MDXG US Equity☆

MDXG · 10-K · period ended 2020-12-31

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Item 8. Financial Statements and Supplementary Data

MDXG US Equity