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 December 31, 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 December 31, 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	4,021,000		$	5.31
Exercised	(1,958,674	)	$	1.01
Unvested options forfeited	(265,002	)	$	3.47
Vested options expired	(35,499	)	$	1.11
Outstanding at December 31, 2013	15,375,960		$	2.46	7.7	$	96,614,260
Vested at December 31, 2013	6,807,732		$	1.33	6.5	$	50,441,475

Vested or expected to vest at December 31, 2013 (a)	15,081,653		$	2.42	7.7	$	95,324,825


(a)	Includes forfeiture adjusted unvested shares.

The intrinsic value of the options exercised during the years ended December 31, 2013, 2012 and 2011 were approximately $8,864,115, $718,978, and $258,000, respectively.

The intrinsic value of options vested during the years ended December 31, 2013, 2012 and 2011 were approximately $3,351,000, $1,851,000, and $1,194,000. respectively.

Following is a summary of stock options outstanding and exercisable at December 31,



		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	1,225,935	4.0	$	0.65	1,225,935	$	0.65
$0.87 - $1.35	6,570,341	7.6	1.20		3,604,469	1.18
$1.40 - $2.29	1,571,700	6.1	1.66		1,321,698	1.66
$2.33 - $3.75	2,091,984	8.7	2.77		655,630	2.77
$3.95 - $6.02	3,435,500	9.3	5.13		—	—
$6.04 - $7.93	480,500	8.9	6.61		—	—
	15,375,960	7.7	$	2.46	6,807,732	$	1.33

A summary of the status of the Company’s unvested stock options as of December 31 is presented below:



	2013
Unvested Stock Options	Number of Shares		Weighted- Average Grant Date Fair Value
Unvested at January 1, 2013	8,377,538		$	0.96
Granted	4,021,000		$	3.08
Cancelled/expired	(265,002	)	$	2.14
Vested	(3,565,308	)	$	0.94
Unvested at December 31, 2013	8,568,228		$	1.94

Total unrecognized compensation expense at December 31, 2013, was approximately $12,052,935 and will be charged to expense through February 2016.

The fair value of the options granted was 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 simplified method was used due to the Company’s lack of sufficient historical data to provide a reasonable basis upon which to estimate the expected term due to the limited period of time its equity shares have been publicly traded. The term for non-employee options is generally based upon the contractual term of the option. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for the period of the expected term or contractual term as described.

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:



	Year ended December 31,
	2013	2012	2011
Expected volatility	61.41 - 64.77%	45.7 - 64.3%	57.3-58.1%
Expected life (in years)	6	6	6
Expected dividend yield	—	—	—
Risk-free interest rate	0.85 - 1.88%	0.62 - 1.77%	0.86 - 2.24%

The weighted-average grant date fair value for options granted during the years ended December 31, 2013, 2012 and 2011 were approximately $3.08, $1.07, and $0.63, respectively.

Restricted Stock Awards

Following is summary information for restricted stock awards for the years ended 2013 and 2012. There were no restricted stock awards in 2011 and prior years. Shares vest over a one to three year period. As of December 31, 2013, there was approximately $2,471,000 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.



	Number of Shares		Weighted-Average Grant Date Fair Value
Unvested at December 31, 2011	—		—
Granted	7,500		$3.49
Vested	—		—
Unvested at December 31, 2012	7,500		$3.49
Granted	576,550		$5.55
Vested	(2,500	)	$3.49
Forfeited	(5,000	)	$6.60
Unvested at December 31, 2013	576,550		$5.53

For the years ended December 31, 2013, 2012, and 2011 the Company recognized stock-based compensation as follows:



	Year Ended December 31,
	2013		2012		2011
Cost of sales	$	279,215	$	97,970	$	98,366
Research and development	417,436		289,341		254,997
Selling, general and administrative	5,312,525		2,151,410		1,305,720
	$	6,009,176	$	2,538,721	$	1,659,083

Warrants

From time to time the Company has granted 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 were 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 were issued for terms of five years.

Common Stock warrants activity and resulting balances for the years ended December 31, 2013, 2012, and 2011 are as follows:



	Number of Warrants		Weighted- Average Exercise Price per Warrant		Number of Contingent Warrants		Weighted- Average Exercise Price per Contingent Warrant
Warrants outstanding at January 1, 2011	6,003,924		$	1.21	1,252,990		$	0.01
Issued in connection with private placement of common stock	1,889,161		1.50		1,889,162		0.01
Issued in connection with convertible promissory notes	203,332		1.50		203,332		0.01
Issued in connection with line of credit with related party	—		—		650,000		0.01
Issued in connection with Senior Secured Promissory Notes	1,250,000		0.01		1,250,000		0.01
Placement agent	42,400		1.09		—		—
Warrants outstanding at December 31, 2011	9,388,817		$	1.00	5,245,484		$	0.01

Warrants outstanding at January 1, 2012	9,388,817		$	1.00	5,245,484		$	0.01
Warrants issued:
Vested contingent warrants related to private placement of common stock	1,672,743		0.01		(1,672,743	)	0.01
Vested contingent warrants related to line of credit with related party	325,000		0.01		(325,000	)	0.01
Contingent warrants voided	—		—		(3,247,741	)	0.01
Warrants exercised:
Contingent warrants related to convertible note	(1,249,750	)	0.01		—		—
Contingent warrants related to private placement of common stock	(1,608,802	)	0.01		—		—
Contingent warrants related to line of credit with related party	(325,000	)	0.01		—		—
Callable warrants	(3,288,733	)	1.50		—		—
Other	(1,703,568	)	0.63		—		—
Warrants expired	(10,000	)	1.00		—		—
Warrants redeemed for cashless exercises	(14,789	)	0.53		—		—
Repurchased callable warrants	(56,750	)	1.50		—		—
Warrants outstanding at December 31, 2012	3,129,168		$	1.04	—		$	—

Warrants outstanding at January 1, 2013	3,129,168		1.04		—		—
Warrants exercised:
Other	(1,844,352	)	1.14		—		—
Warrants outstanding at December 31, 2013	1,284,816		$	0.90	—		$	—

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

•

if permitted by the applicable warrant 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, if permitted by the applicable warrant 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, 2013, December 31, 2012, and December 31, 2011.