# Mimedx Group, Inc.: Form 10-Q for the period ended Jun 30, 2023

- Company: [Mimedx Group, Inc.](/companies/mdxg.md) (CIK 1376339)
- Form: 10-Q
- Filed: 2023-08-01
- Accepted by EDGAR: Aug 1, 2023, 20:04 ET
- Period: 2023-06-30
- Accession: 0001376339-23-000063
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1376339/000137633923000063/mdxg-20230630.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1376339/000137633923000063/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-04-01 to 2023-06-30 | $81.3m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 6 months, 2023-01-01 to 2023-06-30 | $152.9m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2023-04-01 to 2023-06-30 | $13.6m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 6 months, 2023-01-01 to 2023-06-30 | $26.0m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2023-04-01 to 2023-06-30 | $67.7m | us-gaap:GrossProfit |
| Gross profit | 6 months, 2023-01-01 to 2023-06-30 | $126.9m | us-gaap:GrossProfit |
| Research and development | 3 months, 2023-04-01 to 2023-06-30 | $8.5m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 6 months, 2023-01-01 to 2023-06-30 | $15.0m | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2023-04-01 to 2023-06-30 | $51.9m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2023-01-01 to 2023-06-30 | $104.2m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2023-04-01 to 2023-06-30 | $2.8m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2023-01-01 to 2023-06-30 | −$590.0k | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2023-04-01 to 2023-06-30 | −$74.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2023-01-01 to 2023-06-30 | −$23.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-04-01 to 2023-06-30 | $1.2m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2023-01-01 to 2023-06-30 | −$3.8m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-04-01 to 2023-06-30 | $0.00 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2023-01-01 to 2023-06-30 | −$0.06 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-04-01 to 2023-06-30 | $0.00 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2023-01-01 to 2023-06-30 | −$0.06 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-04-01 to 2023-06-30 | 115,866,371 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2023-01-01 to 2023-06-30 | 115,136,646 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2023-01-01 to 2023-06-30 | $3.7m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2023-01-01 to 2023-06-30 | $932.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2023-06-30 | $68.7m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-06-30 | $141.2m | us-gaap:AssetsCurrent |
| Total assets | at 2023-06-30 | $176.4m | us-gaap:Assets |
| Current liabilities | at 2023-06-30 | $44.5m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2023-06-30 | $96.5m | us-gaap:Liabilities |
| Long-term debt | at 2023-06-30 | $48.8m | us-gaap:LongTermDebtNoncurrent |
| Shareholders' equity | at 2023-06-30 | −$12.7m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 42,693 characters.

### Overview

MIMEDX is a pioneer and leader in placental biologics, focused on addressing the needs of patients with acute and chronic non-healing wounds. All of our products sold in the United States are regulated by the U.S. Food & Drug Administration (“***FDA”).***

We have two classes of products: (1) Advanced Wound Care products, or Section 361 products, consisting of our tissue and cord sheet allograft products, as well as certain particulate products regulated under Section 361, and (2) Section 351 products, consisting of our micronized and certain other particulate products, which, prior to May 31, 2021, the date the FDA’s period of enforcement discretion ended, were used to treat a variety of clinical conditions, including both advanced wound care and musculoskeletal applications. Our Advanced Wound Care products includes two product categories: Tissue/Other and Cord products. We apply Current Good Tissue Practices (“***CGTP”***) and Current Good Manufacturing Practice (“***CGMP”***) standards in addition to terminal sterilization to produce our allografts.

During the three and six months ended June 30, 2023, we operated under two defined internal business units: Wound & Surgical and Regenerative Medicine.

The Wound & Surgical business focuses on the Advanced Wound Care and Surgical Recovery markets through sales of our existing product portfolio and product development to serve these primary end markets. This business unit is responsible for substantially all sales of our Advanced Wound Care products, as well as the sale of our Section 351 products internationally.

The Regenerative Medicine business was focused on progressing the Company’s placental biologics platform. Micronized dehydrated human amnion chorion membrane (“***mDHACM”***) was our injectable placental biologic product candidate targeted at achieving FDA approval to help decrease pain and improve function in patients suffering from knee osteoarthritis (“***KOA”***). On June 20, 2023, we announced a plan to disband our Regenerative Medicine business unit and the suspension of our KOA clinical trial program. We do not intend to pursue FDA approval for mDHACM at this time. The Regenerative Medicine business unit was not deemed to be abandoned as of June 30, 2023 as the Company has continuing run-off operations pursuant to certain regulatory requirements. We anticipate that such operations will materially conclude in the second half of 2023.

This discussion, which presents our results for the three and six months ended June 30, 2023 and 2022, should be read in conjunction with our financial statements and accompanying notes in this Form 10-Q and the financial statements and accompanying notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

### Results of Operations

### Three Months Ended June 30, 2023 Compared to the Three Months Ended June 30, 2022

### Total Company

*(in thousands)*

|  | Three Months Ended June 30, 2023 | 2022 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Net sales | $81,257 | $66,883 | $14,374 | 21.5% |
| Cost of sales | 13,583 | 11,823 | 1,760 | 14.9% |
| Gross profit | 67,674 | 55,060 | 12,614 | 22.9% |
| Selling, general and administrative | 51,925 | 55,793 | (3,868) | (6.9)% |
| Research and development | 8,497 | 5,512 | 2,985 | 54.2% |
| Restructuring | 3,256 | — | 3,256 | —% |
| Investigation, restatement and related | 1,017 | 3,218 | (2,201) | (68.4)% |
| Amortization of intangible assets | 191 | 173 | 18 | 10.4% |
| Interest expense, net | (1,630) | (1,170) | (460) | 39.3% |
| Income tax provision benefit (expense) | 74 | (62) | 136 | nm |
| Net income (loss) | $1,200 | $(10,868) | $12,068 | nm |

#### Net Sales

We recorded net sales for the three months ended June 30, 2023 of $81.3 million, a $14.4 million, or 21.5%, increase compared to the three months ended June 30, 2022, in which we recognized net sales of $66.9 million. Net sales in all care settings had one fewer shipping day during the three months ended June 30, 2023 compared to the same period in 2022.

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

|  | Three Months Ended June 30, 2023 | 2022 | Change $% |  |
| --- | ---: | ---: | ---: | ---: |
| Hospital | $46,588 | $39,926 | $6,662 | 16.7% |
| Private Office | 23,750 | 19,039 | 4,711 | 24.7% |
| Other | 10,919 | 7,918 | 3,001 | 37.9% |
| Total | $81,257 | $66,883 | $14,374 | 21.5% |

Net sales in the Hospital care setting were $46.6 million for the three months ended June 30, 2023, a $6.7 million or 16.7% increase compared to $39.9 million for the three months ended June 30, 2022. The increase was primarily driven by sales of our new products that we introduced during the third quarter of 2022.

Net sales in the Private Office care setting grew by $4.7 million, or 24.7%, to $23.8 million for the three months ended June 30, 2023, compared to $19.0 million for the three months ended June 30, 2022. The increase reflects general increases in sales volume, driven by strong commercial execution.

Net sales in Other care settings increased by $3.0 million, or 37.9%, year-over-year. The increase was the result of the addition of new customers and sales of EPIFIX in Japan during the quarter.

#### Cost of Sales and Gross Profit Margin

Cost of sales for the three months ended June 30, 2023 and 2022 was $13.6 million and $11.8 million, respectively, an increase of $1.8 million, or 14.9%. Increases in cost of sales were driven by increases in sales volume noted above.

Gross profit margin for the three months ended June 30, 2023 was 83.3% compared to 82.3% for the three months ended June 30, 2022. Increases in gross profit margin were driven by continued execution on yield improvement projects, as well as year-over-year changes in sales mix, driven by execution in higher-margin care settings.

#### Selling, General and Administrative Expense

Selling, general and administrative (“***SG&A”***) expense for the three months ended June 30, 2023 was $51.9 million, compared to $55.8 million for the three months ended June 30, 2022, a decrease of $3.9 million, or 6.9%. The decrease in SG&A expense was due to decreases in professional service costs, personnel costs, and bad debt expense. The decrease in professional service expenses reflects $2.1 million in consulting and advisory expenses incurred in 2022 related to a withhold the vote campaign launched by a shareholder. There was no similar activity during 2023. The decrease in personnel costs reflect the results of our cost reduction efforts which began during the third quarter of 2022. Finally, the decrease in bad debt expense was the result of the deterioration of credit for certain specific customers in 2022. These decreases were offset by increases in commissions due to higher sales volumes.

#### Research and Development Expense

Our research and development expense increased by $3.0 million, or 54.2%, to $8.5 million for the three months ended June 30, 2023, compared to $5.5 million for the three months ended June 30, 2022. The increase reflects severance expenses of $2.1 million related to the disbanding of our Regenerative Medicine business unit. Prior to this disbanding, we incurred greater expenses related to our clinical trial activities, which also contributed to the increase. As a result of the disbanding of our Regenerative Medicine business unit and the suspension of our KOA clinical trial program, we anticipate that research and development expense will decrease in future quarters.

#### Restructuring Expense

Restructuring expense of $3.3 million for the three months ended June 30, 2023 reflects certain charges related to the disbanding of our Regenerative Medicine business unit, including write-downs of prepaid clinical trial assets of $2.1 million, charges for the wind-down of our KOA clinical trial program of $0.6 million, and impairment of goodwill of $0.5 million.

#### Investigation, Restatement and Related Expense

Investigation, restatement and related expense for the three months ended June 30, 2023 was $1.0 million compared to $3.2 million for the three months ended June 30, 2022. The decrease was primarily attributable to a decrease in legal fees advanced on behalf of a former officer, year-over-year.

#### Amortization of Intangible Assets

Amortization expense related to intangible assets was $0.2 million for each of the three months ended June 30, 2023 and 2022.

#### Interest Expense, Net

Interest expense, net was $1.6 million for the three months ended June 30, 2023 compared to $1.2 million for the three months ended June 30, 2022, an increase of $0.5 million, or 39.3%. The increase was the result of year-over-year increases in the London Interbank Offered Rate (“***LIBOR”***), which was the reference rate on our outstanding debt during both periods.

#### Income Tax Provision Benefit (Expense)

The effective tax rates for the Company were (6.6)% and (0.6)% for the three months ended June 30, 2023 and June 30, 2022, respectively. There were no material discrete items affecting the effective tax rate in either period.

### Wound & Surgical

*(in thousands)*

|  | Three Months Ended June 30, 2023 | 2022 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Net sales | $80,461 | $66,094 | $14,367 | 21.7% |
| Cost of sales | 12,736 | 10,838 | 1,898 | 17.5% |
| Selling, general and administrative expense | 38,500 | 38,681 | (181) | (0.5)% |
| Research and development expense | 1,632 | 2,408 | (776) | (32.2)% |
| Segment contribution | $27,593 | $14,167 | $13,426 | 94.8% |

Our Wound & Surgical business recorded $80.5 million of net sales for the three months ended June 30, 2023, a $14.4 million, or 21.7%, increase compared to the $66.1 million we recorded for the three months ended June 30, 2022. The increase in net sales was driven primarily by strong commercial execution in the Private Office care setting, sales of our new products, addition of new customers in the Other care setting, and sales of EPIFIX in Japan.

Cost of sales for the three months ended June 30, 2023 was $12.7 million, a $1.9 million, or 17.5%, increase compared to the $10.8 million recognized for the three months ended June 30, 2022. The increase was driven by increases in sales volumes, offset in part by year-over-year changes in sales mix.

SG&A expense was $38.5 million for the three months ended June 30, 2023, a $0.2 million, or 0.5%, decrease compared to the three months ended June 30, 2022, during which we incurred $38.7 million of expenses. The decrease was driven by year-over-year decreases in personnel costs and bad debt expense. The decrease in personnel costs reflects the results of our cost reduction efforts which began in the third quarter of 2022. The decrease in bad debt expense was the result of the deterioration of credit for certain specific customers in 2022. These decreases were offset by increases in commissions resulting from increases in sales volume.

Research and development expense was $1.6 million for the three months ended June 30, 2023, compared to $2.4 million for the three months ended June 30, 2022. The decrease reflects fewer product development costs, year-over-year, driven by the timing of our product launches.

Segment contribution margin for Wound & Surgical was 34.3% for the three months ended June 30, 2023, compared to 21.4% for the three months ended June 30, 2022.

### Regenerative Medicine

*(in thousands)*

|  | Three Months Ended June 30, 2023 | 2022 | $ Change | % Change |
| --- | ---: | ---: | ---: | --- |
| Research and development expense | $6,865 | $3,104 | $3,761 | nm |
| Restructuring | 3,256 | — | 3,256 | nm |
| Segment contribution | $(10,121) | $(3,104) | $(7,017) | nm |

On June 20, 2023, we announced a plan to disband our Regenerative Medicine business unit and the suspension of our KOA clinical trial program. As a result of these actions, we incurred severance expense for former employees of $2.1 million.

Research and development expense was $6.9 million for the three months ended June 30, 2023, compared to $3.1 million for the three months ended June 30, 2022, an increase of $3.8 million. In addition to the severance expenses referenced above, we incurred greater expenses related to our clinical trial activities during the three months ended June 30, 2023.

Restructuring reflects certain charges related to the disbanding of our Regenerative Medicine business unit, including write-downs of prepaid clinical trial assets of $2.1 million, charges for the wind-down of our KOA clinical trial program of $0.6 million, and impairment of goodwill of $0.5 million.

### Corporate

SG&A expense for the Corporate function was $13.4 million, or 16.5% of total net sales, for the three months ended June 30, 2023, compared to $17.1 million for the three months ended June 30, 2022, reflecting 25.6% of total net sales. The decrease in SG&A expense was primarily due to year-over-year decreases in professional services costs, primarily resulting from a withhold the vote campaign launched by a shareholder during 2022. There was no similar activity in 2023.

### Six Months Ended June 30, 2023 Compared to the Six Months Ended June 30, 2022

### Total Company

*(in thousands)*

|  | Six Months Ended June 30, 2023 | 2022 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Net sales | $152,933 | $125,777 | $27,156 | 21.6% |
| Cost of sales | 26,002 | 21,759 | 4,243 | 19.5% |
| Gross profit | 126,931 | 104,018 | 22,913 | 22.0% |
| Selling, general and administrative | 104,202 | 105,363 | (1,161) | (1.1)% |
| Research and development | 14,993 | 11,476 | 3,517 | 30.6% |
| Restructuring | 3,256 | — | 3,256 | —% |
| Investigation, restatement and related | 4,690 | 5,770 | (1,080) | (18.7)% |
| Amortization of intangible assets | 380 | 345 | 35 | 10.1% |
| Interest expense, net | (3,184) | (2,295) | (889) | 38.7% |
| Other expense, net | (32) | (1) | (31) | nm |
| Income tax provision benefit (expense) | 23 | (125) | 148 | nm |
| Net loss | $(3,783) | $(21,357) | $17,574 | (82.3)% |

#### Net Sales

We recorded net sales for the six months ended June 30, 2023 of $152.9 million, a $27.2 million, or 21.6%, increase compared to the six months ended June 30, 2022, for which we recorded net sales of $125.8 million. Net sales for the six months ended June 30, 2023 in all sites of service benefited from the alleviation of the Omicron wave of the Covid-19 Pandemic, which adversely impacted sales during the six months ended June 30, 2022. There was an equal number of shipping days in each period.

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

|  | Six Months Ended June 30, 2023 | 2022 | Change $% |  |
| --- | ---: | ---: | ---: | ---: |
| Hospital | $88,758 | $75,907 | $12,851 | 16.9% |
| Private Office | 45,237 | 35,196 | 10,041 | 28.5% |
| Other | 18,938 | 14,674 | 4,264 | 29.1% |
| Total | $152,933 | $125,777 | $27,156 | 21.6% |

Net sales in the Hospital care setting were $88.8 million for the six months ended June 30, 2023, a $12.9 million or 16.9% increase compared to $75.9 million for the six months ended June 30, 2022. The increase was primarily driven by sales of our new products that we introduced during the third quarter of 2022.

Net sales in the Private Office care setting grew by $10.0 million, or 28.5%, to $45.2 million for the six months ended June 30, 2023, compared to $35.2 million for the six months ended June 30, 2022. The increase reflects general increases in sales volume, driven by strong commercial execution resulting from a prioritization of this site of service.

Net sales in Other care settings increased by $4.3 million, or 29.1%, year-over-year. The increase was primarily driven by our new products, addition of new customers in certain sites of service and sales of EPIFIX in Japan.

#### Cost of Sales and Gross Profit Margin

Cost of sales for the six months ended June 30, 2023 was $26.0 million, an increase of $4.2 million, or 19.5%, compared to $21.8 million for the six months ended June 30, 2022. Increases in cost of sales were driven by increases in sales volume noted above.

Gross profit margin for six months ended June 30, 2023 was 83.0% and 82.7% for the six months ended June 30, 2023 and 2022, respectively.

#### Selling, General and Administrative Expense

SG&A expense for the six months ended June 30, 2023 decreased by $1.8 million, or 1.7%, to $104.2 million, compared to $105.4 million for the six months ended June 30, 2022. The decrease was driven by decreases in professional services expenses, personnel costs and bad debt expense. The decrease in professional services expenses reflects $2.1 million in consulting and advisory expenses incurred in 2022 related to a withhold the vote campaign launched by a shareholder. There was no similar activity during 2023. The decrease in personnel costs reflects the results of our cost reduction efforts that began in the third quarter of 2022. Finally, the decrease in bad debt expense was the result of the deterioration of credit for certain specific customers in 2022.

The decrease was offset by increases in sales commissions, driven by increases in sales volumes. In addition, we incurred greater travel expenses, reflecting the removal of travel restrictions that were in place during the six months ended June 30, 2022 due to the Covid-19 Pandemic.

#### Research and Development Expense

Our research and development expenses increased by $3.5 million, or 30.6%, to $15.0 million for the six months ended June 30, 2023, compared to $11.5 million for the six months ended June 30, 2022. The increase reflects severance expenses of $2.1 million related to the disbanding of our Regenerative Medicine business unit. Prior to this disbanding, we incurred greater personnel costs and clinical trial expenses to support clinical activities, which also contributed to the increase.

#### Investigation, Restatement and Related Expense

Investigation, restatement and related expenses for the six months ended June 30, 2023 decreased by $1.1 million, or 18.7%, to $4.7 million compared to $5.8 million for the six months ended June 30, 2022. The decrease was attributable to a decrease in legal fees advanced on behalf of a former officer.

#### Amortization of Intangible Assets

Amortization expense increased from $0.3 million for the six months ended June 30, 2022 to $0.4 million for the six months ended June 30, 2023.

#### Restructuring Expense

Restructuring expense of $3.3 million for the six months ended June 30, 2023 reflects certain charges related to the disbanding of our Regenerative Medicine business unit, including write-downs of prepaid clinical trial assets of $2.1 million, charges for the wind-down of our KOA clinical trial program of $0.6 million, and impairment of goodwill of $0.5 million.

#### Interest Expense, Net

Interest expense, net was $3.2 million for the six months ended June 30, 2023 compared to $2.3 million for the six months ended June 30, 2022. The increase was the result of year-over-year increases in LIBOR, which was the reference rate on our outstanding debt during both periods.

#### Income Tax Provision Benefit (Expense)

The effective tax rates for the Company were 0.6% and (0.6)% for the six months ended June 30, 2023 and 2022, respectively. There were no material discrete items affecting the effective tax rate in either period. Net operating losses incurred during both periods were offset by a valuation allowance.

### Wound & Surgical

*(in thousands)*

|  | Six Months Ended June 30, 2023 | 2022 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Net sales | $151,090 | $124,423 | $26,667 | 21.4% |
| Cost of sales | 24,068 | 19,967 | 4,101 | 20.5% |
| Selling, general and administrative expense | 76,166 | 72,725 | 3,441 | 4.7% |
| Research and development expense | 3,154 | 4,358 | (1,204) | (27.6)% |
| Segment contribution | $47,702 | $27,373 | $20,329 | 74.3% |

32

Our Wound & Surgical business recorded $151.1 million of net sales for the six months ended June 30, 2023, a $26.7 million, or 21.4%, increase compared to the $124.4 million we recorded for the six months ended June 30, 2022. Net sales for the six months ended June 30, 2023 benefited from the alleviation of the Omicron wave of the Covid-19 Pandemic, which adversely impacted sales during the six months ended June 30, 2022. The increase in net sales was driven primarily by strong commercial execution in the Private Office care setting, sales of our new products, addition of new customers in the Other care setting, and sales of EPIFIX in Japan.

Cost of sales for the six months ended June 30, 2023 was $24.1 million, a $4.1 million, or 20.5%, increase compared to the $20.0 million recognized for six months ended June 30, 2022. Cost of sales increased due to increases in sales volumes.

SG&A expense was $76.2 million for the six months ended June 30, 2023, a $3.4 million, or 4.7%, increase over the six months ended June 30, 2022, during which we incurred $72.7 million of expenses. The increase was driven by increases in commissions, driven by sales volumes. In addition, we incurred greater travel expenses, reflecting the removal of travel restrictions that were in place during the six months ended June 30, 2022 due to the Covid-19 Pandemic. These effects were offset by year-over-year decreases in personnel costs, which reflects the results of our cost reduction efforts that began in the third quarter of 2022, and in bad debt expense, which was the result of the deterioration of credit for certain specific customers in 2022.

Research and development expense was $3.2 million for the six months ended June 30, 2023, compared to $4.4 million for the six months ended June 30, 2022, a decrease of $1.2 million, or 27.6%. The decrease reflects less product development costs during 2023, specifically as we were readying product launches in the third quarter of 2022.

### Regenerative Medicine

*(in thousands)*

|  | Six Months Ended June 30, 2023 | 2022 | $ Change | % Change |
| --- | ---: | ---: | ---: | --- |
| Research and development expense | $11,839 | $7,118 | $4,721 | 66.3% |
| Restructuring | 3,256 | — | 3,256 | nm |
| Segment contribution | $(15,095) | $(7,118) | $(7,977) | nm |

On June 20, 2023, we announced a plan to disband our Regenerative Medicine business unit and the suspension of our KOA clinical trial program. As a result of these actions, we incurred severance expense for former employees of $2.1 million.

Research and development expense was $11.8 million for the six months ended June 30, 2023, compared to $7.1 million for the six months ended June 30, 2022, an increase of $4.7 million. In addition to the one-time expenses referenced above, we incurred greater personnel costs and clinical trial expenses to support clinical activities during the three months ended June 30, 2023.

Restructuring expense reflects certain charges related to the disbanding of our Regenerative Medicine business unit, including write-downs of prepaid clinical trial assets of $2.1 million, charges for the wind-down of our KOA clinical trial program of $0.6 million, and impairment of goodwill of $0.5 million.

### Corporate

SG&A expense for the Corporate function was $28.0 million, or 18.3% of total net sales, for the six months ended June 30, 2023, compared to $32.6 million for the six months ended June 30, 2022, reflecting 25.9% of total net sales. The decrease in SG&A expense was primarily due to year-over-year decreases in professional services costs related to a withhold the vote campaign launched by a shareholder during 2022.

### Non-GAAP Financial Measures

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

### EBITDA and Adjusted EBITDA

In addition to our GAAP results, we provide the following Non-GAAP measures: Earnings Before Interest, Taxes, Depreciation and Amortization (“***EBITDA”***) and Adjusted EBITDA. These measurements are not, and should not be used, as a substitute for GAAP measures. Company management uses these Non-GAAP measures as aids in monitoring our ongoing financial performance on a regular basis and for benchmarking against comparable companies.

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

Adjusted EBITDA is intended to provide an enduring, normalized view of EBITDA and our broader business operations that we expect to experience on an ongoing basis by removing certain non-cash items and items which may be irregular, one-time, or non-recurring from EBITDA. This includes share-based compensation, which is predominantly settled in shares. This enables us to identify underlying trends in our business that could otherwise be masked by such items.

Adjusted EBITDA consists of GAAP net income or loss excluding: (i) depreciation, (ii) amortization of intangibles, (iii) interest expense, (iv) income tax provision, (v) investigation, restatement and related expenses, (vi) share-based compensation, and (vii) expenses related to the disbanding of our Regenerative Medicine business unit.

Expenses related to the disbanding of our Regenerative Medicine business unit include (i) write-downs of our prepaid clinical trial assets, (ii) charges associated with the wind-down of contracts associated with our KOA clinical trial program, (iii) severance expenses incurred which were directly attributable to the disbanding, and (iv) impairment of goodwill.

Management also assesses EBITDA margin and Adjusted EBITDA margin to provide an additional layer of context to the Company’s profitability; indicating our ability to convert our sales into sustainable operating results. EBITDA margin is calculated as EBITDA divided by GAAP net sales. Similarly, Adjusted EBITDA margin is calculated as Adjusted EBITDA divided by GAAP net sales.

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

|  | Three Months Ended June 30, 2023 | 2022 | Six Months Ended June 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Net income (loss) | $1,200 | $(10,868) | $(3,783) | $(21,357) |
| Net margin | 1.5% | (16.2)% | (2.5)% | (17.0)% |
| Non-GAAP Adjustments: |  |  |  |  |
| Depreciation expense | 687 | 858 | 1,401 | 1,718 |
| Amortization of intangible assets | 191 | 173 | 380 | 345 |
| Interest expense, net | 1,630 | 1,170 | 3,184 | 2,295 |
| Income tax provision | (74) | 62 | (23) | 125 |
| EBITDA | 3,634 | (8,605) | 1,159 | (16,874) |
| EBITDA margin | 4.5% | (12.9)% | 0.8% | (13.4)% |
| Additional Non-GAAP Adjustments |  |  |  |  |
| Costs incurred in connection with Audit Committee Investigation and Restatement | 1,017 | 3,218 | 4,690 | 5,770 |
| Share-based compensation | 4,060 | 4,428 | 8,405 | 8,426 |
| Expenses related to disbanding of Regenerative Medicine business unit | 5,391 | — | 5,391 | — |
| Adjusted EBITDA | $14,102 | $(959) | $19,645 | $(2,678) |
| Adjusted EBITDA margin | 17.4% | (1.4)% | 12.8% | (2.1)% |

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### Discussion of Cash Flows

### Operating Activities

Net cash provided by operating activities during the six months ended June 30, 2023 was $3.7 million, compared to cash used of $13.2 million for the six months ended June 30, 2022. The change was primarily the result of year-over-year increases in net sales, which drove increases in collections from customers, as well as year-over-year decreases in operating expenses.

### Investing Activities

Net cash used for investing activities during the six months ended June 30, 2023 was $1.0 million, compared to $0.6 million for the six months ended June 30, 2022. This increase reflects a $0.4 million year-over-year increase in capital expenditures.

### Financing Activities

We did not have meaningful cash flows from financing activities during the six months ended June 30, 2023. Cash used in financing activities was $0.8 million during the six months ended June 30, 2022. We ceased withholding shares to satisfy employee tax obligations upon vesting of equity awards in 2022. Accordingly, we did not have any cash paid for tax withholdings during the six months ended June 30, 2023, compared to $1.2 million for the six months ended June 30, 2022. This effect was offset by $0.4 million of cash receipts from option exercises in the six months ended June 30, 2022, compared to immaterial proceeds from option exercises during 2023.

### Liquidity and Capital Resources

Our business requires 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.

As of June 30, 2023, we had $68.7 million of cash and cash equivalents, total current assets of $141.2 million and total current liabilities of $44.5 million, reflecting a current ratio of 3.2.

We are currently paying our obligations in the ordinary course of business.

We anticipate cash requirements related to the following items within one year of the date of the filing of this Quarterly Report:

- investments to advance and expand our existing product portfolio;
- expenditures required to achieve necessary regulatory approval and establish operations in new markets deemed strategically important toward the enhancement of our global footprint;
- costs to wind-down certain contracts associated with our KOA clinical trial program; and
- severance payments related to certain former members of management and other employees.

We have analyzed our ability to address these commitments and potential liabilities for the 12 months extending from the date of the filing of this Quarterly Report. After completing this analysis, which included a review of expectations of revenue, margins, and expenses, we believe that our existing cash and cash from operations will be sufficient to meet our obligations as they come due.

### Term Loan

On June 30, 2020, we entered into a Loan Agreement with, among others, Hayfin Services, LLP, (“***Hayfin”***) an affiliate of Hayfin Capital Management, LLP (as amended, the “***Hayfin Loan Agreement”***), under which Hayfin provided us with a senior secured term loan of $50 million (the “***Term Loan”***). The Term Loan matures on June 30, 2025 (the “***Maturity Date”).***

No principal payments are due on the Term Loan until the Maturity Date. Interest is payable on the Term Loan for principal outstanding quarterly through the Maturity Date. Pursuant to Amendment No. 2 to the Loan Agreement entered into in June 2023, interest on any borrowings under the Term Loan is equal to the Secured Overnight Finance Rate (“***SOFR”***), plus a fallback provision of 0.15%, subject to a floor of 1.5%, plus a margin of 6.75%. An additional 3.0% margin would be applied to the interest rate upon the occurrence of an Event of Default, as defined in the Hayfin Loan Agreement. As of June 30, 2023, the Term Loan carried an interest rate of 12.1%.

The Hayfin Loan Agreement contains certain financial covenants, including a Minimum Consolidated Total Net Sales covenant, tested quarterly, and a Minimum Liquidity covenant, tested monthly (each as defined). In addition, the Hayfin Loan Agreement includes certain negative covenants and events of default customary for facilities of this type. Upon the occurrence of such events of default, all outstanding loans under the Hayfin Loan Agreement may be accelerated or the lenders’ commitments terminated. The Hayfin Loan Agreement also specifies mandatory prepayments based on a percentage of Excess Cash Flow (as defined in the Hayfin Loan Agreement, if such is generated), as well as upon the occurrence of other events specified in the Hayfin Loan Agreement.

As of June 30, 2023, we were in compliance with all financial covenants under the Hayfin Loan Agreement. A breach of a financial covenant in the Hayfin Loan Agreement, if uncured or unable to be cured, would likely result in an event of default that could trigger the lenders’ remedies, including acceleration of the entire principal balance of the loan as well as any applicable prepayment premiums.

### Series B Preferred Stock

We have 100,000 shares of Series B Preferred Stock outstanding as of June 30, 2023.

The Series B Preferred Stock accumulates dividends at a rate of 6.0% per annum. Dividends are declared at the sole discretion of our Board of Directors. Dividends, if declared, are paid in cash at the end of each quarter based on dividend amounts that accumulate beginning on the last payment date through the day prior to the end of each quarter. In lieu of paying a dividend, we may elect to accrue the dividend owed to shareholders. Dividend balances accumulate at the prevailing dividend rate for each dividend period during 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. The Series B Preferred Stock converts automatically at any time after July 2, 2023, provided that the common stock has traded at $7.70 or higher (i) for 20 out of 30 consecutive trading days, and (ii) on such date of conversion.

If we undergo a change of control, we will have the option to repurchase some or all then-outstanding shares of Series B Preferred Stock for cash in an amount equal to the liquidation preference and any accumulated and unpaid dividends. If we do not exercise this 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 in an amount equal to the liquidation preference plus unpaid dividends, or (2) convert the Series B Preferred stock into common stock and receive its pro rata consideration thereunder.

We have not declared or paid any cash dividends on our Series B Preferred Stock since issuance. Dividends accumulated but not paid as of June 30, 2023 were $17.2 million. The Series B Preferred Stock was convertible into 30,445,997 shares of common stock as of June 30, 2023.

### Share Repurchases

We did not repurchase any shares of our common stock during the three months ended June 30, 2023. The timing and amount of future repurchases, if any, will depend upon our stock price, economic and market conditions, regulatory requirements, and other corporate considerations. We may initiate, suspend or discontinue purchases at any time.

### Contractual Obligations

Except as described below and as previously disclosed in our Quarterly Report for the three months ended March 31, 2023, there were no significant changes to our contractual obligations during the six months ended June 30, 2023 from those disclosed in the section Item 7, “*Management’s Discussion and Analysis of Financial Condition and Results from Operations”*, in our 2022 Form 10-K.

#### Nordic Agreement

In June 2022, we entered into a collaboration agreement (the “***Nordic Agreement”***) with Nordic Bioscience Clinical Development A/S (“***NBCD”***) to provide full operational support for our KOA clinical trial program. Under the terms of the Nordic Agreement, we were obligated to pay $10.2 million upon the achievement of specified milestones over the course of the clinical trial. Pursuant to the Nordic Agreement, we are obligated to reimburse NBCD for services performed through the effective termination date and for non-cancelable obligations reasonably incurred prior to that date. If we have prepaid NBCD for services performed, we are entitled to reimbursement to the extent that such funds have not been consumed. In addition, we have certain regulatory obligations for all trial participants enrolled in the study prior to the suspension of clinical trial activities.

### Critical Accounting Estimates

In preparing financial statements, we follow accounting principles generally accepted in the United States, which require us to make certain estimates and apply judgments that affect our financial position and results of operations. We regularly review our accounting policies and financial information disclosures. A summary of critical accounting estimates in preparing the financial statements was provided in our 2022 Form 10-K.

In addition, during the period covered by this Quarterly Report, we identified the following critical accounting estimates which were not material to the 2022 Form 10-K.

### Share-Based Compensation Expense

#### Description

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

#### Judgments and Uncertainties

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

The fair value of stock options is calculated using an appropriate valuation technique. The valuation technique generally requires us to make certain assumptions, including (1) the fair value of the common stock, (2) the expected volatility of our stock price, (3) the expected term of the award, (4) the risk-free interest rate, and (5) expected dividends. Our expectation for volatility is generally based on historical daily share price movements, with certain adjustments for abnormal share price activity associated with events which are not expected to recur during the expected term. The expected term of the award requires us to make assumptions regarding the post-vesting behavior of the recipients, which is based off available evidence. Our assumption for the risk-free rate is derived from prevailing U.S. Treasuries with similar terms to the award on the grant date. Our assumption for dividends is derived from our own dividend history.

To the extent that any such awards are subject to a market condition, the resolution of the market condition is reflected in the fair value of the grant date. Further, the requisite service period associated with an award containing a market condition must derive the service period over which the market condition is expected to be met. Fair value and derived service periods are generally determined using a Monte Carlo simulation.

Subsequent to the determination of fair value, we recognize expense to the extent we evaluate that performance conditions associated with share-based payment arrangements are probable of occurring. In certain cases where the extent of vesting is based on the extent of achievement, we are required to determine the extent to which achievement is probable. We determine probable performance based on actual performance to date, internally-developed budgets and forecasts for periods covered by the relevant performance condition, and other evidence deemed relevant to this determination. We re-evaluate our probability assessments at least quarterly, with any revisions reflected as a cumulative adjustment to expense. Because of the cumulative nature of adjustments, during any period in which we re-evaluate probability, the adjustments could significantly impact our results of operations.

#### Sensitivity of Estimate to Change

During the six months ended June 30, 2023, we granted stock options with a fair value on the grant date of $7.0 million. This estimate was determined using a Monte Carlo simulation using the following inputs:

|  | Assumption |
| --- | ---: |
| Stock price on grant date | $3.70 |
| Exercise price | $3.70 |
| Risk-free interest rate | 3.58% |
| Expected volatility (annualized) | 75.00% |
| Dividend yield | —% |
| Weighted average grant date fair value | $1.93 |

37

The granted stock options reflected an expected term based on our expectations for exercise activity. Changes in any of these assumptions could result in a revised estimate of fair value of the granted stock options, which would impact the amount of expense recognized over the requisite service period, and could materially affect the total fair value or the amount of expense recognized in a particular period.

In addition, cumulative expense recognized for unvested performance stock unit awards was $0.9 million as of June 30, 2023. This is based on determinations regarding probable resolution or the extent of probable resolution of relevant performance conditions to earn such awards. If it is subsequently determined that the performance conditions associated with these awards are no longer probable of being met, or performance conditions which were determined to be probable of occurring do not actually occur, we could reverse up to this amount of expense in the period such determination is made. Furthermore, if probable levels of achievement are later determined to be greater, or actual achievement exceeds the level of achievement assessed as probable, we could record increases to expense to reflect this level of achievement. The amount of any incremental expense recognition or reversal will depend on the magnitude and timing of such change in estimate.

### Recent Accounting Pronouncements

For the effect of recent accounting pronouncements, see Note 2, “*Significant Accounting Policies”*, to the unaudited condensed consolidated financial statements contained herein.

## Market risk

As filed, 831 characters.

We are exposed to risks associated with changes in interest rates that could adversely affect our results of operations and financial condition. We do not hedge against interest rate risk.

The interest rate on our Term Loan is determined quarterly based on the 3-month SOFR rate, subject to a floor of 1.5%. As of June 30, 2023, the interest rate on our Term Loan was 12.1%. A 100 basis point change in SOFR, to the extent that such change would not cause SOFR to be below the 1.5% floor, would change our interest expense by $0.5 million on an annualized basis.

During the three and six months ended June 30, 2023, we incurred $0.5 million and $0.9 million in incremental interest expense compared to the equivalent periods in the prior year resulting from increases in the relevant reference rate during the intervening period.

## Controls and procedures

As filed, 1,739 characters.

### Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended, or the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were effective at a reasonable assurance level in ensuring that information required to be disclosed by us in reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely discussions regarding required disclosure. We believe that a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the control system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

### Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during the fiscal quarter ended June 30, 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Filed Aug 1, 2023.
Source: SEC EDGAR, the filing index for accession 0001376339-23-000063. Last ingested by Listed: Oct 24, 2026, 15:09 ET. No prices; not investment advice.