Acquisition of Surgical Biologics, LLC

9 Months Ended

Sep. 30, 2012

Acquisition of Surgical Biologics, LLC [Abstract]

Acquisition of Surgical Biologics, LLC

4.           Acquisition of Surgical Biologics, LLC

On December 21, 2010, we entered into an Agreement and Plan of Merger ("the Merger Agreement") with Membrane Products Holdings, LLC and OnRamp Capital Investments, LLC, the owners of Surgical Biologics, LLC ("Surgical Biologics"), a privately held company headquartered in Kennesaw, Georgia.  This transaction closed on January 5, 2011 and as a result we acquired all of the outstanding shares of Surgical Biologics in exchange for $500,000 cash, a total of $1,250,000 in 4% Convertible Secured Promissory Notes, and $7,087,500 in stock, represented by 5,250,000 shares of our common stock (525,000 of which were held in escrow for the purpose of securing the indemnification obligations outlined in the Merger Agreement).  Contingent consideration shall be payable in a formula determined by sales for the years 2011 and 2012.  As presented in the table below, the significant unobservable inputs used in the fair value measurement of contingent consideration related to the acquisitions are annualized revenue forecasts developed by the Company's management and the probability of achievement of those revenue forecasts.  The contingent consideration was initially valued at $7,404,700 and is shown in the schedule below as fair value of earn-out.  We completed the acquisition of Surgical Biologics in an effort to extend our biomaterials product lines.  As of December 31, 2011, the Company evaluated the contingent liability based on operating results for the year, and adjusted the earn-out liability to $7,410,503.  On April 30, 2012, the Company issued 2,632,576 shares of its Common Stock valued at $3,185,223 in payment of the 2011 earn-out.  As of September 30, 2012, the Company evaluated the 2012 contingent liability based on operating results for the nine months ended September 30, 2012, and adjusted the 2012 earn-out liability to $5,545,280.

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Contingent Liability for
	Accrued Earn-out
	Acquisition Consideration
Beginning balance at January 1, 2012	$	7,410,503
Common stock issued on earn-out		(3,185,223	)
Total remeasurement adjustments:
(Gains) or losses included in earnings		1,320,000
Ending balance at September 30, 2012	$	5,545,280

In total, the 4% Convertible Promissory Notes were convertible into up to 1,250,000 shares of the Company's common stock at $1.00 per share (a) at any time upon the election of the holder of the Convertible Notes; or (b) at the election of the Company, at any 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, as the case may be) closes at no less than $1.75 per share for not less than 20 consecutive trading days in any period prior to the maturity date. When converted, the Common Stock was available to be sold following satisfaction of the applicable conditions as set forth in Rule 144. The 4% Convertible Promissory Notes matured in eighteen (18) months and earned interest at 4% 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 4% Convertible Promissory Notes are secured by a security interest in the Intellectual Property, including the Patents and know-how and trade secrets related thereto, owned by, or exclusively licensed to, Surgical Biologics, LLC.  In July, 2012, the Company settled the Convertible Promissory Notes by paying approximately $177,000 in cash and issuing 893,267 shares of MiMedx common stock.

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

     The actual purchase price was based on cash paid, the fair value of our stock on the date of the Surgical Biologics acquisition, and direct costs associated with the combination. The actual purchase price was allocated as follows:

Value of 5,250,000 shares issued at $1.35 per share	$	7,087,500
Cash paid at closing		350,000
Cash retained for working capital		150,000
Assumed Debt		182,777
Convertible Secured Promissory Note		1,250,000
Fair value of earn-out		7,404,700
Total fair value of purchase price	$	16,424,977
Assets purchased:
Tangible assets:
Debt-free working capital	$	671,880
Other assets, net		385
Property, plant and equipment		72,866
		745,131
Intangible assets:
Customer relationships		3,520,000
Supplier relationships		241,000
Patents and know-how		5,530,000
Trade names and trademarks		1,008,000
In-process research and development – liquid		2,160,000
In-process research and development – other		25,000
Licenses and permits		13,000
		12,497,000
Goodwill		3,182,846
Total Assets Purchased	$	16,424,977

Working capital and other assets were composed of the following:

Working capital:
Cash	$	33,583
Prepaid Expenses		2,738
Accounts Receivable		181,087
License Receivable		340,000
Inventory		347,106
Accounts payable and accrued expenses		(196,101	)
Deferred rent and customer deposits		(36,533	)
Debt-free working capital		671,880
Current portion of debt		(62,590	)
Long-term debt		(21,187	)
Line of credit		(99,000	)
Net working capital	$	489,103
Deposits	$	16,582
Deferred rent (non-current)		(16,197	)
	$	385

The combination was accounted for as a purchase business combination as defined by ASC Topic 805 – Business Combinations.  The allocation of the purchase price to the assets acquired and liabilities assumed was based on an independent valuation report obtained by us.

The values assigned to intangible assets are subject to amortization.  The intangible assets were assigned the following lives for amortization purposes:

		Estimated useful
Intangible asset:		life (in years)
	Customer relationships	14
	Supplier relationships	14
	Patents and know-how	14
	Trade names and trademarks	indefinite
	In-process research and development – liquid	indefinite
	In-process research and development – other	indefinite
	Licenses and permits	3

Goodwill consists of the excess of the purchase price paid over the identifiable net assets and liabilities acquired at fair value.  Goodwill was determined using the residual method based on an independent appraisal of the assets and liabilities acquired in the transaction.  Goodwill is tested for impairment as defined by ASC Topic 350 – Intangibles – Goodwill and Other.