Attached files

file filename
EX-32.2 - EXHIBIT 32.2 - MIMEDX GROUP, INC.exhibit322-certificationof.htm
EX-32.1 - EXHIBIT 32.1 - MIMEDX GROUP, INC.exhibit321-certificationof.htm
EX-31.2 - EXHIBIT 31.2 - MIMEDX GROUP, INC.exhibit312-certificationof.htm
EX-31.1 - EXHIBIT 31.1 - MIMEDX GROUP, INC.exhibit311-certificationof.htm



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2017
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________________to______________________

Commission file number 001-35887
MIMEDX GROUP, INC.
(Exact name of registrant as specified in its charter)
Florida
 
26-2792552
(State or other jurisdiction of incorporation)
 
(I.R.S. Employer Identification Number)
1775 West Oak Commons Ct NE
Marietta, GA
 
30062
(Address of principal executive offices)
 
(Zip Code)
(770) 651-9100
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x     No ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x
Accelerated filer ¨
Non-accelerated filer ¨
(Do not check if a smaller reporting company)
Smaller reporting company ¨
Emerging growth company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(A) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x
 
As of April 14, 2017, there were 110,870,826 shares of the registrant’s common stock outstanding.




Table of Contents
 
Part I     FINANCIAL INFORMATION
 
Item 1
Condensed Consolidated Financial Statements
 
 
Condensed Consolidated Balance Sheets (unaudited) March 31, 2017 and December 31, 2016

 
Condensed Consolidated Statements of Operations (unaudited) Three Months Ended March 31, 2017 and 2016

 
Condensed Consolidated Statements of Stockholders' Equity (unaudited) for Three Months Ended March 31, 2017

 
Condensed Consolidated Statements of Cash Flows (unaudited) Three Months Ended March 31, 2017 and 2016

 
Notes to the Unaudited Condensed Consolidated Financial Statements Three Months Ended March 31, 2017 and 2016
8

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

Item 3
Quantitative and Qualitative Disclosures About Market Risk

Item 4
Controls and Procedures

Part II   OTHER INFORMATION
Item 1
Legal Proceedings

Item 1A
Risk Factors

Item 2
Unregistered Sales of Equity Securities and Use of Proceeds

Item 3
Defaults upon Senior Securities

Item 4
Mine Safety Disclosures

Item 5
Other Information

Item 6
Exhibits

Signatures
 


2



Forward-Looking Statements
 
This Form 10-Q and certain information incorporated herein by reference contain forward-looking statements and information within the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934.  This information includes assumptions made by, and information currently available to management, including statements regarding future economic performance and financial condition, liquidity and capital resources, acceptance of our products by the market, and management’s plans and objectives. In addition, certain statements included in this and our future filings with the Securities and Exchange Commission (“SEC”), in press releases, and in oral and written statements made by us or with our approval, which are not statements of historical fact, are forward-looking statements. Words such as “may,” “could,” “should,” “would,” “believe,” “expect,” “expectation,” “anticipate,” “estimate,” “intend,” “seeks,” “plan,” “project,” “continue,” “predict,” “will,” “should,” and other words or expressions of similar meaning are intended by us to identify forward-looking statements, although not all forward-looking statements contain these identifying words.  These forward-looking statements are found at various places throughout this report and in the documents incorporated herein by reference.  These statements are based on our current expectations about future events or results and information that is currently available to us, involve assumptions, risks, and uncertainties, and speak only as of the date on which such statements are made.
Our actual results may differ materially from those expressed or implied in these forward-looking statements.  Factors that may cause such a difference include, but are not limited to, those discussed in Part II, Item 1A, “Risk Factors,” below and in our most recent Annual Report on Form 10-K, as well as other reports we file with the SEC.  Except as expressly required by the federal securities laws, we undertake no obligation to update any such factors, or to publicly announce the results of, or changes to any of the forward-looking statements contained herein to reflect future events, developments, changed circumstances, or for any other reason.
As used herein, the terms “MiMedx,” “the Company,” “we,” “our” and “us” refer to MiMedx Group, Inc., a Florida corporation, and its consolidated subsidiaries as a combined entity, except where it is clear that the terms mean only MiMedx Group, Inc.



3




Part I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements

MIMEDX GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
 
March 31, 2017
(unaudited)
 
December 31, 2016
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
30,924

 
$
34,391

Accounts receivable, net
66,846

 
67,151

Inventory, net
16,050

 
17,814

Prepaid expenses
6,878

 
5,894

Other current assets
1,200

 
1,288

Total current assets
121,898

 
126,538

Property and equipment, net of accumulated depreciation
13,763

 
13,786

Goodwill
20,203

 
20,203

Intangible assets, net of accumulated amortization
22,788

 
23,268

Deferred tax asset, net
9,530

 
9,114

Deferred financing costs and other assets
309

 
354

Total assets
$
188,491

 
$
193,263

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
10,892

 
$
11,436

Accrued compensation
11,602

 
12,365

Accrued expenses
9,940

 
10,941

Current portion of earn out liability
8,740

 
8,740

Income taxes
7,839

 
5,768

Other current liabilities
587

 
1,482

Total current liabilities
49,600

 
50,732

Earn out liability
8,769

 
8,710

Other liabilities
1,086

 
821

Total liabilities
59,455

 
60,263

Commitments and contingencies (Note 13)


 


Stockholders' equity:
 
 
 
Preferred stock; $.001 par value; 5,000,000 shares authorized and 0 shares issued and outstanding

 

Common stock; $.001 par value; 150,000,000 shares authorized;
111,195,825 issued and 110,840,873 outstanding at March 31, 2017 and 110,212,547 issued and 109,862,787 outstanding at December 31, 2016
111

 
110

Additional paid-in capital
153,735

 
161,261

Treasury stock at cost:
354,952 shares at March 31, 2017 and 349,760 shares at December 31, 2016
(2,982
)
 
(2,216
)
Accumulated deficit
(21,828
)
 
(26,155
)
Total stockholders' equity
129,036

 
133,000

Total liabilities and stockholders' equity
$
188,491

 
$
193,263

See notes to condensed consolidated financial statements

4



MIMEDX GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
(unaudited)
 
Three Months Ended March 31,
 
2017
 
2016

 
 
 
Net sales
$
72,607

 
$
53,367

Cost of sales
8,743

 
7,946

Gross margin
63,864

 
45,421

 
 
 
 
Operating expenses:
 
 
 
Research and development expenses
4,202

 
2,496

Selling, general and administrative expenses
52,951

 
40,648

Amortization of intangible assets
526

 
810

Operating income
6,185

 
1,467

 
 
 
 
Other expense, net
 
 
 
Interest expense, net
(145
)
 
(56
)
 
 
 
 
Income before income tax provision
6,040

 
1,411

Income tax provision (expense) benefit
(1,713
)
 
(214
)
 
 
 
 
Net income
$
4,327

 
$
1,197

 
 
 
 
Net income per common share - basic
$
0.04

 
$
0.01

 
 
 
 
Net income per common share - diluted
$
0.04

 
$
0.01

 
 
 
 
Weighted average shares outstanding - basic
105,708,526

 
105,538,271

 
 
 
 
Weighted average shares outstanding - diluted
113,730,591

 
112,039,860

See notes to condensed consolidated financial statements

5




MIMEDX GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share data)
(unaudited)



 
 
Common Stock Issued
Additional Paid - in
Treasury Stock
Accumulated
 
 
 
Shares
Amount
Capital
Shares
Amount
 Deficit
Total
Balance December 31, 2016
 
110,212,547

$
110

$
161,261

349,760

$
(2,216
)
$
(26,155
)
$
133,000

Share-based compensation expense
 


4,671




4,671

Exercise of stock options
 


(1,183
)
(387,653
)
3,048


1,865

Issuance of restricted stock
 
983,278

1

(11,626
)
(1,508,933
)
11,625



Restricted stock shares canceled/forfeited
 


571

93,450

(571
)


Shares issued for services performed
 


41

(17,539
)
125


166

Stock repurchase
 



1,540,398

(12,666
)

(12,666
)
Shares repurchased for tax withholding
 



285,469

(2,327
)
 
(2,327
)
Net income
 





4,327

4,327

Balance March 31, 2017
 
111,195,825

$
111

$
153,735

354,952

$
(2,982
)
$
(21,828
)
$
129,036


See notes to condensed consolidated financial statements

6



MIMEDX GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
Three Months Ended March 31,
 
2017
 
2016
Cash flows from operating activities:
 
 
 
Net income
$
4,327

 
$
1,197

Adjustments to reconcile net income to net cash from operating activities:
 
 
 
Depreciation
946

 
734

Amortization of intangible assets
526

 
810

Amortization of inventory fair value step-up
75

 
734

Amortization of deferred financing costs
45

 
49

Share-based compensation
4,671

 
4,615

Change in deferred income taxes
(416
)
 

Increase (decrease) in cash, net of effects of acquisition, resulting from changes in:
 
 
 
  Accounts receivable
305

 
1,874

  Inventory
1,689

 
(264
)
  Prepaid expenses
(984
)
 
(2,066
)
  Other current assets
87

 
209

  Accounts payable
(379
)
 
(4,265
)
  Accrued compensation
(763
)
 
(5,640
)
  Accrued expenses
(942
)
 
493

  Income taxes
2,071

 
411

  Other liabilities
(618
)
 
132

Net cash flows from operating activities
10,640

 
(977
)
 
 
 
 
Cash flows from investing activities:
 
 
 
 Purchases of equipment
(923
)
 
(2,008
)
 Purchase of Stability Inc., net of cash acquired

 
(7,631
)
 Fixed maturity securities redemption

 
500

 Patent application costs
(46
)
 
(147
)
Net cash flows from investing activities
(969
)
 
(9,286
)
 
 
 
 
Cash flows from financing activities:
 
 
 
 Proceeds from exercise of stock options
1,865

 
1,138

 Stock repurchase under repurchase plan
(12,666
)
 
(3,530
)
 Stock repurchase for tax withholdings on vesting of restricted stock
(2,327
)
 
(684
)
 Deferred financing costs

 
(20
)
 Payments under capital lease obligations
(10
)
 
(10
)
Net cash flows from financing activities
(13,138
)
 
(3,106
)
 
 
 
 
Net change in cash
(3,467
)
 
(13,369
)
 
 
 
 
Cash and cash equivalents, beginning of period
34,391

 
28,486

Cash and cash equivalents, end of period
$
30,924

 
$
15,117

See notes to condensed consolidated financial statements

7



MIMEDX GROUP, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2017 AND 2016
1.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) from interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.  Changes to GAAP are established by the Financial Accounting Standards Board (“FASB”) in the form of Accounting Standards Updates (“ASU’’) to the FASB’s Accounting Standards Codification (“ASC”).  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the results of operations for the periods presented have been included.  Operating results for the three months ended March 31, 2017 and 2016, are not necessarily indicative of the results that may be expected for the fiscal year.  The balance sheet at December 31, 2016, has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by GAAP for complete financial statements. 
You should read these condensed consolidated financial statements together with the historical consolidated financial statements of the Company for the year ended December 31, 2016, included in the Company's Annual Report on Form 10-K for the year ended December 31, 2016, filed with the SEC on March 1, 2017. 
The Company operates in one business segment, Regenerative Biomaterials, which includes the design, manufacture and marketing of products and tissue processing services for the Wound Care, Surgical, Sports Medicine, Ophthalmic and Dental market categories. The MiMedx allograft product families include our: dHACM family with AmnioFix® and EpiFix® brands; Amniotic Fluid family with OrthoFlo brand; Umbilical family with EpiCord® and AmnioCord® brands; Placental Collagen family with CollaFix™ and AmnioFill® brands; and Bone family with Physio® brand. AmnioFix and EpiFix are our tissue technologies processed from human amniotic membrane; OrthoFlo is an amniotic fluid derived allograft;  EpiCord and AmnioCord are derived from the umbilical cord; Physio is a bone grafting material comprised of 100% bone tissue with no added carrier; and CollaFix, our next brand we plan to commercialize, is our collagen fiber technology, developed with our patented cross-linking polymers, designed to mimic the natural composition, structure and mechanical properties of musculoskeletal tissues in order to augment their repair. 
2.
Significant Accounting Policies
Please see Note 2 to the Company's Consolidated Financial Statements included in the Company’s Form 10-K for the fiscal year ended December 31, 2016, for a description of all significant accounting policies. 
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. 
Accounts Receivable
Accounts receivable represent amounts due from customers for which revenue has been recognized. Generally, the Company does not require collateral or any other security to support its receivables.
The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing receivables. The Company determines the allowance based on factors such as historical collection experience, customers' current creditworthiness, customer concentrations, age of accounts receivable balance and general economic conditions that may affect the customers' ability to pay. 
Inventories
Inventories are valued at the lower of cost or market, using the first–in, first-out (FIFO) method.  Inventory is tracked through Raw Material, WIP, and Finished Good stages as the product progresses through various production steps and stocking locations. Labor and overhead costs are absorbed through the various production processes 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 market demand.

8



Revenue Recognition

The Company sells its products through a combination of a direct sales force, independent stocking distributors and third - party representatives in the U.S. and independent distributors in international markets. The Company recognizes revenue when title to the goods and risk of loss transfers to customers, provided there are no material remaining performance obligations required of the Company or any matters of customer acceptance. The Company records revenues from sales to our independent stocking distributors at the time the product is shipped to the distributor. Our stocking distributors, who sell the products to their customers or sub-distributors, contractually take title to the products and assume all risks of ownership at the time of shipment. Our stocking distributors are obligated to pay us the contractually agreed upon invoice price within specified terms regardless of when, if ever, they sell the products. Our stocking distributors do not have any contractual rights of return or exchange other than for defective product or shipping error; however, in limited situations, we do accept returns or exchanges at our discretion.
A portion of the Company’s revenue is generated from inventory maintained at hospitals or physicians' offices. For these products, revenue is recognized at the time the product has been used or implanted. The Company records estimated sales returns, discounts and allowances as a reduction of net sales in the same period revenue is recognized.
Significant terms of our consignment agreements state that title to the inventory remains with the Company until the product, which has been segregated by the consignee, is withdrawn and therefore purchased by the consignee. Consignee accepts all risk of loss and full responsibility for any product in the consignment inventory that may be opened, lost, stolen or damaged. The Company recognizes revenue when we are notified that product has been used or implanted.
Some of the Company’s sales to Government accounts, including the Department of Veterans Affairs, are made through a distributor relationship with AvKARE Inc., which is a veteran-owned General Services Administration Federal Supply Schedule (FSS) contractor. The Company's agreement with AvKARE expires, subject to certain for-cause termination rights, on June 30, 2017. The Company may also elect to terminate the agreement without cause and pay a termination fee to AvKARE as specified in the agreement. Upon termination of the agreement, the parties may mutually agree to extend the agreement or the Company has an obligation to repurchase AvKARE’s remaining inventory, if any, within ninety (90) days in accordance with the terms of the Agreement. The agreement provides that the parties intend for AvKARE’s inventory to be minimal at the end of the term.
We make estimates of potential future sales returns, discounts and allowances related to current period product revenue and these are reflected as a reduction of revenue in the same period revenue is recognized. We base our estimate for sales returns, discounts and allowances on historical sales and product return information, including historical experience and actual and projected trend information as well as projected sales returns based on estimated usage and contractual arrangements. These estimates have historically been consistent with actual results.
We continually evaluate new and current customers, including our stocking distributors, for collectability based on various factors including past history with the customer, evaluation of their credit worthiness, and current economic conditions. We only record revenue when collectability is reasonably assured. 
Acquisitions
Results of operations of acquired companies are included in the Company’s results of operations as of the respective acquisition dates. The purchase price of each acquisition is allocated to the net assets acquired based on estimates of their fair values at the date of the acquisition. Any purchase price in excess of these net assets is recorded as goodwill. The allocation of purchase price in certain cases may be subject to revision based on the final determination of fair values during the measurement period, which may be up to one year from the acquisition date.

Contingent consideration is recognized at the estimated fair value on the acquisition date. Subsequent changes, after the measurement period has expired, to the fair value of contingent payments are recognized in earnings. Contingent payments related to acquisitions consist of an earn out based on sales less direct production costs, and are valued using discounted cash flow techniques. The fair value of these payments is based upon probability-weighted future revenue estimates and increases or decreases as revenue estimates or expectation of timing of payments changes.
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 and are included in Intangible Assets in the Condensed Consolidated Balance Sheets. The Company capitalized approximately $46,000 of

9



patent costs during the first three months of 2017. The Company capitalized approximately $147,000 of patent costs during the first three months of 2016.
Treasury Stock
The Company accounts for the purchase of treasury stock under the cost method. Treasury stock which is reissued for the exercise of option grants and the issuance of restricted stock grants is accounted for on a first - in first - out (FIFO) basis.
Recently Issued and Adopted Accounting Standards
The Company considers the applicability and impact of all Accounting Standards Updates ("ASUs") issued, both effective and
not yet effective. In May 2014, the FASB issued ASU 2014-09, “Revenue Recognition - Revenue from Contracts with
Customers” (ASU 2014-09) that requires companies to recognize revenue when a customer obtains control rather than when
companies have transferred substantially all risks and rewards of a good or service. This update is effective for annual reporting
periods beginning on or after December 15, 2017 and interim periods therein and requires expanded disclosures. We are in the process of evaluating the impact of the adoption of the standard. We have identified one revenue stream from our contracts with customers, product sales. While our evaluation of our contracts for product sales is in its initial stage, based upon the results of our work to date we currently do not expect the application of the new standard to these contracts to have a material impact to our consolidated financial statements either at initial implementation or on an ongoing basis.

In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)". The core principle of Topic 842 is that a lessee
should recognize the assets and liabilities that arise from both capital and operating leases. ASU 2016-02 is effective for public companies for annual reporting periods beginning after December 15, 2018, and interim periods within those fiscal years. The guidance may be adopted prospectively or retrospectively and early adoption is permitted. The Company is currently assessing the impact the adoption of ASU 2016-02 will have on its consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for share-based payment award transactions including (a) income tax consequences; (b) classification of awards as either debt or equity liabilities; and (c) classification on the statement of cash flows.  The amendments are effective for public business entities for annual periods beginning after December 15, 2016, and interim periods within those annual periods.  The Company has adopted this ASU as of January 1, 2017. The primary amendment impacting the Company's financial statements is the requirement for excess tax benefits or shortfalls on the exercise of stock-based compensation awards to be presented in income tax expense in the Consolidated Statements of Income during the period the award is exercised as opposed to being recorded in Additional paid-in capital on the Consolidated Balance Sheets.  The excess tax benefit or shortfall is calculated as the difference between the fair value of the award on the date of exercise and the fair value of the award used to measure the expense to be recognized over the service period.  Changes are required to be applied prospectively to all excess tax benefits and deficiencies resulting from the exercise of awards after the date of adoption. The ASU requires a "modified retrospective" approach application for excess tax benefits that were not previously recognized in situations where the tax deduction did not reduce current taxes payable. For the three-month period ended March 31, 2017, the Company recorded an income tax benefit of $19,700 related to the excess tax benefit of exercised awards during the period, that would have been recorded in additional paid-in capital during prior years. As the end result is dependent on the future value of the Company's stock as well as the timing of employee exercises, the amount of future impact cannot be quantified at this time. The Company has elected to continue to estimate forfeitures expected to occur to determine the share-based compensation expense.

In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments”. The update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. This ASU is effective for public business entities for fiscal years beginning after December 15, 2017 and for interim periods within those fiscal years. The amendments in this update may be applied retrospectively or prospectively and early adoption is permitted. The Company is currently assessing the impact of the adoption of ASU 2016-15 will have on its consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04,"Intangibles-Goodwill and Other (Topic 350) Simplifying the Test for Goodwill Impairment." The update eliminates Step 2 from the goodwill impairment test. This ASU is effective for fiscal years beginning after December 15, 2019. The amendments in this update should be applied on a prospective basis. The Company is currently assessing the impact the adoption of ASU 2017-04 will have on its consolidated financial statements.
All other ASUs issued and not yet effective for the three months ended March 31, 2017, and through the date of this report, were assessed and determined to be either not applicable or are expected to have minimal impact on the Company's financial position or results of operations.


10



3.
Liquidity and Management’s Plans
As of March 31, 2017, the Company had approximately $30,924,000 of cash and cash equivalents.  The Company reported total current assets of approximately $121,898,000 and current liabilities of approximately $49,600,000 as of March 31, 2017.  The Company believes that its anticipated cash from operating and financing activities, existing cash and cash equivalents and availability under its line of credit will enable the Company to meet its operational liquidity needs and fund its planned investing activities for the next year.


4. Acquisition of Stability Inc.

On January 13, 2016, the Company completed the acquisition of Stability Inc., d/b/a Stability Biologics ("Stability"), a provider of human tissue products to surgeons, facilities and distributors serving the surgical, spine and orthopedic sectors of the healthcare
industry. As a result of this transaction, the Company acquired all of the outstanding shares of Stability in exchange for
$6,000,000 cash, $3,346,000 in stock, represented by 441,009 shares of our common stock, and assumed debt of $1,771,000. Additional one time costs incurred in connection with the transaction totaled $1,088,000 and were included within selling, general and administrative expenses on the consolidated statements of operations in the first quarter of 2016. Contingent consideration may be payable in a formula determined by sales less certain expenses for the years 2016 and 2017. The contingent consideration was valued at $17,450,000 as part of the acquisition accounting and is shown in the schedule below as fair value of earn-out. The Company used a third party specialist to assist us with the valuation. However, the purchase price allocation figures should be attributed to the Company and not to the third party valuation firm. The Company anticipates that any payments to be made will approximate the fair value of the contingent consideration of $17,450,000 determined as of the acquisition date and we have not adjusted the accrued earn-out liability recorded as part of the acquisition accounting except to record interest expense. The contingent consideration was classified as a liability and is adjusted to fair value at each reporting period until payment is made with the changes in fair value recognized as a period expense.

The Company has evaluated the contingent consideration for accounting purposes under GAAP and has determined that the
contingent consideration is within the scope of ASC 480 "Distinguishing Liabilities from Equity" whereby a financial instrument,
other than an outstanding share, that embodies a conditional obligation that the issuer may settle by issuing a variable number
of its equity shares shall be classified as a liability if, at inception, the monetary value of the obligation is based solely or
predominantly on variations in something other than the fair value of the issuer’s equity shares.

The actual purchase price was based on cash paid, the fair value of our stock on the date of the acquisition, and direct costs
associated with the acquisition. The fair value of stock consideration was determined as set forth below:
Common Share Price at Closing on January 13, 2016
$
8.43

Multiplied by: Number of Common Shares Transferred to the Sellers
441,009

Indicated Value of Equity Consideration (on a Freely Tradable Interest Basis)
$
3,717,706

Less: Marketability Discount @ 10% [a]
(371,771
)
Fair Value of Equity Consideration Transferred
$
3,345,935

[a] Shares transferred to the Stability sellers were restricted securities pursuant to Rule 144. As such, the sellers
were prevented from selling the shares for a period of six months. In addition, they were subject to contractual
lockups which restricted sales for up to twelve months post transaction.

The actual purchase price has been allocated as follows (in thousands):


11



Cash paid at closing
 
$
6,000

Working capital adjustment
 
(480
)
Common stock issued (441,009 shares)
 
3,346

Assumed debt
 
1,771

Fair value of earn-out
 
17,450

Total fair value of purchase price
 
$
28,087

 
 
 
Net assets acquired:
 

Debt-free working capital
 
$
2,456

Other long-term assets
 
199

Property, plant and equipment
 
1,375

Deferred tax liability
 
(5,896
)
Subtotal
 
(1,866
)
Intangible assets:
 
 
Customer relationships
 
5,330

Patents and know-how
 
6,790

Trade names and trademarks
 
450

Non compete agreements
 
830

Licenses and permits
 
390

Subtotal
 
13,790

Goodwill
 
16,163

Total Assets Purchased
 
$
28,087

 
 
 
Working capital and other assets were composed of the following (in thousands):
 
 
Working capital
 
 
Cash
 
$
140

Prepaid Expenses and other current assets
 
100

Accounts receivable
 
2,001

Federal and state taxes receivable
 
28

Inventory
 
9,002

Accounts payable and accrued expenses
 
(8,815
)
Debt-free working capital
 
$
2,456

 
 
 
Current portion of long term debt
 
$
(194
)
Long-term debt
 
(560
)
Line of Credit
 
(932
)
Shareholder loan
 
(85
)
Assumed Debt
 
(1,771
)
 
 

Net working capital
 
$
685


The acquisition was accounted for as a purchase business combination as defined by FASB Topic 805 - "Business Combinations". The fair value of the contingent consideration is measured as a Level 3 instrument. The contingent consideration liability is recorded at fair value on the acquisition date. Increases or decreases in the fair value of contingent consideration can result from changes in anticipated revenue levels and changes in assumed discount periods and rates. As the fair value measured is based on significant inputs that are not observable in the market, they are categorized as Level 3. The income valuation approach was applied in determining the fair value of the contingent consideration using a discounted cash flow valuation technique with significant unobservable inputs comprised of projected sales and certain expenses.

12



The following table presents a reconciliation of those liabilities measured at fair value on a recurring basis using unobservable inputs (Level 3) (in thousands):


Contingent


Consideration


Obligation
Balance December 31, 2016

$
17,450

Changes in fair value of contingent consideration (a)

59

Payment of contingent consideration


Balance March 31, 2017

$
17,509

(a) Amount is included in interest expense in the consolidated statement of operations.

The values assigned to intangible assets are subject to amortization. The intangible assets were assigned the following lives for amortization purposes:
 
 
Estimated useful life (in years)
Intangible asset:
 
 
Customer relationships
 
12
Patents and know-how
 
20
Trade name and Trademarks
 
Indefinite
Non compete agreements
 
4
Licenses and permits
 
2

Goodwill consists of the excess of the purchase price paid over the identifiable net assets and liabilities acquired at fair value.
Goodwill is attributable to the assembled workforce of Stability and the synergies expected to arise following the acquisition. Goodwill is not expected to be deductible for tax purposes. Goodwill was determined using the residual method based on an independent appraisal of the assets and liabilities acquired in the transaction. The Company used a third party specialist to assist it with estimating the fair value of Goodwill. However, the purchase price allocation figures and residual Goodwill should be attributed to the Company and not to the third party valuation firm. Goodwill is tested for impairment on an annual basis as defined by FASB Topic 350 - "Intangibles - Goodwill and Other".

Goodwill Reconciliation (in thousands):
Balance at March 31, 2016

$
26,690

Goodwill Measurement Period Adjustments in 2016 (a)

(10,527
)
Balance at March 31, 2017

$
16,163

(a) Goodwill is the result of a residual calculation



The changes in the preliminary fair values of the acquired assets and liabilities were due to adjustments made to the prospective financial information ("PFI") to better reflect an expected case from a market participant's perspective. As the earn-out is limited to the gross profit margin for the first two years after the acquisition, the adjustment to the PFI had a decreasing impact on the estimated fair value of the earn-out at the acquisition date, which resulted in a lower total purchase consideration and a reduction of the estimated fair value of the identifiable intangible assets.

In 2016, during the measurement period, management determined that the initial PFI should be adjusted to better reflect an expected case from a market participant's perspective. At the time of the acquisition, management believed that certain of the acquired company's products had reached certain marketability milestones. Management subsequently concluded that these milestones had indeed not yet been achieved. Also, at the time of the acquisition Management believed that certain manufacturing processes were at standards aligned with our overall company standards. Management subsequently concluded that the standards required improvements. These factors resulted in a lower revenue trajectory in the periods that apply to the earn-out thus reducing the fair value of the earn-out.



13



The measurement period adjustments were as follows (in thousands):

 
 
Provisional Per
 
Measurement Period
 
 
 
 
March 31, 2016 Form 10Q
 
Adjustments
 
Final
 
 
 
 
 
 
 
Cash paid at closing
 
$
6,000

 
$

 
$
6,000

Working capital adjustment
 

 
(480
)
 
(480
)
Common stock issued
 
3,346

 

 
3,346

Assumed debt
 
1,771

 

 
1,771

Fair value of earn-out
 
33,240

 
(15,790
)
 
17,450

Total fair value of purchase price
 
$
44,357

 
$
(16,270
)
 
$
28,087

 
 
 
 
 
 
 
Net assets acquired:
 
 
 
 
 
 
Debt-free working capital
 
$
2,382

 
$
74

 
$
2,456

Other assets, net
 
199

 

 
199

Property, plant and equipment
 
1,375

 

 
1,375

Deferred tax liability
 
(9,899
)
 
4,003

 
(5,896
)
Subtotal
 
$
(5,943
)
 
$
4,077

 
$
(1,866
)
Intangible assets:
 
 
 
 
 
 
Customer relationships
 
$
8,920

 
$
(3,590
)
 
$
5,330

Patents and know-how
 
10,230

 
(3,440
)
 
6,790

Trade names and trademarks
 
1,000

 
(550
)
 
450

Non compete agreements
 
2,700

 
(1,870
)
 
830

Licenses and permits
 
760

 
(370
)
 
390

Subtotal
 
23,610

 
(9,820
)
 
13,790

Goodwill
 
26,690

 
(10,527
)
 
16,163

Total Assets Purchased
 
$
44,357

 
$
(16,270
)
 
$
28,087



Pursuant to the terms of the earn-out arrangement, the Company is obligated to pay, for each of the years ending December 31, 2016 and 2017, an amount equal to one times the gross profit margin from (a) the net sales of Stability products sold by Stability's or the Company's sales personnel and (b) the net sales of Company products sold by Stability's sales personnel; provided, however, if the amount of such net sales for either earn-out period is less than $12 million, the earn-out amount will decrease to 0.5 times the gross profit margin for such earn-out period. The full details of the earn-out arrangement are set forth in the acquisition agreement which is filed as Exhibit 2.1 to the Company's Form 8-K filed on January 13, 2016.

The amount of the contingent consideration recognized as of the acquisition date is $17,450,000. The structure of the earn-out is such that the Sellers should always earn at least some payout during the applicable periods. The payout to the Sellers is not capped, and therefore there is no pre-determined upper bound to the undiscounted range. Therefore an estimate of the range of outcomes cannot be estimated.

As the Company is managed and operates in one segment, and since Stability was merged with the Company's existing operations, the Company has determined that disaggregation of the Company's operating results to provide the amount of revenue and earnings for Stability since the acquisition date is impracticable.






14



5. Inventories
Inventories consisted of the following items as of March 31, 2017, and December 31, 2016 (in thousands):
 
March 31, 2017
 
December 31, 2016
Raw materials
$
952

 
$
1,148

Work in process
6,433

 
6,677

Finished goods
9,639

 
10,817

 Inventory, gross
17,024

 
18,642

Reserve for obsolescence
(974
)
 
(828
)
 Inventory, net
$
16,050

 
$
17,814


6. Property and Equipment 
Property and equipment consisted of the following as of March 31, 2017, and December 31, 2016 (in thousands):
 
March 31,
2017
 
December 31,
2016
Leasehold improvements
$
3,306

 
$
3,274

Lab and clean room equipment
9,565

 
8,666

Furniture and office equipment
7,810

 
7,051

Construction in progress
2,533

 
3,300

   Property and equipment, gross
23,214

 
22,291

Less accumulated depreciation
(9,451
)
 
(8,505
)
   Property and equipment, net
$
13,763

 
$
13,786

Included in net property and equipment is approximately $427,000 of equipment covered under capital leases. The corresponding liability of approximately $21,000 is included in other liabilities in the accompanying Condensed Consolidated Balance Sheets. Interest rates for these leases range from approximately 3% to 12% with maturity dates to January 2018.
Also included in net property and equipment is approximately $1.0 million in leasehold improvements paid for by the landlord of the Company's main facility with a corresponding liability included in other liabilities which is amortized over the term of the lease.
Depreciation expense for the three months ended March 31, 2017 and 2016, was approximately $946,000 and $734,000, respectively.












15



7.
Intangible Assets and Royalty Agreement
Intangible assets are summarized as follows (in thousands):
 
Weighted
Average
Amortization
Lives
 
March 31, 2017
 
December 31, 2016
 
 
 
Cost
 
Cost
Licenses (a) (b) (c) (d)
7 years
 
$
1,399

 
$
1,399

Patents & Know How (b) (d)
19 years
 
14,841

 
14,839

Customer & Supplier Relationships (b) (d)
13 years
 
9,091

 
9,091

Tradenames & Trademarks (d)
indefinite
 
1,458

 
1,458

Non-compete agreements
4 years
 
830

 
830

In Process Research & Development (b)
various
 
25

 
25

Patents in Process (c)
various
 
2,662

 
2,618

Total
 
 
30,306

 
30,260

Less Accumulated amortization and impairment charges
 
 
(7,518
)
 
(6,992
)
Net
 
 
$
22,788

 
$
23,268

(a)
On January 29, 2007, the Company acquired a license from Shriners Hospitals for Children and University of South Florida Research Foundation, Inc. in the amount of $996,000.  Within 30 days after the receipt by the Company of approval by the FDA allowing the sale of the first licensed product, the Company is required to pay an additional $200,000 to the licensor.  Due to its contingent nature, this amount is not recorded as a liability. The Company will also be required to pay a royalty of 3% on all commercial sales revenue from the licensed products. The Company is also obligated to pay a $50,000 minimum annual royalty payment over the life of the license. As of March 31, 2017, the license was fully amortized.
(b)
On January 5, 2011, the Company acquired Surgical Biologics, LLC.  As a result, the Company recorded intangible assets for Customer & Supplier Relationships of $3,761,000, Patents & Know-How of $7,690,000, Licenses of $13,000, Tradenames & Trademarks of $1,008,000 and In-Process Research & Development of $25,000. For the three months ended March 31, 2017, approximately $2,000 of costs associated with patents granted during the period were capitalized and included in Patents & Know-How subject to amortization over the life of the patents.
(c)
Patents in Process consist of capitalized external legal and other registration costs in connection with internally developed tissue-based patents that are pending. Once issued, the costs associated with a given patent will be included in Patents & Know-How under intangible assets subject to amortization.
(d)
On January 13, 2016, the Company acquired Stability. As a result, the Company recorded intangible assets for Patents & Know - How of $6,790,000, Customer Relationships of $5,330,000, Non - compete agreements of $830,000, Tradenames & Trademarks of $450,000 and Licenses of $390,000.
Amortization expense for the three months ended March 31, 2017 and 2016, was approximately $526,000 and $810,000, respectively.

16



Expected future amortization of intangible assets as of March 31, 2017, is as follows (in thousands):
Year ending December 31,
Estimated
Amortization
Expense
2017 (a)
$
1,518

2018
1,830

2019
1,830

2020
1,622

2021
1,622

Thereafter
12,908

 
$
21,330

(a) Estimated amortization expense for the year ending December 31, 2017, includes only amortization to be recorded after March 31, 2017.

8. Credit Facility

On October 12, 2015, the Company and its subsidiaries entered into a Credit Agreement (the "Credit Agreement") with
certain lenders and Bank of America, N.A., as administrative agent. The Credit Agreement establishes a senior secured
revolving credit facility in favor of the Company with a maturity date of October 12, 2018 and an aggregate lender commitment
of up to $50 million. The Credit Agreement also provides for an uncommitted incremental facility of up to $35 million, which
can be exercised as one or more revolving commitment increases or new term loans, all subject to certain customary terms and
conditions set forth in the Credit Agreement. The obligations of the Company under the Credit Agreement are guaranteed by
the Company's subsidiaries. The obligations of the loan parties under the Credit Agreement and the other credit documents are
secured by liens on and security interests in substantially all of the assets of each of the loan parties and a pledge of the equity
interests of each subsidiary owned by a loan party, subject to certain customary exclusions. Borrowings under the facility will
bear interest at LIBOR plus 1.5% to 2.25%. Fees paid in connection with the initiation of the credit facility totaled approximately $500,000. These deferred financing costs are being amortized to interest expense over the three-year life of the
facility. The Credit Agreement contains customary representations, warranties, covenants, and events of default, including
restrictions on certain payments of dividends by the Company. As of March 31, 2017, there were no outstanding revolving
loans under the credit facility, and the Company was in compliance with all covenants under the Credit Agreement.

9. Net Income Per Share
Basic net income per common share is computed using the weighted-average number of common shares outstanding during the period.  Diluted net income per common share is computed using the weighted-average number of common and dilutive common equivalent shares from stock options, restricted stock and warrants using the treasury stock method. 
The following table sets forth the computation of basic and diluted net income per share (in thousands except share data):
 
Three Months Ended March 31,
 
2017
 
2016
Net income
$
4,327

 
$
1,197

Denominator for basic earnings per share - weighted average shares
105,708,526

 
105,538,271

Effect of dilutive securities: Stock options, restricted stock, and warrants outstanding(a)
8,022,065

 
6,501,589

Denominator for diluted earnings per share - weighted average shares adjusted for dilutive securities
113,730,591

 
112,039,860

Income per common share - basic
$
0.04

 
$
0.01

Income per common share - diluted
$
0.04

 
$
0.01


17



(a) Securities outstanding that are included in the computation above, utilizing the treasury stock method are as follows:
 
Three Months Ended March 31,
 
2017
 
2016
Outstanding Stock Options
7,105,788

 
5,981,250

Restricted Stock Awards
916,277

 
520,339

 
8,022,065

 
6,501,589


10. Equity
Stock Incentive Plans 

The Company has four share-based compensation plans which provide for the granting of equity awards, including qualified incentive and non-qualified stock options, stock appreciation awards and restricted stock awards to employees, directors, consultants and advisors: the MiMedx Group, Inc. 2016 Equity and Cash Incentive Plan (the "2016 Plan"), which was approved by shareholders on May 18, 2016; the MiMedx Group, Inc. Assumed 2006 Stock Incentive Plan (the “Assumed 2006 Plan”); the MiMedx Inc. 2007 Assumed Stock Plan (the “Assumed 2007 Plan”); and the MiMedx Group Inc. Amended and Restated Assumed 2005 Stock Plan (the “Assumed 2005 Plan”). The awards are subject to a vesting schedule as set forth in each individual agreement. The Company currently intends to use only the 2016 Plan to make future grants.

Activity with respect to the stock options is summarized as follows:
 
Number
 of
Shares
 
Weighted-
Average
Exercise
Price
 
Weighted-Average
Remaining
Contractual Term
(in years)
 
Aggregate
Intrinsic
Value
Outstanding at January 1, 2017
12,552,608

 
$
3.61

 
 
 
 
Granted

 
$

 
 
 
 
Exercised
(387,653
)
 
$
4.68

 
 
 
 
Unvested options forfeited
(22,971
)
 
$
6.46

 
 
 
 
Vested options expired
(56,329
)
 
$
5.80

 
 
 
 

Outstanding at March 31, 2017
12,085,655

 
$
3.55

 
5.24
 
$
72,155,029

Vested at March 31, 2017
11,824,156

 
$
3.48

 
5.20
 
$
71,633,353

Vested or expected to vest at March 31, 2017 (a)
12,057,583

 
$
3.55

 
5.24
 
$
72,148,754

(a)
Includes forfeiture-adjusted unvested shares.
The intrinsic value of the options exercised during the three months ended March 31, 2017, was approximately $1,665,512

18



Following is a summary of stock options outstanding and exercisable at March 31, 2017:
 
Options Outstanding
 
Options Exercisable
Range of Exercise Prices
Number outstanding
 
Weighted-Average
Remaining
Contractual Term
(in years)
 
Weighted-
Average
Exercise
Price
 
Number Exercisable
 
Weighted-
Average
Exercise Price
$0.50 - $0.76
431,429

 
2.1
 
$
0.72

 
431,429

 
$
0.72

$0.87 - $1.35
4,322,236

 
4.4
 
1.19

 
4,318,569

 
1.19

$1.40 - $2.45
1,362,424

 
3.8
 
1.92

 
1,362,424

 
1.92

$2.66 - $3.99
850,513

 
5.6
 
3.07

 
830,513

 
3.07

$4.19 - $6.38
2,808,206

 
6.2
 
5.37

 
2,712,379

 
5.34

$6.45 - $9.78
2,209,847

 
6.9
 
7.30

 
2,107,346

 
7.28

$9.90- $10.99
101,000

 
7.7
 
10.40

 
61,496

 
10.43

 
12,085,655

 
5.2
 
$
3.55

 
11,824,156

 
$
3.48

 
Total unrecognized compensation expense related to granted stock options at March 31, 2017, was approximately $427,135 and will be charged to expense ratably through October 2017. 
The fair value of options granted by the Company is estimated on the date of grant using the Black-Scholes-Merton option-pricing model that uses assumptions for expected volatility, expected dividends, expected term, and the risk-free interest rate.  Expected volatilities are based on historical volatility of peer companies and other factors estimated over the expected term of the options.  The term of employee options granted is derived using the “simplified method,” which computes expected term as the mid point between the weighted average time to vesting and the contractual maturity. The simplified method was used due to the Company's lack of sufficient historical data to provide a reasonable basis upon which to estimate the expected term due to the limited period of time its equity shares have been publicly traded.  The term for non-employee options is generally based upon the contractual term of the option.  The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for the period of the expected term or contractual term as described.
There were no options granted during the three months ended March 31, 2017 and March 31, 2016.
Restricted Stock Awards                                                    
Activity with respect to restricted stock awards for the three months ended March 31, 2017 is summarized as follows and includes 17,539 shares of common stock valued at approximately $166,000 which were issued under the 2016 Plan to a consultant in return for services performed: 
 
Number
of
Shares
 
Weighted-Average Grant Date
Fair Value
Unvested at January 1, 2017
3,828,445

 
$8.53
Granted
2,509,750

 
8.30
Vested
(1,007,272
)
 
8.54
Forfeited
(93,450
)
 
8.74

Unvested at March 31, 2017
5,237,473

 
$8.42
As of March 31, 2017, there was approximately $36,153,619 of total unrecognized stock-based compensation related to time-based, nonvested restricted stock.  That expense is expected to be recognized on a straight-line basis over a weighted-average period of 2.34 years, which approximates the remaining vesting period of these grants. All shares noted above as unvested are considered issued and outstanding at March 31, 2017.






19



For the three months ended March 31, 2017 and 2016, the Company recognized stock-based compensation as follows (in thousands): 
 
Three Months Ended March 31,
 
2017
 
2016
Cost of sales
$
136

 
$
96

Research and development
134

 
205

Selling, general and administrative
4,401

 
4,314

 
$
4,671

 
$
4,615

Treasury Stock
On May 12, 2014, our Board of Directors authorized the repurchase of up to $10 million of our common stock from time to time, through December 31, 2014. The Board subsequently extended the program until December 31, 2017, and increased the total authorization to $86 million. The timing and amount of repurchases will depend upon the Company's stock price, economic and market conditions, regulatory requirements and other corporate considerations. The Company may initiate, suspend or discontinue purchases under the stock repurchase program at any time.
For the three months ended March 31, 2017, the Company purchased 1,540,398 shares of its common stock for a purchase price of approximately $12,620,000 before brokerage commissions of approximately $46,000. As of March 31, 2017, the Company had approximately $17,316,000 of availability remaining under the repurchase program. In addition, the Company purchased during the quarter 285,469 shares surrendered by employees to satisfy tax withholding obligations upon vesting of restricted stock.
Additionally, for the three months ended March 31, 2017, the Company reissued 1,820,675 shares from the Treasury for restricted stock grants and stock option exercises, net of forfeitures, with an aggregate carrying value of approximately $14,227,000.
11. Income taxes 

The effective tax rates for continuing operations of 28.4% and 15.2% for the three months ended March 31, 2017 and March 31, 2016, respectively, were determined using an estimated annual effective tax rate and includes the impact of discrete items of approximately ($355,000) in 2017 and ($350,000) in 2016. As of the end of March 2017, the projected annual effective tax rate for 2017 is 34.2%. The discrete impact to the tax expense for the first quarter of 2017 related to ASU 2016-09 was insignificant. See Note 2.

12. Supplemental disclosure of cash flow and non-cash investing and financing activities:
    
Selected cash payments, receipts, and noncash activities are as follows (in thousands):
 
Three Months Ended March 31,
 
2017
 
2016
Cash paid for interest
$
100

 
$
56

Income taxes paid
58

 
139

Stock issuance of 441,009 shares in connection with acquisition

 
3,346

Stock issuances of 17,539 and 20,406 shares in exchange for services performed, respectively
166

 
173


20



13. Contractual Commitments and Contingencies
Contractual Commitments
In addition to the capital leases noted above in Note 6, the Company has entered into operating lease agreements for facility space and equipment. These leases expire over the next seven years and generally contain renewal options. The Company anticipates that most of these leases will be renewed or replaced upon expiration. The Company also has commitments for meeting space.
The estimated annual lease payments, meeting space commitments are as follows (in thousands):
12-month period ended March 31,
2018
$
2,612

2019
1,790

2020
1,805

2021
1,353

2022
1,241

Thereafter
1,279

 
$
10,080


Rent expense for the three months ended March 31, 2017 and 2016, was approximately $434,000 and $423,000, respectively, and is allocated among cost of sales, research and development, and selling, general and administrative expenses.

Letters of Credit
As a condition of the lease for the Company's main facility, the Company is obligated under standby letters of credit in the amount of approximately $52,000. These obligations are reduced at various times over the life of the lease.
FDA Untitled Letter and Draft Guidance
On August 28, 2013, the FDA issued an Untitled Letter alleging that the Company's micronized allografts do not meet the criteria for regulation solely under Section 361 of the Public Health Service Act and that, as a result, MiMedx would need a biologics license to lawfully market those micronized products. Since the issuance of the Untitled Letter, the Company has been in discussions with the FDA to communicate its disagreement with the FDA's assertion that the Company's micronized allografts are more than minimally manipulated. To date, the FDA has not changed its position that the Company's micronized products are not eligible for marketing solely under Section 361 of the Public Health Service Act. The Company continues to market its micronized products but is also pursuing the Biologics License Application (“BLA”) process for certain of its micronized products.




On December 22, 2014, the FDA issued for comment “Draft Guidance for Industry and FDA Staff: Minimal Manipulation of Human Cells, Tissues, and Cellular and Tissue-Based Products.” Essentially the Minimal Manipulation draft guidance takes the same position with respect to micronized amniotic tissue that it took in the Untitled Letter to MiMedx 16 months earlier. The Company submitted comments asserting that the Minimal Manipulation draft guidance represents agency action that goes far beyond the FDA’s statutory authority, is inconsistent with existing HCT/P regulations and the FDA’s prior positions, and is internally inconsistent and scientifically unsound.

On October 28, 2015, the FDA issued for comment, "Draft Guidance for Industry and FDA Staff: Homologous Use of Human Cells, Tissues, and Cellular and Tissue-Based Products." The Company submitted comments on this Homologous Use draft guidance as well. On September 12 and 13, 2016, the FDA held a public hearing to obtain input on the Homologous Use draft guidance and the previously released Minimal Manipulation draft guidance, as well as other recently issued guidance documents on HCT/Ps. The Company awaits further decision from FDA on the draft guidances, but anticipates this will be a lengthy process.

If the FDA does allow the Company to continue to market a micronized form of its sheet allografts without a biologics license either prior to or after finalization of the draft guidance documents, it may impose conditions, such as labeling restrictions and compliance with cGMP. Although the Company is preparing for these requirements in connection with its pursuit of a BLA for certain of its micronized products, earlier compliance with these conditions requires significant additional time and cost investments by the Company. It is also possible that the FDA will not allow the Company to market any form of a micronized product without a biologics license even prior to finalization of the draft guidance documents and could even require the

21



Company to recall its micronized products. Revenues from micronized products comprised approximately 10% of the Company's revenues in 2016.

Former Employee Litigation

On December 13, 2016, the Company filed lawsuits against former employees Jess Kruchoski (in the lawsuit styled MiMedx Group, Inc. v. Academy Medical, LLC, et. al. in the County Court of the Fifteenth Judicial Circuit in and for Palm Beach County, Florida (the “Florida Action”)) and Luke Tornquist (in the lawsuit styled MiMedx Group, Inc., v. Luke Tornquist in the Superior Court for Cobb County, Georgia, which was removed to the United States District Court for the Northern District of Georgia (the “Georgia Action”)).  Both the Florida and Georgia Actions assert claims against Messrs. Kruchoski and Tornquist that each of them violated their restrictive covenants entered into with the Company, that each of them misappropriated trade secrets of the Company, that each of them tortiously interfered with contracts between the Company and its customers and employees and that each of them breached his duty of loyalty owed to the Company, among other claims.  

On December 15, 2016, Messrs. Kruchoski and Tornquist filed a lawsuit in the United States District Court of Minnesota (the “Minnesota Action”) against the Company and the Company’s Chairman and Chief Executive Officer, Parker Petit. The plaintiffs in this lawsuit each claimed that their employment with the Company was terminated in retaliation for their complaints about the Company’s alleged business practices in violation of the Dodd-Frank Act, 15 U.S.C. § 78u-6(h); and was an unlawful discharge in violation of Minnesota Statutes Section 181.931 subdivision 1. Mr. Kruchoski also claimed that the termination of his employment with the Company constituted marital status discrimination and familial status discrimination in violation of the Minnesota Human Rights Act. Messrs. Kruchoski and Tornquist also claimed that Mr. Petit tortiously interfered with their employment relationships with the Company.

On January 26, 2017, the Company and Mr. Petit filed motions to dismiss the Minnesota Action.  In response, Messrs. Kruchoski and Tornquist voluntarily dismissed the Minnesota Action without prejudice on February 7, 2017. On February 7, 2017, Mr. Tornquist filed his Answer and Counterclaims in the Georgia Action wherein he asserted claims similar to those he had asserted in the Minnesota Action, with the exception that he did not include a claim of tortious interference against Mr. Petit.  On February 13, 2017, the Judge in the Georgia Action entered a Consent Order enforcing the restrictive covenants against Mr. Tornquist.  On February 27, 2017, the Judge in the Florida Action entered a Consent Order enforcing the restrictive covenants against Mr. Kruchoski.

On February 15, 2017, Mr. Kruchoski filed a new lawsuit in Georgia against MiMedx and Mr. Petit, making many of the same allegations in that suit as were made in the Minnesota suit, with the addition of claims against the Company and Mr. Petit for defamation.  In March, MiMedx and Mr. Petit both filed motions to dismiss Mr. Kruchoski’s claims, which motions are currently pending, arguing, among other things, that the claims should be brought in the Florida Action.

On December 29, 2016, MiMedx also initiated an action against former employee Mike Fox in the United States District Court for the Northern District of Illinois alleging breach of contract with respect to his restrictive covenants, breach of his duty of loyalty, breach of his fiduciary duty and for the return of certain MiMedx property.

On December 30, 2016, MiMedx initiated a lawsuit against former employee Harold Purdy and his company, Recon Medical Devices, LLC in the Texas state district court for Dallas County alleging breach of Mr. Purdy’s restrictive covenants, breach of Mr. Purdy’s duty of loyalty, conspiracy to breach other employees' duties to MiMedx, tortious interference, and misappropriation of trade secrets. Mr. Purdy has a pending counterclaim against MiMedx alleging breach of contract.

The Company continues to vigorously pursue its claims asserted in all of these actions and also to vigorously defend against the lawsuits and counterclaims asserted against it.

Patent Litigation

MiMedx continues to diligently enforce its intellectual property against several entities. Currently, there are four actions pending, as described below:

The Liventa Action

On April 22, 2014, the Company filed a patent infringement lawsuit in the United States District Court for the Northern District of Georgia against Liventa Bioscience, Inc. ("Liventa"), Medline Industries, Inc. ("Medline") and Musculoskeletal Transplant Foundation, Inc. ("MTF") for permanent injunctive relief and unspecified damages (the "Liventa Action"). In addition to the allegations of infringement of MiMedx's patents, the lawsuit asserts that Liventa and Medline knowingly and willfully made

22



false and misleading representations about their respective products to providers, patients, and in some cases, prospective investors. Though the terms of the agreement are confidential, the parties have reached a settlement of the false advertising claims for an undisclosed sum. The patent infringement claims are still pending as described below.

MiMedx asserts that Liventa (formerly known as AFCell Medical, Inc.), Medline and MTF infringed and continue to infringe certain of the Company's patents relating to the MiMedx dehydrated human amnion/chorion membrane ("dHACM") allografts. MTF is the tissue processor while Liventa and Medline are the distributors of the allegedly infringing products. On May 30, 2014, defendants filed answers to the Complaint, denying the allegations in the Complaint. They also raised affirmative defenses of non-infringement, invalidity, laches and estoppel. MTF and Medline also filed counterclaims seeking declaratory judgments of non-infringement and invalidity. Defendants filed parallel Inter Partes Review ("IPR") proceedings which are discussed below. We expect the case to go to trial in 2017.

The Bone Bank Action

On May 16, 2014, the Company also filed a patent infringement lawsuit against Transplant Technology, Inc. d/b/a Bone Bank Allografts ("Bone Bank") and Texas Human Biologics, Ltd. ("Biologics") for permanent injunctive relief and unspecified damages (the "Bone Bank Action"). The Bone Bank Action was filed in the United States District Court for the Western District of Texas. This lawsuit similarly asserts that Bone Bank and Biologics infringed certain of the Company's patents through the manufacturing and sale of their placental-derived tissue graft products. On July 10, 2014, Defendants filed an answer to the Complaint, denying the allegations in the Complaint. They also raised affirmative defenses of non-infringement and invalidity and filed counterclaims seeking declaratory judgments of non-infringement and invalidity. Defendants also filed parallel IPR proceedings which are further discussed below. We expect the case to go to trial in 2017.

The NuTech Action

On March 2, 2015, the Company filed a patent infringement lawsuit against NuTech Medical, Inc. ("NuTech") and DCI Donor Services, Inc. ("DCI") for permanent injunctive relief and unspecified damages. This lawsuit was filed in the United States District Court for the Northern District of Alabama. The lawsuit alleges that NuTech and DCI have infringed and continue to infringe the Company's patents through the manufacture, use, sale, and/or offering of their tissue graft product. The lawsuit also asserts that NuTech knowingly and willfully made false and misleading representations about its products to customers and/or prospective customers. The case is currently in the discovery phase.

The Vivex Action

On April 1, 2016, the Company also filed a patent infringement lawsuit against Vivex BioMedical (“Vivex”) for permanent injunctive relief and unspecified damages (the "Vivex Action"). The lawsuit was filed in the United States District Court for the Northern District of Georgia. The patent at issue is the 8,709,494 patent (the "'494" patent). Vivex answered the Company’s complaint and filed counterclaims of non-infringement and invalidity. On January 4, 2017, the Court granted a joint motion to stay the proceedings pending the outcome of the Bone Bank Action.

IPRs

In addition to defending the claims in the pending district court litigations, defendants in the Liventa and Bone Bank cases challenged certain of the Company's patents in several IPR proceedings to avoid the high burden of proof of proving invalidity by "clear and convincing evidence" in the district court litigations. An inter partes review (or "IPR") is a request for a specialized group within the United States Patent and Trademark Office to review the validity of a plaintiff's patent claims. The defendants in the Bone Bank Action challenged the validity of the Company's 8,597,687 (the "'687" patent) and the '494 patent; while the defendants in the Liventa Action challenged the validity of the Company's 8,372,437 and 8,323,701 patents (the "'437" and "'701" patents, respectively). 

On June 29, 2015, the Patent Trial and Appeals Board ("PTAB") denied the Bone Bank defendants' request for institution of an IPR with respect to the '494 patent (EpiFix) on all seven challenged grounds. On August 18, 2015, the PTAB also denied the Liventa defendants' request for institution of an IPR with respect to the '701 patent (AmnioFix) on all six challenged grounds. That is, the PTAB decided in each case that the defendants failed to establish a reasonable likelihood that defendants would prevail in showing any of the challenged claims of the '494 or the '701 patent were unpatentable.

On July 10, 2015, the PTAB issued an opinion allowing a review of the '687 patent to proceed, although on only two of the five challenged grounds. On July 7, 2016, the PTAB issued an opinion finding that the challenged claims, which relate to embossment and not configuration, were invalid for obviousness. The Company decided not to appeal the decision, as it

23



impacted a non-core patent. On August 18, 2015, the PTAB issued an opinion allowing a review of the '437 patent to proceed, although only on one of the seven challenged grounds. On August 16, 2016, the PTAB issued an opinion finding that the challenged claims were unpatentable.  MiMedx has filed an appeal of the PTAB’s decision regarding the '437 patent.

Further, on March 31, 2017, Vivex filed a petition to initiate a new IPR with respect to the ‘494 patent, which MiMedx intends to vigorously oppose.

14. Subsequent Events
None


24



Schedule II Valuation and Qualifying Accounts
MIMEDX GROUP, INC. AND SUBSIDIARIES
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
 Three Months Ended March 31, 2017 and 2016 (in thousands)
 
 
 
 
 
 
 
 
Balance at
Beginning of Period
Additions charged to Expense or Revenue
Deductions
and write-offs
Balance at
End of Period
 
 
 
 
 
 
For the three months ended March 31, 2017
 
 
 
 
 
 Allowance for doubtful accounts
 
$
4,842

$
1,950

$
(23
)
$
6,769

 Allowance for product returns
 
4,894

2,631

(2,488
)
5,037

 Allowance for obsolescence
 
828

435

(289
)
974

 
 
 
 
 
 
For the three months ended March 31, 2016
 
 
 
 
 
 Allowance for doubtful accounts
 
$
3,270

$
602

$

$
3,872

 Allowance for product returns
 
1,262

1,300

(911
)
1,651

 Allowance for obsolescence
 
397

235

(28
)
604

 
 
 
 
 
 


25



Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
The Company operates in one business segment, Regenerative Biomaterials, which includes the design, manufacture and marketing of products and tissue processing services for the Wound Care, Surgical, Sports Medicine, Ophthalmic and Dental market categories. The MiMedx allograft product families include our: dHACM family with AmnioFix® and EpiFix® brands; Amniotic Fluid family with OrthoFlo brand; Umbilical family with EpiCord® and AmnioCord® brands; Placental Collagen family with CollaFix™ and AmnioFill® brands; and Bone family with Physio® brand. AmnioFix and EpiFix are our tissue technologies processed from human amniotic membrane; OrthoFlo is an amniotic fluid derived allograft;  EpiCord and AmnioCord are derived from the umbilical cord; Physio is a bone grafting material comprised of 100% bone tissue with no added carrier; and CollaFix, our next brand we plan to commercialize, is our collagen fiber technology, developed with our patented cross-linking polymers, designed to mimic the natural composition, structure and mechanical properties of musculoskeletal tissues in order to augment their repair. 





26



Results of Operations Comparison for the Three Months Ended March 31, 2017, to the Three Months Ended March 31, 2016
Revenue

We recorded revenue for the quarter ended March 31, 2017 of $72.6 million, a $19.2 million or 36.0% increase over the quarter ended March 31, 2016 revenue of $53.4 million.
Wound Care revenue in the first quarter of 2017 was $54.9 million which represented a $15.6 million, or 39.7%, increase over the first quarter of 2016 revenue of $39.3 million. Surgical, Sports Medicine & Orthopedics (SSO) revenue in the first quarter of 2017 was $17.7 million which represented a $3.6 million, or 25.5%, increase over the first quarter of 2016 revenue of $14.1 million.
The increase of $19.2 million in the first quarter of 2017 revenue as compared to the first quarter of 2016 includes approximately $21.7 million in volume from market share gains and market expansion. Overall pricing was $0.6 million more favorable partially offsetting an unfavorable mix of $3.1 million.
We group our products into two categories: Wound Care and Surgical, Sports Medicine & Orthopedics (SSO) for purposes of the required disclosure under ASC 280-10-50-40. This grouping of products does not constitute a basis for resource allocation but is information intended to provide the reader with the ability to better understand our product categories. These groupings also do not meet the criteria under ASC 280-10-50-1 as a separate segment.
Gross Margin

Gross margins in the first quarter of 2017 were 88.0% as compared to 85.1% in the first quarter of 2016. Gross margins increased due to the impact of lower one-time inventory costs incurred in connection with the Stability acquisition as well as volume driven manufacturing efficiencies and yield improvement in our in Wound Care and SSO product lines.
Research and Development Expenses 

Our research and development expenses increased approximately $1.7 million, or 68.0%, to $4.2 million in the first quarter of 2017, compared to approximately $2.5 million in the first quarter of 2016. The increase is primarily related to increased investments in clinical trials, animal studies, lab supplies, consulting fees and personnel costs. We expect research and development expenses to remain in line with current spending on a percentage of sales basis moving forward.
Selling, General and Administrative Expenses
Selling, General and Administrative expenses for the first quarter of 2017 increased approximately $12.4 million, or 30.5%, to $53.0 million compared to $40.6 million for the first quarter of 2016. Selling expense increases were driven primarily by costs associated with the continued build out of our direct sales organization for both the Wound Care and SSO markets, where headcount grew by 54 during the past twelve months, as well as increased commissions due to higher sales volume. General and administrative expense increases were driven primarily by costs associated with adding personnel to support continued growth including reimbursement staffs and other support areas. Selling, General and Administrative expenses consist of personnel costs, professional fees, sales commissions, sales training costs, industry trade show fees and expenses, product promotions and product literature costs, facilities costs and other sales, marketing and administrative costs, depreciation and amortization and share-based compensation. Share-based compensation included in Selling, General and Administrative for the the first quarter of 2017 and 2016, was approximately $4.4 million and $4.3 million, respectively, an increase of approximately $0.1 million, or 2.3%.
Amortization of Intangible Assets
Amortization expense related to intangible assets decreased approximately $0.3 million, or 37.5%, to $0.5 million for the first quarter of 2017, compared to $0.8 million in the the first quarter of 2016. We amortize our intangible assets over a period of 4 to 19 years, which we believe represents the remaining useful lives of the patents underlying the licensing rights and intellectual property. We do not amortize goodwill but we test our goodwill at least annually for impairment and periodically evaluate other intangibles for impairment based on events or changes in circumstances as they occur.
Income Taxes
The effective tax rate increased approximately 13% when compared to the same period of 2016, primarily due to the smaller relative impact of discrete tax items on the larger quarterly pre-tax book income in 2017.


27



Liquidity and Capital Resources
As of March 31, 2017, the Company had approximately $30.9 million of cash and cash equivalents. The Company reported total current assets of approximately $121.9 million and total current liabilities of approximately $49.6 million at March 31, 2017, which represents a current ratio of 2.5 as of March 31, 2017.

On October 12, 2015, the Company and its subsidiaries entered into a Credit Agreement (the "Credit Agreement") with certain lenders and Bank of America, N.A., as administrative agent. The Credit Agreement established a senior secured revolving credit facility in favor of the Company, with an aggregate lender commitment of up to $50 million. As of the date hereof, there are no outstanding revolving loans under the Credit Agreement. The Credit Agreement also provides for an uncommitted incremental facility of up to $35 million, which can be exercised as one or more revolving commitment increases or new term loans, all subject to certain customary terms and conditions set forth in the Credit Agreement. The Credit Agreement contains customary covenants and events of default for senior secured credit agreements of this type. The covenants include (a) a requirement for the Company to maintain a maximum consolidated leverage ratio of 2.50:1.00; (b) a requirement for the Company to maintain a minimum consolidated fixed charge coverage ratio of 2.00:1.00; and (c) a requirement for the Company to maintain minimum liquidity of $10 million. As of March 31, 2017, the Company was in compliance with all of its covenants.
For the three months ended March 31, 2017, the Company repurchased 1,540,398 shares of its common stock for a purchase price of approximately $12,620,000, before brokerage commissions of approximately $46,000 bringing the total amount spent under the program to approximately $68,684,000 since inception. As of March 31, 2017, the Company had approximately $17,316,000 of availability remaining under the repurchase program. The timing and amount of future repurchases, if any, will depend upon the Company's stock price, economic and market conditions, regulatory requirements, and other corporate considerations. The Company may initiate, suspend or discontinue purchases under the stock repurchase program at any time.
In addition, during the three months ended March 31, 2017, the Company repurchased 285,469 shares surrendered by employees to satisfy tax withholding obligations upon vesting of restricted stock.
We believe that our anticipated cash from operating activities, existing cash and cash equivalents, and availability under the Credit Agreement will enable us to meet our operational liquidity needs and fund our planned investing activities for the next year.
Contingencies
See Note 13 to our Condensed Consolidated Financial Statements in Part I, Item 1 herein.
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 March 31, 2017 (in thousands):
 
 
 
Less than
 
 
 
 
 
 
Contractual Obligations
TOTAL
 
1 year
 
1-3 years
 
3-5 years
 
Thereafter
Capital lease obligations
$
21

 
$
21

 
$

 
$

 
$

Operating lease obligations
8,417

 
1,550

 
2,994

 
2,594

 
1,279

Software license
261

 
95

 
166

 

 

Meeting space commitments
1,402

 
967

 
435

 

 

 
$
10,101

 
$
2,633

 
$
3,595

 
$
2,594

 
$
1,279


28



Discussion of cash flows
Net cash from operations during the three months ended March 31, 2017 increased approximately $11.6 million to approximately $10.6 million, compared to $(1.0) million from operating activities for the three months ended March 31, 2016, primarily attributable to an increase in net income, as well as favorable changes in accounts payable, accrued compensation and income taxes when compared to the prior year.
Net cash used in investing activities during the three months ended March 31, 2017 was approximately $1.0 million, compared to approximately $9.3 million for 2016. Cash used in the three months ended March 31, 2016 for the acquisition of Stability totaled $7.6 million.
Net cash used in financing activities during the three months ended March 31, 2017 increased approximately $10.0 million to $13.1 million compared to $3.1 million of cash used during the three months ended March 31, 2016. Cash used in financing activities during the three months ended March 31, 2017 included approximately $12.7 million for stock repurchases under the repurchase plan compared to $3.5 million in the prior year. Additionally, the Company received $1.9 million from the exercise of stock options compared to approximately $1.1 million in the prior year.
Non-GAAP Financial Measures
In addition to our GAAP results, we provide certain Non-GAAP metrics including Adjusted EBITDA, Adjusted Gross Margin, Adjusted Net Income and Adjusted Diluted Net Income per share. 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, although Company management uses these measurements as aids in monitoring the Company's on-going financial performance from quarter-to-quarter and year-to-year on a regular basis and for benchmarking against other medical technology companies. Adjusted EBITDA consists of GAAP Net Income excluding: (i) depreciation and amortization, (ii) interest income and expense, (iii) income taxes, (iv) one time acquisition related costs, (v) the effect of purchase accounting due to acquisitions and (vi) share-based compensation expense. Due to the impact of the acquisition of Stability in January 2016, we have decided to provide additional adjusted non-GAAP measures to provide comparability of normal ongoing operating results. Beginning in 2016, we have reported Adjusted Gross Margin, Adjusted Net Income and Adjusted Diluted Net Income per Share to normalize results for comparison purposes. Adjusted Gross Margin consists of GAAP gross margin excluding amortization of inventory fair value step-up. Adjusted Net Income and Adjusted Diluted Net Income per share consists of GAAP net income excluding: (i) one time acquisition related costs, (ii) amortization of inventory fair value step-up, (iii) amortization of intangible assets and (iv) share-based compensation. Reconciliations of GAAP Net Income to Adjusted EBITDA, GAAP Gross Margin to Adjusted Gross Margin and GAAP Net Income to Adjusted Net Income and Adjusted Diluted Net Income per Share for the three months ended March 31, 2017 and 2016 appear in the tables below (in thousands).
The Company's Adjusted EBITDA for the three months ended March 31, 2017, was approximately $12.4 million which is an increase of $3.3 million as compared to the three months ended March 31, 2016. The increase was attributable to higher net income before taxes, partially offset by a lower add back for one-time costs incurred in connection with the Stability acquisition compared to the prior year.
 
Three Months Ended March 31,
 
 
2017
 
2016
 
Net Income (Per GAAP)
$
4,327

 
$
1,197

 
 
 
 
 
 
Add back:
 
 
 
 
Income taxes
1,713

 
214

 
One time costs incurred in connection with acquisition

 
713

 
One time inventory costs incurred in connection with acquisition
75

 
734

 
Other interest expense, net
145

 
56

 
Depreciation expense
946

 
734

 
Amortization of intangible assets
526

 
810

 
Share-based compensation
4,671

 
4,615

 
Adjusted EBITDA
$
12,403

 
$
9,073

 


29



Reconciliation of "Adjusted Gross Margin" defined as Gross Margin before Amortization of inventory fair value step-up (in thousands):
 
Three Months Ended March 31,
 
 
2017
 
2016
 
Gross Margin (Per GAAP)
$
63,864

 
$
45,421

 
 
 
 
 
 
Non-GAAP Adjustments:
 
 
 
 
One time inventory costs incurred in connection with acquisition
75

 
734

 
Gross Margin before Amortization of inventory fair value step-up
$
63,939

 
$
46,155

 
Adjusted Gross Margin
88.1
%
 
86.5
%
 

Reconciliation of "Adjusted Net Income" and "Adjusted Diluted Net Income" per share defined as Net Income less Amortization, One Time Costs and Share-Based Compensation (in thousands, except share and per share data):
 
Three Months Ended March 31,
 
 
2017
 
2016
 
Net Income (Per GAAP)
$
4,327

 
$
1,197

 
 
 
 
 
 
Non-GAAP Adjustments:
 
 
 

 
Tax rate normalization*
(355
)
 
(350
)
 
One time costs incurred in connection with acquisition

 
713

 
One time inventory costs incurred in connection with acquisition
75

 
734

 
Amortization of intangible assets
526

 
810

 
Share - based compensation
4,671

 
4,615

 
Estimated income tax impact from adjustments
(1,805
)
 
(2,777
)
 
Adjusted Net Income
$
7,439

 
$
4,942

 
Adjusted Diluted Net Income per Share
$
0.07

 
$
0.04

 
Denominator for diluted earnings per share - weighted average shares adjusted for dilutive securities
113,730,591

 
112,039,860

 
*Assumes a normalized tax rate of 40% for 2016 and 34% for 2017.
Critical Accounting Policies
In preparing financial statements, the Company follows accounting principles generally accepted in the United States, which require the Company to make certain estimates and apply judgments that affect its financial position and results of operations. Management continually reviews the Company's accounting policies and financial information disclosures. A summary of significant accounting policies that require the use of estimates and judgments in preparing the financial statements was provided in the Company's Annual Report on Form 10-K for the year ended December 31, 2016.  During the quarter covered by this report, there were no material changes to the accounting policies and assumptions previously disclosed, except as disclosed in Note 2 to the Condensed Consolidated Financial Statements contained herein.
Recent Accounting Pronouncements
For the effect of recent accounting pronouncements, see Note 2 to the Condensed Consolidated Financial Statements contained herein.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements.

30



Item 3. Quantitative and Qualitative Disclosures about Market Risk

Based on our lack of market risk sensitive instruments outstanding at March 31, 2017, we have determined that there was no material market risk exposure to our consolidated financial position, results of operations or cash flows as of such date.

31



Item 4. Controls and Procedures
Disclosure Controls and Procedures

We maintain “disclosure controls and procedures” within the meaning of Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended, or the "Exchange Act". Our disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed by the Company in the reports filed under the Exchange Act, such as this Quarterly Report on Form 10-Q, is recorded, processed, summarized and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms. Our disclosure controls and procedures include controls and procedures designed to provide reasonable assurance that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and no evaluation of controls and procedures can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. Management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by Rule 13a-15(b) of the Exchange Act, prior to filing this Quarterly Report on Form 10-Q, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended, were not effective because of the material weakness in our internal control over financial reporting, as described in Management’s Report On Internal Control Over Financial Reporting in Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2016 (the "2016 10-K"), which continues to exist as of March 31, 2017.

Remediation of Material Weakness in Internal Control over Financial Reporting

The Company took steps during the first quarter of 2017 to remediate its material weakness in internal control over financial reporting related to our accounting for income taxes.  In reviewing the Company's tax accounting in preparation for filing the 2016 10-K, management concluded the Company had a material weakness in the design of our internal control over the tax accounting related to an overstatement of an excess tax benefit which, if undetected could have resulted in an understatement of income taxes payable. Specifically, management did not have adequate supervision and review of certain technical tax accounting performed by a third party tax specialist in 2016.

The Company has made progress implementing activities and improvements to address the control deficiency that led to the material weakness during the first quarter of 2017 which include:

Implementing specific review procedures, including the increased involvement of our CFO and Controller.

Beginning the process of hiring of an internal tax specialist to oversee the work performed by the third - party tax specialists.

Strengthening our income tax control with improved documentation standards, technical oversight, and training.

When fully implemented and operational, we believe the measures described above will remediate the material weakness we have identified and generally strengthen our internal control over financial reporting. The material weakness will not be considered remediated until the applicable remedial controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. The Company expects to make additional improvements in internal control during the remainder of 2017. Our goal is to remediate this material weakness by the end of the 2017 fiscal year, subject to there being sufficient opportunities to conclude, through testing, that the enhanced control is operating effectively.

Changes in Internal Control over Financial Reporting

Other than the efforts discussed immediately above in Remediation of the Material Weakness in Internal Control over Financial Reporting, there was no change in the Company's internal control over financial reporting that occurred during the

32



quarter ended March 31, 2017, that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

We are a party to various legal claims and actions incidental to our business. These items are more fully discussed in Note 13 to our Condensed Consolidated Financial Statements.
Item 1A. Risk Factors
There have been no material changes to the risk factors previously disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2016.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Stock Repurchases 

The following table sets forth information regarding the purchases of the Company’s equity securities made by or on behalf of the Company or any affiliated purchaser (as defined in Exchange Act Rule 10b-18) during the three month period ended March 31, 2017:

 
Total number of
shares purchased (a)
 
Average price paid
per share
 
Total number of shares purchased under publicly announced plan(b)
 
Total amount spent under the plan
 
Remaining amount
to be spent
under the plan
Total amount remaining December 31, 2016
 
 
 
 
 
 
 
 
$
9,935,789

 
 
 
 
 
 
 
 
 
 
January 1, 2017 - January 31, 2017
726,100
 
$
8.25

 
719,398

 
$
5,934,607

 
$
4,001,182

 
 
 
 
 
 
 
 
 
 
February 1 - February 28, 2017
669,136
 
$
7.82

 
395,000

 
$
3,087,675

 
$
913,507

 
 
 
 
 
 
 
 
 
 
February 2017 increased spending authorization
 
 
 
 
 
 
 
 
$
20,000,000

 
 
 
 
 
 
 
 
 
 
March 1 - March 31, 2017
430,631
 
$
8.45

 
426,000

 
$
3,597,871

 
$
17,315,636

 
 
 
 
 
 
 
 
 
 
    Total for the quarter
1,825,867
 
 
 
1,540,398

 
$
12,620,153

 
 

(a) Shares repurchased during the quarter include 285,469 shares surrendered by employees to satisfy tax withholding obligations upon vesting of restricted stock.

(b) On May 12, 2014, our Board of Directors authorized the repurchase of up to $10 million of our common stock from time to time, through December 31, 2014. The Board subsequently extended the program until December 31, 2017, and increased the total authorization to $86 million. The timing and amount of repurchases will depend upon the Company's stock price, economic and market conditions, regulatory requirements, and other corporate considerations. The Company may initiate, suspend or discontinue purchases under the stock repurchase program at any time. The above table sets forth information regarding the purchases of the Company’s equity securities made under the repurchase program during the quarter prior to brokerage commissions of approximately $46,000.
Item 3. Defaults Upon Senior Securities

33



Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.

34



Item 6. Exhibits
Exhibit
Number
Reference
Description
 
 
 
10.1
 
Amendment dated March 7, 2017 to the Lease dated January 25, 2013 by and between the MiMedx Group, Inc. and CPVF II West Oak LLC (as successor in interest to HUB Properties GA, LLC) (incorporated by reference to Exhibit 3.1 to the Registrants Form 8-K filed on March 13, 2017)

31.1 #
 
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 #
 
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 #
 
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 #
 
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS
 
XBRL Instance Document
101.SCH
 
XBRL Taxonomy Extension Schema Document
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
 
#
Filed herewith

35



SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
May 1, 2017
 
 
 
By:
/s/ Michael J. Senken
 
 
Michael J. Senken
 
 
Chief Financial Officer
 
 
(principal financial and accounting officer)

36