Equity

Stock Incentive Plans

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 September 30, 2013, totaled 375,000. On March 6, 2013, the Board of Directors approved 6,000,000 additional shares to be made available under the 2006 Plan, bringing the maximum number of shares of common stock which can be issued under the 2006 Plan to 22,500,000 at September 30, 2013. The shareholders approved the increase on May 9, 2013.

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



	Number of Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value
Outstanding at January 1, 2013	13,614,135		$	1.42
Granted	3,368,000		5.19
Exercised	(1,610,426	)	0.94
Unvested options forfeited	(179,167	)	3.82
Vested options expired	(52,999	)	1.11
Outstanding at September 30, 2013	15,139,543		2.28		7.9	$	31,918,608
Vested at September 30, 2013	6,482,824		1.25		6.6	$	18,911,451
Vested or expected to vest at September 30, 2013 (a)	14,824,937		$	2.25	7.9	$	31,649,823


(a)	Includes forfeiture adjusted unvested shares.

The intrinsic value of the options exercised during the nine months ended September 30, 2013, was approximately $7,182,000.

Following is a summary of stock options outstanding and exercisable at September 30, 2013:



	Options Outstanding				Options Exercisable
Range of Exercise Prices	Number outstanding	Weighted- Average Remaining Contractual Term (in years)	Weighted- Average Exercise Price		Number Exercisable	Weighted- Average Exercise Price
$0.50 - $0.76	1,340,935	3.9	$	0.65	1,340,935	$	0.65
$0.87 - $1.35	6,656,908	7.9	1.20		3,336,870	1.19
$1.40 - $2.29	1,686,700	6.4	1.62		1,436,698	1.65
$2.33 - $3.75	2,159,500	9.0	2.75		368,321	2.52
$3.95 - $6.02	3,035,000	9.5	5.07		—	—
$6.11 - $6.75	260,500	9.7	6.49		—	—
	15,139,543	7.9	$	2.28	6,482,824	$	1.25

Total unrecognized compensation expense related to granted stock options at September 30, 2013, was approximately $11,438,000 and is expected to be recognized over a weighted-average period of 2.2 years.

The fair value of options granted by the Company is estimated on the date of grant using the Black-Scholes-Merton option-pricing model that uses assumptions for expected volatility, expected dividends, expected term, and the risk-free interest rate. Expected volatilities are based on historical volatility of peer companies and other factors estimated over the expected term of the options. The term of employee options granted is derived using the “simplified method” which computes expected term as the 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-Merton option-pricing model are set forth in the following table:



	Nine months ended September 30,
	2013	2012
Expected volatility	61.41 - 64.56%	45.75 - 64.3%
Expected life (in years)	6	6
Expected dividend yield	—	—
Risk-free interest rate	0.85 -1.88%	0.62 - 1.62%

The weighted-average grant date fair value for options granted during the nine months ended September 30, 2013 was approximately $3.00.

During the first nine months of 2013, the Company granted 419,300 shares of restricted stock with a weighted-average grant date fair value of $5.58 which vest over a 1 to 3 year period. As of September 30, 2013, there was approximately $1,894,000 of total unrecognized stock-based compensation related to time-based, nonvested restricted stock. That expense is expected to be recognized on a straight-line basis over a weighted-average period of 2.5 years.

For the three and nine months ended September 30, 2013 and 2012, the Company recognized stock-based compensation as follows:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
Cost of sales	$	75,287	$	11,643	$	198,119	$	65,132
Research and development	110,694		70,754		309,461		217,885
Selling, general and administrative	1,481,785		587,072		3,647,425		1,472,652
	$	1,667,766	$	669,469	$	4,155,005	$	1,755,669

Warrants

The Company grants common stock warrants in connection with equity share 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.

Following is a summary of the warrant activity for the nine months ended September 30, 2013:



	Number of Warrants		Weighted- Average Exercise Price per Warrant
Warrants outstanding at January 1, 2013	3,129,168		$	1.04
Warrants exercised:
Contingent warrants related to private placement of common stock	(62,500	)	0.01
Callable warrants	(266,666	)	1.50
Other	(876,333	)	1.23
Warrants outstanding at September 30, 2013	1,923,669		$	0.93

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, and do not obligate the Company to repurchase its equity shares by transferring assets or issuing 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 September 30, 2013, and December 31, 2012.