Form 10-KT
Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
     
o   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
     
þ   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from April 1, 2009 to December 31, 2009
Commission file number 0-52491
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)
     
811 Livingston Court, Suite B    
Marietta, GA   30067
(Address of principal executive offices)   (Zip Code)
(678) 384-6720
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $0.001 per share
(Title of class)
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ
Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ
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 þ No o
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 (§229,405 of this chapter) during the preceeding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
             
Large accelerated filer o   Accelerated filer o   Non-accelerated filer o   Smaller reporting company þ
        (Do not check if a smaller reporting company)    
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
The aggregate market value of Common Stock held by non-affiliates on September 30, 2009, based upon the last sale price of the shares as reported on the OTC Bulletin Board on such date, was approximately $24,400,000.
There were 51,331,613 shares of Common Stock outstanding as of March 15, 2010.
Documents Incorporated by Reference
Portions of the proxy statement relating to the 2010 annual meeting of shareholders, to be filed within 120 days after the end of the fiscal year to which this report relates, are incorporated by reference in Part III of this Report.
 
 

 

 


 

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 Exhibit 23.1
 Exhibit 31.1
 Exhibit 31.2
 Exhibit 32.1
 Exhibit 32.2

 

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PART I
This Form 10-K 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 the Company’s 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,” “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 I, Item 1A, “Risk Factors,” below. 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 “the Company,” “we,” “our” and “us” refer to MiMedx Group, Inc., a Florida corporation (formerly Alynx, Co.), and its consolidated subsidiaries as a combined entity, except where it is clear that the terms mean only MiMedx Group, Inc.
Item 1. Business
Overview
MiMedx Group, Inc. (“MiMedx Group”) is an integrated developer, manufacturer and marketer of patent protected biomaterial-based products. MiMedx Group is emerging from a development-focused start-up company into a fully integrated operating company with the expertise to capitalize on its science and technology and the capacity to generate sales growth and profitability.
“Repair, don’t replace” is the mantra of the MiMedx Group biochemists, engineers, and designers who are developing today’s biomaterial-based solutions for patients and physicians. Market research shows the first desire of patients ranging from active baby-boomers and weekend warriors to high-school and professional athletes is to augment repair when possible, rather than replace traumatized, but otherwise healthy tissues and structures. Clinical research has proven that biomaterials can be used to achieve augmentation and repair.
Our Strategy
The Company’s initial business strategy was to identify and acquire innovative new medical products and technologies, focused primarily on the musculoskeletal market, as well as novel medical instrumentation and surgical techniques. We have recently refined our strategy to focus on our proprietary biomaterial technologies that can be transformed into unique medical devices that fill an unmet or underserved clinical need. Our HydroFix™ hydrogel technology and our CollaFix™ collagen fiber technology are proprietary platforms that can serve as the basis for medical devices in various orthopedic and orthobiologic applications, such as spine, sports medicine, and trauma. We also have identified multiple product opportunities in general surgery, drug delivery, wound management and cardiac markets, among others.
Our plan is to focus our internal commercialization efforts on orthopedics and orthobiologic applications for our technologies and to partner with large, established companies in the general surgery, drug delivery, wound management, cardiac and other markets. Initial conversations with respect to such external relationships have been initiated, but they will take time to develop.

 

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We have organized an advisory panel of leading physicians to provide insight into our primary fields of interest for new products and technology, as well as guidance and advice with respect to ongoing product development programs.
Under the direction of our new leadership, our core focus is on near-term opportunities for each of our technologies, advancing them through the regulatory process, establishing reliable and cost-effective manufacturing, and establishing an effective distribution system.
History of MiMedx Group, Inc.
MiMedx Group, Inc. originally was formed as a Utah corporation on July 30, 1985, under the name Leibra, Inc. We later changed domicile, through a merger, to Nevada, and subsequently changed our name to Alynx, Co. We had several additional name changes in connection with various business acquisitions, all of which were discontinued or rescinded. We were an inactive shell corporation for 10 years or more, seeking to acquire an interest in a business with long-term growth potential. On March 6, 2007, Alynx, Co. filed a registration statement with the SEC on Form 10-SB to register its common stock under the Securities Exchange Act of 1934.
In a merger consummated on February 8, 2008, Alynx, Co. acquired MiMedx, Inc., a Florida-based, privately-held, development-stage medical device company (“MiMedx”) founded by Steve Gorlin. MiMedx’s assets included three development units focused on the development of medical devices based on their respective patented and proprietary technologies. MiMedx’s primary development unit was focused on the development of products for the repair of soft tissue, such as tendons, ligaments and cartilage, using a collagen fiber-based platform predicated on certain cross linking technology, which was licensed from Shriners Hospital for Children and University of South Florida Research Foundation in January 2007. The assets of MiMedx also included 100% of the membership interests in SpineMedica, LLC (“SpineMedica”), a development-stage company focused on Orthopedic-Spine biomaterial technologies using a poly-vinyl alcohol (“PVA”) based hydrogel that its predecessor, SpineMedica Corp., licensed from SaluMedica, LLC for applications related to the spine in August 2005, and for applications related to the hand (excluding the wrist) and rotator cuff in August 2007. Additionally, MiMedx’s assets included certain intellectual property related to implants for use in fracture fixation in the upper extremities, which we referred to as the LeveL Orthopedics assets. These assets had been contributed to, or developed on behalf of, MiMedx pursuant to a consulting agreement it had entered into in September 2007, with Thomas J. Graham, M.D., a leading hand surgeon.
On March 31, 2008, Alynx, Co. merged into MiMedx Group, Inc., a Florida corporation and wholly-owned subsidiary that had been formed on February 28, 2008, for purposes of the merger. MiMedx Group, Inc. was the surviving corporation in the merger. Also on March 31, 2008, MiMedx entered into a license with SaluMedica, LLC, for the PVA-based hydrogel biomaterial for applications as a surgical sheet outside of the spine.
To assist the Company in transitioning from a development stage company to an operating company, effective February 24, 2009, the Company’s Board of Directors appointed Parker H. “Pete” Petit to serve as the Company’s Chairman of the Board, President and Chief Executive Officer. Mr. Petit has over 30 years’ experience in the healthcare products and services markets, and a track record of having successfully nurtured several companies from the development stage to industry leadership. In September 2009, Mr. Petit recruited another experienced medical device executive, William C. Taylor, to become the Company’s President and Chief Operating Officer. Mr. Taylor has over 20 years’ of medical device design, development, and manufacturing experience.
On April 20, 2009, we received clearance from the U.S. Food and Drug Administration (the “FDA”) to market our Paradís Vaso Shield™ device, indicated for use as a cover for vessels following anterior vertebral surgery. In October 2009, we divested our LeveL Orthopedics assets in order to focus exclusively on biomaterials, and also relinquished the SaluMedica license for the hydrogel application in the hand.
Prior to the 4th quarter of 2009, the Company explored business strategies through our three development units, MiMedx, SpineMedica and LeveL Orthopedics. After the sale of the LeveL assets and a thorough review of the strategic direction of the Company, management made the decision in late 2009 to consolidate the organizational structure. Instead of independent development teams and manufacturing locations, we will have integrated development teams and all manufacturing will be consolidated into one site. Our Tampa, Florida location will focus on research and early stage product and process development. Our Marietta, Georgia location will house our corporate headquarters, our development and sales teams and all manufacturing and distribution operations.

 

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In December 2009 we made the decision to simplify our corporate and technology branding in order to build a stronger brand identity. Our new branding strategy is to focus on MiMedx Group, Inc. as the corporate brand identity and to brand each of our technologies, rather than each product embodying our technologies. Our PVA Hydrogel technology is now called HydroFix™ and our collagen fiber technology is now called CollaFix™. We are currently transitioning the name of our current product from Paradís Vaso Shield™ to HydroFix™ Vaso Shield.
Our Products
CollaFixProducts
The CollaFix™ technology combines an innovative means of creating fibers from soluble collagen and a unique cross-linking process that utilizes nordihydroguaiaretic acid (“NDGA”), a naturally occurring plant compound. Initial laboratory and animal testing shows that collagen cross-linked with NDGA produces a very strong, biocompatible, and durable fiber that can be transformed into surgical meshes intended to treat a number of orthopedic soft-tissue trauma and disease disorders. Furthermore, tests have shown NDGA biocompatibilizes certain materials that may otherwise create a foreign body response. NDGA is a biological compound, and therefore biomaterials cross-linked with NDGA are composed entirely of biological components.
Embodiments and benefits of products that we believe, based on preliminary studies, could be developed using this licensed technology are:
    Initial tests of fibers cross-linked with NDGA appear to demonstrate they are stronger than existing collagenous tissue, including healthy tendons and ligaments. These fibers form the fundamental unit from which a variety of devices could be configured as follows:
    Linear and braided arrays for tendon and ligament repair
 
    Cross-helical arrays forming tubular structures that also can be cut to form flat patches
 
    Woven meshes for general surgical use;
    NDGA-treated biomaterials have been tested and results preliminarily suggest that the materials are biocompatible and biodegradable;
    Biocompatibilization (making a material biocompatible that may otherwise not be) of in-dwelling medical devices by coating with NDGA polymerized collagen;
    NDGA treatment of xenograft (animal in origin) and allograft (human in origin) materials could make them more biocompatible and possibly improve functional lifetime; and
    NDGA-treated collagen-based biorivets have the potential to be used for bone fracture fixation.
Our core collagen technology is licensed to us and is embodied in two patents. The core patent covers the polymerization chemistry of NDGA as applied to biological materials, bioprostheses, or devices created through its application. It covers chemistries and compounds that have the reactive groups that are responsible for the effectiveness of NDGA, including a variety of organically synthesized NDGA analogs and natural compounds. Multiple medical products potentially could be developed and patented that are all tied to the core patented technology.
We are currently pursuing the manufacture and optimization of various collagen constructs and we are focused on advancing our products through the regulatory process to receive FDA clearance to introduce our products to the market.
We may license rights to specific aspects of our collagen technology to third parties for use in applications and indications that we choose not to exploit ourselves.
HydroFix™ Products
We license rights to a PVA polymer, which is a water-based biomaterial that can be manufactured with a wide range of mechanical properties, including those that appear to mimic closely the mechanical and physical properties of natural, healthy human tissue. This hydrogel has been used in other orthopedic and general surgery device applications, and we believe it has demonstrated biocompatibility and durability inside the human body. Regulatory agencies both inside and outside the United States have cleared the hydrogel material for use inside the body for several applications. For example, in the United States, the FDA has cleared devices using the hydrogel material for use as a cover for vessels following anterior vertebral surgery as well as for use next to nerves. In the European Union and Canada, devices using the hydrogel material have been cleared for use next to nerves, to replace worn-out and lesioned cartilage in the knee, and as a post-surgical adhesion inhibiting barrier for spine surgeries in specific locations.

 

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As mentioned above, on April 20, 2009, we received FDA clearance via a 510(k), for our Paradís Vaso Shield™, recently renamed HydroFix™ Vaso Shield (the “Vaso Shield”), which is a vessel guard made of our hydrogel material. Protection of veins and arteries is a common issue associated with many types of surgeries. Protection of the aorta, vena cava, iliac vessels and other anatomy is particularly important in anterior spine surgery. The HydroFix™ Vaso Shield was designed to help physicians protect vessels following anterior vertebral surgery. The FDA cleared the HydroFix™ Vaso Shield as a vessel guard or cover for anterior vertebral surgery, however, the safety and effectiveness of this device for reducing the incidence, severity and extent of post-operative adhesion formation has not been established.
We have a similar version of the product for the European market called HydroFix™ Spine Shield, which has recently received the CE mark. The device is classified as a post-surgical adhesion inhibiting barrier and is used in specific spine surgeries. The CE marking, also known as “CE Mark,” is a mandatory conformity mark on many products placed on the single market in the European Economic Area (EEA). The CE marking certifies that a product has met European Union (EU) consumer safety, health or environmental requirements. The CE marked HydroFix™ Spine Shield is not available in the United States.
We are currently in the process of identifying other uses and indications for the HydroFix™ technologies, including, but not limited to other areas of the spine as well as healthcare categories outside the spine, such as general surgery, obstetrics, and gynecology, maxilla-facial, plastic and cosmetic applications, and others. We filed our second 510(k) application for the HydroFix™ sheet material in February 2010 for anticipated use in orthopedic applications.
Market Opportunity
In 2008, the value of the Orthopedic-Biomaterials segment was estimated to be $7.4 billion, representing over 20% of the total Orthopedic Market. It is estimated that this market segment will grow at over 13% per year, which is more than double the growth rate for the overall Orthopedics Market. The Biomaterials market is expected to grow to a value of $9.4 billion by 2011, mainly due to advancements in materials science technology, the incidence of trauma and disease associated with the baby-boomer population and resource focus and investment (MedMarket Diligence, Report #M625, “Emerging Trends, Technologies and Opportunities in the Markets for Orthopedic Biomaterials, Worldwide”, 2008).
Orthopedics is one of the largest medical sectors utilizing biomaterials. The development of advanced generation products has prompted many orthopedic companies whose foundations lie in traditional therapies to focus on biomaterials due to physician and patient demand. We believe that new biomaterial products will continue to replace existing products.
The main orthopedic biomaterials markets driving growth are connective and soft tissues, such as tendon and ligament repair (tendons connect muscle to bone and ligaments connect bone to bone), meniscus repair, bone grafts, resorbable technologies, and cartilage repair.
We believe that the number of procedures that might utilize our products is large. The total number of procedures of arthroscopy and soft-tissue repair (including shoulders, hands, knees, ankles, and elbows) in 2003 was estimated at approximately 2.6 million compared to approximately 2.3 million procedures in 2002 according to The Ortho FactBook (2006), published by Knowledge Enterprises, Inc.
Rotator cuff injuries represent a leading cause of shoulder instability and result in approximately 300,000 invasive procedures annually, according to MedTech Insight, an industry marketing research firm.
Also, the NDGA-based biomaterials and related processes under license may prove suitable for use in general surgical procedures for reinforcement of soft tissue where weakness exists or scar tissue formation is not desirable.
The market revenues for biomaterials in wound care are expected to rise at an accelerated compound annual growth rate of 16.5% from 2006-2013. Combination products (biomaterial dressings that also possess moist dressing, antimicrobials, or alginates) are further driving growth and gaining market share from other advanced wound dressing segments, according to the Frost and Sullivan US Interactive Wound Care Markets Report for 2008.
The market for general soft-tissue patches and slings is not heavily populated because few products have fully satisfied clinical needs and physicians and patients are demanding implants that resorb over time. In 2005, the general soft-tissue repair market for the products listed above was valued at over $600 million in the United States and over $500 million in Europe, with an anticipated growth rate of 14% through 2010, according to a 2006 market research report by Millennium Research Group.

 

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Tendon and Ligament Repair Technologies
Advancements in tendon surgery have focused largely on augmenting the standard of care using synthetic and biomaterials including collagen based devices. Advancements in ligament surgery have focused largely on new methods of graft fixation using interference screws and anchors, which have opened new approaches to repair. We believe there is a new wave of development for ligament and tendon repair, including collagen matrices, allografts and tissue engineered tendons and ligaments that we believe will change how physicians treat these procedures. Therapeutic modalities we continue to focus on are related to the treatment and repair of soft tissues during tendon repair surgery, including reinforcement of the rotator cuff, patellar, Achilles, biceps, quadriceps or other tendons. Following clinical development of the above, we plan to focus on treatments for ligaments and joints, such as medial and lateral collateral ligaments of the knee, elbow and ankle and meniscal repair. Our products potentially could be used in other orthopedic categories as well.
PVA-Based Biomaterials
Our PVA based biomaterial, HydroFix™, has been used in several medical device applications and is cleared by the FDA for use as a cover for vessels following anterior vertebral surgery and for use as a nerve cuff (SaluMedica, LLC). We have licensed the right to use Salubria®, SaluMedica LLC’s formulation, or similar PVA-based biomaterials for certain applications within the body under a world-wide license (see “Collaborations and License Agreements”). The material, as Salubria®, has been sold in Europe for certain applications for over seven years. The PVA-based hydrogel can be processed to have mechanical and physical properties similar to that of human tissue. The biostable hydrogel composition contains water in similar proportions to human tissue, mimicking human tissue’s strength and compliance. For certain applications, the PVA-based hydrogel has been formulated to be wear-resistant and strong. The base organic polymer is known to be biocompatible and hydrophilic. These properties make it a candidate for use as an implant, and may prove suitable for development into medical products addressing various applications. The PVA-based hydrogel and products formed therefrom are MRI compatible (allowing for Magnetic Resonance Imaging of a patient with no artifacts or special safety precautions necessary). We currently license the PVA-based hydrogel for use in the spine, rotator cuff and as a surgical sheet.
Spine Anatomy and Disorders
The spine is considered by many orthopedic and neurosurgeons to be the most complex motion segment of the human body. It provides a balance between structural support and flexibility. It consists of 26 separate bones called vertebrae that are connected together by connective tissue to permit a normal range of motion. The spinal cord, the body’s central nerve conduit, is enclosed within the spinal column. Vertebrae are paired into what are called motion segments that move by means of three joints: two facet joints and one spinal disc.
The four major categories of spine disorders are degenerative conditions, deformities, trauma and tumors. The largest market is degenerative conditions of the vertebral discs. These conditions can result in instability, pressure and impingement on the nerve roots as they exit the spinal column, causing often severe and debilitating pain in the back, arms and/or legs.
Current Treatments for Spine Disorders
The current prescribed treatment for spine disorders depends on the severity and duration of the disorder. Initially, physicians typically prescribe non-operative procedures including bed rest, medication, lifestyle modification, exercise, physical therapy, chiropractic care and steroid injections. Non-operative treatment options are often effective; however, other patients require spine surgery. According to Knowledge Enterprises, Inc., the number of spine surgery procedures grew to over 1.2 million per year in 2005 in the United States. The most common spine surgery procedures are: discectomy, the removal of all or part of a damaged disc; laminectomy, the removal of all or part of a lamina, or thin layer of bone, to relieve pinching of the nerve and narrowing of the spinal canal; and fusion, where two or more adjoining vertebrae are fused together to provide stability.
Spine Repair and Vessel Protection
MedTech Insight, LLC’s March 2007 report on “United States Markets for Spinal Motion Preservation Devices,” states that an estimated 50 million people in the United States suffer from back pain. This report also states that in 2004, more than 1 million spine surgeries were performed in the United States—far more than the number of hip and knee replacements combined. Factors driving growth of the spine surgery products market include the growing number of people with degenerative disc disease, which typically is caused by gradual disc damage and often results in disc herniation and chronic, debilitating lower back pain. It is most common among otherwise healthy people in their 30s and 40s and affects approximately half of the United States population age 40 and older.

 

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A disc herniation, or abnormal bulge or rupture, is often caused by degenerative disc disease but may also result from trauma and/or injury. As we age, the disc’s nucleus pulposus, or the center of a spinal disc, loses its water content and the disc begins to degenerate, becoming drier, less flexible, and prone to damage or tears. By the time a person reaches age 80, the nucleus pulposus’ water content decreases to approximately 74%; during the first year of a person’s life, the water content is approximately 90%. The annulus fibrosus, or the outer rim of a spinal disc, also may be damaged by general wear and tear or by injury and can cause bulging and impingement on adjacent nerve roots.
Repair of herniated intervertebral discs or damage as a result of degenerative disc disease commonly involves surgical intervention such as fusion or total disc replacement (TDR). Postsurgical adhesions and fibrosis formation are a common consequence of the normal healing process. The presence of fibrosis may render reoperations or follow-up surgeries risky and have caused nerve root tethering in some patients.
One approach to protecting vessels following anterior vertebral surgery is to provide a barrier between the anterior spine and adjacent vessels. Some studies, not performed by us, have demonstrated that the application of a barrier to protect adjacent vessels may create a dissection plane for future surgeries in that anatomical area.
The safety and effectiveness of the FDA cleared HydroFix™ Vaso Shield device for reducing the incidence, severity and extent of post-operative adhesion formation has not been established.
Another market for which a barrier or plane of dissection-type product is needed is in gynecological uses where the removal and surgical cutting of fibroids and cysts, hysterectomies, and other procedures may lead to post-surgical adhesions. Such adhesions may result in infertility and pelvic pain. Gynecological surgery provides a compelling market because of the high volume of procedures worldwide, and because gynecological infertility surgery is frequently followed up by a laparoscopic second-look procedure at the disease site.
There are many other medical categories for which scar-tissue and fibrosis formation are complicating issues and the Company is researching opportunities for expansion of this product platform.
Physician Advisory Boards
We have empanelled a number of key physician opinion leaders in relevant fields by asking these physicians to serve on one of our Physician Advisory Boards (“PABs”). Each has entered into a consulting agreement with the Company.
Our PABs include physicians who move medicine forward by scientific endeavor, such as publishing, teaching and developing new solutions to treat injury and diseases. Several members chair their respective departments at university medical schools, teaching institutions and fellowship programs.
The Chairman of our Sports Medicine PAB is James Andrews, M.D., of Birmingham, Alabama, and Gulf Breeze, Florida. Dr. Andrews is one of the best known and most respected sports-medicine physicians in the world. He is the physician for several National Football League and Major League Baseball teams and treats many of the highest-paid professional athletes from numerous teams and from a multitude of sports, including Drew Brees, the 2010 Superbowl MVP, and is regularly profiled in newspapers and magazines. Dr. Andrews also runs a sought-after fellowship program.
The Sports Committee is chaired by Lonnie Paulos, M.D. a renowned orthopedic surgeon and researcher. Dr. Paulos is presently a surgeon at the Andrews-Paulos Institute for Orthopedics & Sports Medicine in Gulf Breeze, Florida. He is the former physician to the Cincinnati Bengals, Cincinnati Reds, US Ski team, and the US Gymnastics Federation.
Similarly, we have assembled a group of leading orthopedic spine and neurosurgeons who are advising on the development of our spinal implants, instruments and surgical procedures
The Chairman of the Spine PAB is Randal Betz, M.D. Dr. Betz holds hospital positions as Chief of Staff at Shriners Hospitals for Children and Medical Director of Shriners’ Spinal Cord Injury Unit, in Philadelphia, PA. Additionally, Dr. Betz is on staff at Temple University Children’s Medical Center and is a Professor of Orthopaedic Surgery at Temple University School of Medicine.

 

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Government Regulation
Our products are medical devices subject to extensive regulation by the FDA, under the Federal Food, Drug, and Cosmetic Act and they are also regulated in the European Union through the Medical Device Directive. Similar regulations apply in other countries. These regulations govern, among other things, the following activities:
    product design and development;
    product testing;
    product manufacturing;
    product labeling;
    product storage;
    premarket clearance or approval;
    advertising and promotion;
    product sales and distribution; and
    medical device reporting.
Each medical device that we distribute commercially in the U.S. likely will require either 510(k) clearance or Premarket Approval (“PMA”) from the FDA prior to marketing. Devices deemed to pose relatively less risk are placed in either Class I or II which requires the manufacturer to submit a premarket notification requesting permission for commercial distribution; this is known as 510(k) clearance, which indicates that the device is substantially equivalent to devices already legally on the market. Most Class I devices are considered very low risk and are exempted from this requirement. Devices deemed by the FDA to pose the greatest risk, such as life-sustaining, life-supporting or implantable devices, or devices deemed not substantially equivalent to a previously 510(k) cleared device or a pre-amendment Class III device for which PMA applications have not been required, are placed in Class III, requiring PMA approval.
Some of our products contain biologic materials. We believe that the FDA will regulate our products as medical devices. However, the FDA may determine that some of our products are combination products comprised of a biologic and medical device component. For a combination product, the FDA must determine which center or centers within the FDA will review the products and under what legal authority the products will be reviewed. While we believe our products would likely be regulated under the medical device authorities even if they are deemed “combination products,” there can be no assurances that the FDA will agree. In addition, the review of combination products is often more complex and more time consuming than the review of a product under the jurisdiction of only one center within the FDA.
510(k) Clearance Pathway
To obtain 510(k) clearance for one of our products, we must submit a premarket notification demonstrating that the proposed device is substantially equivalent in intended use and in safety and effectiveness to a previously 510(k) cleared device or a device that was in commercial distribution before May 28, 1976, for which the FDA has not yet called for submission of PMA applications. The FDA’s 510(k) clearance pathway usually takes from four to 12 months, but it can take significantly longer for submissions that include clinical data.
After a device receives 510(k) clearance, any modification that could significantly affect its safety or effectiveness, or that would constitute a major change in its intended use, requires a new 510(k) clearance or could require a PMA approval. The FDA requires each manufacturer to make this determination in the first instance, but the FDA can review any such decision. If the FDA disagrees with a manufacturer’s decision not to seek a new 510(k) clearance, the agency may retroactively require the manufacturer to seek 510(k) clearance or PMA approval. As part of the PMA review, the FDA typically will inspect the manufacturer’s facilities for compliance with Quality System Regulation, or QSR, requirements, which prescribe elaborate testing, control, documentation and other quality assurance procedures.
The FDA also can require the manufacturer to cease marketing and/or recall the modified device until 510(k) clearance or PMA approval is obtained.

 

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PMA Approval Pathway
If 510(k) clearance is unavailable for one of our products, the product must follow the PMA approval pathway, which requires proof of the safety and effectiveness of the device to the FDA’s satisfaction. The PMA approval pathway is much more costly, lengthy and uncertain. It generally takes from one to three years and can take even longer.
A PMA application must provide extensive preclinical and clinical trial data and also information about the device and its components regarding, among other things, device design, manufacturing and labeling. As mentioned above, in conjunction with a PMA review, the FDA typically will inspect the manufacturer’s facilities for compliance with QSR requirements, which prescribe elaborate testing, control, documentation and other quality assurance procedures.
Upon submission, the FDA determines if the PMA application is sufficiently complete to permit a substantive review, and, if so, the application is accepted for filing. The FDA then commences an in-depth review of the PMA application, which typically takes one to three years, but may take longer. The review time is often significantly extended as a result of the FDA asking for more information or clarification of information already provided. The FDA also may respond with a “not approvable” determination based on deficiencies in the application and require additional clinical trials that are often expensive and time consuming and can delay approval for months or even years. During the review period, an FDA advisory committee may be convened to review the application and recommend to the FDA whether, or upon what conditions, the device should be approved. Although the FDA is not bound by the advisory panel decision, the panel’s recommendation is important to the FDA’s overall decision making process.
If the FDA’s evaluation of the PMA application is favorable, the FDA typically issues an “approvable letter” requiring the applicant’s agreement to specific conditions (e.g., changes in labeling) or specific additional information (e.g., submission of final labeling) in order to secure final approval of the PMA application. Once the approvable letter is satisfied, the FDA will issue a PMA for the approved indications, which can be more limited than those originally sought by the manufacturer. The PMA can include post approval conditions that the FDA believes necessary to ensure the safety and effectiveness of the device including, among other things, restrictions on labeling, promotion, sale and distribution. Failure to comply with the conditions of approval can result in material adverse enforcement action, including the loss or withdrawal of the approval. Even after approval of a PMA, a new PMA or PMA supplement is required in the event of a modification to the device, its labeling or its manufacturing process.
Clinical Trials
A clinical trial is generally required to support a PMA application and is sometimes required for a premarket notification. Such trials generally require submission of an application for an Investigational Device Exemption, or IDE. The IDE application must be supported by appropriate data, such as animal and laboratory testing results, showing that it is safe to test the device in humans and that the testing protocol is scientifically sound. The IDE must be approved in advance by the FDA for a specified number of patients (unless the product is deemed a nonsignificant risk device eligible for more abbreviated IDE requirements). Clinical trials are subject to extensive monitoring, record keeping and reporting requirements. Clinical trials may begin once the IDE application is approved by the FDA and the appropriate institutional review boards, or IRBs, at the clinical trial sites, and must comply with FDA regulations. To conduct a clinical trial, we also are required to obtain the patients’ informed consent that complies with both FDA requirements and state and federal privacy and human subject protection regulations. We, the FDA or the IRB could suspend a clinical trial at any time for various reasons, including a belief that the risks to study subjects outweigh the anticipated benefits. Even if a trial is completed, the results of clinical testing may not adequately demonstrate the safety and efficacy of the device or may otherwise not be sufficient to obtain FDA approval to market the product in the U.S.

 

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Postmarket
After a device is placed on the market, numerous regulatory requirements apply. These include: the Quality System Regulation, which requires manufacturers to follow elaborate design, testing, control, documentation and other quality assurance procedures during the manufacturing process; labeling regulations; the FDA’s general prohibition against promoting products for unapproved or “off-label” uses; and the Medical Device Reporting regulation, which requires that manufacturers report to the FDA if their device may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if it were to recur. Class II devices also can have special controls such as performance standards, postmarket surveillance, patient registries, and FDA guidelines that do not apply to Class I devices.
We are subject to inspection and marketing surveillance by the FDA to determine our compliance with regulatory requirements. If the FDA finds that we have failed to comply, it can institute a wide variety of enforcement actions, ranging from a public warning letter to more severe sanctions such as:
    fines, injunctions, and civil penalties;
    recall or seizure of our products;
    operating restrictions, partial suspension or total shutdown of production;
    refusing our requests for 510(k) clearance or PMA approval of new products;
    withdrawing 510(k) clearance or PMA approvals already granted; and
    criminal prosecution.
The FDA also has the authority to require repair, replacement or refund of the cost of any medical device that we have manufactured or distributed.
International
International sales of medical devices are subject to foreign government regulations, which vary substantially from country to country. The time required to obtain approval by a foreign country may be longer or shorter than that required for FDA approval, and the requirements may differ. In addition, the export of certain of our products that have not yet been cleared or approved for domestic distribution may be subject to FDA export restrictions. There can be no assurance that we will receive on a timely basis, if at all, any foreign government or United States export approvals necessary for the marketing of our products abroad.
The primary regulatory environment in Europe is that of the European Union, which consists of twenty-seven countries, encompassing most of the major countries in Europe. Other countries, such as Switzerland, have voluntarily adopted laws and regulations that mirror those of the European Union with respect to medical devices. The European Union has adopted numerous directives and standards regulating design, manufacture, clinical trials, labeling, and adverse event reporting for medical devices. Devices that comply with the requirements of a relevant directive will be entitled to bear a CE Mark and can be commercially distributed throughout Europe. The method of assessing conformity varies depending on the class of the product, but normally involves a combination of self-assessment by the manufacturer and a third party assessment by a “Notified Body.” This third party assessment may consist of an audit of the manufacturer’s quality system and specific testing of the manufacturer’s product. An assessment by a Notified Body in one country within the European Union is required in order for a manufacturer to commercially distribute the product throughout the European Union.
Export of Uncleared or Unapproved Devices
Export of devices eligible for the 510(k) clearance process, but not yet cleared to market, is permitted without FDA approval, provided that certain requirements are met. Unapproved devices subject to the PMA process can be exported to any country without FDA approval provided that, among other things, they are not contrary to the laws of the country to which they are intended for import, they are manufactured in substantial compliance with the Quality System Regulations, and they have been granted valid marketing authorization by any member country of the European Union, Australia, Canada, Israel, Japan, New Zealand, Switzerland or South Africa. If these conditions are not met, FDA approval must be obtained, among other things, by demonstrating to the FDA that the product is approved for import into the country to which it is to be exported and, in some cases, by providing safety data for the device. There can be no assurance that the FDA will grant export approval when necessary or that countries to which the device is to be exported will approve the device for import. Our failure to obtain necessary FDA export authorization and/or import approval could have a material adverse effect on our business, financial condition and results of operation.

 

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Regulatory Status of our Products
On April 20, 2009, the Company received FDA clearance to market the HydroFix™ Vaso Shield (formerly called Paradís™ Vaso Shield) device, indicated for use as a cover for vessels following anterior vertebral surgery. The proprietary, patented, and PVA based membrane may reduce the risk of associated injury following anterior vertebral surgeries by providing a vessel cover. We have products under development that may qualify for 510(k), such as NDGA-polymerized collagen implants and additional sheet products made from PVA-based hydrogel. In February 2010 we filed two additional 510 (k) submissions, one for an orthopedic application of our HydroFixTM Sheet. The second was for our first Collagen product submission for general soft tissue repair. There can be no assurance of the outcome of these submissions or the timeframe to complete the process.
Reimbursement—Procedures, Profitability and Costs
Our products likely will be purchased by hospitals or ambulatory surgery centers that are reimbursed by third-party payers. In the U.S., such payers include governmental programs (e.g., Medicare and Medicaid), private insurance plans, managed care programs and workers’ compensation plans. Governmental payment programs have prescribed reimbursement rates for procedures and medical products. Similarly, private third-party payers have carefully negotiated payment levels for procedures and medical products. In addition, in the United States, an increasing percentage of insured individuals are receiving their medical care through managed care programs, which monitor and may require pre-approval of the services that a member will receive. Our success depends on adequate levels of third-party reimbursement for our products.
In those countries outside the U.S. where our products are approved for sale, we expect that sales volumes and prices of our products will be influenced by the availability of reimbursement from governments or third-party payers. If adequate levels of reimbursement from governments or third-party payers outside of the U.S. are not obtained, international sales of our products will be limited. Outside of the U.S., reimbursement systems vary significantly by country. Many foreign markets have government-managed health care systems that govern reimbursement for medical devices and procedures and often require special consideration for reimbursement for a new device.
We are currently working with industry reimbursement consultants to aid in the reimbursement planning for our products. At this time there can be no assurance that reimbursement policies will provide an acceptable return on our products.
Competition
CollaFix™ Products
In the US in 2007, approximately 2,090,000 orthopedic soft tissue repair procedures were performed. This procedure volume is growing at a rate of 4.5 % supported by the rising number of sports-related injuries, particularly among the increasingly active aging population. Source: US Markets for Orthopedic Soft Tissue Solutions 2008, Millennium Research Group
There are currently a large number of devices on the market used to reinforce surgically repaired soft tissues. These include hardware (screws, pins, disposables) as well as allografts, synthetic products and xenografts (derived from porcine, bovine and equine tissues).
Leading Competitors in the Orthopedic Soft Tissue Solutions Market, as a % of Total, US, 2007.
         
    Percent of US total  
Leading Competitors   Soft Tissue Market  
Arthrex
    33.8 %
DePuy Mitek
    17.1 %
Smith and Nephew
    13.2 %
CONMED Linvatec
    5.8 %
Genzyme Biosurgery
    3.4 %
Musculoskeletal Transplant Foundation
    3.2 %
Biomet Sports Medicine
    3.1 %
AlloSource
    2.7 %
ArthroCare
    2.1 %
LifeNet Health
    1.9 %
Other
    13.7 %
Source: US Markets for Orthopedic Soft Tissue Solutions 2008, Millennium Research Group

 

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There are several technologies currently on the market or anticipated to enter the market for ligament and tendon repair and/or replacements. Those technologies include collagen matrices, cell-seeded polymer scaffolds, cryopreserved allografts, fibroblast-seeded ligament analogs, and small intestinal submucosa.
Competitors who market collagen based devices currently include:
         
Developer   Product   Cross-linking
 
       
DePuy
  RESTORE   None
Wright Medical Technology
  GraftJacket   None
Synovis
  OrthAdapt   Carbodiimide
ReGen Biologics
  Collagen matrices   None
Biomet/Organogenesis
  CuffPatch   Carbodiimide
The above technologies may or may not utilize cross-linking agents, which are FDA-approved and used in the manufacturing of collagen for soft-tissue repair. The current market leader is the Restore Orthobiologic Soft Tissue Implant from DePuy. It utilizes small intestinal submucosa of porcine origin. We believe our collagen fiber-based devices will provide better reinforcement for tendon and ligament repair because they are made of high strength cross-linked collagen fibers and, by mimicking the natural fiber orientation in tendons and ligaments, they provide targeted mechanical properties equivalent to those of tendons and ligaments.
There are a few synthetic products, such as W.L. Gore’s GoreTex, 3M Kennedy Ligament Augmentation Device (“LAD”), and Stryker’s Meadox Dacron Ligament Augmentation Graft which were developed for use in Anterior Cruciate Ligament (ACL) reconstruction. These were first and second generation soft-tissue repair products and generally produce results that we believe are less satisfactory than those containing soft-tissue constructs, because the materials tend to stretch and become deformed over time.
HydroFix™ Products
Spinal Orthopaedic and neurosurgeons actively seek patient treatment alternatives and utilize various technologies during different stages of the patient care continuum. Until the recent success of non-fusion technologies, spine implant market manufacturers have focused almost exclusively on refining and improving spinal fusion techniques. Multiple fusion techniques and products are available to patients today.
Regardless of the type of surgery, fusion or TDR, physicians commonly deal with venous injury during anterior spinal revision surgery. Currently, competition for vessel guards for this specific application is limited. W.L. Gore & Associates, Inc. is the dominant manufacturer in this area.
Collaborations and License Agreements
License Agreement between MiMedx, Shriners Hospitals for Children, and University of South Florida Research Foundation
We entered into a license agreement with Shriners Hospitals for Children and University of South Florida Research Foundation (collectively “Licensor”) in January 2007 for the worldwide, exclusive rights for all applications using NDGA-polymerized materials, including for reconstruction of soft tissue. We paid a one-time license fee of $100,000, plus issued to the Licensor 1,120,000 shares of our Common Stock, and the Licensor will receive future additional milestone payments and continuing royalties based on sales of all licensed products.
The license is perpetual and terminable by us at any time, in whole or in part. The licensor has the right to terminate this license in the event that any breach, which they are required to give us notice, is not cured.

 

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License Agreement between SpineMedica and SaluMedica, LLC
In August 2005 we entered into an exclusive, perpetual, worldwide, non-terminable, royalty-free, transferable license of certain patents and patent application rights held by SaluMedica, LLC that relate to a PVA-based hydrogel. SpineMedica has the right to manufacture, market, use and sell medical devices and products incorporating the claimed technology for all neurological and orthopedic uses related to the human spine, including muscular and skeletal uses. Some of the licensed patents and patent application rights are owned by SaluMedica, LLC and at least one of these patent and patent application rights is licensed by SaluMedica, LLC from Georgia Tech Research Corporation. In connection with this license agreement, SpineMedica also acquired certain of SaluMedica, LLC’s assets, including manufacturing and testing equipment and office equipment, and obtained a license to use the trademarks “SaluMedica™” and “Salubria® biomaterial.”
License Agreement between SaluMedica, LLC and Georgia Tech Research Corporation
Some of the patents and patent application rights licensed to SpineMedica by SaluMedica, LLC are licensed to SaluMedica, LLC from Georgia Tech Research Corporation. SaluMedica, LLC and Georgia Tech Research Corporation have agreed that in the event the license agreement between them is terminated for any reason (other than the expiration of the patents), Georgia Tech Research Corporation will license the technology to SpineMedica for uses related to the human spine on substantially the same terms as granted to SaluMedica, LLC without further payment.
Hand License with SaluMedica, LLC
MiMedx has a Technology License Agreement, as amended by a First Amendment to Technology License Agreement, as well as a related Trademark License Agreement, all dated August 3, 2007, (collectively, the “Hand License”) that provides MiMedx with the exclusive, fully-paid, worldwide, royalty-free, irrevocable and non-terminable (except as provided in the Hand License), and sublicensable rights to develop, use, manufacture, market, and sell Salubria® biomaterial or similar PVA-based hydrogels for all neurological and orthopedic uses (including muscular and skeletal uses) related to the rotator cuff and the hand (excluding the wrist), but excluding the product SaluBridge (which is made from Salubria® biomaterial and is currently cleared for use by the FDA) (the “Licensed Hand IP”). SaluMedica, LLC’s rights in the Licensed Hand IP derive from and are subject to one or more licenses from Georgia Tech Research Corporation and, consequently, the Hand License is subject to those same licenses. This license was amended in October 2009 to relinquish the license for uses related to the hand but to keep the rotator cuff license.
Surgical Sheet License with SaluMedica, LLC
On March 31, 2008, we entered into an exclusive world-wide license with SaluMedica, LLC for a PVA-based hydrogel biomaterial for applications as a surgical sheet. The license covers both internal and external applications. In exchange for the exclusive, worldwide, perpetual license to develop, manufacture, and sell the “surgical sheet” technology for application anywhere in the body, we issued SaluMedica, LLC 400,000 shares of restricted Common Stock. In addition, SaluMedica, LLC is eligible to receive up to an aggregate additional 600,000 shares of restricted Common Stock if certain sales and revenue milestones are achieved not later than June 30, 2013. On December 31, 2009, we completed the sale of our first commercial product, the HydroFix™ Vaso Shield, and met the first milestone under this agreement. As a result we issued 100,000 shares of Common Stock to the licensor valued at $71,000.
Intellectual Property
Our intellectual property includes licensed patents, owned and licensed patent applications and patents pending, proprietary manufacturing processes and trade secrets, brands, trademarks and trade names associated with our technology. Furthermore, we require employees, consultants and advisors to sign Proprietary Information and Inventions Agreements as well as Nondisclosure Agreements that assign to us and protect the intellectual property existing and generated from their work and that we may use and own exclusively.
The pending and provisional patent applications may not issue into patents, as is true with any provisional or patent application.

 

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CollaFixIntellectual Property
Our MiMedx intellectual property, includes two licensed and issued patents, eight licensed patent applications and two licensed provisional patent applications, as well as proprietary manufacturing processes and trade secrets, related to NDGA coatings, devices, scaffolds, substrates, or other materials and polymer treated collagen material for medical devices, implants, prosthesis and constructs. The licensed patents protecting the NDGA Polymer Composite, rather than being limited to specific products, provide broad process compatibility and protection.
HydroFix™ Intellectual Property
Our SpineMedica intellectual property includes six licensed and issued patents, thirteen owned patent applications, two co-owned (with Salumedica, LLC) patent application, and three licensed patent applications related to products and technology intended for, but not limited to, the Orthopedic-Spine market.
Improvements to Technology
Any improvements to Salubria® developed by SaluMedica, LLC during the life of the licensed patents are included as part of the license from SaluMedica, LLC. The Company will own all improvements to Salubria® that we develop. However, we will license these improvements to SaluMedica, LLC for no additional consideration, provided that the use of these improvements must be unrelated to all neurological and orthopedic uses, including muscular and skeletal uses, related to the human spine.
Trademarks & Trade Names
We also own trademark and trade name registration of the mark Paradís Vaso ShieldTM and license the SaluMedica™ and Salubria® trademarks. We also have applied for registration of the HydroFix™, CollaFix™ and MiMedx™ trademarks.
Manufacturing
MiMedx Group performs research and early stage product and process development activities and operates a pilot production facility for its proprietary CollaFix™ cross-linked collagen products in its Tampa, Florida, facility. In the future, we may contract with third parties to perform certain manufacturing or assembly of the products that are developed and enter into strategic relationships for sales and marketing of products that we develop.
Our Marietta, Georgia, facility is also our corporate headquarters, which houses our general management, sales, marketing, product development, quality and regulatory functions as well as the consolidation of our manufacturing operations for HydroFix™ and CollaFix™.
We are subject to the FDA’s quality system regulations, state regulations, and regulations promulgated by the European Union. We are FDA registered, CE marked and ISO certified. Our facilities are subject to periodic unannounced inspections by regulatory authorities, and may undergo compliance inspections conducted by the FDA and corresponding state and foreign agencies.
Suppliers
We have identified reliable sources and suppliers of collagen, source materials of NDGA, which we believe will provide a product in compliance with FDA guidelines. We engage in the manufacture of our own hydrogel products and accessibility to critical raw materials for the PVA-based biomaterial products is not inhibited by supply or market constraints.
Marketing and Sales
We plan to utilize our experienced management team to commercialize these medical technologies by advancing them through the proper regulatory approval processes, developing or arranging for reliable and cost-effective manufacturing, and to either sell or license the product lines to others or market and sell the products. For our first U.S. product, HydroFix™ Vaso Shield, we are in the process of assembling a network of independent sales representatives to sell our products domestically. We are assembling a network of stocking distributors for our first European product, HydroFix™ Spine Shield.

 

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Employees
As of December 31, 2009, we have 40 employees, of whom 37 are full-time and three are part-time employees. We consider our relationships with our employees to be satisfactory. None of our employees is covered by a collective bargaining agreement.
Litigation
We are not involved in any litigation, nor are we aware of any threatened litigation.
Research and Development
Our research and development efforts are focused on developing products for various surgical and orthopedic markets using NDGA biomaterials, and development of other sheet based spine products and other sheet products using a PVA-based hydrogel. Our research and development staff currently consists of 19 employees. To support development, we have contracts with outside labs who aid us in our research and development process. Our research and development group has extensive experience in developing products related to our field of interest, and works with our Physician Advisory Boards to design products that are intended to improve patient outcomes, simplify techniques, shorten procedures, reduce hospitalization and rehabilitation times and, as a result, reduce costs. From our inception in November 2006 to December 31, 2009, we have spent approximately $8,740,000 on research and development and $7,177,000 on acquired in-process research and development. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” at Item 7 below for information regarding expenditures for research and development in each of the last two fiscal years.
Surgeon Training and Education
We devote significant resources to working with our Physician Advisory Boards. We believe that the most effective way to introduce and build market demand for our products will be by partnering with leading surgeons from around the globe in the use of our products. We have access to state-of-the-art cadaver operating theaters and other training facilities at some of the nation’s leading medical institutions. We intend to continue to focus on working with leading surgeons in the United States. See “Business-Physician Advisory Boards.”
Available Information
Our website address is www.mimedx.com. We make available on this website under “Investor Relations – SEC Filings,” free of charge, our proxy statements, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports as soon as reasonably practicable after we electronically file or furnish such materials to the U.S. Securities and Exchange Commission (“SEC”). In addition, we post filings of Forms 3, 4, and 5 filed by our directors, executive officers and ten percent or more shareholders. We also make available on this website under the heading “Investor Relations – Corporate Governance” our Audit Committee, Compensation Committee and Corporate Governance and Nominating Committee Charters as well as our Code of Business Conduct and Ethics.
Item 1A. Risk Factors
Risks Related to Our Business and Industry
We are a high-risk startup venture.
With the commercialization of our first product, we are transitioning from being a development company to an operating company. Nonetheless, most of our products are still in the development stage and we have no significant operating history. We do not currently have any material assets, other than cash, certain laboratory equipment, and certain intellectual property rights. Our business and prospects must be evaluated in light of the expenses, delays, uncertainties and complications typically encountered by businesses in our stage of development, many of which may be beyond our control. These include, but are not limited to, lack of sufficient capital, unanticipated problems, delays or expenses relating to product development, governmental approvals, and licensing and marketing activities, competition, technological changes and uncertain market acceptance. In addition, if we are unable to manage growth effectively, our operating results could be materially and adversely affected. We must overcome these and other business risks to be successful. Our efforts may not be successful. We may never be profitable. Therefore, investors could lose their entire investment.

 

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Most of our planned products are in the early stage of product development.
We have only had one product cleared by the FDA for market and two additional products for which we have submitted 510(k) premarket notifications to the FDA. Many of the possible products we have rights to have had only limited research in the fields of use we currently intend to commercialize. Our product candidates will require testing and regulatory clearances or approvals. Accordingly, most of the products we are developing are not yet ready for sale and may never be ready for sale. The successful development of any products is subject to the risks of failure inherent in product development. These risks include the possibilities that any or all of these proposed products or procedures are found to be ineffective or toxic, or otherwise fail to receive necessary regulatory clearances or approvals; that the proposed products or procedures are uneconomical to market or do not achieve broad market acceptance; that third parties hold proprietary rights that preclude us from marketing them; or third parties market a superior or equivalent product. We are unable to predict whether our research and development activities will result in any additional commercially viable products or procedures. Furthermore, due to the extended testing and regulatory review process required before marketing clearances or approvals can be obtained, the time frames for commercialization of any products or procedures are long and uncertain.
Our financial condition raises substantial doubt about our ability to continue as a going concern.
As of December 31, 2009, we had approximately $2,654,000 of cash or cash equivalents on hand. In January 2010, the Company received final proceeds totaling $785,000 from a private placement of common stock and warrants. Assuming it receives no additional funds, the Company estimates that it has sufficient funds to operate until June 2010. If we fail to obtain additional capital in the immediate future, we will have to terminate our planned business operations, in which case the investors will lose all or part of their investment. In addition, as of December 31, 2009, the Company had outstanding debt of approximately $3,542,000 related to principal and interest under its 3% Convertible Senior Secured Promissory Notes (the “Notes”). If we default on our Notes, the holders could foreclose on our property and investors could lose all or part of their investment.
Continuing disruptions in the overall economy and the credit and financial markets may adversely impact our ability to raise necessary additional capital.
The capital and credit markets continue to be very volatile as a result of adverse conditions that have caused the failure and near failure of a number of large financial services companies. If the capital and credit markets continue to experience volatility and the availability of funds remains limited, it is possible that our ability to access the capital and credit markets may be limited or nonexistent because of these or other factors, and we require additional capital in the near future in order to continue operations.
We will need additional financing to meet our future capital requirements.
We will require significant additional funds, either through additional equity or debt financings or collaborative agreements or from other sources to engage in research and development activities with respect to our potential product candidates and to establish the personnel necessary to successfully manage us. We believe that our current cash and cash equivalents will be sufficient to meet our projected operating requirements until June 2010. However, obtaining the required regulatory approvals and clearances and the planned expansion of our business will be expensive and time-consuming and we will in the future seek funds from public and private stock or debt offerings, borrowings under lines of credit or other sources. Our capital requirements will depend on many factors, including:
    the revenues generated by sales of our products;
    the costs associated with expanding our sales and marketing efforts, including efforts to hire independent agents and sales representatives;
    the expenses we incur in developing and commercializing our products, including the cost of obtaining and maintaining FDA or other regulatory clearances and approvals; and
    unanticipated general and administrative expenses.

 

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As a result of these factors, we must raise additional funds now and in the future and such funds may not be available on favorable terms, or at all. Furthermore, if we issue equity or debt securities to raise additional funds, our existing shareholders may experience dilution and the new equity or debt securities we issue may have rights, preferences and privileges senior to those of our existing shareholders. In addition, if we raise additional funds through collaboration, licensing or other similar arrangements, it may be necessary to relinquish valuable rights to our products or proprietary technologies, or grant licenses on terms that are not favorable to us. If we cannot raise funds on acceptable terms, we may not be able to develop or enhance our products, obtain the required regulatory clearances or approvals, execute our business plan, take advantage of future opportunities, or respond to competitive pressures or unanticipated customer requirements. Any of these events could adversely affect our ability to achieve our development and commercialization goals, which could have a material and adverse effect on our business, results of operations and financial condition.
We have a limited operating history, and, to date, we have generated insignificant revenues from our products. Further, we have incurred losses since inception. We expect to continue to incur losses through 2010. The actual extent of our future losses and the timing of profitability are highly uncertain, and we may never achieve profitable operations. The principal causes of our losses are likely to be primarily attributable to personnel costs, working capital costs, research and development costs, brand development costs and marketing and promotion costs. We may never achieve profitability.
We are in a highly competitive industry and face competition from large, well-established medical device manufacturers as well as new market entrants.
Competition from other medical device companies and from research and academic institutions is intense, expected to increase, subject to rapid change, and significantly affected by new product introductions and other market activities of industry participants. In addition to competing with universities and other research institutions in the development of products, technologies and processes, we compete with other companies in acquiring rights to products or technologies from those institutions. There can be no assurance that we can develop products that are more effective or achieve greater market acceptance than competitive products, or that our competitors will not succeed in developing or acquiring products and technologies that are more effective than those being developed by us, that would render our products and technologies less competitive or obsolete.
Our competitors enjoy several competitive advantages over us, including some or all of the following:
    products which have been approved by regulatory authorities for use in the United States and/or Europe and which are supported by long-term clinical data;
    significantly greater name recognition;
    established relations with surgeons, hospitals, other healthcare providers and third party payors;
    large and established distribution networks in the United States and/or in international markets;
    greater experience in obtaining and maintaining regulatory approvals and/or clearances from the United States Food and Drug Administration and other regulatory agencies;
    more expansive portfolios of intellectual property rights; and
    greater financial, managerial and other resources for products research and development, sales and marketing efforts and protecting and enforcing intellectual property rights.
Our competitors’ products will compete directly with our products if and when ours can be marketed. In addition, our competitors as well as new market entrants may develop or acquire new treatments, products or procedures that will compete directly or indirectly with our products. The presence of this competition in our market may lead to pricing pressure which would make it more difficult to sell our products at a price that will make us profitable or prevent us from selling our products at all. Our failure to compete effectively would have a material and adverse effect on our business, results of operations and financial condition.
Our ability to protect our intellectual property and proprietary technology through patents and other means is uncertain and may be inadequate, which would have a material and adverse effect on us.
Our success depends significantly on our ability to protect our proprietary rights to the technologies used in our products. We rely on patent protection, as well as a combination of copyright, trade secret and trademark laws and nondisclosure, confidentiality and other contractual restrictions to protect our proprietary technology, including our licensed technology. These legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep any competitive advantage. For example, our pending United States and foreign patent applications (and those we have or will have licenses to) may not issue as patents in a form that will be advantageous to us or may issue and be subsequently successfully challenged by others and invalidated. In addition, our pending patent applications include claims to material aspects of our products and procedures that are not currently protected by issued patents. Both the patent application process and the process of managing patent disputes can be time consuming and expensive. Competitors may be able to design around our patents or develop products that provide outcomes that are comparable or even superior to ours. Although we have taken steps to protect our intellectual property and proprietary technology, including entering into confidentiality agreements and intellectual property assignment agreements with some of our officers, employees, consultants and advisors, such agreements may not be enforceable or may not provide meaningful protection for our trade secrets or other proprietary information in the event of unauthorized use or disclosure or other breaches of the agreements. Furthermore, the laws of foreign countries may not protect our intellectual property rights to the same extent as do the laws of the United States.

 

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In the event a competitor infringes upon our licensed or pending patent or other intellectual property rights, enforcing those rights may be costly, uncertain, difficult and time consuming. Even if successful, litigation to enforce our intellectual property rights or to defend our patents against challenge could be expensive and time consuming and could divert our management’s attention. We may not have sufficient resources to enforce our intellectual property rights or to defend our patents rights against a challenge. The failure to obtain patents and/or protect our intellectual property rights could have a material and adverse effect on our business, results of operations, and financial condition.
We may become subject to claims of infringement or misappropriation of the intellectual property rights of others, which could prohibit us from developing our products, require us to obtain licenses from third parties or to develop non-infringing alternatives, and subject us to substantial monetary damages.
Third parties could, in the future, assert infringement or misappropriation claims against us with respect to products we develop. Whether a product infringes a patent or misappropriates other intellectual property involves complex legal and factual issues, the determination of which is often uncertain. Therefore, we cannot be certain that we have not infringed the intellectual property rights of others. Our potential competitors may assert that some aspect of our product infringes their patents. Because patent applications may take years to issue, there also may be applications now pending of which we are unaware that may later result in issued patents that our products infringe. There also may be existing patents or pending patent applications of which we are unaware that our products may inadvertently infringe.
Any infringement or misappropriation claim could cause us to incur significant costs, place significant strain on our financial resources, divert management’s attention from our business and harm our reputation. If the relevant patents in such claim were upheld as valid and enforceable and we were found to infringe, we could be prohibited from selling any product that is found to infringe unless we could obtain licenses to use the technology covered by the patent or are able to design around the patent. We may be unable to obtain such a license on terms acceptable to us, if at all, and we may not be able to redesign our products to avoid infringement. A court could also order us to pay compensatory damages for such infringement, plus prejudgment interest and could, in addition, treble the compensatory damages and award attorney fees. These damages could be substantial and could harm our reputation, business, financial condition and operating results. A court also could enter orders that temporarily, preliminarily or permanently enjoin us and our customers from making, using, or selling products, and could enter an order mandating that we undertake certain remedial activities. Depending on the nature of the relief ordered by the court, we could become liable for additional damages to third parties.
Our patents and licenses may be subject to challenge on validity grounds, and our patent applications may be rejected.
We rely on our patents, patent applications, licenses and other intellectual property rights to give us a competitive advantage. Whether a patent is valid, or whether a patent application should be granted, is a complex matter of science and law, and therefore we cannot be certain that, if challenged, our patents, patent applications and/or other intellectual property rights would be upheld. If one or more of those patents, patent applications, licenses and other intellectual property rights are invalidated, rejected or found unenforceable, that could reduce or eliminate any competitive advantage we might otherwise have had.
The prosecution and enforcement of patents licensed to us by third parties are not within our control, and without these technologies, our product may not be successful and our business would be harmed if the patents were infringed or misappropriated without action by such third parties.
We have obtained licenses from third parties for patents and patent application rights related to the products we are developing, allowing us to use intellectual property rights owned by or licensed to these third parties. We do not control the maintenance, prosecution, enforcement or strategy for many of these patents or patent application rights and as such are dependent in part on the owners of the intellectual property rights to maintain their viability. Without access to these technologies or suitable design-around or alternative technology options, our ability to conduct our business could be impaired significantly.

 

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Our NDGA License Agreement could be terminated.
Under our license agreement with Shriners Hospitals for Children and University of South Florida Research Foundation dated January 29, 2007, it is possible for the licensor to terminate the agreement if we breach the license agreement and all of our cure rights are exhausted. If our license agreement were to be terminated, it would have a negative impact on our business.
We may be subject to damages resulting from claims that we, our employees, or our independent contractors have wrongfully used or disclosed alleged trade secrets of others.
Some of our employees were previously employed at other medical device companies. We may also hire additional employees who are currently employed at other medical device companies, including our competitors. Additionally, consultants or other independent agents with which we may contract may be or have been in a contractual arrangement with one or more of our competitors. Although no claims against us are currently pending, we may be subject to claims that these employees or independent contractors have used or disclosed any party’s trade secrets or other proprietary information. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management. If we fail to defend such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. A loss of key personnel or their work product could hamper or prevent our ability to market existing or new products, which could severely harm our business.
SaluMedica, LLC may license the PVA-based hydrogel, the material used to make SpineMedica’s products and other products we are developing, and its trademark to third parties for use in applications unrelated to the spine, rotator cuff, or surgical sheet applications. This may expose us to adverse publicity if these uses are not proven safe and effective.
Our licenses with SaluMedica, LLC allows us to use technology and/or know-how related to the material used to manufacture applications related to the spine, rotator cuff and surgical sheet, and allows us to use the Salubria® biomaterial trademark. SaluMedica, LLC may license the PVA-based hydrogel and rights related to the Salubria® biomaterial trademark to third parties for applications not related to the spine, rotator cuff, or surgical sheet. If the use of Salubria® biomaterial or the PVA-based hydrogel by these third parties results in product liability claims or has other adverse effects in patients, surgeons and patients may associate these claims and effects with our products, even if our products are nevertheless proven safe and effective. If Salubria® biomaterial experiences adverse publicity or is not proven safe and effective in other applications, sales of our products could be adversely affected.
We depend on key personnel.
We currently have 37 full-time and 3 part-time employees. Our success will depend, in part, upon our ability to attract and retain additional skilled personnel, which will require substantial additional funds. There can be no assurance that we will be able to find and attract additional qualified employees or retain any such personnel. Our inability to hire qualified personnel, the loss of services of our key personnel, or the loss of services of executive officers or key employees that that may be hired in the future may have a material and adverse effect on our business.
Our operating results may fluctuate significantly as a result of a variety of factors, many of which are outside of our control.
We are subject to the following factors, among others, that may negatively affect our operating results:
    the announcement or introduction of new products by our competitors;
    our ability to upgrade and develop our systems and infrastructure to accommodate growth;
    our ability to attract and retain key personnel in a timely and cost effective manner;
    technical difficulties;
    the amount and timing of operating costs and capital expenditures relating to the expansion of our business, operations and infrastructure;
    regulation by federal, state or local governments; and
    general economic conditions as well as economic conditions specific to the healthcare industry.

 

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As a result of our limited operating history, limited resources, and the nature of the markets in which we compete, it is extremely difficult for us to forecast accurately. We have based our current and future expense levels largely on our investment plans and estimates of future events although certain of our expense levels are, to a large extent, fixed. Assuming our products reach the market, we may be unable to adjust spending in a timely manner to compensate for any unexpected revenue shortfall. Accordingly, any significant shortfall in revenues relative to our planned expenditures would have an immediate adverse effect on our business, results of operations and financial condition. Further, as a strategic response to changes in the competitive environment, the Company may from time to time make certain pricing, service or marketing decisions that could have a material and adverse effect on our business, results of operations and financial condition. Due to the foregoing factors, our revenues and operating results are and will remain difficult to forecast.
The failure of government health administrators and private health insurers to reimburse patients for costs of services incorporating our potential products would materially and adversely affect our business.
Our success depends, in part, on the extent to which reimbursement for the costs of products to users will be available from government health administration authorities, private health insurers and other organizations. Significant uncertainty usually exists as to the reimbursement status of newly approved healthcare products. Adequate third party insurance coverage may be unavailable for us, our sublicensees or partners to establish and maintain price levels sufficient for realization of an appropriate return on investment. Government and other third-party payers attempt to contain healthcare costs by limiting both coverage and the level of reimbursement of new products. Therefore, we cannot be certain that our products or the procedures performed with them will be covered or adequately reimbursed and thus we may be unable to sell our products profitably if third-party payors deny coverage or reduce their levels of payment below that which we project, or if our production costs increase at a greater rate than payment levels. If government and other third party payers do not provide adequate coverage and reimbursement for uses of the products incorporating our technology, the market’s acceptance of our products could be adversely affected.
Disruption of our manufacturing could adversely affect our business, financial condition and results of operations.
Our results of operations are dependent upon the continued operation of our manufacturing facilities. The operation of biomedical manufacturing plants involves many risks. Such risks include the risks of breakdown, failure or substandard performance of equipment, the occurrence of natural and other disasters, and the need to comply with the requirements of directives from government agencies, including the FDA. The occurrence of material operational problems could have a material adverse effect on our business, financial condition, and results of operations during the period of such operational difficulties.
We currently have only one product cleared by the FDA for marketing, and may never develop or launch, any commercialized products.
We currently have only one commercialized product in the United States and, to date, have had only limited sales. We have invested substantial time and resources in developing various additional products. Commercialization of these products, including NDGA and PVA-based hydrogel products, will require additional development, clinical evaluation, regulatory clearance or approval, significant marketing efforts and substantial additional investment before they can provide us with any revenue. Despite our efforts, our products may not become commercially successful products for a number of reasons, including:
    we may not be able to obtain regulatory clearance or approvals for our products, or the approved indication may be narrower than we seek;
    our products may not prove to be safe and effective in clinical trials;
    physicians may not receive any reimbursement from third party payors, or the level of reimbursement may be insufficient to support widespread adoption of our products;
    we may experience delays in our development program;
    any products that are approved may not be accepted in the marketplace by physicians or patients;
    we may not be able to manufacture any of our products in commercial quantities or at an acceptable cost; and
    rapid technological change may make our products obsolete.

 

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We face the risk of product liability claims or recalls and may not be able to obtain or maintain adequate product liability insurance.
Our business exposes us to the risk of product liability claims that are inherent in the testing, manufacturing and marketing of medical devices, including those that may arise from the misuse or malfunction of, or design flaws in, our products. We may be subject to such claims if our products cause, or appear to have caused, an injury. Claims may be made by patients, healthcare providers or others selling our products. Defending a lawsuit, regardless of merit, could be costly, divert management attention and result in adverse publicity, which could result in the withdrawal of, or reduced acceptance of, our products in the market.
Although we have product liability insurance that we believe is adequate, this insurance is subject to deductibles and coverage limitations and we may not be able to maintain this insurance. If we are unable to maintain product liability insurance at an acceptable cost or on acceptable terms with adequate coverage or otherwise protect ourselves against potential product liability claims, we could be exposed to significant liabilities, which may harm our business. A product liability claim or other claim with respect to uninsured liabilities or for amounts in excess of insured liabilities could result in significant costs and significant harm to our business.
If we are unable to establish sales, marketing and distribution capabilities or enter into and maintain arrangements with third parties to sell, market and distribute our products, our business may be harmed.
To achieve commercial success for our products, we must develop a sales and marketing force, or enter into arrangements with others to market and sell our products. In addition to being expensive, developing such a sales force is time consuming, and could delay or limit the success of any product launch. We may not be able to develop this capacity on a timely basis or at all. Qualified direct sales personnel with experience in the medical device market are in high demand, and there is no assurance that we will be able to hire or retain an effective direct sales team. Similarly, qualified independent medical device representatives both within and outside the United States are in high demand, and we may not be able to build an effective network for the distribution of our product through such representatives. We have no assurance that we will be able to enter into contracts with representatives on terms acceptable to us, or if we do, we may be subject to a number of risks, including:
    We may be required to relinquish important rights to our products;
 
    We may not be able to control the amount and timing of resources that our distributors may devote to the commercialization of our products;
 
    Our distributors may experience financial difficulties; and
 
    Business combinations or significant changes in a distributor’s business strategy may also adversely affect a distributor’s willingness or ability to complete its obligations under any arrangement.
Failure to market and distribute products to our customers in a timely and cost effective manner would cause our potential future sales to decrease and our margins to fall.
Off-label promotion of our products could result in substantial penalties.
We are only permitted to promote our products for the uses indicated on the respective label as cleared by the FDA. The U.S. Attorneys’ offices and other regulators, in addition to the FDA, have recently focused substantial attention on off-label promotional activities and have initiated civil and criminal investigations related to such practices. If it is determined by these or other regulators that we have promoted our products for off-label use, we could be subject to fines, legal proceedings, injunctions or other penalties.
To be commercially successful, we must convince surgeons that our products are safe and effective alternatives to existing surgical treatments and that our products should be used in their procedures.
We believe surgeons may not widely adopt our products unless they determine, based on experience, clinical data and published peer reviewed journal articles, that the use of our products in a particular procedure is a favorable alternative to conventional methods. Surgeons may be slow to change their medical treatment practices for the following reasons, among others:
    their lack of experience with prior procedures in the field using our products;
    lack of evidence supporting additional patient benefits and our products over conventional methods;
    perceived liability risks generally associated with the use of new products and procedures;
    limited availability of reimbursement from third party payors; and
    the time that must be dedicated to training.

 

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In addition, we believe recommendations for and support of our products by influential surgeons are essential for market acceptance and adoption. If we do not receive this support or if we are unable to demonstrate favorable long-term clinical data, surgeons and hospitals may not use our products which would significantly reduce our ability to achieve expected revenues and would prevent us from becoming profitable.
Any failure in our efforts to train surgeons could significantly reduce the market acceptance of our products.
There will be a learning process involved for surgeons to become proficient in the use of our products. It will be critical to the success of our commercialization efforts to train a sufficient number of surgeons and to provide them with adequate instruction in the use of our products. This training process may take longer than expected and may therefore affect our ability to generate sales. Convincing surgeons to dedicate the time and energy necessary for adequate training is challenging and we may not be successful in these efforts. If surgeons are not properly trained, they may misuse or ineffectively use our products. This may result in unsatisfactory patient outcomes, patient injury, negative publicity, or lawsuits against us, any of which could have an adverse effect on our business.
We depend on a single or a limited number of third-party suppliers, and the loss of these third-party suppliers or their inability to supply us with adequate raw materials could adversely affect our business.
We rely on a limited number of third-party suppliers for the raw materials required for the production of our implant products. Furthermore, in some cases we rely on a single supplier. Our dependence on a limited number of third-party suppliers or on a single supplier, and the challenges we may face in obtaining adequate supplies of raw materials, involve several risks, including limited control over pricing, availability, quality, and delivery schedules. We cannot be certain that our current suppliers will continue to provide us with the quantities of these raw materials that we require or satisfy our anticipated specifications and quality requirements. Any supply interruption in limited or sole sourced raw materials could materially harm our ability to manufacture our products until a new source of supply, if any, could be identified and qualified. Although we believe there are other suppliers of these raw materials, we may be unable to find a sufficient alternative supply channel in a reasonable time or on commercially reasonable terms. Any performance failure on the part of our suppliers could delay the development and commercialization of our products, including limiting supplies necessary for clinical trials and regulatory approvals, or interrupt production of the existing products that are already marketed, which would have a material adverse effect on our business.
We also use collagen, a protein obtained from animal source tissue, as another significant material required to produce our products. We may not be able to obtain adequate supplies of animal source tissue, or to obtain this tissue from animal herds that we believe do not involve pathogen contamination risks, to meet our future needs or on a cost-effective basis. Any significant supply interruption could adversely affect the production of our products and delay our product development or clinical trial programs. These delays would have an adverse effect on our business.
We will need to increase the size of our organization, and we may be unable to manage rapid growth effectively.
Our failure to manage growth effectively could have a material and adverse effect on our business, results of operations and financial condition. We anticipate that a period of significant expansion will be required to address possible other acquisitions of business, products, or rights, and potential internal growth to handle licensing and research activities. This expansion will place a significant strain on management, operational and financial resources. To manage the expected growth of our operations and personnel, we must both modify our existing operational and financial systems, procedures and controls and implement new systems, procedures and controls. We must also expand our finance, administrative, and operations staff. Our current personnel, systems, procedures and controls may not adequately support our future operations. Management may be unable to hire, train, retain, motivate and manage necessary personnel or to identify, manage and exploit existing and potential strategic relationships and market opportunities.

 

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Our business could be materially and adversely impacted by risks inherent in international markets.
We expect a significant percentage of our revenues to be from sales to customers outside the U.S.  International sales subject us to inherent risks related to changes in the economic, political, legal and business environments in the foreign countries in which we do business, including the following:
    Fluctuations in currency exchange rates;
    Regulatory, product approval and reimbursement requirements;
    Tariffs and other trade barriers;
    Greater difficulty in accounts receivable collection and longer collection periods;
    Difficulties and costs of managing foreign distributors;
    Reduced protection for intellectual property rights in some countries;
    Burdens of complying with a wide variety of foreign laws;
    The impact of recessions in economics outside the U.S.; and
    Political and economic instability
    U.S. Export regulatory restrictions
If we fail to successfully market and sell our products in international markets, our business, financial condition, results of operations and cash flows could be materially and adversely affected.
Risks Related to Regulatory Approval of Our Products and Other Government Regulations
Government regulation of our business is extensive and obtaining and maintaining the necessary regulatory approvals is uncertain, expensive and time-consuming.
The process of obtaining regulatory clearances or approvals to market a medical device from the FDA, or similar regulatory authorities outside of the United States is costly and time consuming, and there can be no assurance that such clearances or approvals will be granted on a timely basis, or at all. The FDA’s 510(k) clearance process generally takes 30 days to 6 months from submission, depending on whether a Special or traditional 510(k) premarket notification has been submitted, but can take significantly longer. An application for premarket approval, or PMA, must be submitted to the FDA if the device cannot be cleared through the 510(k) clearance process and is not exempt from premarket review by the FDA. The PMA process almost always requires one or more clinical trials and can take one to three years from the date of filing, or longer. In some cases, the FDA has indicated that it will require clinical data as part of the 510(k) process.
There is no certainty that any of our products will be cleared by the FDA by means of either a 510(k) notice or a PMA application. Even if the FDA permits us to use the 510(k) clearance process, we cannot assure you that the FDA will not require either supporting data from laboratory tests or studies that we have not conducted, or substantial supporting clinical data. If we are unable to use the 510(k) clearance process for any of our products, are required to provide clinical data or laboratory data that we do not possess to support our 510(k) premarket notifications for any of these products, or otherwise experience delays in obtaining or fail to obtain regulatory clearances, the commercialization of such product will be delayed or prevented, which will adversely affect our ability to generate revenues. It also may result in the loss of potential competitive advantages that we might otherwise attain by bringing our products to market earlier than our competitors. Any of these contingencies could adversely affect our business.
Even if regulatory clearance is obtained, a marketed product is subject to continual review, and later discovery of previously unidentified problems or failure to comply with the applicable regulatory requirements may result in restrictions on a product’s marketing, recalls, or withdrawal of the product from the market as well as possible civil or criminal sanctions.
We expect to be required to conduct clinical trials for some of our products. We have no experience conducting clinical trials, they may proceed more slowly than anticipated, and we cannot be certain that our products will be shown to be safe and effective for human use.
In order to commercialize some of our products, we may be required to submit a PMA, which will require us to conduct clinical trials. Even if we seek FDA clearance of one our products through the 510(k) process, the FDA may require us to conduct a clinical trial in support of our 510(k). We will receive approval from the FDA to commercialize products requiring a clinical trial only if we can demonstrate to the satisfaction of the FDA, in well-designed and properly conducted clinical trials, that our product candidates are safe and effective and otherwise meet the appropriate standards required for approval for specified indications. Clinical trials are complex, expensive, time consuming, uncertain and subject to substantial and unanticipated delays. Before we may begin clinical trials that present a significant risk to subjects, we must submit and obtain FDA approval of an investigational device exemption, or IDE, that describes, among other things, the manufacture of, and controls for, the device and a complete investigational plan. Clinical trials may involve a substantial number of patients in a multi-year study. We may encounter problems with our clinical trials and any of those problems could cause us or the FDA to suspend those trials, or delay the analysis of the data derived from them.

 

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A number of events or factors, including any of the following, could delay or prevent the completion of our clinical trials in the future and negatively impact or even foreclose our ability to obtain FDA approval for, and to introduce a particular product:
    failure to obtain approval from the FDA or any foreign regulatory authority to commence an investigational study;
    conditions imposed on us by the FDA or any foreign regulatory authority regarding the scope or design of our clinical trials;
    delays in obtaining or in our maintaining required approvals from institutional review boards or other reviewing entities at clinical sites selected for participation in our clinical trials;
    insufficient supply of our products or other materials necessary to conduct our clinical trials;
    difficulties in enrolling patients in our clinical trials;
    negative or inconclusive results from clinical trials, or results that are inconsistent with earlier results, that necessitate additional clinical studies;
    serious or unexpected side effects experienced by patients in whom our products are implanted; or
    failure by any of our third-party contractors or investigators to comply with regulatory requirements or meet other contractual obligations in a timely manner.
Our clinical trials may not begin as planned, may need to be redesigned, and may not be completed on schedule, if at all. Delays in our clinical trials may result in increased development costs for our product candidates, which could cause our stock price to decline and limit our ability to obtain additional financing. In addition, if one or more of our clinical trials are delayed, competitors may be able to bring products to market before we do, and the commercial viability of our product candidates could be significantly reduced.
There may be unexpected findings, particularly those that may only become evident from larger scale clinical trials, as compared with the smaller scale tests we intend to do initially. The occurrence of unexpected findings in connection with our clinical trials or any subsequent clinical trial required by our regulators may prevent or delay obtaining regulatory approval, and may adversely affect coverage or reimbursement determinations. Our regulators may also determine that additional clinical trials are necessary, in which case approval may be delayed for several months or even years while these trials are conducted. The clinical trials may not show that our products based on NDGA, PVA-based hydrogel, or any other products we develop are safe and effective. If we are unable to complete the clinical trials necessary to successfully support our regulatory applications, our ability to commercialize our products, business, financial condition, and results of operations would be materially adversely affected.
Our products contain biologic materials, and so may face additional obstacles to FDA clearance or approval.
To complete successful clinical trials, a product must meet the criteria for clinical approval, or endpoints, established in the clinical study. These endpoints are established in consultation with the FDA, following any applicable clinical trial design guidelines, to establish the safety and effectiveness for approval of devices subject to PMA approval, or to demonstrate the substantial equivalence of devices subject to 510(k) clearance. However, in the case of products which are novel or which target parts of the human body for which there are no FDA approved products, the scientific literature may not be as complete and there may not be established guidelines for the design of studies to demonstrate the effectiveness of such products. As a result, clinical trials considering such products may take longer than average and obtaining approval may be more difficult. Additionally, the endpoints established for such a clinical trial might be inadequate to demonstrate the safety and efficacy or substantial equivalence required for regulatory clearance because they do not adequately measure the clinical benefit of the product being tested. In certain cases additional data collected in the clinical trial or further clinical trials may be required by the FDA. Any delays in regulatory approval will delay commercialization of our products, which may have an adverse effect on our business.
The FDA regulates human therapeutic products in one of three broad categories: drugs, biologics or medical devices. The FDA’s scrutiny of products containing biologic materials may be heightened. Although we anticipate that our products will be regulated in the U.S. as medical devices, we will use biological materials in the production of several devices. FDA may conclude that some of our products are combinations of devices and biologicals, or may conclude that some of our products are biologics rather than devices, potentially requiring a different and more time consuming premarket clearance mechanism. Use of this biological material in our products may result in heightened scrutiny of such product which may result in further delays in, or obstacles to, obtaining FDA clearance or approval.

 

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Subsequent modifications to our products may require new regulatory approvals, or may require us to cease marketing or recall the modified products until approvals are obtained.
Once our products receive FDA approval or clearance, subsequent modification to our products may require new regulatory approvals or clearances, including 510(k) clearances or premarket approvals, or require us to recall or cease marketing the modified devices until these clearances or approvals are obtained. The FDA requires device manufacturers to initially make and document a determination of whether or not a modification requires a new approval, supplement or clearance. A manufacturer may determine that a modification does not require a new clearance or approval. However, the FDA can review a manufacturer’s decision and may disagree. The FDA may also on its own initiative determine that a new clearance or approval is required. We may make modifications that we believe do not or will not require additional clearances or approvals. If the FDA disagrees and requires new clearances or approvals for the modifications, we may be required to recall and to stop marketing our products as modified, which could require us to redesign our products and harm our operating results. In these circumstances, we may be subject to significant enforcement actions.
If a manufacturer determines that a modification to a FDA-cleared device requires premarket clearance, then the manufacturer must file for a new 510(k) clearance or possibly a premarket approval application supplement. Where we determine that modifications to our products require a new 510(k) clearance or premarket approval application, we may not be able to obtain those additional clearances or approvals for the modifications or additional indications in a timely manner, or at all. Obtaining clearances and approvals can be a time consuming process, and delays in obtaining required future clearances or approvals would adversely affect our ability to introduce new or enhanced products in a timely manner, which in turn would harm our future growth.
If we or our suppliers fail to comply with the FDA’s quality system regulations, the manufacture of our products could be delayed.
We and our suppliers are required to comply with the FDA’s quality system regulations, which cover the methods and documentation of the design, testing, production, control, quality assurance, labeling, packaging, storage and shipping of our products. The FDA enforces the quality system regulation through inspections. If we or our supplier fail a quality system regulations inspection or if any corrective action plan is not sufficient, FDA could take enforcement action, including any of the following sanctions and the manufacture of our products could be delayed or terminated:
    untitled letters, warning letters, fines, injunctions, consent decrees and civil penalties;
    customer notifications for repair, replacement, refunds;
    recall, detention or seizure of our products;
    operating restrictions or partial suspension or total shutdown of production;
    refusing or delaying our requests for 510(k) clearance or premarket approval of new products or modified products;
    withdrawing 510(k) clearances on PMA approvals that have already been granted;
    refusal to grant export approval for our products; or
    criminal prosecution.
We and our sales personnel, whether employed by us or by others, must comply with various federal and state anti-kickback, self referral, false claims and similar laws, any breach of which could cause a material adverse effect on our business, financial condition and results of operations.
Our relationships with surgeons, hospitals and the marketers of our products are subject to scrutiny under various federal anti-kickback, self-referral, false claims and similar laws, often referred to collectively as healthcare fraud and abuse laws. Healthcare fraud and abuse laws are complex, and even minor, inadvertent violations can give rise to claims that the relevant law has been violated. Possible sanctions for violation of these fraud and abuse laws include monetary fines, civil and criminal penalties, exclusion from federal and state healthcare programs, including Medicare, Medicaid, Veterans Administration health programs, workers’ compensation programs and TRICARE (the healthcare system administered by or on behalf of the U.S. Department of Defense for uniformed services beneficiaries, including active duty and their dependents, retirees and their dependents), and forfeiture of amounts collected in violation of such prohibitions. Certain states in which we intend to market our products have similar fraud and abuse laws, imposing substantial penalties for violations. Any government investigation or a finding of a violation of these laws would likely result in a material adverse effect on the market price of our common stock, as well as our business, financial condition and results of operations.

 

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Anti-kickback laws and regulations prohibit any knowing and willful offer, payment, solicitation or receipt of any form of remuneration in return for the referral of an individual or the ordering or recommending of the use of a product or service for which payment may be made by Medicare, Medicaid or other government-sponsored healthcare programs. We have formed Physician Advisory Boards consisting of an aggregate of over 25 physicians to assist us with scientific research and development and to help us evaluate technologies. We have also entered into consulting agreements and product development agreements with surgeons, including some who may make referrals to us or order our products after our products are introduced to market. In addition, some of these physicians own our stock, which they purchased in arms’ length transactions on terms identical to those offered to non-surgeons, or received stock options from us as consideration for consulting services performed by them. We also may engage additional physicians on a consulting basis. While these transactions were structured with the intention of complying with all applicable laws, including the federal ban on physician self referrals, commonly known as the “Stark Law,” state anti-referral laws and other applicable anti-kickback laws, it is possible that regulatory or enforcement agencies or courts may in the future view these transactions as prohibited arrangements that must be restructured or for which we would be subject to other significant civil or criminal penalties, or prohibit us from accepting referrals from these surgeons. Because our strategy relies on the involvement of physicians who consult with us on the design of our product candidates, we could be materially impacted if regulatory or enforcement agencies or courts interpret our financial relationships with our physician advisors who refer or order our products to be in violation of applicable laws and determine that we would be unable to achieve compliance with such applicable laws. This could harm our reputation and the reputations of our physician advisors. In addition, the cost of noncompliance with these laws could be substantial since we could be subject to monetary fines and civil or criminal penalties, and we could also be excluded from federally funded healthcare programs, including Medicare and Medicaid, for non-compliance.
The scope and enforcement of all of these laws is uncertain and subject to rapid change, especially in light of the lack of applicable precedent and regulations. There can be no assurance that federal or state regulatory or enforcement authorities will not investigate or challenge our current or future activities under these laws. Any investigation or challenge could have a material adverse effect on our business, financial condition and results of operations. Any state or federal regulatory or enforcement review of us, regardless of the outcome, would be costly and time consuming. Additionally, we cannot predict the impact of any changes in these laws, whether these changes are retroactive or will have effect on a going-forward basis only.
We face significant uncertainty in the industry due to government healthcare reform.
Political, economic and regulatory influences are subjecting the healthcare industry to fundamental changes. Reforms under consideration in the United States include mandated basic healthcare benefits, controls on healthcare spending, increases in insurance premiums and increased out-of-pocket requirements for patients, the creation of large group purchasing organizations that aim to reduce the costs of products that their member hospitals consume, and significant modifications to the healthcare delivery system. We anticipate that the U.S. Congress and state legislatures will continue to review and assess alternative healthcare delivery systems and payment methods. Due to uncertainties regarding the ultimate features of reform initiatives and the timing of their enactment and implementation, we cannot predict which, if any, of such reform proposals will be adopted, when they may be adopted or what impact reform initiatives may have on us.
Risks Related to the Securities Markets and Ownership of Our Common Stock
The price of our Common Stock has been, and will likely continue to be, volatile.
The market price of our Common Stock, like that of the securities of many other companies that are in, or are just emerging from, the development stage, has fluctuated over a wide range and it is likely that the price of our Common Stock will fluctuate in the future. Over the past two fiscal years, the closing price of our Common Stock, as reported by the OTC Bulletin Board, has fluctuated from a low of $.40 to a high of $6.35. The market price of our Common Stock could be impacted by a variety of factors, including:
    Fluctuations in stock market prices and trading volumes of similar companies or of the markets generally;
    Our ability to successfully launch, market and earn significant revenue from our products;
    Our ability to obtain additional financing to support our continuing operations;
    Disclosure of the details and results of regulatory applications and proceedings;
    Changes in government regulation;
    Additions or departures of key personnel;
    Our investments in research and development or other corporate resources;

 

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    Announcements of technological innovations or new commercial products or services by us or our competitors;
    Developments in the patents or other proprietary rights owned or licensed by us or our competitors;
    The timing of new product introductions;
    Actual or anticipated fluctuations in our operating results, including any restatements of previously reported results;
    Our ability to effectively and consistently manufacture our products and avoid costs associated with the recall of defective or potentially defective products;
    Our ability and the ability of our distribution partners to market and sell our products;
    Changes in distribution channels; and
    The ability of our vendors to effectively and timely deliver necessary materials and product components.
Further, due to the relatively fixed nature of most of our costs, which primarily include personnel costs as well as facilities costs, any unanticipated shortfall in revenue in any fiscal quarter would have an adverse effect on our results of operations in that quarter. Accordingly, our operating results for any particular quarter may not be indicative of results for future periods and should not be relied upon as an indication of our future performance. These fluctuations could cause the trading price of our stock to be negatively affected. Our quarterly operating results have varied substantially in the past and may vary substantially in the future. In addition, the stock market has been very volatile, particularly on the OTC Bulletin Board where our stock is quoted. This volatility is often not related to the operating performance of companies listed thereon and will probably continue in the foreseeable future.
The concentrated Common Stock ownership by certain of our executive officers and directors will limit your ability to influence corporate matters.
As of December 31, 2009, our directors and executive officers together beneficially owned approximately 30% of our outstanding Common Stock. This group has significant influence over our management and affairs and overall matters requiring shareholder approval, including the election of directors and significant corporate transactions, such as a merger or sale of our company or our assets, for the foreseeable future. This concentrated control will limit the ability of other shareholders to influence corporate matters and, as a result, we may take actions that some of its shareholders do not view as beneficial. In addition, such concentrated control could discourage others from initiating changes of control. As a result, the market price of our shares could be adversely affected.
The exercise of warrants or options or conversion of notes may depress our stock price and may result in dilution to our common stockholders.
There are a significant number of outstanding warrants and options to purchase our stock and there are a certain number of outstanding notes that are convertible into our Common Stock. If the market price of our Common Stock rises above the exercise price of outstanding warrants and options or the conversion price of the outstanding notes, holders of those securities may be likely to exercise their warrants and options or convert their notes and sell the Common Stock acquired upon exercise or conversion of such securities, as applicable, in the open market. Sales of a substantial number of shares of our Common Stock in the public market by holders of warrants, options, or notes may depress the prevailing market price for our Common Stock and could impair our ability to raise capital through the future sale of our equity securities. Additionally, if the holders of outstanding options, warrants, or notes exercise those options or warrants or convert those notes, as applicable, our common stockholders will incur dilution in their relative percentage ownership.
As of December 31, 2009, warrants to purchase 6,991,371 shares of our common stock at a weighted average exercise price of $1.17 per share were outstanding and exercisable; options to purchase 6,182,500 shares of common stock were outstanding, of which 3,662,082 were exercisable at a weighted average exercise price of $1.35 per share; and notes convertible into 6,944,000 shares of common stock at a conversion price of $.50 per share were outstanding.

 

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Our Common Stock is and likely will remain subject to the SEC’s “Penny Stock” rules, which may make its shares more difficult to sell.
Because the price of our Common Stock is currently and may remain less than $5.00 per share, it is expected to be classified as a “penny stock.” The SEC rules regarding penny stocks may have the effect of reducing trading activity in our shares, making it more difficult for investors to sell. Under these rules, broker-dealers who recommend such securities to persons other than institutional accredited investors must:
    make a special written suitability determination for the purchaser;
    receive the purchaser’s written agreement to a transaction prior to sale;
    provide the purchaser with risk disclosure documents which identify certain risks associated with investing in “penny stocks” and which describe the market for these “penny stocks” as well as a purchaser’s legal remedies;
    obtain a signed and dated acknowledgment from the purchaser demonstrating that the purchaser has received the required risk disclosure document before a transaction in a “penny stock” can be completed; and
    give bid and offer quotations and broker and salesperson compensation information to the customer orally or in writing before or with the confirmation.
These rules make it more difficult for broker-dealers to effectuate customer transactions and trading activity in our securities and may result in a lower trading volume of our common stock and lower trading prices.
 
Our Common Stock may be thinly traded.
There is a minimal public market for our Common Stock. We cannot be certain more of a public market for our Common Stock will develop, or if developed, that it will be sustained. Our Common Stock will likely be thinly traded compared to larger more widely known companies. We cannot predict the extent to which an active public market for our Common Stock will develop or be sustained at any time in the future. If we are unable to develop or sustain a market for our Common Stock, investors may be unable to sell the Common Stock they own, and may lose the entire value of their investment.
Securities analysts may elect not to report on our Common Stock or may issue negative reports that adversely affect the stock price.
At this time, no securities analysts provide research coverage of our Common Stock, and securities analysts may elect not to provide such coverage in the future. Rules mandated by the Sarbanes-Oxley Act and a global settlement reached in 2003 among the SEC, other regulatory agencies, and a number of investment banks led to a number of fundamental changes in how analysts are reviewed and compensated. In particular, many investment banking firms are required to contract with independent financial analysts for their stock research. It may remain difficult for a company such as ours, with a smaller market capitalization, to attract independent financial analysts that will cover our Common Stock. If securities analysts do not cover our Common Stock, the lack of research coverage may adversely affect its actual and potential market price. The trading market for our Common Stock may be affected in part by the research and reports that industry or financial analysts publish about its business. If one or more analysts elect to cover us and then downgrade the stock, the stock price would likely decline rapidly. If one or more of these analysts cease coverage of us, we could lose visibility in the market, which in turn could cause its stock price to decline. This could have a negative effect on the market price of our shares.
We do not intend to pay cash dividends.
We have never declared or paid cash dividends on our capital stock. We currently expect to use available funds and any future earnings in the development, operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future. In addition, the terms of any future debt or credit facility we may obtain may preclude us from paying any dividends. As a result, capital appreciation, if any, of our Common Stock will be an investor’s only source of potential gain from our Common Stock for the foreseeable future.
Shareholders may experience significant dilution if future equity offerings are used to fund operations or acquire complementary businesses.
If future operations or acquisitions are financed through the issuance of equity securities, shareholders could experience significant dilution. In addition, securities issued in connection with future financing activities or potential acquisitions may have rights and preferences senior to the rights and preferences of our Common Stock. The issuance of shares of our Common Stock upon the exercise of options may result in dilution to our shareholders.

 

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We may become involved in securities class action litigation that could divert management’s attention and harm its business.
The stock market in general and the stocks of medical device companies in particular have experienced extreme price and volume fluctuations. These fluctuations have often been unrelated or disproportionate to the operating performance of the companies involved. If these fluctuations occur in the future, the market price of our shares could fall regardless of its operating performance. In the past, following periods of volatility in the market price of a particular company’s securities, securities class action litigation has been brought against that company. If the market price or volume of our shares suffers extreme fluctuations, then we may become involved in this type of litigation which would be expensive and divert management’s attention and resources from managing the business.
Anti-takeover provisions in our organizational documents may discourage or prevent a change of control, even if an acquisition would be beneficial to shareholders, which could affect our share price adversely and prevent attempts by shareholders to replace or remove current management
Our Articles of Incorporation and Bylaws contain provisions that could delay or prevent a change of control of our company or its Board of Directors that shareholders might consider favorable. Some of these provisions include:
    authorizing the issuance of preferred stock which can be created and issued by the Board of Directors without prior common stock shareholder approval, with rights senior to those of the common stock;
    restricting persons who may call shareholder meetings; and
    allowing the Board to fill vacancies and to fix the number of directors.
Item 1B. Unresolved Staff Comments
None
Item 2. Properties
Our corporate headquarters are located in Marietta, Georgia where we lease approximately 12,200 square feet of office, laboratory and manufacturing space. We lease approximately 5,000 square feet in Tampa, Florida, which primarily consists of laboratory (2,000 feet) and manufacturing (3,000 feet) space. We believe these facilities are adequate for our current activities but expect to lease additional space in conjunction with executing our business plan.
Item 3. Legal Proceedings
None
Item 4. (Removed and Reserved)

 

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PART II
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
Our Common Stock was approved for quotation on the OTC Bulletin Board on July 19, 2007. Only a limited number of shares were traded after the approval of the quotation in July 2007. The Common Stock was traded with the trading symbol of “AYXC.”
Our common stock began trading under the symbol “MDXG” on April 2, 2008. The following table sets forth the high and low bid prices on the OTC Bulletin Board for our common stock, based on information provided from OTC Bulletin Board. These quotations reflect inter-dealer prices, without retail mark-up, mark-down, or commission and may not necessarily represent actual transactions.
                 
    High*     Low*  
Nine Months Ended December 31, 2009
               
First Quarter
  $ .75     $ .40  
Second Quarter
    .75       .41  
Third Quarter
    .90       .60  
Year Ended March 31, 2009
               
First Quarter
  $ 6.35     $ 4.05  
Second Quarter
    5.10       4.50  
Third Quarter
    4.75       2.60  
Fourth Quarter
    4.40       0.40  
 
     
*   Adjusted to reflect the reverse stock split effective on April 2, 2008.
Based upon information supplied from our transfer agent, there were approximately 780 shareholders of record of our Common Stock as of March 15, 2010.
We have not paid any cash dividends on our common stock since our formation and do not intend to do so in the future.
To facilitate trading in the Company’s shares, the Board is considering applying for a listing on a national exchange. If the Board does determine to pursue listing on a national exchange, the Company may consider implementing a reverse split of its Common Stock.
Unregistered Sales of Equity Securities and Use of Proceeds
As reported in Note 8 “Common Stock Placements” in our consolidated financial statements as of and for the nine months ended December 31, 2009, from January 1, 2010, through January 21, 2010, the Company sold an additional 1,308,332 shares of common stock and issued an additional 654,163 warrants and received proceeds of $785,000. These sales were made in conjunction with the Company’s most recent private placement which commenced in October 2009, the “October 2009 Private Placement”, which we closed on January 21, 2010.
The Company relied on Section 4(2) of the Securities Act of 1933 (the “Securities Act”) and Rule 506 of Regulation D under the Securities Act, as amended, to issue the securities described above because they were offered to accredited investors and a limited number of unaccredited investors who purchased for investment in transactions that did not involve a general solicitation.
Form 10-Q for the six months ended September 30, 2009 filed November 16, 2009 and Form 8-K dated December 31, 2009, also provide information related to unrestricted sales of equity securities during the nine months ended December 31, 2009.
We did not repurchase any shares during the last three months of 2009 and currently have no share repurchase plans or programs.

 

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Item 6. Selected Financial Data
Not applicable.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of financial condition and results of operations, together with the financial statements and the related notes appearing at the end of this report. Some of the information contained in this discussion and analysis or set forth elsewhere in this report, including information with respect to our plans and related financing, includes forward-looking statements that involve risks and uncertainties. You should read the “Risk Factors” section of this report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
The discussion and analysis of our financial conditions and results of operations are based on the Company’s financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires making estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues, if any, and expenses during the reporting periods. On an ongoing basis, we evaluate such estimates and judgments, including those described in greater detail below. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Overview
We are a development stage enterprise headquartered in Marietta, Georgia. The Company has generated insignificant revenue and has a history of losses since its inception in November 2006.
MiMedx Group, Inc. (“MiMedx Group”) is an integrated developer, manufacturer and marketer of patent-protected biomaterial-based products. We operate in one business segment, Biomaterials. MiMedx Group is emerging from a development-focused start-up company into a fully integrated operating company with the expertise to capitalize on its science and technology and the capacity to generate sales growth and profitability.
Prior to the 4th quarter of 2009, the Company explored business strategies through our three development units, MiMedx, SpineMedica and LeveL Orthopedics. After the sale of the LeveL assets and a thorough review of the strategic direction of the Company, management made the decision in late 2009 to consolidate the organizational structure. Instead of independent development teams and manufacturing locations, we will have integrated development teams and all manufacturing will be consolidated into one site. Our Tampa, Florida location will focus on research and early stage product and process development. Our Marietta, Georgia location, will house our corporate headquarters and our development and sales teams, as well as all manufacturing and distribution operations.
The Company incurred a net loss of approximately $8,296,000 in the nine months ended December 31, 2009, or approximately $(0.20) per share. Since our inception in November 2006, we have incurred a net loss of approximately $38,237,000.
From inception through December 31, 2009, we funded our start-up costs, operating costs and capital expenditures through issuances of stock and convertible debt and will require additional funds to, execute our business plan, support our research and development activities, obtain clearances and approvals by regulatory authorities, including the FDA, for the sale of developed products until we are able to generate revenues sufficient to cover all costs. We currently have no material commitments for capital expenditures.
Our initial business strategy was to identify and acquire innovative new medical products and technologies, focused initially on the musculoskeletal market, as well as novel medical instrumentation and surgical techniques. We have recently refined our strategy to specialize in proprietary biomaterial technologies that can be transformed into unique medical devices that fill an unmet or underserved clinical need. Our HydroFix™ hydrogel technology and our CollaFix™ collagen fiber technology are proprietary platforms that can serve as the basis for medical devices in various orthopedic and orthobiologic applications, such as spine, sports medicine, and trauma. We also have identified multiple product opportunities in general surgery, drug delivery, wound management and cardiac markets among others.

 

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Our plan is to focus our internal commercialization efforts on orthopedics and orthobiologic applications for our technologies and to partner with large, established companies in the general surgery, drug delivery, wound management, cardiac and other markets. Initial conversations with such external relationships have been initiated, but they will take time to develop.
We have organized an advisory panel of leading physicians to provide insight into our primary fields of interest for new products and technology, as well as guidance and advice with respect to ongoing product development programs. Under the direction of our new leadership, our core focus is on near-term opportunities for each of our technologies, advancing them through the regulatory process, establishing reliable and cost-effective manufacturing, and establishing an effective distribution system.
To implement our business plan and generate revenue from other sources, we must develop products and obtain regulatory clearances or approvals for those products in many jurisdictions. Other than the clearance for the HydroFix Vaso Shield™, we may not receive any such regulatory clearances or approvals. Due to this and a variety of other factors, many of which are discussed in this report under “Risk Factors,” we may be unable to generate significant revenues or margins, control operating expenses, or achieve or sustain profitability in future years.
Critical Accounting Policies
We believe that of our significant accounting policies, which are described in Note 2 to our financial statements appearing elsewhere in this report, the following accounting policies involve a greater degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations.
Goodwill and intangible assets:
Intangible assets include licensing rights and are accounted for based on FASB Accounting Standards Codification 350, “Intangibles – Goodwill and Other” (ASC 350), previously referred to as Financial Accounting Standard Statement No. 142 Goodwill and Other Intangible Assets (“FAS 142”). In that regard, goodwill is not amortized but is tested at least annually for impairment, or more frequently if events or changes in circumstances indicate that the asset might be impaired. Intangible assets with finite useful lives are amortized using the straight-line method over a period of ten years, the remaining term of the patents underlying the licensing rights (considered to be the remaining useful life of the license).
Impairment of long-lived assets:
We evaluate the recoverability of our long-lived assets (finite lived intangible asset and property and equipment) whenever adverse events or changes in business climate indicate that the expected undiscounted future cash flows from the related assets may be less than previously anticipated. If the net book value of the related assets exceeds the expected undiscounted future cash flows of the assets, the carrying amount will be reduced to the present value of their expected future cash flows and an impairment loss would be recognized.
Share-based compensation:
We follow the provisions of FASB Accounting Standards Codification 718, “Compensation – Stock Compensation” (ASC 718), previously referred to as Statement of Financial Accounting Standards No. 123R – Share-based Payments (“FAS123R”) which requires the use of the fair-value based method to determine compensation for all arrangements under which employees and others receive shares of stock or equity instruments (options and warrants).
Research and development costs:
Research and development costs consist of direct and indirect costs associated with the development of our technologies. These costs are expensed as incurred.

 

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Recent Accounting Pronouncements
In June 2009, the FASB issued Accounting Standards Update No. 2009-01 (“ASU 2009-01”), which establishes the FASB Accounting Standards Codification™ as the source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. The Company adopted ASU 2009-01 during the three months ended September 30, 2009, and its adoption did not have any impact on the Company’s consolidated financial statements.
In August 2009, the FASB issued Accounting Standards Update No. 2009-05 (“ASU 2009-05”), which clarified how to measure the fair value of liabilities in circumstances when a quoted price in an active market for the identical liability is not available. ASU 2009-05 is effective for the first reporting period beginning after the issuance of this standard. The Company adopted ASU 2009-05, and its adoption did not have an impact on its consolidated financial statements.
In October 2009, the FASB issued Accounting Standards Update No. 2009-13 (“ASU 2009-13”), which addresses the accounting for multiple-deliverable arrangements to enable vendors to account for products or services (deliverables) separately rather than as a combined unit. ASU 2009-13 is effective prospectively for revenue arrangements entered into or materially modified beginning in fiscal years on or after June 15, 2010. Early adoption is permitted.  The Company does not expect the adoption of this standard to have any effect on its financial statements until or unless it enters into agreements covered by this standard.
Results of Operations for the nine months ended December 31, 2009 compared to the year ended March 31, 2009
The Company changed its fiscal year end to December 31, 2009 and in conjunction with this transition report we are comparing the nine months ended December 31, 2009 to the year ended March 31, 2009, which inherently is a shorter operating period and is a primary factor in decreases in costs when comparing the two periods.
Research and Development Expenses
Research and development expenses during the nine months ended December 31, 2009 decreased approximately $1,433,000 to $2,590,000 compared to $4,023,000 for the year ended March 31, 2009. The decline in our research and development costs reflect our focus on reducing costs and stream-lining our critical path to market. Our research and development expenses consist primarily of internal personnel costs, fees paid to external consultants, and supplies and instruments used in our laboratories. As of December 31, 2009, we employed 28 employees devoted to research and development, validation of our manufacturing processes, and the manufacturing of prototype devices. As of March 31, 2009, we had 25 employees devoted to these efforts. Internal personnel costs represent approximately 55.5% of total research and development expenses during the nine months ended December 31, 2009 as compared to 47% for the year ended March 31, 2009. Fees paid to external consultants and supplies and instruments used in our laboratories represent approximately 32.8% and 11.7%, respectively, of research and development expenses during the nine months ended December 31, 2009 as compared to 42.8% and 10.2% for the year ended March 31, 2009. We anticipate our spending in the area of research and development in the foreseeable future to continue at comparable current levels as we progress our technologies thru additional testing and validation in order to obtain clearance or approval from the FDA to market our technologies.
General and Administrative Expenses
General and administrative expenses for the nine months ended December 31, 2009, decreased approximately $4,488,000 to $3,463,000 compared to $7,951,000 for the year ended March 31, 2009. Included in our general and administrative expenses for the nine months ended December 31, 2009, is a $585,000 gain on settlement of payables, primarily related to legal fees incurred prior to March 31, 2009. Excluding the gain on settlement of payables, our general and administrative expenses decreased approximately $3,903,000 compared to the year ended March 31, 2009. The decline in our general and administrative expenses reflects our focus on reducing costs and stream-lining our critical path to market.
General and administrative expenses consist of personnel costs, professional fees, facilities costs and other administrative costs. During the nine months ended December 31, 2009, salaries and benefits, excluding stock-based compensation, totaled $1,325,000 compared to $2,978,000 for the year ended March 31, 2009. This significant decrease primarily relates to the departure of certain executives at the end of fiscal year end March 31, 2009 for which those positions were either eliminated in the nine months ended December 31, 2009 or filled near the end of the nine month period ended December 31, 2009. As of December 31, 2009, we employed 12 personnel (5 of which were hired in the last quarter of 2009) not related to research and development functions as compared to 9 as of March 31, 2009.
Professional fees, excluding stock-based compensation and gain on settlement of payables, which consist of legal and accounting fees, business consulting and directors fees decreased $479,000, during the nine months ended December 31, 2009, to $657,000 compared to $1,136,000 during the year ended March 31, 2009. The decrease in professional fees is primarily attributed to $400,000 of costs incurred for merger and acquisition activity in the same period in 2008 that were not incurred in the nine months ended December 31, 2009.

 

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Facilities and other administrative costs decreased $591,000 to $750,000 during the nine months ended December 31, 2009, compared to the year ended March 31, 2009, and $364,000 compared to the nine months ended December 31, 2008, reflecting our focus on reducing costs and controlling all discretionary costs.
During the nine months ended December 31, 2009, we recorded approximately $338,000 in depreciation expense and approximately $497,000 in amortization expense as compared to amounts approximating $425,000 and $667,000, respectively, for the year ended March 31, 2009, and $313,000 and $500,000, respectively for the nine months ended December 31, 2008. We depreciate our assets on a straight-line basis, principally over five to seven years and amortize our intangible assets over a period of ten 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 at least annually we test goodwill for impairment and periodically evaluate other intangibles for impairment based on events or changes in circumstances as they occur.
Gain on Sale of Assets
During the last three months of 2009, we sold our upper extremities technology, which we referred to as our Level Orthopedics development unit, in two separate transactions. In total we received cash proceeds of $360,000 and a $100,000 secured promissory note for these assets, and recognized a gain of approximately $281,000. Additionally, we may receive up to $630,000 in future royalty payments in conjunction with one of the transactions, but due to the contingent nature of the royalty payments we did not recognize these potential payments in calculating our gain on sale.
We anticipate spending in the area of general and administrative expenses in the foreseeable future to continue at comparable current levels.
Net Interest Income
We recorded net interest expense of approximately $243,000 during the nine months ended December 31, 2009 compared to net interest income of approximately $60,000 during the year ended March 31, 2009. The net interest expense during the nine months ended December 31, 2009, reflects interest costs and financing costs primarily related to our long term convertible debt offering that we completed in June 2009.
Share-Based Compensation
We follow the provisions of FASB Accounting Standards Codification 718, “Compensation – Stock Compensation” (ASC 718), previously referred to as Statement of Financial Accounting Standards No. 123R – Share-based Payments (“FAS123R”) which requires the use of the fair-value based method to determine compensation for all arrangements under which employees and others receive shares of stock or equity instruments (options and warrants). The total share based compensation recognized during the nine months ended December 31, 2009 approximated $481,000 as compared to $1,409,000 recognized during the year ended March 31, 2009.
Contractual Commitments
The table below sets forth our known contractual obligations as of December 31, 2009:
                                         
    Payments due by period  
            Less than 1                    
Contractual Obligations   Total     year     2 – 3 years     4 – 5 years     After 5 years  
Consulting Agreements
  $ 18,750     $ 18,750     $     $     $  
Employment Agreements
    166,000       166,000                    
Operating Lease Obligations
    601,000       284,000       317,000              
Royalty Obligations
    155,000       25,000       80,000       50,000        
 
                             
Total
  $ 940,750     $ 493,750     $ 397,000     $ 50,000     $  
 
                             

 

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Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Liquidity and Capital Resources
Since inception, we have funded our development, operating costs and capital expenditures through issuances of stock or convertible debt. As of December 31, 2009, the Company has not emerged from the development stage. We had approximately $2,654,000 of cash and cash equivalents on hand as of December 31, 2009. From January 1, 2010 through January 21, 2010, prior to closing our October 2009 Private Placement, we received an additional $785,000 of proceeds related to the sale of our common stock and warrants. We estimate, assuming we receive no additional funds, that we have sufficient funds to operate until June 2010.
In order to fund on-going operating cash requirements beyond that point or to further accelerate and execute our business plan, we will need to raise significant additional funds. In view of these matters, the ability of the Company to continue as a going concern is dependent upon the our ability to secure additional financing sufficient to support our research and development activities, approval of developed products for sale by regulatory authorities, including the FDA, and ultimately to generate revenues sufficient to cover all costs. Since inception, the Company has financed its activities principally from the sale of equity securities and convertible debt. While the Company has been successful in the past in obtaining the necessary capital to support its operations, there is no assurance that the Company will be able to obtain additional equity capital or other financing under commercially reasonable terms and conditions, or at all. Furthermore, if the Company issues equity or debt securities to raise additional funds, existing shareholders may experience dilution and the new equity or debt securities it issues may have rights, preferences and privileges senior to those of existing shareholders. In addition, if the Company raises additional funds through collaboration, licensing or other similar arrangements, it may be necessary to relinquish valuable rights to products or proprietary technologies, or grant licenses on terms that are not favorable.
Currently, the Board is considering how most effectively to raise the required additional capital. Among the alternatives being considered is a private placement of Common Stock to certain existing shareholders and potential investors we have identified who are accredited investors with whom the Company has a pre-existing relationship with and offering a temporary reduction in the warrant exercise price on certain outstanding warrants as an incentive to the warrant holders to exercise their warrants for cash.
In the past our Chairman and CEO has provided bridge financing pending completion of our offerings. The Chairman and CEO has indicated that he is willing to provide similar financing if the need arises subject to mutually agreeable terms.
If the Company cannot raise funds on acceptable terms, the Company will not be able to continue as a going concern, develop or enhance products, obtain the required regulatory clearances or approvals, execute the Company’s business plan, take advantage of future opportunities, or respond to competitive pressure or unanticipated customer requirements. Any of these events would adversely affect the Company’s ability to achieve the Company’s development and commercialization goals, which could have a material adverse effect on the Company’s business, results of operations and financial condition.
Inflation
We do not believe that the rate of inflation has had a material effect on our operating results. However, inflation could adversely affect our future operating results.

 

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk
In the normal course of doing business we currently are not exposed to the risks associated with foreign currency exchange rates and changes in interest rates. We do not engage in trading market risk sensitive instruments or purchasing hedging instruments or “other than trading” instruments that are likely to expose us to significant market risk, whether interest rate, foreign currency exchange, commodity price or equity price risk.
Our exposure to market risk relates to our cash and investments.
The primary objective of our investment activities is to preserve principal while at the same time maximizing yields without significantly increasing risk. To achieve this objective, we invest our excess cash in debt instruments of the U.S. Government and its agencies, bank obligations, repurchase agreements and high-quality corporate issuers, and, by policy, restrict our exposure to any single corporate issuer by imposing concentration limits. To minimize the exposure due to adverse shifts in interest rates, we maintain investments at an average maturity of generally less than three months.
Item 8. Financial Statements and Supplementary Data

 

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Report of Independent Registered Public Accounting Firm
Board of Directors
MiMedx Group, Inc.
We have audited the accompanying consolidated balance sheets of MiMedx Group, Inc. and subsidiaries as of December 31, 2009, and March 31, 2009 and the related consolidated statements of operations, stockholders’ equity and cash flows for the nine months ended December 31, 2009 and the year ended March 31, 2009 and the period from inception (November 22, 2006) through December 31, 2009. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States of America). The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purposes of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above, present fairly, in all material respects, the consolidated financial position of MiMedx Group, Inc. and subsidiaries as of December 31, 2009 and March 31, 2009 and the consolidated results of their operations and their cash flows for the nine months ended December 31, 2009 and the year ended March 31, 2009 and the period from inception (November 22, 2006) through December 31, 2009, in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 3 to the financial statements, the Company has incurred net losses and negative operating cash flows since inception and will require additional financing to fund the continued development of products subject to its licensed technologies. The availability of such financing cannot be assured. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are described in Note 3. The financial statements do not include any adjustments with respect to the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that might result from the outcome of these uncertainties.
     
/s/ Cherry, Bekaert & Holland, L.L.P.
 
Cherry, Bekaert & Holland, L.L.P.
   
Tampa, Florida
March 30, 2010

 

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MIMEDX GROUP, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEETS
                 
    December 31,     March 31,  
    2009     2009  
ASSETS
Current assets:
               
Cash and cash equivalents
  $ 2,653,537     $ 34,828  
Inventory
    30,920        
Prepaid expenses and other current assets
    121,277       82,953  
 
           
 
               
Total current assets
    2,805,734       117,781  
 
               
Property and equipment, net of accumulated depreciation
    1,049,597       1,375,896  
Goodwill
    857,597       857,597  
Intangible assets, net
    4,597,326       5,116,337  
Deferred financing costs
    192,627        
Deposits and other assets
    189,202       149,202  
 
           
 
               
Total assets
  $ 9,692,083     $ 7,616,813  
 
           
 
               
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
               
Accounts payable and accrued expenses
  $ 629,349     $ 1,699,337  
 
           
Total current liabilities
    629,349       1,699,337  
 
               
Long term convertible debt, face value $3,472,000 less unamortized discount of $550,478 and including accrued interest of $69,604
    2,990,856        
 
           
 
               
Total liabilities
    3,620,205       1,699,337  
 
           
 
               
Commitments and contingency (Notes 6 and 15)
           
 
               
Common stock with registration rights, 1,905,000 shares issued and outstanding (March)
          3,761,250  
 
           
Stockholders’ equity:
               
Preferred stock; $.001 par value; 5,000,000 shares authorized and no (December and March) shares issued and outstanding
           
Common stock; $.001 par value; 100,000,000 shares authorized and 50,002,887 (December) and 37,339,628 (March) shares issued and outstanding
    50,003       37,340  
Additional paid-in capital
    46,454,482       34,230,824  
Treasury stock (50,000 shares at cost)
    (25,000 )      
Deficit accumulated during the development stage
    (40,407,607 )     (32,111,938 )
 
           
 
               
Total stockholders’ equity
    6,071,878       2,156,226  
 
           
 
               
Total liabilities and stockholders’ equity
  $ 9,692,083     $ 7,616,813  
 
           
See notes to consolidated financial statements.

 

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MIMEDX GROUP, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS
                         
                    Period from  
                    Inception  
    Nine Months     Year     (November 22, 2006)  
    Ended     Ended     through  
    December 31, 2009     March 31, 2009     December 31, 2009  
 
REVENUES:
                       
Net Sales
  $ 800     $     $ 800  
 
                       
OPERATING COSTS AND EXPENSES:
                       
Cost of products sold
    240             240  
Research and development expenses
    2,590,227       4,022,709       8,739,835  
Acquired in-process research and development (Note 4)
                7,177,000  
General and administrative expenses
    3,463,303       7,950,673       20,644,007  
(Gain)/loss on sale of assets
    (280,868 )     5,440       (275,428 )
 
                 
 
                       
LOSS FROM OPERATIONS
    (5,772,102 )     (11,978,822 )     (36,284,854 )
 
                       
OTHER INCOME (EXPENSE):
                       
 
                       
Financing expense associated with issuance of common stock for registration rights waivers
    (1,305,100 )           (1,305,100 )
Financing expense associated with warrants issued in connection with convertible promissory note
    (975,833 )           (975,833 )
Net interest (expense) income, net
    (242,634 )     59,551       370,370  
Change in fair value of investment, related party
                (41,775 )
 
                 
 
                       
LOSS BEFORE INCOME TAX
    (8,295,669 )     (11,919,271 )     (38,237,192 )
Income tax
                 
 
                 
 
                       
NET LOSS
    (8,295,669 )     (11,919,271 )     (38,237,192 )
 
                 
 
                       
Accretion of redeemable common stock and common stock with registration rights to fair value
          (2,158,823 )     (2,158,823 )
 
                 
 
                       
Loss attributable to common shareholders
  $ (8,295,669 )   $ (14,078,094 )   $ (40,396,015 )
 
                 
 
                       
Net loss per common share
                       
Basic and diluted
  $ (0.20 )   $ (0.37 )        
 
                   
 
                       
Shares used in computing net loss per common share
                       
Basic and diluted
    41,365,513       37,735,563          
 
                   
See notes to consolidated financial statements.

 

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MIMEDX GROUP, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
PERIOD FROM INCEPTION (NOVEMBER 22, 2006) THROUGH DECEMBER 31, 2009
                                                                                                                 
                                                                                                    Deficit        
    Convertible     Convertible     Convertible                                                     Accumulated        
    Preferred Stock     Preferred Stock     Preferred Stock                     Additional             Stock     Note     During the        
    Series A     Series B     Series C     Common Stock     Paid-in     Treasury     Subscriptions     Receivable,     Development        
    Shares     Amount     Shares     Amount     Shares     Amount     Shares     Amount     Capital     Stock     Receivable     Related party     Stage     Total  
 
Balances, November 22, 2006
        $           $           $           $     $           $     $     $     $  
Issuance of common stock at inception
                                        12,880,000       12,880                               (11,592 )     1,288  
Employee share-based compensation expense
                                                    13,409                               13,409  
Other share-based compensation expense
                                                    17,980                               17,980  
Common stock issued in connection with purchase of license agreement
                                        1,120,000       1,120       894,880                               896,000  
Issuance of note receivable, related party
                                                                      (2,000,000 )           (2,000,000 )
Sale of Series A Preferred stock
    11,212,800       14,016,000                                           (918,806 )           (1,233,750 )                 11,863,444  
Accrued interest income
                                                                              (7,644 )           (7,644 )
Net loss for the period
                                                                            (650,777 )     (650,777 )
 
                                                                                   
Balances, March 31, 2007
    11,212,800       14,016,000                               14,000,000       14,000       7,463             (1,233,750 )     (2,007,644 )     (662,369 )     10,133,700  
Employee share-based compensation expense
                                                    649,783                               649,783  
Other share-based compensation expense
                                                    158,247                               158,247  
Collection of stock subscription receivable
                                                                1,233,750                   1,233,750  
Accrued interest income
                                                                      (41,250 )           (41,250 )
SpineMedica Corp. acquisition
                5,922,397       7,402,996                       2,911,117       2,911       2,316,908                   2,048,894               11,771,709  
Sale of Series C Preferred stock
                            1,285,001       3,855,000                                                 3,855,000  
Stock options issued in connection with purchase of intellectual property
                                                    116,000                               116,000  
Exercise of stock options
                                        1,200       1       2,159                               2,160  
Alynx Merger — Recapitalization
    7,207,398       11,257,996       (5,922,397 )     (7,402,996 )     (1,285,001 )     (3,855,000 )     926,168       926       (926 )                              
Alynx Merger — Transaction Costs (expensed)
                                        205,851       206       1,126,173                               1,126,379  
Conversion of Preferred stock
    (18,420,198 )     (25,273,996 )                                 18,420,198       18,420       25,255,576                                
Common stock issued in connection with purchase of license agreement
                                        400,000       400       2,595,600                               2,596,000  
Net loss for the period
                                                                            (17,371,475 )     (17,371,475 )
 
                                                                                   
Balances, March 31, 2008
                                        36,864,534       36,864       32,226,983                         (18,033,844 )     14,230,003  
See notes to consolidated financial statements.

 

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                                                                                                    Deficit        
    Convertible     Convertible     Convertible                                                     Accumulated        
    Preferred Stock     Preferred Stock     Preferred Stock                     Additional             Stock     Note     During the        
    Series A     Series B     Series C     Common Stock     Paid-in     Treasury     Subscriptions     Receivable,     Development        
    Shares     Amount     Shares     Amount     Shares     Amount     Shares     Amount     Capital     Stock     Receivable     Related party     Stage     Total  
 
Employee share-based compensation expense
                                                    945,062                               945,062  
Other share-based compensation expense
                                                    130,076                               130,076  
Cashless exercise of stock warrants
                                        417,594       418       (418 )                                
Sale of warrants in connection with private placement of redeemable common stock
                                                    595,073                               595,073  
Exercise of stock options
                                        57,500       58       (52 )                             6  
Accretion of redeemable common stock and common stock with registration rights to fair value
                                                                            (2,158,823 )     (2,158,823 )
Warrants issued in connection with the amendment of private placement of common stock
                                                    334,100                               334,100  
Net loss for the period
                                                                            (11,919,271 )     (11,919,271 )
 
                                                                                   
Balances, March 31, 2009
                                        37,339,628       37,340       34,230,824                         (32,111,938 )     2,156,226  
Employee share-based compensation expense
                                                    363,457                               363,457  
Other share-based compensation expense
                                                    117,689                               117,689  
Beneficial conversion feature recognized on convertible debt
                                                    676,500                               676,500  
Warrants issued to placement agents in conjunction with convertible debt
                                                    98,574                               98,574  
Exercise of Stock Options
                                        20,000       20       (18 )                             2  
Common stock issued for waivers of registration rights
                                        2,490,000       2,490       1,302,610                               1,305,100  
Reclassification of common stock with registration rights
                                        1,905,000       1,905       3,759,345                               3,761,250  
Common stock issued for accrued directors fees
                                        162,750       163       81,212                               81,375  
Common stock issued for accrued executive compensation
                                        187,644       187       93,635                               93,822  
Common Stock issued in connection with purchase of license agreement
                                        100,000       100       70,900                               71,000  
Sale of Common Stock and Warrants (net of $42,000 of offering costs)
                                        7,697,865       7,698       4,569,021                               4,576,719  
Common stock issued for services in conjunction with private placement
                                        100,000       100       41,900                               42,000  
Warrants issued in conjunction with convertible promissory note
                                                    975,833                               975,833  
Modification of stock options and purchase of treasury stock
                                                    73,000       (25,000 )                       48,000  
Net loss for the period
                                                                            (8,295,669 )     (8,295,669 )
 
                                                                                   
 
Balances, December 31, 2009
        $           $           $       50,002,887     $ 50,003     $ 46,454,482     $ (25,000 )   $     $     $ (40,407,607 )   $ 6,071,878  
 
                                                                                   
See notes to consolidated financial statements.

 

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MIMEDX GROUP, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS
                         
                    Period from  
                    Inception  
    Nine     Year     (November 22, 2006)  
    Months Ended     Ended     through  
    December 31, 2009     March 31, 2009     December 31, 2009  
Cash flows from operating activities:
                       
Net loss
  $ (8,295,669 )   $ (11,919,271 )   $ (38,237,192 )
Adjustments to reconcile net loss to net cash flows from operating activities, net of effects of acquisition:
                       
Gain on settlement of payables
    (584,969 )             (584,969 )
(Gain)/loss on sales of assets
    (280,868 )     5,440       (275,428 )
Acquired in-process research and development
                7,177,000  
Depreciation
    337,909       425,013       955,077  
Amortization of intangible assets
    497,211       666,816       1,487,874  
Amortization of debt discount and deferred financing costs
    169,739             169,739  
Employee share-based compensation expense
    363,457       945,062       1,971,711  
Other share-based compensation expense
    117,689       464,176       758,092  
Financing expense associated with issuance of common stock for waivers of registration rights
    1,305,100             1,305,100  
Financing expense associated with warrants issued in connection with convertible promissory note
    975,833             975,833  
Modifications of options and purchase of treasury stock
    48,000             48,000  
Issuance of common stock for transaction fees
                1,126,379  
Accrued interest on notes receivable, related party
                (48,894 )
Change in fair value of investment, related party
                41,775  
(Decrease)/increase in cash resulting from changes in:
                       
Inventory
    (30,920 )           (30,920 )
Prepaid expenses and other current assets
    21,676       106,300       (42,199 )
Accounts payable and accrued expenses
    (240,468 )     750,859       560,755  
Deferred interest income
                (43,200 )
 
                 
 
                       
Net cash flows from operating activities
    (5,596,280 )     (8,555,605 )     (22,685,467 )
 
                 
 
                       
Cash flows from investing activities:
                       
Payments for purchase of equipment
    (11,610 )     (360,493 )     (1,552,905 )
Proceeds from sale of assets
    360,250       6,580       366,830  
Costs paid in conjunction with sales of assets
    (86,332 )           (86,332 )
Cash paid for intangible asset
                (100,000 )
Cash paid for security deposits
          (2,769 )     (115,400 )
Cash received in acquisition of SpineMedica Corp.
                1,957,405  
Cash paid for acquisition costs of SpineMedica Corp.
                (227,901 )
Payments from (advances to) related party
                (2,008,522 )
 
                 
 
                       
Net cash flows from investing activities
    262,308       (356,682 )     (1,766,825 )
 
                 
 
                       
Cash flows from financing activities:
                       
Proceeds from convertible debt offering
    3,472,000             3,472,000  
Proceeds from convertible promissory note
    500,000             500,000  
Repayment of convertible promissory note
    (500,000 )           (500,000 )
Proceeds from Series A preferred stock
                14,016,000  
Proceeds from Series C preferred stock
                3,855,000  
Proceeds from sale of common stock and warrants
    4,618,719       2,197,500       6,817,507  
Proceeds from exercise of stock options
    2       6       2,168  
Offering costs paid in connection with convertible debt offering
    (138,040 )           (138,040 )
Offering costs paid in connection with Series A preferred stock offering
                (918,806 )
 
                 
 
                       
Net cash flows from financing activities
    7,952,681       2,197,506       27,105,829  
 
                 
 
                       
Net change in cash and cash equivalents
    2,618,709       (6,714,781 )     2,653,537  
 
                       
Cash, beginning of period
    34,828       6,749,609        
 
                 
 
                       
 
    .                  
Cash, end of period
  $ 2,653,537     $ 34,828     $ 2,653,537  
 
                 
 
                       
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
 
                       
Cash paid for:
                       
Interest
  $ 4,745     $     $  
 
                 
Income taxes
  $     $     $  
 
                 
See notes to consolidated financial statements.

 

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MIMEDX GROUP, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS (CONTINUED)
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES
During the year ended March 31, 2009, common stock and common stock with registration rights (classified outside of stockholders’ equity) was accreted to fair value by $2,158,823 through a charge to accumulated deficit.
During the nine months ended December 31, 2009, the Company issued 315,520 warrants to purchase common stock, valued at $98,574 and recognized a beneficial conversion feature of $676,500 in conjunction with a convertible debt offering.
During the nine months ended December 31, 2009, the Company issued common stock valued at $42,000 for costs associated with its private placement sale of common stock and warrants, $81,375 for accrued directors fees, and $93,822 for accrued executive compensation.
During the nine months ended December 31, 2009, the Company reclassified $3,761,250 of common stock with registration rights to equity as the result of the termination of such rights (Note 8).
During the nine months ended December 31, 2009, the Company issued 100,000 shares of common stock valued at $71,000 for intellectual property upon achieving certain milestones (Note 6).
During the nine months ended December 31, 2009, the Company received a $100,000 3% Secured Promissory Note in conjunction with its sale of intellectual property (Note 6).
See notes to consolidated financial statements.

 

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MIMEDX GROUP, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED DECEMBER 31, 2009 AND THE YEAR ENDED MARCH 31, 2009
AND FROM INCEPTION (NOVEMBER 22, 2006) THROUGH DECEMBER 31, 2009
1.   Formation and nature of business:
    Nature of business:
    MiMedx, Inc. (“MiMedx”) was incorporated in Florida in 2006. MiMedx entered into and consummated an Agreement and Plan of Merger (“Merger Agreement”) with a publicly-traded Nevada Corporation, Alynx, Co. (“Alynx”), a public shell company, on February 8, 2008. As a result of this transaction, MiMedx shareholders owned approximately 97% of the outstanding shares, thus giving MiMedx substantial control.
    Under U.S. generally accepted accounting principles (“GAAP”), MiMedx was deemed to be the accounting acquirer since the shareholders of MiMedx own a substantial majority of the issued and outstanding shares, and thus this reverse merger was accounted for as a capital transaction. The historical financial statements are a continuation of financial statements of the accounting acquirer and the capital structure of the consolidated enterprise is now different from that appearing in the historical financial statements of the accounting acquirer in earlier periods due to the recapitalization.
    On March 31, 2008, MiMedx Group, Inc., a Florida Corporation, and Alynx merged. As a result of this transaction, MiMedx Group, Inc. became the surviving corporation. The “Company” refers to MiMedx Group, Inc., a development stage company, as well as its two operating subsidiaries: MiMedx and SpineMedica, LLC.
    MiMedx acquired a license for the use, adoption and development of certain core technologies developed at the Shriners Hospital for Children and the University of South Florida Research Foundation. This technology focuses on biomaterials for soft tissue repair, such as tendons, ligaments and cartilage, as well as other biomaterial-based products for numerous other medical applications. The development of the licensed technologies requires continued research and development and, ultimately, the approval of the U.S. Food and Drug Administration (“FDA”) and/or foreign regulatory authorities in order for the Company to be able to generate revenues from the sale of its products. This process is expected to take at least six months to one year, and there can be no assurance that the Company will be successful in its efforts to commercialize the licensed technology.
    On July 23, 2007, MiMedx acquired SpineMedica Corp. through its wholly-owned subsidiary, SpineMedica, LLC (“SpineMedica”). SpineMedica Corp. was incorporated in the State of Florida on June 9, 2005 and its successor SpineMedica, LLC was incorporated in the State of Florida on June 27, 2007. SpineMedica has licensed the right to use Salubria®, or similar poly-vinyl alcohol (“PVA”) -based biomaterials for certain applications within the body. SpineMedica also owns certain assets (equipment) for the production of products based on a PVA-based hydrogel, which is a water-based biomaterial that can be manufactured with a wide range of mechanical properties, including those that appear to closely mimic the mechanical and physical properties of natural, healthy human tissue.
    The Company operates in one business segment, Biomaterials, which includes the design, manufacture, and marketing of products for the Orthopedics and Spine market categories. The MiMedx division’s products are assembled from a strong, collagen-fiber based technology that potentially could be used to augment the repair of soft-tissue and connective tissue injuries. The SpineMedica division is developing a line of products constructed of a durable hydrogel, the first of which is the Paradis Vaso Shield™ indicated as a cover for vessels following anterior vertebral surgery. SpineMedica completed the development of the Paradis Vaso Shield™ surgical sheet products with a FDA 510(k) marketing clearance, received on April 20, 2009 and completed the sale of its first commercial product in December 2009. SpineMedica is investigating expansion of this product line to other areas of the body in and outside the orthopedic and spine category.
    The Company is a development stage enterprise and will remain as such until significant revenues are generated, if ever.

 

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2.   Significant accounting policies:
    Fiscal year:
    On December 15, 2009, the Board of Directors of the Company authorized a change in the Company’s fiscal year end to December 31, from March 31, effective for the current fiscal year. The result of this change is that our reporting period for the current fiscal year is the nine months ended December 31, 2009. The comparable amounts for the nine months ended December 31, 2009 and 2008 (unaudited), respectively, are as follows:
                 
            Nine Months Ended  
    Nine Months Ended     December 31, 2008  
    December 31, 2009     (unaudited)  
Revenues
  $ 800     $  
Loss from operations
    (5,772,102 )     (9,106,144 )
Loss before income tax
    (8,295,669 )     (9,047,287 )
Income tax
           
 
           
Net loss
    (8,295,669 )     (9,047,287 )
 
           
Accretion of redeemable common stock and common stock with registration rights to fair value
          (2,158,823 )
Loss attributable to common shareholders
  $ (8,295,669 )   $ (11,206,110 )
 
           
Net loss per common share
  $ (.20 )   $ (.30 )
 
           
    Use of estimates:
 
    The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 revenues and expenses during the reporting period. Actual results could differ from those estimates.
    Principles of consolidation:
    The financial statements include the accounts of MiMedx Group, Inc. and its wholly-owned subsidiaries MiMedx and, SpineMedica. All significant inter-company balances and transactions have been eliminated.
    Concentrations of credit risk:
    The Company places its cash and cash equivalents on deposit with financial institutions in the United States. In October and November 2008 the Federal Deposit Insurance Corporation (FDIC) temporarily increased coverage to $250,000 for substantially all depository accounts and temporarily provides unlimited coverage for certain qualifying and participating non-interest bearing transaction accounts. The increased coverage is scheduled to expire on December 31, 2013, at which time it is anticipated amounts insured by the FDIC will return to $100,000. During the year, the Company from time to time may have had amounts on deposit in excess of the insured limits. As of December 31, 2009, the Company had cash and cash equivalents of approximately $2,400,000 which exceeds these insured amounts.
    Cash and cash equivalents:
    Cash and cash equivalents include all highly liquid investments with an original maturity of three months or less.
    Inventories:
    Inventories, which consist primarily of raw materials at December 31, 2009, are valued at the lower of actual cost or market, using the first-in, first-out (FIFO) method. Work in process is calculated by estimating the number of units that will be successfully converted to finished goods, based upon a build-up in the stage of completion using estimated labor inputs for each stage and historical yields reduced by estimated usage for quality control testing. Abnormal amounts of overhead expense incurred during production ramp up are recognized as a current period charge.

 

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    Goodwill and intangible assets:
    Goodwill is tested at least annually for impairment, or more frequently if events or changes in circumstances indicate that the asset might be impaired. Intangible assets with finite useful lives are amortized using the straight-line method over a period of 10 years, the remaining term of the patents underlying the licensing rights and intellectual property (considered to be the remaining useful life of the assets).
    Property and equipment:
    Property and equipment are recorded at cost and depreciated on a straight-line basis over their estimated useful lives, principally five to seven years. Leasehold improvements are depreciated on a straight-line basis over the lesser of the estimated useful lives or the life of the lease.
    Impairment of long-lived assets:
    The Company evaluates the recoverability of its long-lived assets (finite lived intangible assets and property and equipment) whenever adverse events or changes in business climate indicate that the expected undiscounted future cash flows from the related assets may be less than previously anticipated. If the net book value of the related assets exceeds the expected undiscounted future cash flows of the assets, the carrying amount would be reduced to the present value of their expected future cash flows and an impairment loss would be recognized. There have been no impairment losses in the periods presented.
    Research and development costs:
    Research and development costs consist of direct and indirect costs associated with the development of the Company’s technologies. These costs are expensed as incurred.
    Acquired in-process research and development:
    In connection with the acquisition of SpineMedica, the Company determined that approximately $7.2 million of the fair value of the acquisition price qualified as in-process research and development, and as such, this amount was expensed as research and development expense on the acquisition date (see Note 4).
    Income taxes:
    Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that included the enactment date. Valuation allowances are recorded for deferred tax assets when the recoverability of such assets is not deemed more likely than not.
    Share-based compensation:
    The Company follows the provisions of ASC topic 718 “Compensation — Stock compensation” which requires the use of the fair-value based method to determine compensation for all arrangements under which employees and others receive shares of stock or equity instruments (options and warrants).
    Fair value of financial instruments:
    The carrying value of accounts payable and accrued expenses approximate their fair value due to the short-term nature of these liabilities. The fair value of our long term convertible debt approximates $3,542,000 which represents the face value and accrued but unpaid interest at December 31, 2009, primarily due to the minimal trading volume of our common stock.

 

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    Fair value determination of privately-held securities:
    Prior to February 8, 2008, the fair values of the common stock as well as the common stock underlying options and warrants granted as part of asset purchase prices or as compensation were estimated by management with input from an unrelated valuation specialist. Determining the fair value of stock requires making complex and subjective judgments. The Company used the market approach to estimate the value of the enterprise at each date on which securities were issued or granted. The enterprise value was then allocated to preferred and common shares taking into account the enterprise value available to all stockholders and allocating that value among the various classes of stock based on the rights, privileges and preferences of the respective classes. There is inherent uncertainty in these estimates.
    Net loss per share / Reverse stock split
    Basic net loss per common share is computed using the weighted-average number of common shares outstanding during the period.
    For all periods presented, diluted net loss per share is the same as basic net loss per share, as the inclusion of equivalent shares from outstanding common stock options, warrants, convertible debt and preferred stock would be anti-dilutive.
    The following table sets forth the computation of basic and diluted net loss per share for the nine months ended December 31, 2009 and the fiscal year ended March 31, 2009:
                 
    Nine Months Ended     Year Ended  
    December 31, 2009     March 31, 2009  
 
               
Net loss
  $ (8,295,669 )   $ (11,919,271 )
 
               
Accretion of redeemable common stock and common stock with registration rights to fair value
          (2,158,823 )
 
           
 
               
Loss attributable to common shareholders
  $ (8,295,669 )   $ (14,078,094 )
 
           
 
               
Denominator for basic earnings per share-weighted average shares
    41,365,513       37,735,563  
 
               
Effect of dilutive securities: Stock options, warrants and convertible debt outstanding (a)
           
 
               
Denominator for diluted earnings per share — weighted average shares adjusted for dilutive securities
    41,365,513       37,735,563  
 
               
Loss per common share attributable to common shareholders — basic and diluted
  $ (.20 )   $ (0.37 )
     
(a)   Securities outstanding that were excluded from the computation, prior to the use of the treasury stock method, because they would have been anti-dilutive are as follows:
                 
    December 31, 2009     March 31, 2009  
 
               
Stock options
    6,182,500       4,301,250  
 
               
Warrants
    6,991,371       1,160,251  
 
               
Convertible Debt
    6,944,000        

 

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    Recently issued accounting pronouncements:
    In June 2009, the FASB issued Accounting Standards Update No. 2009-01 (“ASU 2009-01”), which establishes the FASB Accounting Standards Codification™ as the source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. The Company adopted ASU 2009-01 during the three months ended September 30, 2009, and its adoption did not have any impact on the Company’s consolidated financial statements.
    In August 2009, the FASB issued Accounting Standards Update No. 2009-05 (“ASU 2009-05”), which clarified how to measure the fair value of liabilities in circumstances when a quoted price in an active market for the identical liability is not available. ASU 2009-05 is effective for the first reporting period beginning after the issuance of this standard. The Company adopted ASU 2009-05, and its adoption did not have an impact on its consolidated financial statements.
    In October 2009, the FASB issued Accounting Standards Update No. 2009-13 (“ASU 2009-13”), which addresses the accounting for multiple-deliverable arrangements to enable vendors to account for products or services (deliverables) separately rather than as a combined unit. ASU 2009-13 is effective prospectively for revenue arrangements entered into or materially modified beginning in fiscal years on or after June 15, 2010. Early adoption is permitted. The Company does not expect the adoption of this standard to have any effect on its financial statements until or unless it enters into agreements covered by this standard.
3.   Liquidity and management’s plans:
    The accompanying financial statements have been prepared assuming the Company will continue as a going concern. For the period from inception (November 22, 2006) through December 31, 2009 the Company experienced net losses of $38,237,192 and cash used in operations of $22,685,467. As of December 31, 2009, the Company has not emerged from the development stage and had approximately $2,654,000 of cash and cash equivalents. In January 2010, prior to closing its October 2009 Private Placement, the Company received an additional $785,000 of proceeds related to sales of its common stock and warrants. The Company estimates, assuming it receives no additional funds, that is has sufficient funds to operate until June 2010.
    In order to fund on-going operating cash requirements beyond that point or to accelerate and execute its business plan, the Company will need to raise significant additional funds. In view of these matters, the ability of the Company to continue as a going concern is dependent upon the Company’s ability to secure additional financing sufficient to support its research and development activities, approval of developed products for sale by regulatory authorities, including the FDA, and ultimately to generate revenues sufficient to cover all costs. Since inception, the Company has financed its activities principally from the sale of equity securities and convertible debt. While the Company has been successful in the past in obtaining the necessary capital to support its operations, there is no assurance that the Company will be able to obtain additional equity capital or other financing under commercially reasonable terms and conditions, or at all. Furthermore, if the Company issues equity or debt securities to raise additional funds, existing shareholders may experience dilution and the new equity or debt securities it issues may have rights, preferences and privileges senior to those of existing shareholders. In addition, if the Company raises additional funds through collaboration, licensing or other similar arrangements, it may be necessary to relinquish valuable rights to products or proprietary technologies, or grant licenses on terms that are not favorable. If the Company cannot raise funds on acceptable terms, the Company will not be able to continue as a going concern, develop or enhance products, obtain the required regulatory clearances or approvals, execute the Company’s business plan, take advantage of future opportunities, or respond to competitive pressure or unanticipated customer requirements. Any of these events would adversely affect the Company’s ability to achieve the Company’s development and commercialization goals, which could have a material adverse effect on the Company’s business, results of operations and financial condition. The Company’s financial statements do not include any adjustments relating to the recoverability or classification of assets or the amounts of liabilities that might result from the outcome of these uncertainties.
4.   SpineMedica Corp. acquisition:
    On July 23, 2007, MiMedx purchased 100% of the capital stock of SpineMedica Corp. through a newly formed subsidiary, SpineMedica, LLC. SpineMedica’s results of operations and cash flows are included in the accompanying financial statements from July 23, 2007 and thereafter.

 

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    The acquisition was accounted for as a purchase and was accomplished through the issuance of 2,911,117 Common Shares of MiMedx (for the acquisition of the SpineMedica Corp.’s Common Shares) and the issuance of 5,922,397 Series B Convertible Preferred Shares of MiMedx and 5,922,398 Common Stock Warrants (for the acquisition of SpineMedica Corp. Preferred Stock).
    The Series B preferred stockholders had voting rights identical to those of common stockholders, were entitled to dividends only when, or if, declared by the Board of Directors and had preference over the common stockholders in the event of the Company’s liquidation.
    The Series B Preferred Stock was convertible into Common Stock of MiMedx at the option of the holder at any time on a one share for one share basis, subject to adjustment for stock splits, stock dividends, recapitalizations and the like. All preferred stock automatically was to convert to common stock upon the Company becoming a publicly traded company, an upstream merger or consolidation, a sale of substantially all the Company’s assets or the consent of holders of the majority of the then outstanding shares of Series B Preferred Stock. As a result of the Alynx merger transaction, discussed in Note 9, all Series B Preferred Stock was exchanged for New Series A Preferred Stock.
    The Common Stock Warrants were exercisable at $.01 per share from January 2009 through January 2010 and were automatically cancelled under any of the following conditions:
    Preferred Stock sales for at least $3.00 per share
 
    Sale of a controlling interest in the Company of at least $3.00 per share
 
    Issuance of securities by the Company with $2,000,000 minimum proceeds at a minimum price of $3.00 per share
 
    Trading of the Series B Preferred Stock on a national or regional exchange, quotation system, or the OTCBB at a closing price of at least $3.00 per share for 15 out of 20 days on a rolling basis.
    These Common Stock Warrants were cancelled on September 30, 2007 as the result of the Series C Convertible Preferred Stock sale (Note 9).
    In addition, the Company assumed 1,333,750 common stock options and 175,251 common stock warrants to the holders of an equal number of SpineMedica Corp. options and warrants in connection with the acquisition. Terms of those options and warrants are summarized as follows:
         
Stock options:
       
Exercise price
  $ 1.80  
Range of expiration dates
  April 2011 – April 2017  
 
       
Warrants:
       
Exercise price
  $ 1.80  
Expiration date
  October 2010  
    Finally, the Company’s note receivable, related party, deferred interest income related thereto and common stock warrant in SpineMedica (recorded as investment, related party) were cancelled pursuant to this transaction.

 

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    The SpineMedica acquisition was accounted for as a purchase and is summarized as follows (in thousands $):
         
Purchase price components:
       
Common stock issued
  $ 2,300  
Preferred stock issued
    7,403  
Common stock warrants issued
    20  
Expenses incurred on acquisition
    238  
Cancellation of note receivable from and warrants in SpineMedica
    2,049  
 
     
Total consideration
  $ 12,010  
 
     
Allocation of purchase price:
       
 
       
Cash (acquired at closing)
  $ 1,957  
Prepaid expenses and other current assets
    19  
Property and equipment
    464  
Intangible assets (licenses – 10 year amortization period)
    2,399  
Deposits
    34  
Current liabilities
    (898 )
 
     
Net assets received
    3,975  
Goodwill
    858  
In-process research and development (1)
    7,177  
 
     
 
  $ 12,010  
 
     
     
(1)   The in-process research and development (“IPR&D”) acquired was related to two products, a cervical total disc replacement device and a posterior lumbar interbody fusion device.
    Significant assumptions used in connection with the determination of the value of the IPR&D were as follows:
    Material cash inflows from the products were anticipated to commence in the near future.
 
    Material anticipated changes from historical pricing and margins were not considered as there was no history for the products. There were projected increases in expenditures associated with the products development over the historical levels in order to advance the products through any regulatory agencies.
 
    The risk adjusted discount rate applied to the estimated future cash flows was 43%.
    The following pro-forma information presents a summary of the Company’s consolidated results of operations as if the SpineMedica acquisition had occurred at inception (November 22, 2006):
         
    Period from  
    Inception  
    (November 22, 2006)  
    through  
    December 31, 2009  
 
       
Loss from operations
  $ (40,029,000 )
 
       
Net loss
  $ (41,187,000 )
 
       
5.   Property and equipment:
    Property and equipment consist of the following at:
                 
    December 31, 2009     March 31, 2009  
 
               
Leasehold improvements
  $ 793,899     $ 793,899  
Furniture and equipment
    1,204,143       1,192,533  
 
           
 
    1,998,042       1,986,432  
Less accumulated depreciation
    (948,445 )     (610,536 )
 
           
 
  $ 1,049,597     $ 1,375,896  
 
           

 

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6.   Intangible assets and royalty agreement:
    Intangible assets activity is summarized as follows:
                                         
    License     License     License     Intellectual        
    (a)     (b)     (c)     Property (d)     Total  
 
                                       
April 1, 2008
  $ 881,466       2,195,487       2,596,000       110,200     $ 5,783,153  
Additions
                             
Amortization
    (99,600 )     (296,016 )     (259,600 )     (11,600 )     (666,816 )
 
                             
March 31, 2009
    781,866       1,899,471       2,336,400       98,600       5,116,337  
Additions
                71,000             71,000  
Sale of assets
                      (92,800 )     (92,800 )
Amortization
    (74,700 )     (222,011 )     (194,700 )     (5,800 )     (497,211 )
 
                             
December 31, 2009
  $ 707,166       1,677,460       2,212,700           $ 4,597,326  
 
                             
     
(a)   On January 29, 2007, the Company acquired a license from Shriner’s Hospitals for Children and University of South Florida Research Foundation, Inc. which is further discussed in Note 1. The acquisition price of this license was a one-time fee of $100,000 and 1,120,000 shares of common stock valued at $896,000 (based upon the estimated fair value of the common stock on the transaction date). Within thirty 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. This amount is not recorded as a liability as of December 31, 2009 based on its contingent nature. The Company will also be required to pay a royalty of 3% on all commercial sales revenues of the licensed products.
 
(b)   License from SaluMedica, LLC (SaluMedica) for the use of certain developed technologies related to spine repair. This license was acquired through the acquisition of SpineMedica Corp. (see Note 4).
 
(c)   On March 31, 2008, the Company entered into a license agreement for the use of certain developed technologies related to surgical sheets made of polyvinyl alcohol cryogel. The acquisition price of the asset was 400,000 shares of common stock valued at $2,596,000 (based upon the closing price of the common stock on the transaction date). The agreement also provides for the issuance of an additional 600,000 shares upon the Company meeting certain milestones related to future sales. On December 31, 2009 the Company completed the sale of its first commercial product and met its first milestone under this agreement. As a result the Company issued 100,000 shares of common stock to the licensor valued at $71,000. At December 31, 2009, there are no additional amounts accrued for this obligation due to its contingent nature.
 
(d)   During the year ended March 31, 2008, the Company issued 200,000 stock options valued at $116,000 for certain technologies relating to medical device designs for products used in hand surgery. On October 19, 2009 the Company sold this intellectual property for $300,000 cash, a $100,000 3% promissory note due in monthly installments thru August 2011 and up to $630,000 in royalty payments for a total sales price of up to $1,030,000. As a result of this transaction the Company recognized a net gain of approximately $220,000 representing the cash received and promissory note less the carrying value of the intellectual property and transaction costs. Due to the contingent nature of the royalties, no amounts were included in the calculation of the net gain. The current portion and the long term portion of the note receivable are included in other current assets and other assets, respectively, in the consolidated balance sheet at December 31, 2009.
    Expected future amortization of intangible assets is as follows:
         
Year ending December 31,        
 
2010
  $ 663,800  
2011
    663,800  
2012
    663,800  
2013
    663,800  
2014
    663,800  
Thereafter
    1,278,326  
 
     
 
  $ 4,597,326  
 
     

 

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7.   Convertible Debt:
    In April 2009, the Company commenced a private placement to sell 3% Convertible Senior Secured Promissory Notes (the “Senior Notes”) to accredited investors. The Company completed the offering on June 17, 2009, and received aggregate proceeds of $3,472,000, representing the face value of the Senior Notes. The aggregate proceeds include $250,000 of Senior Notes sold to the Chairman of the Board, President and CEO, and $150,000 of Senior Notes sold to one other director.
    In total, the Senior Notes are convertible into up to 6,944,000 shares of the Company’s common stock at $.50 per share (a) at any time upon the election of the holder of the Senior Notes; (b) automatically immediately prior to the closing of the sale of all or substantially all of the assets or more than 50% of the equity securities of the Company by way of a merger transaction or otherwise which would yield a price per share of not less than $.50; or (c) at the election of the Company, at such time as the closing price per share of the Company’s common stock (as reported by the OTCBB or on any national securities exchange on which the Company’s shares may be listed) is not less than $1.50 for at least 20 consecutive trading days in any period prior to the maturity date. If converted, the common stock will be available to be sold following satisfaction of the applicable conditions set forth in Rule 144. The Senior Notes mature in three years and earn interest at 3% per annum on the outstanding principal amount payable in cash on the maturity date or convertible into shares of common stock of the Company as provided for above. The Senior Notes are secured by a first priority lien on all of the assets, including intellectual property, of MiMedx, Inc., excluding, however, the membership interests in SpineMedica, LLC. The Senior Notes are junior in payment and lien priority to any bank debt of the Company in an amount not to exceed $5,000,000 subsequently incurred by the Company.
    The Company has evaluated the Senior Notes for accounting purposes under Generally Accepted Accounting Principles (“GAAP”) and has determined that the conversion feature meets the conventional-convertible exemption and, accordingly, bifurcation and fair-value measurement of the conversion feature is not required. We are required to re-evaluate this conclusion upon each financial statement closing date while the Senior Notes are outstanding. Notwithstanding, the Senior Notes were issued with a beneficial conversion feature, having an intrinsic value of approximately $676,500. The intrinsic value of the beneficial conversion feature was determined by comparing the contracted conversion price to the fair value of the common stock on the date of the respective Senior Notes. A beneficial conversion feature only exists when the embedded conversion feature is “in-the-money” at the commitment date.
    As a result of the beneficial conversion feature, the Senior Notes were recorded net of a discount of $676,500 related to the beneficial conversion feature, which is recorded in paid-in capital, and the discount will be amortized through periodic charges to interest expense over the term of the Senior Notes using the effective interest method.
    In conjunction with the offering, the Company incurred a placement fee of $138,040 and issued 315,520 common stock warrants to the placement agents at an exercise price of $.50 per share. The warrants expire in five years. The fair value of the warrants was determined to be $98,574 using the Black-Scholes-Merton valuation technique. The total direct costs of $236,614 are recorded as deferred financing costs and are being amortized over the term of the Senior Notes using the effective interest method. Further, the placement agent warrants are classified in stockholders’ equity because they achieved all of the requisite conditions for equity classification in accordance with “GAAP”.
8.   Common Stock Placements:
    September 2008 Private Placement
    On September 25, 2008, the Company commenced a private placement of up to 13,333,333 units (at $3.00 per unit) wherein each unit consists of one share of common stock and a warrant to purchase one share of common stock for $3.50 over a five year term (the “September 2008 Private Placement”). The Company sold 487,500 units for total proceeds of $1,462,500 under the September 2008 Private Placement.
    In connection with the September 2008 Private Placement, the Company entered into a Registration Rights Agreement related solely to the common stock that requires the Company to among other things, (i) file a Registration Statement within 90 days from the closing of the September 2008 Private Placement; and (ii) make required filings under the Securities Act of 1933 and the Securities and Exchange Act of 1934. It also provides for (i) achieving and maintaining effectiveness; and (ii) listing the shares on any exchange on which the Company’s shares are then listed and maintain the listing; each on a best-efforts basis. The Registration Rights Agreement does not provide for an alternative or contain a penalty in the event the Company is unable to fulfill its requirements. In addition, the terms of the sale of common stock provide that the investor has an option, for a period of six months following the purchase, to exchange the common shares for other financial instruments (including those that may require classification outside of stockholders’ equity) that may be issued at a price, or effective price in the case of convertible instruments, lower than the original purchase price. As a result of the registration rights obligation to file within a specified period, which is presumed not to be within the Company’s control, and the contingent redemption feature (which lapsed as of March 31, 2009), the Company is required to classify the common stock outside of stockholders’ equity as common stock with registration rights. Further, given the nature of the contingent redemption provision and the registration rights requirement, GAAP required the Company to initially record the common stock at its fair value, which was accomplished with a charge to retained earnings of $1,423,823.

 

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    The warrants included in the unit offering are indexed to 487,500 shares of the Company’s common stock. These warrants are not subject to the Registration Rights Agreement referred to above, and they otherwise meet the conditions for equity classification provided under GAAP. Accordingly, these warrants are recorded in stockholders’ equity. The Company is required to reevaluate that classification on each reporting date.
    The total basis in the financing was allocated to the redeemable common stock and warrants based upon their relative fair values. The fair value of the redeemable common stock represents the value of the number of shares at the trading market price. The warrants were valued using the Black-Scholes-Merton technique, and the Company estimated (i) the expected term as equal to the five-year warrant term, (ii) the volatility, based upon a reasonable peer group, at 75.33% and (iii) the risk free rate as the published rate for zero coupon government securities with terms consistent with the expected term, or 3.09%. The following table illustrates the allocation:
                 
    Fair     Relative Fair  
Financial Instrument   Values     Values  
 
               
Redeemable Common Stock
  $ 2,291,250     $ 867,427  
Warrants
    1,571,846       595,073  
 
           
 
  $ 3,863,096     $ 1,462,500  
 
           
    On February 19, 2009 the investors exercised their right to restructure their investment (the “new transaction) as a result of the February 2009 Private Placement described below. The investors were granted an additional 682,500 shares of common stock which increased the aggregate total of common shares issued in conjunction with the September Private Placement to 1,170,000. The re-set provision in the original transaction was removed and the investors were granted registration rights, with respect to the new shares, identical to those related to the September transaction.
    Additionally, the new transaction provided for the cancellation of the original 487,500 warrants and the Company issued new warrants to purchase 975,000 shares of common stock for $.73 per share. The Company recorded the $334,100 excess of the fair value of the new warrants over that of the cancelled warrants on the date of the transaction as compensation expense during the year ended March 31, 2009. The warrants met all the requirements for equity classification as noted above under “GAAP” and are recorded in stockholders’ equity.
    November 2008 Private Placement
    On November 21, 2008, the Company commenced a private placement of up to 30,000,000 shares of common stock at $1.00 per share (the “November 2008 Private Placement”). The Company sold 210,000 shares for total proceeds of $210,000.
    In connection with the November 2008 Private Placement, the Company entered into a Registration Rights Agreement related to the common stock that requires the Company to among other things, (i) file a Registration Statement within 90 days from the closing of the November 2008 Private Placement; and (ii) make required filings under the Securities Act of 1933 and the Securities and Exchange Act of 1934. It also provides for (i) achieving and maintaining effectiveness of the registration statement; and (ii) listing the shares on any exchange on which the Company’s shares are then listed and maintain the listing; each on a best-efforts basis. The Registration Rights Agreement does not provide for an alternative or contain a penalty in the event the Company is unable to fulfill its requirements. As a result of the registration rights obligation to file within a specified period, which is presumed not to be within the Company’s control, the Company was required to classify the common stock outside of stockholders’ equity as common stock with registration rights. Further, the Company was required to record the stock at its fair value, which was accomplished with a charge to retained earnings of $735,000.

 

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    February 2009 Private Placement
    In February 2009, the November 2008 Private Placement was extended under identical terms except the number of common shares offered was reduced to 15,000,000. In February and March 2009 the Company sold 525,000 shares of common stock for total proceeds of $525,000.
    The Company entered into a Registration Rights Agreement with respect to the new shares, with terms identical to those of the November 2008 Private Placement discussed above. As a result of the obligation to file a Registration Statement within a specified period, which is presumed not to be within the Company’s control, the Company was required to classify the common stock outside of stockholders’ equity as common stock with registration rights. The Company recorded the stock at its per share selling price, which exceeded the then per share trading price of the Company’s common stock.
    On June 4, 2009, the Company’s Board of Directors agreed to issue additional shares of its common stock to investors who had purchased shares of its common stock in conjunction with the September 2008 Private Placement, the November 2008 Private Placement and the February 2009 Private Placement in order to bring the cost of the acquired shares to $.50 per share. The Board approved the issuance of the additional shares to be fair to the investors who had invested in the Company when it was most in need of funding and to enable the Company’s future fundraising efforts. The issuance was approved by all of the disinterested members of the Board of Directors. As a condition to the receipt of the additional shares, the investors were required to waive registration rights otherwise available with respect to the shares issued in the private placements. The Company issued 2,490,000 additional shares as a result of this action and recorded additional expense of $1,305,100, based on the fair value of the Company’s stock price on the date each respective waiver was executed. As a result of the waiver of registration rights, the common stock with registration rights was reclassified into stockholders’ equity during the nine months ended December 31, 2009.
    October 2009 Private Placement
    In October 2009, the Company commenced a private placement to sell common stock and warrants. From October 30, 2009, through December 31, 2009, the Company sold 7,697,865 shares of common stock at a price of $.60 per share and received proceeds of $4,618,720. Under the terms of the offering, for every two shares of common stock purchased, the investor received a 5-year warrant to purchase one share of common stock for $1.50, (a “Warrant”). Through December 31, 2009, the Company issued a total of 3,848,933 warrants. The warrants met all the requirements for equity classification under “GAAP” and are recorded in stockholders’ equity.
    From January 1, 2010, through January 21, 2010, the Company sold an additional 1,308,332 shares of common stock and issued an additional 654,163 warrants and received proceeds of $785,000.
    The Company closed the offering on January 21, 2010.
    In connection with the October 2009 Private Placement, the Company entered into a registration rights agreement which provides “Piggy-Back” registration rights to each investor.
9.   Stockholders’ equity:
    Alynx merger transaction:
    On January 29, 2008 MiMedx entered into an Agreement and Plan of Merger (“Merger Agreement”) with Alynx. The merger transaction became effective on February 8, 2008.

 

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    In accordance with the Merger Agreement, Alynx issued 52,283,090 shares of common stock to MiMedx shareholders based on a conversion rate of 3.091421 for each share of MiMedx common stock. All Preferred Stock of MiMedx (Series A, B and C) was exchanged for a Series A Preferred Stock of Alynx based on a conversion rate of one share of Alynx Series A Preferred Stock for every five shares of MiMedx Preferred Stock. The Alynx Series A preferred stock was convertible into common stock and contained no cash redemption features. On March 31, 2008, all of the Alynx Series A Preferred Stock shares were converted into common shares of the Company at a rate of five shares of Common Stock of the Company for every one share of Series A Preferred Stock of Alynx.
    The Company incurred approximately $1,870,000 of merger costs related to the merger acquisition. These costs, (including 205,851 shares of common stock which had a value of approximately $1,126,000) are included in general and administrative expenses in the statement of operations for the year ended March 31, 2008.
    Because Alynx had de minimus operations, the merger transaction was accounted for as a reverse acquisition (recapitalization) whereby MiMedx was deemed to be the acquirer for accounting purposes.
    Reverse Stock Split:
    On March 31, 2008, with shareholder approval, the Company affected a reverse stock split. Each share of common stock was converted into .3234758 shares of post reverse split shares of common stock. All share amounts have been retroactively adjusted for all periods presented.
    Conversion of Alynx Series A Preferred Stock:
    The following series of preferred stock were issued prior to the Alynx merger transaction and, as previously discussed, were all redeemed through the issuance of Alynx Series A Preferred Stock:
      Preferred Series A stock:
 
      During the period ended March 31, 2007, MiMedx issued 11,212,800 shares of Series A Convertible Preferred Stock for $13,097,194 ($14,016,000 net of $918,806 transaction expenses). Additionally, the placement agent received detachable warrants to acquire up to 524,080 shares of the Company’s common stock at $1.25 per share with a fair value of $183,428 on the date of issuance. In April 2008, the placement agent executed a cashless exercise of these warrants and the Company issued 417,594 shares of common stock.
 
      The preferred stockholders had voting rights identical to those of common stockholders, were entitled to dividends only when, or if, declared by the Board of Directors and had preference over the common stockholders in the event of the Company’s liquidation.
 
      The preferred stock was convertible into common stock at the option of the holder at any time on a one share for one share basis, subject to adjustment for stock splits, stock dividends, recapitalizations and the like.
 
      This preferred stock was to automatically convert to common stock upon the Company becoming a publicly traded company, an upstream merger or consolidation, a sale of substantially all the Company’s assets or the consent of holders of the majority of the then outstanding shares of Series A Preferred Stock. There was no beneficial conversion feature associated with this transaction.
 
      Preferred series B stock:
 
      In connection with the SpineMedica acquisition the Company issued 5,922,397 shares of Series B Convertible Preferred Stock. See Note 4.
 
      Preferred series C stock:
 
      The Company sold 1,285,001 shares of Preferred Series C Stock for $3,855,000 or $3.00 per share in September and October 2007. Preferred Series C stockholders had voting rights identical to those of common stockholders, were entitled to dividends only when, or if, declared by the Board of Directors and had preference over the common stockholders in the event of the Company’s liquidation. The preferred stock was convertible into common stock at the option of the holder at any time on a one share for one share basis, subject to adjustment for stock splits, stock dividends, recapitalizations and the like.
 
      This preferred stock was to automatically convert to common stock upon the Company becoming a publicly traded company, an upstream merger or consolidation, a sale of substantially all the Company’s assets or the consent of holders of the majority of the then outstanding shares of Series C preferred stock.

 

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    Stock incentive plan:
    The Company has three share-based compensation plans, the MiMedx Group, Inc. Assumed 2006 Stock Incentive Plan (the “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”) which provide for the granting of qualified incentive and non-qualified stock options, stock appreciation awards and restricted stock awards to employees, directors, consultants and advisors. The awards are subject to a vesting schedule as set forth in each individual agreement. The Company intends to use only the 2006 Plan to make future grants. The number of assumed options under the Assumed 2005 Plan and Assumed 2007 Plan outstanding at December 31, 2009 totaled 956,250 and the maximum number of shares of common stock which can be issued under the 2006 Plan is 5,500,000 at December 31, 2009.
    Activity with respect to the stock options is summarized as follows:
                                 
            Range of     Weighted-        
            Exercise     average Exercise     Intrinsic  
    Shares     Prices     Price     Value  
 
                               
Outstanding at April 1, 2008
    4,446,250     $ .0001 – 5.44     $ 2.20          
 
                             
Exercisable at April 1, 2008
    2,036,667       .0001 – 5.44       1.91          
 
                             
 
                               
Granted
    1,100,000       .73 – 5.38       .94          
Cancelled
    (1,187,500 )     .0001 – 5.44       3.29          
Exercised
    (57,500 )     .0001       .0001          
 
                             
Outstanding at March 31, 2009
    4,301,250       .0001 – 5.44       1.60          
 
                             
Exercisable at March 31, 2009
    3,208,749       .0001 – 5.44       1.64          
 
                             
 
                               
Granted
    2,312,500       .50 – .76       .60          
 
                             
Cancelled
    (411,250 )     .50 – 5.44       3.68          
 
                             
Exercised
    (20,000 )     .0001       .0001          
 
                             
Outstanding at December 31, 2009
    6,182,500     $ .0001 – 2.40     $ 1.10     $ 307,535  
 
                         
Exercisable at December 31, 2009
    3,662,082     $ .0001 – 2.40     $ 1.35     $ 80,523  
 
                         
    The intrinsic value of options exercised during the nine months ended December 31, 2009 was approximately $15,000.
    Following is a summary of stock options outstanding and exercisable at December 31, 2009:
                                         
    Options Outstanding     Options Exercisable  
            Weighted-                      
            Average     Weighted-             Weighted-  
Exercise   Number     Remaining     Average     Number     Average  
Price   Outstanding     Contractual Life     Exercise Price     Exercisable     Exercise Price  
$.0001 – .50     1,083,750     4.7 (years)   $ .49       292,500     $ .46  
.65 – 1.00     3,392,500       7.2       .80       1,790,832       .89  
1.80     956,250       6.1       1.80       936,250       1.80  
2.40     750,000       2.8       2.40       642,500       2.40  
 
                                   
 
 
    6,182,500       6.0       1.10       3,662,082       1.35  
 
                                   

 

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    A summary of the status of the Company’s unvested stock options as of December 31, 2009, and changes during the nine months ended December 31, 2009, is presented below:
                 
            Weighted  
            Average  
            Grant Date  
Unvested Stock Options   Shares     Fair Value  
 
               
Unvested at April 1, 2009
    1,092,501       .55  
 
               
Granted
    2,312,500       .50  
Vested
    (827,083 )     .49  
Cancelled
    (57,500 )     1.75  
 
             
 
               
Unvested at December 31, 2009
    2,520,418       .50  
 
             
    Total unrecognized compensation expense at December 31, 2009 was approximately $1,054,000 and will be charged to expense through December 2012.
    The fair value of the options granted was estimated on the date of grant using the Black-Scholes 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 average of the sum of the vesting term plus the contract term. 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.
    The assumptions used in calculating the fair value of options using the Black-Scholes option-pricing model are set forth in the following table:
         
    Nine Months Ended   Year Ended
    December 31, 2009   March 31, 2009
Dividend yield
  0%   0%
Expected volatility
  112.06 to 145.32%   68.85 – 76.90%
Risk free interest rates
  1.54 to 2.53%   1.89 – 3.11%
Expected lives
  3.5 to 6 years   5.75 – 6 years
    The weighted-average grant date fair value for options granted during the nine months ended December 31, 2009 and the year ended March 31, 2009 was approximately $.50 and $.63, respectively.
    Warrants:
    The Company grants common stock warrants in connection with equity shares purchases by investors as an additional incentive for providing long term equity capital to the Company and as additional compensation to consultants and advisors. The warrants are granted at negotiated prices in connection with the equity share purchases and at the market price of the common stock in other instances. The warrants have been issued for terms of five years.

 

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    Common Stock warrants issued, redeemed and outstanding during the nine months ended December 31, 2009 and the year ended March 31, 2009 are as follows:
                 
            Weighted Average  
            Exercise  
    Number     Price per Share  
 
               
Warrants outstanding at April 1, 2008
    709,331     $ 1.41  
 
               
Cashless exercise of warrants (417,594 shares of common stock issued)
    (524,080 )     (1.25 )
 
               
Warrants issued in connection with private placement of common stock (Note 7)
    975,000       .73  
 
           
 
               
Warrants outstanding at March 31, 2009
    1,160,251       .91  
 
               
Issued to placement agents in connection with the 3% convertible senior secured promissory notes offering
    315,520       .50  
 
               
Issued in connection with related party convertible promissory note
    1,666,667       .60  
 
               
Issued in connection with private placement of common stock
    3,848,933       1.50  
 
           
 
               
Warrants outstanding at December 31, 2009
    6,991,371     $ 1.17  
 
           
 
               
    Warrants outstanding at December 31, 2009 consist of the following:
                 
Assumed by the Company in connection with acquisition of SpineMedica Corp. in July 2007 ($1.80 exercise price); expire October, 2010
            175,251  
 
               
Service provided by consultant in October, 2007 ($3.00 exercise price); expire October, 2012
            10,000  
 
               
Issued in connection with September 2008 private placement ($.73 exercise price); expire February 2014
            975,000  
 
               
Issued in connection with 3% convertible senior secured promissory notes offering ($1.50 exercise price); expire June 2014
            315,520  
 
               
Issued in connection with convertible promissory note (exercise price $.60); expire September 2012
            1,666,667  
 
               
Issued in connection with private placement of common Stock ($1.50 exercise price); expire January 2015
            3,848,933  
 
             
 
               
Total warrants outstanding at December 31, 2009
            6,991,371  
 
             

 

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    Warrants may be exercised in whole or in part by:
    notice given by the holder accompanied by payment of an amount equal to the warrant exercise price multiplied by the number of warrant shares being purchased ; or
    election by the holder to exchange the warrant (or portion thereof) for that number of shares equal to the product of (a) the number of shares issuable upon exercise of the warrant (or portion) and (b) a fraction, (x) the numerator of which is the market price of the shares at the time of exercise minus the warrant exercise price per share at the time of exercise and (y) the denominator of which is the market price per share at the time of exercise.
    These warrants are not mandatorily redeemable, do not obligate the Company to repurchase its equity shares by transferring assets or issue a variable number of shares.
    The warrants require that the Company deliver shares as part of a physical settlement or a net-share settlement, at the option of the holder, and do not provide for a net-cash settlement.
    All of our warrants are classified as equity as of December 31, 2009.
10.   Income taxes:
    Significant items comprising the Company’s deferred tax assets and liabilities are as follows at December 31, 2009 and March 31, 2009:
                 
    December 31, 2009     March 31, 2009  
Deferred tax assets:
               
Share-based compensation expense
  $ 733,000     $ 678,000  
Furniture, software and equipment
    283,000       283,000  
Accrued expenses
    20,000       14,000  
Net operating loss carryforward
    11,358,000       9,266,000  
 
           
 
    12,394,000       10,241,000  
 
           
 
               
Deferred tax liabilities:
               
Intangible assets
    (78,000 )     (78,000 )
 
           
Net deferred tax assets
    12,316,000       10,163,000  
 
           
Valuation allowance
    (12,316,000 )     (10,163,000 )
 
           
 
 
  $     $  
 
           
    The reconciliation of the Federal statutory income tax rate of 34% to the effective rate is as follows for the periods ended December 31, 2009 and March 31, 2009:
                 
    December 31, 2009     March 31, 2009  
 
               
Federal statutory rate
    34.00 %     34.00 %
State taxes, net of federal benefit
    3.96 %     3.96 %
Permanent difference
    (12.00 %)     (2.24 %)
Valuation allowance
    (25.96 %)     (32.72 %)
 
           
 
    %     %
 
           
    Income taxes are based on estimates of the annual effective tax rate and evaluations of possible future events and transactions and may be subject to subsequent refinement or revision.

 

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    The Company has incurred net losses since its inception and, therefore, no current income tax liabilities have been incurred for the periods presented. The amount of unused tax losses available to carry forward and apply against taxable income in future years totaled approximately $29,900,000 at December 31, 2009 and $24,400,000 at March 31, 2009. The loss carry forwards expire in 2029. Due to the Company’s losses, management has established a valuation allowance equal to the amount of net deferred tax assets since management cannot determine that realization of these benefits is more likely than not.
    Under Section 382 and 383 of the Internal Revenue Code, if an ownership change occurs with respect to a “loss corporation”, as defined, there are annual limitations on the amount of the net operating loss and other deductions which are available to the Company. At this time the Company has not yet determined whether some of the loss carryforwards may be subject to these limitations.
11.   Gain on Settlement of Payables:
    During the nine months ended December 31, 2009, the Company negotiated a settlement of certain outstanding payables primarily related to legal expenses incurred during the fiscal year ended March 31, 2009. As a result of this negotiation the Company recognized a gain on settlement of payables of approximately $585,000, which is included in general and administrative expenses in our consolidated statement of operations for the nine months ended December 31, 2009.
12.   Termination of agreement:
    On August 19, 2009, the Company and Thomas J. Graham, M.D. (“Graham”) and Phantom Hand Project, LLC (“Phantom”), entered into an Amendment and Settlement Agreement (the “Agreement”).
    The Agreement (i) terminates the Cost Recovery and Revenue Sharing Letter agreement between MiMedx and Graham dated May 22, 2008; (ii) terminates the Finder’s Fee Letter Agreement between MiMedx and Graham dated May 22, 2008; (iii) transfers to Graham certain provisional patent applications that MiMedx did not intend to pursue and to which no value was ascribed; (iv) accelerates the vesting of options to purchase 250,000 shares of the Company’s common stock previously issued to Graham and extends the period in which such options may be exercised through the five year anniversary of their date of issuance, without regard to whether Graham continues to serve as a consultant to MiMedx; (v) obligates Graham to forfeit 50,000 shares of the Company’s common stock issued to him previously; (vi) amends the Consulting Agreement dated September 21, 2007, between MiMedx and Graham; and (vii) provides for certain payments to Graham upon a disposition of certain of the intellectual property comprising MiMedx’s Level Orthopedics division (the “Level Assets”) prior to September 20, 2010.
    In connection with the amendment of the options and the recovery of the common stock (recorded as treasury stock), the Company recorded expense of approximately $48,000, which represented the fair value of the amended options calculated utilizing the Black-Scholes-Merton model less the fair value of the common stock surrendered on the date of the agreement.
13.   Related party transactions:
    Related party expense:
    In October 2009, the Company’s Chairman of the Board (the “holder”) completed an advance of $500,000 to fund the Company’s working capital evidenced by a 5% Convertible Promissory Note (the “Note”). The Note was due and payable in full on December 20, 2009 and, at the option of the holder, was convertible into the number of shares of Common Stock of the Company equal to the outstanding principal amount and accrued interest of the Note divided by $.60 per share. Additionally, under the terms of the Note, the Company issued 1,666,666 warrants to the holder with an exercise price of $.60 per share and a fair value of $975,833 on the date of repayment which was recognized as a financing expense. The warrants expire in September 2012. The outstanding principal and accrued interest of approximately $505,000 was paid back to the holder in December 2009.

 

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    On the inception date, the Company evaluated the terms and conditions of the note and determined the Note possessed a certain feature, the conversion provision, that was not clearly and closely related to the host debt instrument. When a hybrid debt instrument, such as the Note, embodies derivative features that are not clearly and closely related to the host instrument, current accounting standards afford the Company an option to (1) bifurcate from the hybrid instrument one “compound” derivative financial instrument that would be carried as a derivative liability at fair value and recognize the balance of the proceeds as a note payable with subsequent accretions of the resulting discount as interest expense over the term of the note or (2) carry the entire hybrid financial instrument at fair value. After reviewing the terms and conditions of the arrangement in its entirety, the Company elected to carry the entire hybrid convertible debt instrument at fair value with subsequent adjustments to fair value charged or credited to the statement of operations. Upon repayment of the Note in December 2009, the Company re-measured the fair value of the instrument and recorded the change in fair value to the statement of operations.
    At inception, the terms of the warrants did not provide for all of the conditions necessary for equity classification and were recorded as a derivative liability. Upon repayment of the note, because the number of shares and conversion price became fixed, the warrants met the criteria for classification as equity, were adjusted to fair value and reclassified from derivative liability to equity.
    The Company incurred expenses of approximately, $71,000 during the nine months ended December 31, 2009 and $23,000 during the year ended March 31, 2009 related to administrative fees provided by an entity owned by the current Chairman of the Board.
    The Company incurred expenses of approximately $20,000 and $55,000 during the nine months ended December 31, 2009 and the year ended March 31, 2009, respectively, related to aircraft use from an entity owned by the former Chairman of the Board and current member of the Board of Directors.
    The Company incurred expenses of approximately $11,000 during the nine months ended December 31, 2009 and $25,000 during the year ended March 31, 2009 related to the lease of office space from an entity owned by the former Chairman of the Board and current member of the Board of Directors.
    The Company incurred expenses of approximately, $73,000 during the nine months ended December 31, 2009 for management consulting services provided by a company owned by the Chief Operating Officer prior to his employment in September 2009.
    All the above related party expenses were included in general and administrative expenses, except for the warrant expense which is in other expense, in the accompanying consolidated statements of operations.
14.   401k Plan:
    The Company has a 401(k) plan (the “Plan”) covering employees who have attained 21 years of age and have completed 3 months of service. Under the Plan, participants may defer up to 100% of their eligible wages to a maximum of $16,500 per year (annual limit for 2009). Employees age 50 or over in 2009 may make additional pre-tax contributions up to $5,000 above and beyond normal plan and legal limits. Annually, the Company may elect to match employee contributions up to 3% of the employee’s compensation. Additionally, the Company may elect to make a discretionary contribution to the Plan. The Company did not provide matching contributions for the nine months ended December 31, 2009 and the year ended March 31, 2009.
15.   Commitments:
    Consulting agreements:
    The Company has entered into consulting agreements with individuals to provide consulting and advisory services to the Company. The agreements provide for terms of three years.
    At December 31, 2009 the minimum future consulting payments due under non-cancellable consulting agreements is $18,750 all payable during the year ended December 31, 2010.

 

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    Employment agreements:
    The Company has entered into employment agreements with terms ranging from one to three years. At December 31, 2009 the minimum future employment payments due under these agreements approximates $166,000 and are all payable during the year ended December 31, 2010.
    Leases:
    The Company leases office space in Tampa, Florida and Marietta, Georgia. These leases expire during 2012 and 2011, respectively.
    Future minimum lease payments under these operating leases are as follows:
         
Years ending December 31,        
2010
  $ 284,000  
2011
    227,000  
2012
    90,000  
 
     
Total minimum payments
  $ 601,000  
 
     
    Rent expense on all operating leases for the nine months ended December 31, 2009 and the year ended March 31, 2009 was approximately $212,000 and $277,000, respectively.
    Royalties:
    The Company has minimum royalty payments due in conjunction with one of its licenses, as follows:
         
Due Date January   Amount  
2010
  $ 25,000  
2011
    35,000  
2012
    45,000  
2013
    50,000  

 

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Item 9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A(T).   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 Annual Report on Form 10-K, 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 Annual Report on Form 10-K, 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 Annual Report on Form 10-K. Based on their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Annual Report on Form 10-K.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended). Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2009. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework. Our management has concluded that, as of December 31, 2009, our internal control over financial reporting is effective based on these criteria.
An evaluation was also performed under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of any changes in our internal control over financial reporting that occurred during our last fiscal quarter and that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. That evaluation did not identify any change in our internal control over financial reporting that occurred during our latest fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
This Annual Report on Form 10-K does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to temporary rules of the SEC that permit us to provide only management’s report in this Annual Report on Form 10-K.
Item 9B.   Other Information
None.

 

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PART III
Item 10.   Directors, Executive Officers and Corporate Governance
Information required by this Item will be contained in our definitive proxy statement relating to our Annual Meeting of Shareholders under the captions “Corporate Governance,” “Executive Officers,” “Nominees for Election of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance,” or similar captions which are incorporated herein by reference.
We have adopted our “Code of Business Conduct and Ethics” and a copy is posted on our website at http://mimedx.com/governance.aspx. In the event that we amend any of the provisions of this Code of Business Conduct and Ethics that require disclosure under applicable law, SEC rules or listing standards, we intend to disclose such amendment on our website.
Any waiver of the Code of Business Conduct and Ethics for any executive officer or director must be approved by the Board and will be disclosed on a Form 8-K filed with the SEC, along with the reasons for the waiver.
Item 11.   Executive Compensation
Information required by this Item will be contained in our definitive proxy statement relating to our Annual Meeting of Shareholders under the caption “Executive Compensation,” which is incorporated herein by reference.
Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
Information required by this Item will be contained in our definitive proxy statement relating to our Annual Meeting of Shareholders under the captions “Security Ownership of Certain Beneficial Owners and Management,” “Executive Compensation,” and “Equity Compensation Plan Information,” which is incorporated herein by reference.
Item 13.   Certain Relationships and Related Transactions, and Director Independence
Information required by this Item will be contained in our definitive proxy statement relating to our Annual Meeting of Shareholders under the caption “Certain Relationships and Related Transactions,” which is incorporated herein by reference.
Item 14.   Principal Accounting Fees and Services
Information required by this Item will be contained in our definitive proxy statement relating to our Annual Meeting of Shareholders under the captions “Ratification of Appointment of Independent Registered Public Accounting Firm” and “Corporate Governance,” which are incorporated herein by reference.

 

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PART IV
Item 15.   Exhibits, Financial Statement Schedules.
(a)   Documents filed as part of this report:
  (1)   Financial Statements
 
  (2)   Financial Statement Schedules
 
      None
 
  (3)   Exhibits
 
      See Item 15(b) below. Each management contract or compensation plan has been identified.
(b)   Exhibits
         
Exhibit    
Number   Description
       
 
  3.1 (2)  
Articles of Incorporation of MiMedx Group, Inc.
3.2 (2)  
Bylaws of MiMedx Group, Inc.
10.1 (1)*  
MiMedx, Inc. 2006 Stock Incentive Plan
10.2 (1) *  
Declaration of Amendment to MiMedx, Inc. 2006 Stock Incentive Plan
10.3 (1) *  
Form of Incentive Award Agreement under the MiMedx, Inc. 2006 Stock Incentive Plan, including a list of officers and directors receiving options thereunder
10.4 (1) *  
Form of Nonqualified Incentive Award Agreement under the MiMedx, Inc. 2006 Stock Incentive Plan, including a list of officers and directors receiving options thereunder
10.5 (1) *  
MiMedx, Inc. 2005 Assumed Stock Plan
10.6 (1) *  
Declaration of Amendment to MiMedx, Inc. 2005 Assumed Stock Plan
10.7 (1) *  
Form of Incentive Award Agreement under the MiMedx, Inc. Assumed 2005 Stock Plan (formerly the SpineMedica Corp. 2005 Employee, Director and Consultant Stock Plan), including a list of officers and directors receiving options thereunder
10.8 (1) *  
Form of Nonqualified Incentive Award Agreement under the MiMedx, Inc. Assumed 2005 Stock Plan (formerly the SpineMedica Corp. 2005 Employee, Director and Consultant Stock Plan)
10.9 (1) *  
MiMedx, Inc. Assumed 2007 Stock Plan (formerly the SpineMedica Corp. 2007 Stock Incentive Plan)
10.10 (1) *  
Declaration of Amendment to MiMedx, Inc. Assumed 2007 Stock Plan (formerly the SpineMedica Corp. 2007 Stock Incentive Plan)
10.11 (1) *  
Form of Incentive Award Agreement under the MiMedx, Inc. Assumed 2007 Stock Plan (formerly the SpineMedica Corp. 2007 Stock Incentive Plan)
10.12 (1) *  
Form of Nonqualified Incentive Award Agreement under the MiMedx, Inc. Assumed 2007 Stock Plan (formerly the SpineMedica Corp. 2007 Stock Incentive Plan)
10.13 (1)  
Form of MiMedx, Inc. Employee Proprietary Information and Inventions Assignment Agreement
10.23 (1)  
Lease between MiMedx, Inc. and University of South Florida Research Foundation, Incorporated dated March 6, 2007
10.32 (1)  
Technology License Agreement between MiMedx, Inc., Shriners Hospitals for Children, and University of South Florida Research Foundation dated January 29, 2007
10.33 (1)  
Technology License Agreement between SpineMedica Corp. and SaluMedica, LLC dated August 12, 2005
10.34 (1)  
Trademark License Agreement between SaluMedica, LLC and SpineMedica Corp. dated August 12, 2005
10.35 (1)  
Technology License Agreement between SpineMedica Corp. and SaluMedica, LLC dated August 3, 2007
10.36 (1)  
First Amendment Technology License Agreement between SpineMedica Corp. and SaluMedica, LLC dated August 3, 2007
10.37 (1)  
Trademark License Agreement between SaluMedica, LLC and SpineMedica Corp dated August 13, 2007
10.38 (1)  
Acknowledgement of Georgia Tech Research Corporation dated August 12, 2005
10.39 (1)  
License Agreement between Georgia Tech Research Corporation and Restore Therapeutics, Inc. dated March 5, 1998
10.40 (1)  
First Amendment to License Agreement between Georgia Tech Research Corporation and Restore Therapeutics, Inc. dated November 18, 1998
10.41 (1)  
Second Amendment to License Agreement between Georgia Tech Research Corporation and SaluMedica, LLC (f/k/a Restore Therapeutics, Inc.) dated February 28, 2005
10.42 (1)  
Third Amendment to License Agreement between Georgia Tech Research Corporation and SaluMedica, LLC dated August 12, 2005

 

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Exhibit    
Number   Description
 
10.43 (1)  
Assignment of Invention and Non-Provisional Patent Application from David N. Ku to SpineMedica Corp. dated August 11, 2005
10.44 (1)  
Assignment of Invention and Non-Provisional Patent Application from SaluMedica, LLC to SaluMedica, LLC dated August 12, 2005
10.45 (1)  
Form of SpineMedica, Corp. Employee Proprietary Information and Inventions Assignment Agreement
10.46 (1)  
Purchase Agreement between SpineMedica Corp. and SaluMedica, LLC dated March 12, 2007
10.47 (1)  
Letter Agreement between MiMedx, Inc. and SaluMedica, LLC dated June 26, 2007
10.54 (3)  
Investment Agreement dated March 31, 2008 between MiMedx Group, Inc. and SaluMedica, LLC
10.55 (3)  
Technology License Agreement dated March 31, 2008 between MiMedx Group, Inc. and SaluMedica, LLC
10.56 (3)  
Trademark License Agreement dated March 31, 2008 between MiMedx Group, Inc. and SaluMedica, LLC
10.65 (5)  
Form of Indemnification Agreement
10.66 (5)*  
Declaration of Amendment to Alynx, Co. Assumed 2006 Stock Incentive Plan (formerly the MiMedx, Inc. 2006 Stock Incentive Plan)
10.67 (6)*  
MiMedx Group, Inc. Amended and Restated Assumed 2005 Stock Plan
10.68 (7)*  
Form of Incentive Stock Option Award Agreement under MiMedx Group, Inc. Amended and Restated Assumed 2005 Stock Plan
10.69 (7)*  
Form of Nonqualified Stock Option Award Agreement under MiMedx Group, Inc. Amended and Restated Assumed 2005 Stock Plan
10.71 (8)  
Form of Subscription Agreement
10.72 (8)  
Form of 3% Convertible Senior Secured Promissory Note
10.73 (8)  
Form of Security and Intercreditor Agreement
10.74 (9)  
Sale and Purchase Agreement with UPex Holdings, LLC
10.76 (10)  
Subscription Agreement 5% Convertible Promissory Note
10.77 (10)  
5% Convertible Promissory Note
10.78 (10)  
Warrant to Purchase Common Stock
10.79 (10)  
Right of First Refusal Agreement between MiMedx Group, Inc., and Matthew J. Miller
10.82 (11)  
Form of Subscription and Stock Purchase Agreement Accredited Investor
10.83 (11)  
Form of Subscription and Stock Purchase Agreement Unaccredited Investor
10.84 (11)  
Form of Registration Rights Agreement
10.85 (11)  
Form of Warrant to Purchase Common Stock
21.1 (1)  
Subsidiaries of MiMedx Group, Inc.
23.1 #  
Consent of Independent Registered Public Accounting Firm
31.1 #  
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Acts of 2002
31.2 #  
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Acts 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

 

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Notes
 
*   Indicates a management contract or compensatory plan or arrangement
 
#   Filed herewith
 
All other footnotes indicate a document previously filed as an exhibit to and incorporated by reference from the following:
 
(1)   Incorporated by reference to the exhibit with the same number filed with the Registrant’s Form 8-K filed February 8, 2008
 
(2)   Incorporated by reference to the exhibit with the same number filed with the Registrant’s Form 8-K filed April 2, 2008
 
(3)   Incorporated by reference to the exhibit with the same number filed with the Registrant’s Form 8-K filed April 4, 2008
 
(4)   Incorporated by reference to the exhibit with the same number filed with the Registrant’s Form 10-K filed June 27, 2008
 
(5)   Incorporated by reference to the exhibit with the same number filed with the Registrant’s Form 8 -K filed July 15, 2008
 
(6)   Incorporated by reference to exhibit 10.4 filed with the Registrant’s Form S-8 filed August 29, 2008
 
(7)   Incorporated by reference to the exhibit with the same number filed with the Registrant’s Form 8 -K on September 4, 2008
 
(8)   Exhibits 10.71, 10.72, and 10.73 are incorporated by reference to Exhibits 10.1, 10.2, and 10.3, respectively, to the Registrant’s Form 8-K filed May 5, 2009
 
(9)   Incorporated by reference to Exhibit 2.1 to the Registrant’s Form 8-K filed October 22, 2009
 
(10)   Exhibits 10.76, 10.77, 10.78, 10.79 are incorporated by reference to Exhibits 10.1, 10.2, 10.3, and 10.4, respectively, to the Registrant’s Form 8-K filed September 28, 2009
 
(11)   Exhibits 10.82, 10.83, 10.84, and 10.85 are incorporated by reference to Exhibits 10.1, 10.2, 10.3, and 10.4, respectively, to the Registrant’s Form 8-K filed January 7, 2010

 

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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
         
March 30, 2010  MIMEDX GROUP, INC.
 
 
  By:   /s/ Michael J. Senken    
    Michael J. Senken   
    Chief Financial Officer   
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
         
Signature / Name   Title   Date
 
       
/s/ Parker H. Petit
 
Parker H. Petit
  Chief Executive Officer
(principal executive officer)
  March 30, 2010
 
       
/s/ Michael J. Senken
 
Michael J. Senken
  Chief Financial Officer
(principal financial and accounting officer)
  March 30, 2010
 
       
/s/ Steve Gorlin
 
Steve Gorlin
  Director    March 30, 2010
 
       
/s/ Kurt M. Eichler
 
Kurt M. Eichler
  Director    March 30, 2010
 
       
/s/ Charles E. Koob
 
Charles E. Koob
  Director    March 30, 2010
 
       
/s/ Larry W. Papasan
 
Larry W. Papasan
  Director    March 30, 2010
 
       
/s/ A. Kreamer Rooke, Jr.
 
A. Kreamer Rooke, Jr.
  Director    March 30, 2010
 
       
/s/ Joseph G. Bleser
 
Joseph G. Bleser
  Director    March 30, 2010
 
       
/s/ J. Terry Dewberry
 
J. Terry Dewberry
  Director    March 30, 2010
 
       
/s/ Bruce Hack
 
Bruce Hack
  Director    March 30, 2010

 

69

Exhibit 23.1
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-153255) of our report dated, March 30, 2010, with respect to the consolidated financial statements of MiMedx Group, Inc. included in this Annual Report on Form 10-K for the nine months ended December 31, 2009.
         
     
  /s/ Cherry, Bekaert & Holland, L.L.P.    
  Cherry, Bekaert & Holland, L.L.P.   
     
 
Tampa, Florida
March 30, 2010

 

 

Exhibit 31.1
EXHIBIT 31.1
Section 302 Certification
I, Parker H. Petit, certify that:
1.   I have reviewed this annual report on Form 10-K of MiMedx Group, Inc.;
 
2.   Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
 
3.   Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
 
4.   The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in the Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
  (a)   designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared,
 
  (b)   designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles,
 
  (c)   evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation, and
 
  (d)   disclosed in this annual report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.   The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):
  (a)   all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
  (b)   any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: March 30, 2010
         
  /s/ Parker H. Petit    
  Parker H. Petit   
  Chief Executive Officer   

 

 

Exhibit 31.2
         
EXHIBIT 31.2
Section 302 Certification
I, Michael J. Senken, certify that:
1.   I have reviewed this annual report on Form 10-K of MiMedx Group, Inc.;
 
2.   Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
 
3.   Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
 
4.   The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in the Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
  (a)   designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared,
 
  (b)   designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles,
 
  (c)   evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation, and
 
  (d)   disclosed in this annual report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.   The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):
  (a)   all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
  (b)   any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: March 30, 2010
         
  /s/ Michael J. Senken    
  Michael J. Senken   
  Chief Financial Officer   

 

 

Exhibit 32.1
         
Exhibit 32.1
Section 906 Certification
The undersigned Parker H. Petit, the Chief Executive Officer of MiMedx Group, Inc. (the “Company”), has executed this certification in connection with the filing with the Securities and Exchange Commission of the Company’s Annual Report on Form 10-K for the nine months ending December 31, 2009 (the “Report”). The undersigned hereby certifies, to the best of his knowledge, that:
(1)   the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
(2)   the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: March 30, 2010
         
  /s/ Parker H. Petit    
  Parker H. Petit   
  Chief Executive Officer   
A signed original of the written statement required by Section 906 has been provided to MiMedx Group, Inc. and will be retained by MiMedx Group, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

 

 

Exhibit 32.2
Exhibit 32.2
Section 906 Certification
The undersigned Michael J. Senken, the Chief Financial Officer of MiMedx Group, Inc. (the “Company”), has executed this certification in connection with the filing with the Securities and Exchange Commission of the Company’s Annual Report on Form 10-K for the nine months ending December 31, 2009 (the “Report”). The undersigned hereby certifies, to the best of his knowledge, that:
(1)   the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
(2)   the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: March 30, 2010
         
  /s/ Michael J. Senken    
  Michael J. Senken   
  Chief Financial Officer   
A signed original of the written statement required by Section 906 has been provided to MiMedx Group, Inc. and will be retained by MiMedx Group, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.