Current assets:

Cash and cash equivalents

Prepaid expenses and other current assets

 

 

Total current assets

 

Property and equipment, net of accumulated depreciation of $395,314 (September) and $191,588 (March)

 

Goodwill

Intangible assets, net of accumulated amortization of $657,256 (September) and $323,848 (March)

Deposits

 

 

Total assets

 

 

 

Current liabilities:

Accounts payable and accrued expenses

 

 

Total current liabilities

 

 

Redeemable common stock, 487,500 shares issued and outstanding (net of subscription receivable of $289,136)

 

 

Commitments and contingencies (Notes 4 and 9)

 

Stockholders’ equity:

Preferred stock; $.001 par value; 5,000,000 shares authorized and 0 (September and March) shares issued and outstanding

Common stock; $.001 par value; 100,000,000 shares authorized and 37,282,128 (September) and 36,864,534 (March) shares issued and outstanding

Additional paid-in capital

Stock subscriptions receivable

Deficit accumulated during the development stage

 

 

Total stockholders’ equity

 

 

Total liabilities and stockholders’ equity

 

Research and development expenses

Acquired in-process research and development

General and administrative expenses

 

 

Loss from operations

 

Other income, net

 

 

Loss before income taxes

Income taxes

 

 

Net loss

 

Accretion of redeemable common stock to fair value

 

 

Loss attributable to common shareholders

 

 

Loss attributable to common shareholders per common share

Basic and diluted

 

 

Shares used in computing net loss per common share

Basic and diluted

 

Balances, November 22, 2006

Issuance of common stock at inception

Employee share-based compensation expense

Other share-based compensation expense

Common stock issued in connection with purchase of license agreement

Issuance of note receivable, related party

Sale of Series A Preferred stock

Accrued interest income

Net loss for the period

 

 

Balances, March 31, 2007

Employee share-based compensation expense

Other share-based compensation expense

Collection of stock subscription receivable

Accrued interest income

SpineMedica Corp. acquisition

Sale of Series C Preferred stock

Stock options issued in connection with purchase of intellectual property

Exercise of stock options

Alynx Merger — Recapitalization

Alynx Merger — Transaction Costs (expensed)

Conversion of Preferred stock

Common stock issued in connection with purchase of license agreement

Net loss for the period

 

 

Balances, March 31, 2008

Employee share-based compensation expense (unaudited)

Other share-based compensation expense (unaudited)

Cashless exercise of stock warrants (unaudited)

Sale of warrants in connection with private placement of redeemable common stock (unaudited)

Accretion of redeemable common stock to fair value (unaudited)

Net loss for the period (unaudited)

 

 

Balances, September 30, 2008 (unaudited)

 

Cash flows from operating activities:

Net loss

Adjustments to reconcile net loss to net cash flows from operating activities, net of effects of acquisition:

Acquired in-process research and development

Depreciation

Amortization of intangible assets

Employee share-based compensation expense

Other share-based compensation expense

Issuance of common stock for transaction fees

Accrued interest on notes receivable, related party

Change in fair value of investment, related party

Increase (decrease) in cash resulting from changes in:

Prepaid expenses and other current assets

Accounts payable and accrued expenses

Deferred interest income

 

 

Net cash flows from operating activities

 

 

Cash flows from investing activities:

Purchase of equipment

Cash paid for intangible asset

Cash paid for security deposits

Cash received in acquisition of SpineMedica Corp.

Cash paid for acquisition costs of SpineMedica Corp.

Payments from (advances to) related party

 

 

Net cash flows from investing activities

 

 

Cash flows from financing activities:

Payments on related party borrowing

Proceeds from Series A preferred stock

Proceeds from Series C preferred stock

Proceeds from sale of warrants and redeembable common stock

Proceeds from exercise of stock options

Offering costs paid in connection with Series A preferred stock offering

 

 

Net cash flows from financing activities

 

 

Net change in cash

 

Cash, beginning of period

 

 

Cash, end of period

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulations S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the results of operations for the periods presented have been included. Operating results for the three and six months ended September 30, 2008 and 2007 are not necessarily indicative of the results that may be expected for the fiscal year. The balance sheet at March 31, 2008 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by GAAP for complete financial statements.

You should read these condensed consolidated financial statements together with the historical consolidated financial statements of the Company for the years ended March 31, 2008 and period from inception (November 22, 2006) through March 31, 2008 and 2007 included in our Annual Report on Form 10-K for the year ended March 31, 2008, filed with the Securities and Exchange Commission (“SEC”) on June 27, 2008, as amended on July 29, 2008 and September 30, 2008.

MiMedx, Inc. (“MiMedx”) was incorporated in Florida in 2006. MiMedx entered into an Agreement and Plan of Merger (“Merger Agreement”) on January 29, 2008 with a publicly-traded Nevada Corporation, Alynx, Co. (“Alynx”), a public shell company, which was consummated on February 8, 2008. As a result of this transaction, MiMedx shareholders owned approximately 97% of the outstanding shares, of the surviving company, thus giving MiMedx substantial control.

Under 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 the 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, Inc. and SpineMedica, LLC.

The financial statements include the accounts of MiMedx Group, Inc. and its wholly-owned subsidiaries MiMedx, Inc. and SpineMedica, LLC. All significant inter-company balances and transactions have been eliminated.

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

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 and convertible preferred stock would be anti-dilutive.

Outstanding anti-dilutive securities not included in diluted net loss per share calculation are as follows:

Common Stock equivalents:

Stock Options

 

Stock Warrants

 

Convertible Preferred Stock

 

 

 

 

In September 2006, the FASB issued Statement No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 clarifies the principle that fair value should be based on the assumptions that market participants would use when pricing an asset or liability. Additionally, it establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. Effective April 1, 2008 the Company adopted the provisions of SFAS 157. The adoption of the Standard had no effect on the consolidated financial statements.

In April 2008, FASB Staff Position No. 142-3, Determination of the Useful Life of Intangible Assets (FSP 142-3) was issued. This standard amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement 142, Goodwill and Other Intangible Assets. FASP 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. The Company has not determined the impact on its financial statements of this accounting standard.

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 September 30, 2008 the Company experienced net losses of $24,760,484 (unaudited) and cash used in operations of $13,608,664 (unaudited). As of September 30, 2008, the Company had not emerged from the development stage and had only $2,347,000 of cash and cash equivalents on hand. We estimate that the cash and cash equivalents on hand will be sufficient to fund operations for at least 60 days from September 30, 2008, but 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 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. The Company is currently attempting to raise additional funds and such funds may not be available on favorable terms, or at all, particularly when considering the current worldwide financial and credit crises which has made it significantly more difficult to gain access to the capital markets. 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 may 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. Any of these events could 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.

Intangible assets activity is summarized as follows:

 

 

 

2009

2010

2011

2012

2013

Thereafter

 

 

 

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 “Private Placement”). As of September 30, 2008, the Company had sold 487,500 units for total proceeds of $1,462,500. Of this amount, $487,500 is recorded in the form of a subscription receivable that was settled after September 30, 2008. There can be no assurances that the Company will be successful in placing any further units under the Private Placement.

In connection with the 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 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, the Company is required, pursuant to EITF D-98 Classification and Measurement of Redeemable Securities, to classify the common stock outside of stockholders’ equity as redeemable common stock. Further, given the nature of the contingent redemption provision, the standard requires the Company to initially record the redeemable common stock at its fair value, which was accomplished with a charge to retained earnings of $1,423,823. The Company will evaluate the redemption value of the redeemable common stock during the six month period that it is redeemable and may record additional accretion depending on facts and circumstances surrounding the status of the potential exchange. Upon expiration of the exchange period, the redeemable common stock will be reclassified to paid-in capital and par value, unless exchanged for other financial instruments. If the redeemable common stock is exchanged for other financial instruments, other accounting standards will be applied.

The warrants included in the unit offering are indexed to 487,500 shares of the Company’s common stock and were evaluated for purposes of their classification under EITF 00-19 Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock. These warrants are not subject to the Registration Rights Agreement referred to above, and they otherwise meet the conditions for equity classification provided in that standard. 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, consisting of cash and the subscription receivable, was allocated to the redeemable common stock and warrants based upon their relative fair values as provided in EITF D-98 and related standards. 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:

Redeemable Common Stock

Warrants

 

 

 

Activity with respect to the stock options is summarized as follows:

Options outstanding at April 1, 2008

 

Granted

 

Cancelled

 

Exercised

 

Options outstanding at September 30, 2008

 

 

Options exercisable at September 30, 2008

 

Following is a summary of stock options outstanding and exercisable at September 30, 2008:

$.0001 – 1.00

1.80 – 2.40

5.38 – 5.44

 

 

 

 

A summary of the status of the Company’s unvested stock options follows:

 

Unvested at April 1, 2008

 

Granted

 

Cancelled

 

Vested

 

 

Unvested at September 30, 2008

 

Total unrecognized compensation expense at September 30, 2008 was approximately $1,475,000 and will be charged to expense through June, 2011.

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:

Dividend yield

 

 

Expected volatility

 

Risk free interest rates

 

Expected lives

The weighted-average grant date fair value for options granted during the six months ended September 30, 2008, and 2007, was approximately $3.45, and $.44, respectively.

A summary of our common stock warrant activity for the six months ended September 30, 2008 is as follows:

 

Warrants outstanding at April 1, 2008

 

Cashless exercise of warrants (417,594 shares of common stock issued)

 

Warrants issued in connection with private placement of common stock

 

 

Warrants outstanding at September 30, 2008

 

Warrants outstanding at September 30, 2008 consist of the following:

Issued in connection with private placement discussed in Note 5

 

Assumed by the Company in connection with acquisition of SpineMedica Corp. in July, 2007 ($1.80 exercise price); expire October, 2009

 

Service provided by consultant in October, 2007 ($3.00 exercise price); expire October, 2012

 

 

Total warrants outstanding at September 30, 2008

 

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.

The Company has incurred net losses since its inception and, therefore, no current income tax liabilities have been incurred for the periods presented. 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.

The Company incurred expenses of approximately $19,000 and $6,200 during the six months ended September 30, 2008 related to aircraft usage and the lease of office space, respectively, from entities owned by the Chairman of the Board. Amounts incurred for these types of expenses during the six months ended September 30, 2007 approximated $54,000 and $12,000, respectively.

The table below sets forth our known contractual obligations as of September 30, 2008:

Consulting Agreements

Employment Agreements

Operating Lease Obligations

 

Total

 

In May 2008, the Company entered into agreements with a consultant/shareholder which require payments in the event the Company receives proceeds from the sale or disposition of certain intellectual property contributed by the consultant/shareholder. As of September 30, 2008 no commitments have been paid or accrued under these agreements due to their contingent nature.

The Company’s directors and officers are indemnified against costs and expenses related to stockholder and other claims (i.e., only actions taken in their capacity as officers and directors) that are not covered by the Company’s directors and officers insurance policy. This indemnification is ongoing and does not include a limit on the maximum potential future payments, nor are there any recourse provisions or collateral that may offset the cost. No events have occurred as of September 30, 2008 which would trigger any liability under the agreement.

Certain shareholders of the Company have registration rights covering 18,420,198 shares of the Company’s common stock pursuant to an agreement dated July 23, 2007. The rights will be effective nine months after the Company either closes an underwritten public offering or receives, in the aggregate, a minimum of $10,000,000 in cash from the sale or a series of related sales of the Company’s securities at a time when its equity securities are registered under Section 12 of the Exchange Act. As such, these are contingent rights subject to events within the Company’s control. When and if these events occur and the nine month period expires, the majority of the holders of the registration rights can demand that the Company use its best efforts to register such shares on up to two occasions but not more than once in any 12-month period, subject to certain restrictions. The holders of those shares also have certain piggyback registration rights. The various registration rights expire upon the earlier of the fifth anniversary from when the Company has its first underwritten public offering or the date when the holder of such shares is able to sell the registrable shares under Rule 144. Pursuant to a separate registration rights agreement, dated February 8, 2008, the holders of approximately 17,600 additional shares of the Company’s common stock have piggyback registration rights which are substantially the same as those granted in July 2007. The registration rights agreements do not require the Company to pay any consideration to holders if an SEC registration statement is not declared effective or maintained. Beginning February 9, 2009, most, if not all, of the shares subject to the registration rights agreements will be eligible for sale pursuant to Rule 144. Approximately 966,667 of the shares are held by persons who are affiliates. Affiliates will be subject to the condition that the Company be current in its filings before they may utilize Rule 144, and to Rule 144 volume limitations.

As discussed in Note 5, registration rights were also granted to shareholders in conjunction with the Private Placement.

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 arrays of fibers for tendons

Fiber braids for ligament bioprostheses

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 repair.

 

Form of Incentive Stock Option Award Agreement under MiMedx Group, Inc. Amended and Restated Assumed 2005 Stock Plan

 

Form of Nonqualified Stock Option Award Agreement under MiMedx Group, Inc. Amended and Restated Assumed 2005 Stock Plan

 

MiMedx Group, Inc. Amended and Restated Assumed 2005 Stock Plan (formerly the SpineMedica Corp. 2005 Employee, Director and Consultant Stock Plan)

 

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

Form of Incentive Stock Option Award Agreement under MiMedx Group, Inc. Amended and Restated Assumed 2005 Stock Plan

 

Form of Nonqualified Stock Option Award Agreement under MiMedx Group, Inc. Amended and Restated Assumed 2005 Stock Plan

 

MiMedx Group, Inc. Amended and Restated Assumed 2005 Stock Plan (formerly the SpineMedica Corp. 2005 Employee, Director and Consultant Stock Plan)

 

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002