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1. Formation and Business of the Company
a. Formation
Sientra, Inc., or the Company, was incorporated in the State of Delaware on August 29, 2003 under the name Juliet Medical, Inc. and subsequently changed its name to Sientra, Inc. in April 2007. The Company acquired substantially all the assets of Silimed, Inc., or Silimed, on April 4, 2007. The purpose of the acquisition was to acquire the rights to the silicone breast implant clinical trials. Following this acquisition, the Company focused on completing the clinical trials to gain Food and Drug Administration, or FDA, approval to offer its silicone gel breast implants in the United States.
In March 2012, Sientra announced it had received approval from the FDA for its portfolio of silicone gel breast implants, and in the second quarter of 2012 the Company began commercialization efforts to sell its products in the United States. The Company, based in Santa Barbara, California, is a medical aesthetics company that focuses on serving board-certified plastic surgeons and offers a portfolio of silicone shaped and round breast implants, tissue expanders, and body contouring products.
b. Initial Public Offering
The Company completed an initial public offering, or IPO, of its common stock on November 3, 2014. See note 11, Subsequent Events for disclosures related to the IPO and other related transactions.
c. Reverse Stock Split
On October 10, 2014, the board of directors and stockholders approved an amendment to the Company’s fourth amended and restated certificate of incorporation, which was filed on October 17, 2014, which effected a 1 for 2.75 reverse stock split of the Company’s issued and outstanding shares of common stock. The par value of the common stock was not adjusted as a result of the reverse stock split. All issued and outstanding shares of common stock, stock options and warrants and the related per share amounts contained in the Company’s condensed financial statements have been retroactively adjusted to reflect this reverse stock split for all periods presented. Also, as a result of the reverse stock split of the common stock, the conversion ratios for all of the Company’s convertible preferred stock have been adjusted such that the preferred stock are now convertible into shares of common stock at a conversion rate of 2.75-to-1 instead of 1-to-1. The number of issued and outstanding shares of preferred stock and their related per share amounts have not been affected by the reverse stock split and therefore have not been adjusted in the Company’s condensed financial statements. However, to the extent that the convertible preferred stock are presented on an as converted to common stock basis, such share and per share amounts contained in the Company’s financial statements have been retroactively adjusted to reflect this reverse stock split for all periods presented.
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2. Summary of Significant Accounting Policies
a. Basis of Presentation
The accompanying unaudited condensed financial statements in this Quarterly Report on Form 10-Q have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP, and the rules and regulations of the U.S. Securities and Exchange Commission, or SEC. Accordingly, they do not include certain footnotes and financial presentations normally required under accounting principles generally accepted in the United States of America for complete financial reporting. The interim financial information is unaudited, but reflects all normal adjustments and accruals which are, in the opinion of management, considered necessary to provide a fair presentation for the interim periods presented. The accompanying condensed financial statements should be read in conjunction with the Company’s audited financial statements and notes thereto included in the Company’s final prospectus filed pursuant to Rule 424(b)(1) under the Securities and Exchange Act of 1933, as amended, relating to the Company’s Registration Statement on Form S-1 (File No. 333-198837), filed with the SEC. The results for the three and nine months ended September 30, 2014 are not necessarily indicative of results to be expected for the year ending December 31, 2014, any other interim periods, or any future year or period.
b. Use of Estimates
The preparation of the condensed financial statements, in conformity with GAAP, 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 periods. Actual results could differ from those estimates.
c. Significant Accounting Policies
There have been no significant changes to the accounting policies during the three and nine months ended September 30, 2014, as compared to the significant accounting policies described in Note 3 of the “Notes to Financial Statements” in the Company’s audited financial statements included in the final prospectus filed with the SEC on October 29, 2014 other than those listed below.
Deferred Equity Issuance Costs
Deferred equity issuance costs, primarily consisting of legal, accounting and other direct fees and costs relating to the IPO, are capitalized. The deferred equity issuance costs were offset against the IPO proceeds upon the closing of the offering in November 2014. As of September 30, 2014, there was $1,811 in deferred equity issuance costs capitalized in other current assets on the condensed balance sheet. There were no deferred equity issuance costs capitalized as of December 31, 2013.
d. Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board, or FASB, issued accounting standard update 2014-09, Revenue from Contracts with Customers. The standard was issued to provide a single framework that replaces existing industry and transaction specific US GAAP with a five step analysis of transactions to determine when and how revenue is recognized. This accounting standard updated will be effective for the Company beginning in fiscal year 2018. The Company is currently assessing the impact that the standard will have on the financial statements upon adoption of the guidance.
In August 2014, the FASB issued accounting standard update 2014-15, Presentation of Financial Statement — Going Concern. The standard was issued to provide guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. This accounting standard updated will be effective for the Company beginning in fiscal year 2016. The Company anticipates there will be no impact on its financial statement upon adoption of this guidance.
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3. Fair Value of Financial Instruments
The Company has estimated the fair value of its financial instruments using the following methods and assumptions:
· Cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, and customer deposits are carried at cost, which approximates fair value because of the short term nature of those instruments.
· Long-term debt is included in the balance sheet at its amortized cost. The carrying value of the long-term debt approximates its fair value. The fair value of the Company’s long-term debt was determined based on the relative timing of the instruments, all under substantially the same terms, including the issuance of each of the three tranches (tranche A, B, and C) drawn in 2013. In addition, tranches B and C were made available to the Company based on the Company meeting certain performance milestones. Furthermore, on June 30, 2014, the Company negotiated with Oxford Finance LLC, or Oxford, to amend the Loan and Security Agreement and raise an additional $10,000 in a fourth tranche (tranche D). The terms for tranche D were substantially the same as for the prior tranches (see Note 8). Based upon this, for December 31, 2013 and September 30, 2014, the Company has determined the carrying value closely approximates the fair value.
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4. Fair Value Measurements
Certain assets and liabilities are carried at fair value under GAAP. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three levels of the fair value hierarchy, of which the first two are considered observable and the last is considered unobservable:
· Level 1 — Quoted prices in active markets for identical assets or liabilities.
· Level 2 — Observable inputs (other than Level 1 quoted prices) such as quoted prices in active markets for similar assets or liabilities, quoted prices in markets that are not active for identical or similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data.
· Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to determining the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques.
The Company’s common stock warrant liabilities are carried at fair value determined according to the fair value hierarchy described above. The Company has utilized an option pricing valuation model to determine the fair value of its outstanding common stock warrant liabilities. The inputs to the model include fair value of the common stock related to the warrant, exercise price of the warrant, expected term, expected volatility, risk-free interest rate and dividend yield. The Company determines the fair value per share of the underlying common stock by taking into consideration its most recent sale of its convertible preferred stock, the occurrence of the initial public offering, as well as additional factors that the Company deems relevant. The Company historically has been a private company and lacks company-specific historical and implied volatility information of its stock. Therefore, it estimates its expected stock volatility based on the historical volatility of publicly traded peer companies for a term equal to the remaining contractual term of the warrants. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve for time periods approximately equal to the remaining contractual term of the warrants. The Company has estimated a 0% dividend yield based on the expected dividend yield and the fact that the Company has never paid or declared dividends. As several significant inputs are not observable, the overall fair value measurement of the warrants is classified as Level 3.
The following tables present information about the Company’s liabilities that are measured at fair value on a recurring basis as of September 30, 2014 and December 31, 2013 and indicate the level of the fair value hierarchy utilized to determine such fair value:
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Fair Value Measurements as of |
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September 30, 2014 Using: |
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Level 1 |
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Level 2 |
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Level 3 |
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Total |
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Liabilities: |
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Liability for common stock warrants |
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$ |
— |
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— |
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335 |
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335 |
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Fair Value Measurements as of |
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December 31, 2013 Using: |
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Level 1 |
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Level 2 |
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Level 3 |
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Total |
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Liabilities: |
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Liability for common stock warrants |
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$ |
— |
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— |
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90 |
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90 |
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The following table provides a rollforward of the aggregate fair values of the Company’s common stock warrants for which fair value is determined by Level 3 inputs:
Balance, December 31, 2013 |
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$ |
90 |
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Fair value of warrants upon issuance during 2014 |
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110 |
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Increase in fair value through September 30, 2014 |
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135 |
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Balance, September 30, 2014 |
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335 |
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5. Product Warranties
The Company offers a limited warranty and a lifetime product replacement program for the Company’s silicone gel breast implants. Under the limited warranty program, the Company will reimburse patients for certain out-of-pocket costs related to revision surgeries performed within ten years from the date of implantation in a covered event. Under the lifetime product replacement program, the Company provides no-charge replacement breast implants under a covered event. The programs are available to all patients implanted with the Company’s silicone breast implants after April 1, 2012 and are subject to the terms, conditions, claim procedures, limitations and exclusions. Timely completion of a device tracking and warranty enrollment form by the patient’s Plastic Surgeon is required to activate the programs and for the patient to be able to receive benefits under either program.
The Company accrued for warranties issued during the three months ended September 30, 2014 and 2013 in the amounts of $117 and $97, respectively, and accrued for warranties issued during the nine months ended September 30, 2014 and 2013 in the amounts of $363 and $300, respectively. As of September 30, 2014 and December 31, 2013, the Company held total warranty liabilities of $878 and $515, respectively.
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7. Balance Sheet Components
a. Allowance for Sales Returns and Doubtful Accounts
The Company has established an allowance for sales returns of $10,243 and $8,270 as of September 30, 2014 and December 31, 2013, respectively, recorded net against accounts receivable in the balance sheet.
The Company has established an allowance for doubtful accounts of $209 and $273 as of September 30, 2014 and December 31, 2013, respectively, recorded net against accounts receivable in the balance sheet.
b. Property and Equipment
Property and equipment, net consist of the following:
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September 30, |
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December 31, |
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|
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2014 |
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2013 |
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Leasehold improvements |
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$ |
58 |
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19 |
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Computer equipment |
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202 |
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183 |
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Software |
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85 |
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85 |
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Office equipment |
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139 |
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128 |
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Furniture and fixtures |
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708 |
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456 |
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1,192 |
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871 |
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Less accumulated depreciation and amortization |
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(743 |
) |
(617 |
) | |
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$ |
449 |
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254 |
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Depreciation expense for the three months ended September 30, 2014 and 2013 was $47 and $38, respectively. Depreciation expense for the nine month ended September 30, 2014 and 2013 was $126 and $110, respectively.
c. Goodwill and Other Intangible Assets, net
The goodwill on the condensed balance sheets was $14,278 for all periods presented.
The components of the Company’s intangible assets are as follows:
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September 30, |
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December 31, |
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|
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2014 |
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2013 |
| |
|
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|
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Acquired FDA non-gel product approval |
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$ |
1,713 |
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1,713 |
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Less accumulated amortization |
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(1,575 |
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(1,506 |
) | |
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$ |
138 |
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207 |
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Amortization expense for the three months ended September 30, 2014 and 2013 was $23 and $33, respectively. Amortization expense for the nine months ended September 30, 2014 and 2013 was $70 and $99, respectively.
d. Accrued and Other Current Liabilities
Accrued and other current liabilities consist of the following:
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September 30, |
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December 31, |
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2014 |
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2013 |
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Accrued clinical trial and research and development expenses |
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$ |
180 |
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166 |
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Audit, consulting and legal fees |
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181 |
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124 |
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Payroll and related expenses |
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2,039 |
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1,890 |
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Accrued commission |
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1,081 |
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1,563 |
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Other |
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1,112 |
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322 |
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$ |
4,593 |
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4,065 |
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8. Long-term Debt
On January 17, 2013, the Company entered into a Loan and Security Agreement, or the Original Term Loan Agreement, with Oxford providing for a $15,000 term loan facility consisting of original term loans of (i) a $7,500 tranche A term loan, (ii) a $2,500 tranche B term loan and (iii) a $5,000 tranche C term loan, maturing on February 1, 2017. The term loan facility is collateralized by a first-priority security interest in substantially all of the Company’s assets. Borrowings under the term loan facility bear interest at a rate equal to 8.4% per annum and the Original Term Loan Agreement provides for interest-only payments through June 30, 2015. The term loans include an additional lump sum payment of $975 due on February 1, 2017.
On June 30, 2014, the Company entered into the Amended and Restated Loan and Security Agreement, or the Amended Term Loan Agreement, with Oxford, under which the interest-only period for the original term loans was extended to August 1, 2015 and raised an additional $10,000 in a fourth tranche (tranche D) maturing on January 1, 2019. The term loans are collateralized by a first-priority security interest in substantially all of the Company’s assets. The term loans bear interest at a rate equal to 8.4% per annum. The interest-only period for the tranche A, B and C term loans ends on August 1, 2015 and the interest-only period for the tranche D term loan ends on the same date, but with a possible extension of another year if the Company raises at least $50,000 in gross proceeds as part of an initial public offering before June 30, 2015 (see Note 11). The tranche D term loan includes an additional lump sum payment of $650 due on January 1, 2019.
The Amended Term Loan Agreement contains various negative and affirmative covenants, including certain restrictive covenants that limit the Company’s ability to transfer or dispose of certain assets, engage in new lines of business, change the composition of Company management, merge with or acquire other companies, incur additional debt, create new liens and encumbrances, pay dividends or subordinated debt and enter into material transactions with affiliates, among others. The Amended Term Loan Agreement also contains financial reporting requirements.
The aggregate maturities of long-term debt as of September 30, 2014 are: $0 in the remaining three months of 2014, $3,757 in 2015, $11,094 in 2016, $5,558 in 2017, $4,223 in 2018 and $368 in 2019.
In connection with the Original Term Loan Agreement and the Amended Term Loan Agreement, the Company issued to Oxford (i) seven-year warrants in January 2013 to purchase shares of the Company’s common stock with a value equal to 3.0% of the tranche A, B and C term loans amounts and (ii) seven-year warrants in June 2014 to purchase shares of the Company’s common stock with a value equal to 2.5% of the tranche D term loan amount. The warrants have an exercise price per share equal to the lesser of (i) the Series C preferred stock conversion price of $14.671 per share or (ii) the price per share in a subsequent qualified round of financing where gross proceeds are greater than $10,000.
The fair value of the warrants at September 30, 2014 and December 31, 2013 was $335 and $90, respectively, and was recorded in accrued and other current liabilities in the balance sheet. The Company recognized changes in the fair value of these warrants amounting to $42 and $14 in other (expense) income, net in the statements of operations for the three months ended September 30, 2014 and 2013, respectively, and $135 and $34 for the nine months ended September 30, 2014 and 2013, respectively.
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9. Stockholders’ Deficit
a. Convertible Preferred Stock
Under the Company’s certificate of incorporation, as amended, the Company’s convertible preferred stock is issued in three series: A, B and C. At September 30, 2014 and December 31, 2013, the Company’s convertible preferred stock consists of the following:
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Proceeds |
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net of |
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Shares |
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issuance |
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Liquidation |
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Issue |
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Series |
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authorized |
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Outstanding |
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costs |
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value |
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Date |
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A |
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1,000,000 |
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1,000,000 |
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$ |
994 |
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1,000 |
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October 2006 |
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B |
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11,409,397 |
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11,409,397 |
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84,909 |
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85,000 |
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April 2007 and October 2008 |
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C |
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12,183,690 |
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12,183,690 |
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64,553 |
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65,000 |
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March 2012 |
| |
|
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24,593,087 |
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24,593,087 |
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$ |
150,456 |
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151,000 |
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b. Common Stock
The Company’s certificate of incorporation, as amended, authorizes the Company to issue 30,200,000 shares of $0.01 par value common stock. At September 30, 2014 and December 31, 2013, the Company has reserved sufficient shares of common stock for issuance upon conversion of convertible preferred stock and exercise of stock options. Common stockholders are entitled to dividends when and if declared by the board of directors. There have been no dividends declared to date. The holder of each share of common stock is entitled to one vote.
c. Stock Option Plan
In April 2007, the Company adopted the 2007 Equity Incentive Plan, or the 2007 Plan. The 2007 Plan provides for the granting of stock options to employees, directors and consultants of the Company. Options granted under the 2007 Plan may either be incentive stock options or nonstatutory stock options. Incentive stock options, or ISOs, may be granted only to Company employees. Nonstatutory stock options, or NSOs, may be granted to all eligible recipients. A total of 1,690,448 shares of the Company’s common stock were reserved for issuance for the 2007 Plan.
Options under the 2007 Plan may be granted for periods of up to ten years as determined by the board of directors, provided, however, that (i) the exercise price of an ISO shall not be less than 100% of the estimated fair value of the shares on the date of grant, and (ii) the exercise price of an ISO granted to a more than 10% shareholder shall not be less than 110% of the estimated fair value of the shares on the date of grant. An NSO has no such exercise price limitations. The options generally vest over four years. The vesting provisions of individual options may vary but provide for vesting of at least 25% per year.
The following summarizes all option activity under the 2007 Equity Incentive Plan:
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Options outstanding |
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Weighted |
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Options |
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Weighted |
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average |
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|
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available |
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average |
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remaining |
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for |
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Number |
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exercise |
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contractual term |
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grant |
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of options |
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price |
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(years) |
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Balances at December 31, 2013 |
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260,980 |
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1,422,315 |
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$ |
2.67 |
|
5.76 |
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Additional shares authorized |
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— |
|
— |
|
|
|
|
| |
Options granted |
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(224,707 |
) |
224,707 |
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11.70 |
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Options exercised |
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— |
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(2,193 |
) |
3.99 |
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Options forfeited |
|
12,907 |
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(12,907 |
) |
3.95 |
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Balances at September 30, 2014 |
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49,180 |
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1,631,922 |
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$ |
3.90 |
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5.63 |
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For stock-based awards the Company recognizes compensation expense based on the grant date fair value using the Black-Scholes option valuation model. Stock-based compensation expense was $169 and $85 for the three months ended September 30, 2014 and 2013, respectively. Stock-based compensation expense was $368 and $256 for the nine months ended September 30, 2014 and 2013, respectively. As of September 30, 2014, there was $1,784 of unrecognized compensation costs related to stock options. The expense is recorded within the operating expense captions in the statement of operations based on the employees receiving the awards. These costs are expected to be recognized over weighted average period of 2.84 years.
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10. Commitments and Contingencies
a. Operating Leases
The Company’s general office facility in Santa Barbara, California, lease expires in February 2020. The Company also has warehouse leases for additional general office, warehouse and research and development. Rent expense was $152 and $84 for the three months ended September 30, 2014 and 2013, respectively, and $332 and $256 for the nine months ended September 30, 2014 and 2013, respectively. The Company recognizes rent expense on a straight-line basis over the lease term.
b. Contingencies
The Company is subject to claims and assessment from time to time in the ordinary course of business. The Company accrues a liability for such matters when it is probable that future expenditures will be made and such expenditures can be reasonably estimated. There were no contingent liabilities requiring accrual at September 30, 2014.
On March 27, 2012, Mentor Worldwide LLC, or Mentor, a wholly owned subsidiary of Johnson & Johnson, filed thirteen lawsuits against fifteen employees of the Company (all former Mentor employees) and, on June 8, 2012, filed a fourteenth lawsuit against the Company and an additional employee. In general, these fourteen lawsuits alleged that the former employees of Mentor breached their confidentiality and non-compete agreements when they resigned in favor of employment with the Company; misappropriated confidential Mentor information and trade secrets; and breached their respective duties of loyalty. Although not a party to thirteen employee lawsuits, the Company provided for the defense of its employees in the lawsuits. In the employee lawsuits, all of Mentor’s claims for Preliminary Injunctive Relief were denied. Following that, some of the employee lawsuits were dismissed with prejudice and others dismissed without prejudice. On October 3, 2013, the last of the thirteen employee lawsuits was dismissed.
In the sole lawsuit against the Company, the Company and its employee prevailed at trial with verdicts of “no liability” rendered by the jury and judge. Final judgment in this case was entered on October 3, 2013 with the plaintiff ordered to reimburse defendants for certain court costs, and in 2014, Mentor waived its right to appeal.
In 2012, the Company filed a claim with the Hartford Insurance Company, or Hartford, for reimbursement of legal costs incurred in connection with litigation with Mentor. The Company held a D&O insurance policy with Hartford, and the Company and Hartford settled the matter in May of 2014. The Company received settlement payments from Hartford and recovery of costs associated with the Mentor litigation of $0 and $0 for the three months ended September 30, 2014 and 2013, respectively, and $2,358 and $0 for the nine months ended September 2014 and 2013, respectively.
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11. Subsequent Events
a. Reverse Stock Split
On October 10, 2014, the board of directors and stockholders approved an amendment to the Company’s fourth amended and restated certificate of incorporation, which was filed on October 17, 2014, which effected a 1 for 2.75 reverse stock split of the Company’s issued and outstanding shares of common stock. The par value of the common stock was not adjusted as a result of the reverse stock split. All issued and outstanding shares of common stock, stock options and warrants and the related per share amounts contained in the Company’s condensed financial statements have been retroactively adjusted to reflect this reverse stock split for all periods presented. Also, as a result of the reverse stock split of the common stock, the conversion ratios for all of the Company’s convertible preferred stock have been adjusted such that the preferred stock are now convertible into shares of common stock at a conversion rate of 2.75-to-1 instead of 1-to-1. The number of issued and outstanding shares of preferred stock and their related per share amounts have not been affected by the reverse stock split and therefore have not been adjusted in the Company’s condensed financial statements. However, to the extent that the convertible preferred stock are presented on an as converted to common stock basis, such share and per share amounts contained in the Company’s financial statements have been retroactively adjusted to reflect this reverse stock split for all periods presented.
b. Initial Public Offering
On November 3, 2014, the Company completed the IPO whereby it sold a total of 5,750,000 shares of common stock at $15.00 per share including 750,000 shares sold to underwriters for the exercise of their option to purchase additional shares. The Company received net proceeds from the IPO of approximately $77,213, after deducting underwriting discounts and commissions and offering expenses of approximately $9,038. These expenses will be recorded against the proceeds received from the IPO.
The interest-only period for the tranche D term loan was extended from August 1, 2015 to August 1, 2016 as a result of having raised at least $50,000 in gross proceeds in the IPO and the completion of the IPO before June 30, 2015.
The outstanding shares of convertible preferred stock were converted on a 2.75-to-1 basis into shares of common stock concurrent with the closing of the IPO. All of the outstanding shares of Series A, Series B and Series C preferred stock converted into 8,942,925 shares of common stock. Following the closing of the IPO, there were no shares of preferred stock outstanding.
The accompanying unaudited pro forma balance sheet data as of September 30, 2014 has been prepared to give effect to the automatic conversion of all outstanding shares of convertible preferred stock into 8,942,925 shares of common stock and the issuance of 5,750,000 shares of common stock at a price of $15.00 per share, net of deducting underwriting discounts and estimated offering costs in connection with the closing of this IPO.
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As of September 30, 2014 (Unaudited) |
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Balance sheet data (at end of period): |
|
Actual |
|
Pro Forma As |
| |
|
|
|
|
|
| |
Cash and cash equivalents |
|
$ |
19,816 |
|
97,029 |
|
Total assets |
|
62,275 |
|
139,488 |
| |
Long-term debt |
|
25,304 |
|
25,304 |
| |
Convertible preferred stock |
|
150,456 |
|
— |
| |
Total stockholders’ (deficit) equity |
|
(128,910 |
) |
98,759 |
| |
c. 2014 Equity Incentive Plan
Our board of directors adopted our 2014 Equity Incentive Plan, or 2014 Plan, in July 2014, and our stockholders approved the 2014 Plan in October 2014. The 2014 Plan became effective upon completion of the IPO, at which time the Company ceased making awards under the 2007 Plan. Under the 2014 Plan, the Company may issue ISO, NSOs, stock appreciation rights, restricted stock awards, restricted stock unit awards and other forms of stock awards, or collectively, stock awards, all of which may be granted to employees, including officers, non-employee directors and consultants of us and our affiliates. ISOs may be granted only to employees. A total of 1,027,500 shares of common stock were initially reserved for issuance under the 2014 Plan, subject to certain annual increases.
d. 2014 Employee Stock Purchase Plan
Our board of directors adopted our 2014 Employee Stock Purchase Plan, or our ESPP, in July 2014, and our stockholders approved the ESPP in October 2014. Our ESPP is intended to qualify as an employee stock purchase plan under Section 423 of the Code. The ESPP became effective upon the completion of the IPO. A total of 255,500 shares were initially reserved for issuance under the ESPP, subject to certain annual increases.
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a. Basis of Presentation
The accompanying unaudited condensed financial statements in this Quarterly Report on Form 10-Q have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP, and the rules and regulations of the U.S. Securities and Exchange Commission, or SEC. Accordingly, they do not include certain footnotes and financial presentations normally required under accounting principles generally accepted in the United States of America for complete financial reporting. The interim financial information is unaudited, but reflects all normal adjustments and accruals which are, in the opinion of management, considered necessary to provide a fair presentation for the interim periods presented. The accompanying condensed financial statements should be read in conjunction with the Company’s audited financial statements and notes thereto included in the Company’s final prospectus filed pursuant to Rule 424(b)(1) under the Securities and Exchange Act of 1933, as amended, relating to the Company’s Registration Statement on Form S-1 (File No. 333-198837), filed with the SEC. The results for the three and nine months ended September 30, 2014 are not necessarily indicative of results to be expected for the year ending December 31, 2014, any other interim periods, or any future year or period.
b. Use of Estimates
The preparation of the condensed financial statements, in conformity with GAAP, 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 periods. Actual results could differ from those estimates.
c. Significant Accounting Policies
There have been no significant changes to the accounting policies during the three and nine months ended September 30, 2014, as compared to the significant accounting policies described in Note 3 of the “Notes to Financial Statements” in the Company’s audited financial statements included in the final prospectus filed with the SEC on October 29, 2014 other than those listed below.
Deferred Equity Issuance Costs
Deferred equity issuance costs, primarily consisting of legal, accounting and other direct fees and costs relating to the IPO, are capitalized. The deferred equity issuance costs were offset against the IPO proceeds upon the closing of the offering in November 2014. As of September 30, 2014, there was $1,811 in deferred equity issuance costs capitalized in other current assets on the condensed balance sheet. There were no deferred equity issuance costs capitalized as of December 31, 2013.
d. Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board, or FASB, issued accounting standard update 2014-09, Revenue from Contracts with Customers. The standard was issued to provide a single framework that replaces existing industry and transaction specific US GAAP with a five step analysis of transactions to determine when and how revenue is recognized. This accounting standard updated will be effective for the Company beginning in fiscal year 2018. The Company is currently assessing the impact that the standard will have on the financial statements upon adoption of the guidance.
In August 2014, the FASB issued accounting standard update 2014-15, Presentation of Financial Statement — Going Concern. The standard was issued to provide guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. This accounting standard updated will be effective for the Company beginning in fiscal year 2016. The Company anticipates there will be no impact on its financial statement upon adoption of this guidance.
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Fair Value Measurements as of |
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September 30, 2014 Using: |
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Level 1 |
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Level 2 |
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Level 3 |
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Total |
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Liabilities: |
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Liability for common stock warrants |
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$ |
— |
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— |
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335 |
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335 |
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Fair Value Measurements as of |
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December 31, 2013 Using: |
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Level 1 |
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Level 2 |
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Level 3 |
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Total |
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Liabilities: |
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Liability for common stock warrants |
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$ |
— |
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— |
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90 |
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90 |
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Balance, December 31, 2013 |
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$ |
90 |
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Fair value of warrants upon issuance during 2014 |
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110 |
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Increase in fair value through September 30, 2014 |
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135 |
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Balance, September 30, 2014 |
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335 |
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September 30, |
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December 31, |
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2014 |
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2013 |
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Leasehold improvements |
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$ |
58 |
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19 |
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Computer equipment |
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202 |
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183 |
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Software |
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85 |
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85 |
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Office equipment |
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139 |
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128 |
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Furniture and fixtures |
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708 |
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456 |
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1,192 |
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871 |
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Less accumulated depreciation and amortization |
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(743 |
) |
(617 |
) | |
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$ |
449 |
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254 |
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September 30, |
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December 31, |
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2014 |
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2013 |
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Acquired FDA non-gel product approval |
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$ |
1,713 |
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1,713 |
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Less accumulated amortization |
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(1,575 |
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(1,506 |
) | |
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$ |
138 |
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207 |
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September 30, |
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December 31, |
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2014 |
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2013 |
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Accrued clinical trial and research and development expenses |
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$ |
180 |
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166 |
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Audit, consulting and legal fees |
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181 |
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124 |
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Payroll and related expenses |
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2,039 |
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1,890 |
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Accrued commission |
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1,081 |
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1,563 |
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Other |
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1,112 |
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322 |
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$ |
4,593 |
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4,065 |
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Proceeds |
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net of |
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Shares |
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issuance |
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Liquidation |
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Issue |
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Series |
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authorized |
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Outstanding |
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costs |
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value |
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Date |
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A |
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1,000,000 |
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1,000,000 |
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$ |
994 |
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1,000 |
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October 2006 |
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B |
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11,409,397 |
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11,409,397 |
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84,909 |
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85,000 |
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April 2007 and October 2008 |
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C |
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12,183,690 |
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12,183,690 |
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64,553 |
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65,000 |
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March 2012 |
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24,593,087 |
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24,593,087 |
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$ |
150,456 |
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151,000 |
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Options outstanding |
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Weighted |
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Options |
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Weighted |
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average |
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available |
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average |
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remaining |
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for |
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Number |
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exercise |
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contractual term |
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grant |
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of options |
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price |
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(years) |
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Balances at December 31, 2013 |
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260,980 |
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1,422,315 |
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$ |
2.67 |
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5.76 |
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Additional shares authorized |
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— |
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— |
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Options granted |
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(224,707 |
) |
224,707 |
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11.70 |
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Options exercised |
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— |
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(2,193 |
) |
3.99 |
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Options forfeited |
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12,907 |
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(12,907 |
) |
3.95 |
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Balances at September 30, 2014 |
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49,180 |
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1,631,922 |
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$ |
3.90 |
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5.63 |
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As of September 30, 2014 (Unaudited) |
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Balance sheet data (at end of period): |
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Actual |
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Pro Forma As |
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Cash and cash equivalents |
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$ |
19,816 |
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97,029 |
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Total assets |
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62,275 |
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139,488 |
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Long-term debt |
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25,304 |
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25,304 |
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Convertible preferred stock |
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150,456 |
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— |
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Total stockholders’ (deficit) equity |
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(128,910 |
) |
98,759 |
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