10-Q 1 amda-10q_20140930.htm 10-Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2014

OR

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 001-33624

 

Amedica Corporation

(Exact name of registrant as specified in its charter)

 

 

DELAWARE

 

84-1375299

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

 

1885 West 2100 South, Salt Lake City, UT

 

 

84119

(Address of principal executive offices)

 

(Zip Code)

(801) 839-3500

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days:    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files);    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer

 

¨

  

Accelerated filer

 

¨

 

Non-accelerated filer

 

 

¨  (Do not check if a smaller reporting company)

  

 

Smaller reporting company

 

 

x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):    ¨  Yes    x  No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

13,798,619 shares of common stock, $0.01 par value, were outstanding at October 31, 2014

 

 

 

 

 


Amedica Corporation

Table of Contents

 

Part I. Financial Information

  

 

 

Item 1. Financial Statements

  

 

3

 

Condensed Consolidated Balance Sheets (unaudited) as of September 30, 2014 and December 31, 2013

  

 

3

 

Condensed Consolidated Statements of Operations and Comprehensive Loss (unaudited) for the Three and Nine Months Ended September 30, 2014 and 2013

  

 

4

 

Condensed Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended September 30, 2014 and 2013

  

 

5

 

Notes to Condensed Consolidated Financial Statements (unaudited)

  

 

6

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

 

17

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

  

 

25

 

Item 4. Controls and Procedures

  

 

25

 

Part II. Other Information

  

 

 

Item 1. Legal Proceedings

  

 

26

 

Item 1A. Risk Factors

  

 

26

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

 

29

 

Item 3. Defaults Upon Senior Securities

 

 

29

 

Item 4. Mine Safety Disclosures

 

 

29

 

Item 5. Other Information

 

 

29

 

Item 6. Exhibits

  

 

30

 

Signatures

  

 

30

 

 

 

2


Amedica Corporation

Condensed Consolidated Balance Sheets - Unaudited

(in thousands, except share and per share data)

 

 

September 30,

2014

 

 

December 31,

2013

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

10,360

 

 

$

2,279

 

Restricted cash

 

-

 

 

 

392

 

Trade accounts receivable, net of allowance of $63 and $49, respectively

 

3,166

 

 

 

2,817

 

Prepaid expenses and other current assets

 

1,632

 

 

 

1,575

 

Deferred offering costs

 

-

 

 

 

2,763

 

Inventories, net

 

12,632

 

 

 

10,084

 

Total current assets

 

27,790

 

 

 

19,910

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

4,048

 

 

 

3,531

 

Intangible assets, net

 

4,313

 

 

 

4,688

 

Goodwill

 

6,163

 

 

 

6,163

 

Other long-term assets

 

35

 

 

 

35

 

Total assets

$

42,349

 

 

$

34,327

 

 

 

 

 

 

 

 

 

Liabilities and stockholders’ equity (deficit)

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

1,326

 

 

$

3,377

 

Accrued liabilities

 

3,653

 

 

 

3,711

 

Current portion of long-term debt

 

18,984

 

 

 

17,925

 

Total current liabilities

 

23,963

 

 

 

25,013

 

 

 

 

 

 

 

 

 

Deferred rent

 

532

 

 

 

575

 

Long-term debt

 

3,718

 

 

 

-

 

Other long-term liabilities

 

134

 

 

 

134

 

Derivative liabilities

 

2,045

 

 

 

210

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

Convertible preferred stock, $0.01 par value, 130,000,000 shares authorized; 0 and 80,910,394 shares issued and outstanding at September 30, 2014 and December 31, 2013, respectively; aggregate liquidation value of $0 and $149,692 at September 30, 2014 and December 31, 2013, respectively

 

-

 

 

 

161,456

 

Stockholders’ equity (deficit):

 

 

 

 

 

 

 

Common stock, $0.01 par value; 250,000,000 shares authorized; 12,878,681 and 597,675 shares issued and outstanding at September 30, 2014 and December 31, 2013, respectively

 

129

 

 

 

6

 

Additional paid-in capital / (capital deficiency)

 

174,635

 

 

 

(13,144

)

Accumulated deficit

 

(162,807

)

 

 

(139,923

)

Total stockholders’ equity (deficit)

 

11,957

 

 

 

(153,061

)

Total liabilities, convertible preferred stock and stockholders’ equity (deficit)

$

42,349

 

 

$

34,327

 

 

See accompanying notes.

 

 

 

3


Amedica Corporation

Condensed Consolidated Statements of Operations and Comprehensive Loss - Unaudited

(in thousands, except share and per share data)

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Product revenue

$

5,998

 

 

$

5,298

 

 

$

17,614

 

 

$

16,604

 

Costs of revenue

 

1,939

 

 

 

1,737

 

 

 

5,191

 

 

 

5,012

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

1,970

 

 

 

666

 

 

 

5,602

 

 

 

2,867

 

General and administrative

 

2,943

 

 

 

1,193

 

 

 

12,298

 

 

 

4,067

 

Sales and marketing

 

4,783

 

 

 

3,720

 

 

 

14,844

 

 

 

12,123

 

Total operating expenses

 

9,696

 

 

 

5,579

 

 

 

32,744

 

 

 

19,057

 

Loss from operations

 

(5,637

)

 

 

(2,018

)

 

 

(20,321

)

 

 

(7,465

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

3

 

 

 

4

 

 

 

11

 

 

 

13

 

Interest expense

 

(1,107

)

 

 

(453

)

 

 

(2,191

)

 

 

(1,345

)

Loss on extinguishment of debt

 

-

 

 

 

-

 

 

 

(1,596

)

 

 

-

 

Change in fair value of derivative liabilities

 

1,887

 

 

 

115

 

 

 

1,325

 

 

 

(150

)

Other expense

 

(78

)

 

 

4

 

 

 

(112

)

 

 

(1

)

Total other income (expense)

 

705

 

 

 

(330

)

 

 

(2,563

)

 

 

(1,483

)

Net loss before income taxes

 

(4,932

)

 

 

(2,348

)

 

 

(22,884

)

 

 

(8,948

)

Provision for income taxes

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Net Loss

 

(4,932

)

 

 

(2,348

)

 

 

(22,884

)

 

 

(8,948

)

Other comprehensive loss, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized loss on marketable securities

 

-

 

 

 

-

 

 

 

-

 

 

 

(2

)

Total comprehensive loss

$

(4,932

)

 

$

(2,348

)

 

$

(22,884

)

 

$

(8,950

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share attributable to common stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Basic and diluted

$

(0.39

)

 

$

(4.11

)

 

$

(2.20

)

 

$

(17.64

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Basic and diluted

 

12,689,307

 

 

 

571,645

 

 

 

10,383,228

 

 

 

507,227

 

 

 

 

 

 

 

See accompanying notes.

 

 

 

4


Amedica Corporation

Condensed Consolidated Statements of Cash Flows - Unaudited

(in thousands)

 

 

Nine Months Ended September 30,

 

 

2014

 

 

2013

 

Cash flow from operating activities

 

 

 

 

 

 

 

Net loss

$

(22,884

)

 

$

(8,948

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

Depreciation expense

 

1,368

 

 

 

1,290

 

Amortization of intangible assets

 

375

 

 

 

375

 

Amortization of lease incentive for tenant improvements

 

15

 

 

 

15

 

Non cash interest expense

 

961

 

 

 

275

 

Loss on extinguishment of debt

 

1,596

 

 

 

-

 

Stock based compensation

 

10,851

 

 

 

381

 

Change in fair value of derivative liabilities

 

(1,325

)

 

 

150

 

Loss on disposal of equipment

 

112

 

 

 

-

 

Provision for inventory reserve

 

1,500

 

 

 

778

 

Bad debt expense

 

38

 

 

 

102

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Trade accounts receivable

 

(388

)

 

 

1,570

 

Prepaid expenses and other current assets

 

2,604

 

 

 

(1,574

)

Inventories

 

(4,047

)

 

 

(1,162

)

Other long-term assets

 

-

 

 

 

3

 

Accounts payable and accrued liabilities

 

(2,209

)

 

 

1,260

 

Net cash used in operating activities

 

(11,433

)

 

 

(5,485

)

Cash flows from investing activities

 

 

 

 

 

 

 

Purchase of property and equipment

 

(2,027

)

 

 

(1,570

)

Proceeds from sale of property and equipment

 

30

 

 

 

-

 

Decrease in restricted cash

 

392

 

 

 

(38

)

Purchases of marketable securities

 

-

 

 

 

-

 

Proceeds from maturities of marketable securities

 

-

 

 

 

2,680

 

Net cash provided by (used in) investing activities

 

(1,605

)

 

 

1,072

 

Cash flows from financing activities

 

 

 

 

 

 

 

Proceeds from issuance of common stock, net of issuance costs

 

15,369

 

 

 

-

 

Proceeds from issuance of stock in connection with exercise of warrants

 

-

 

 

 

2,878

 

Proceeds from exercise of stock options

 

-

 

 

 

77

 

Proceeds from issuance of preferred stock

 

-

 

 

 

8,852

 

Proceeds from line of credit

 

-

 

 

 

10,940

 

Payments on line of credit

 

-

 

 

 

(13,513

)

Payments on long-term debt

 

(18,000

)

 

 

-

 

Debt extinguishment payments

 

(735

)

 

 

-

 

Proceeds from issuance of long-term debt

 

25,800

 

 

 

-

 

Payment of deferred financing costs

 

(1,315

)

 

 

-

 

Net cash provided by financing activities

 

21,119

 

 

 

9,234

 

Net increase in cash and cash equivalents

 

8,081

 

 

 

4,821

 

Cash and cash equivalents at beginning of period

 

2,279

 

 

 

2,741

 

Cash and cash equivalents at end of period

$

10,360

 

 

$

7,562

 

 

 

 

 

 

 

 

 

Noncash investing and financing activities

 

 

 

 

 

 

 

Preferred stock converted into common stock

$

161,456

 

 

$

-

 

Reclassification of warrant liability

$

5

 

 

$

-

 

Deferred financing costs included in accounts payable and accrued liabilities

$

64

 

 

$

-

 

Stock and derivative liabilities issued with long-term debt

$

3,350

 

 

$

-

 

Derivative liabilities issued for prepaid financing costs

$

46

 

 

$

-

 

Derivative liabilities issued with preferred stock

$

-

 

 

$

871

 

Supplemental cash flow information

 

 

 

 

 

 

 

Cash paid for interest

$

1,167

 

 

$

1,057

 

See accompanying notes.

 

 

 

5


AMEDICA CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1. Organization and Summary of Significant Accounting Policies

Organization

Amedica Corporation (“Amedica” or “the Company”) was incorporated in the state of Delaware on December 10, 1996. Amedica is a commercial-stage biomaterials company focused on using its silicon nitride technology platform to develop, manufacture, and commercialize a broad range of medical devices. The Company believes it is the first and only manufacturer to use silicon nitride in medical applications. The Company acquired US Spine, Inc. (“US Spine”), a Delaware spinal products corporation with operations in Florida, on September 20, 2010. The Company’s products are sold primarily in the United States.

Basis of Presentation

These unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the United States Securities and Exchange Commission (“SEC”). Such rules and regulations allow the omission of certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States, so long as the statements are not misleading. In the opinion of management, these financial statements and accompanying notes contain all adjustments (consisting of normal recurring adjustments) necessary to present fairly the financial position and results of operations for the periods presented herein. These condensed consolidated financial statements should be read in conjunction with the consolidated audited financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, filed with the SEC on March 31, 2014. The results of operations for the three and nine months ended September 30, 2014 are not necessarily indicative of the results to be expected for the year ending December 31, 2014. The Company’s significant accounting policies are set forth in Note 1 to the consolidated financial statements in its Annual Report on Form 10-K for the year ended December 31, 2013.

Reverse Stock Split

On February 11, 2014, the Company effected a 1 for 25.7746 reverse stock split of the Company’s common stock. The par value and the number of authorized shares of the common and convertible preferred stock were not adjusted as a result of the reverse stock split. All common stock share and per-share amounts for all periods presented in these financial statements have been adjusted retroactively to reflect the reverse stock split.

Initial Public Offering

On February 12, 2014, the Company completed an initial public offering (“IPO”) of its common stock, in which the Company sold and issued 3,682,900 shares, including 182,900 shares sold pursuant to the exercise by the underwriters of their over-allotment option, at an issuance price of $5.75 per share, less underwriting discounts and commissions. As a result of the IPO, the Company received proceeds of approximately $15.4 million, net of approximately $5.8 million in underwriting and other offering costs.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“U.S. 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 revenue and expenses during the period. Actual results could differ from those estimates. Some of the more significant estimates relate to inventory, stock-based compensation, long-lived and intangible assets and the liability for preferred stock and common stock warrants.

Liquidity and Capital Resources

For the nine months ended September 30, 2014 and 2013, the Company incurred a net loss of $22.9 million and $8.9 million, respectively, and used cash in operations of $11.4 million and $5.5 million, respectively. The Company had an accumulated deficit of $162.8 million and $139.9 million at September 30, 2014 and December 31, 2013, respectively. To date, the Company’s operations have been principally financed from proceeds from the issuance of preferred and common stock, convertible debt and bank debt and, to a lesser extent, cash generated from product sales. It is anticipated that the Company will continue to generate operating losses and use cash in operations through 2014.

As discussed further in Note 7, the Company refinanced its long-term debt and entered into a term loan with Hercules Technology Growth Capital, Inc. (“Hercules Technology”), as administrative and collateral agent for the lenders thereunder and as lender, and

6


Hercules Technology III, LP, as lender (the “Hercules Term Loan”). The Hercules Term Loan has a liquidity covenant that requires the Company to maintain a cash balance in excess of $9.0 million. At September 30, 2014, the Company’s cash balance was approximately $10.4 million. The Company will need to obtain additional funding during the fourth quarter of 2014 to maintain compliance with the liquidity covenants related to the Hercules Term Loan through 2014. Furthermore, if the Company is unable to access additional funds prior to becoming non-compliant with the liquidity covenant, the entire remaining balance of the debt could become immediately due and payable at the option of the lender. Although the Company is seeking additional financing, additional funding may not be available to the Company on acceptable terms, or at all. Any additional equity financing, if available to the Company, may not be available on favorable terms and will most likely be dilutive to its current stockholders, and debt financing, if available, may involve more restrictive covenants. The Company’s ability to access capital when needed is not assured and, if not achieved on a timely basis, will materially harm its business, financial condition and results of operations. These uncertainties create substantial doubt about the Company’s ability to continue as a going concern. No adjustment has been made to our financial statements as a result of this uncertainty.

Significant Accounting Policies

There have been no significant changes to the Company’s significant accounting policies as described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

New Accounting Pronouncements

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle is that a company should recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP. The standard is effective for annual periods beginning after December 15, 2016, and interim periods therein, and shall be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. The Company is evaluating the potential impact of this adoption on its consolidated financial statements.

 

2. Basic and Diluted Net Loss per Common Share

Basic net loss per share is calculated by dividing the net loss by the weighted-average number of common shares outstanding for the period, without consideration for common stock equivalents. Diluted net loss per share is calculated by dividing the net loss by the weighted-average number of common share equivalents outstanding for the period determined using the treasury-stock method. Dilutive common stock equivalents are comprised of convertible preferred stock, warrants for the purchase of convertible preferred stock and common stock, convertible notes, stock options and unvested restricted stock units. For all periods presented, there is no difference in the number of shares used to calculate basic and diluted shares outstanding due to the Company reporting a net loss. The Company had potentially dilutive securities representing approximately 5.8 million and 4.7 million shares of common stock at September 30, 2014 and 2013, respectively.

 

3. Inventories

The components of inventory were as follows (in thousands):

 

 

September 30,

 

 

December 31,

 

 

2014

 

 

2013

 

Raw materials

$

939

 

 

$

1,025

 

WIP

 

471

 

 

 

1,410

 

Finished Goods

 

11,222

 

 

 

7,649

 

 

$

12,632

 

 

$

10,084

 

 

 

Finished goods include consigned inventory in the amounts of approximately $3.6 million and $5.5 million as of September 30, 2014 and December 31, 2013, respectively.

 

7


4. Intangible Assets

Intangible assets consisted of the following (in thousands):

 

 

September 30,

 

 

December 31,

 

 

2014

 

 

2013

 

Customer relationships

$

3,990

 

 

$

3,990

 

Developed technology

 

4,685

 

 

 

4,685

 

Other patents and patent applications

 

562

 

 

 

562

 

Trademarks

 

350

 

 

 

350

 

 

 

9,587

 

 

 

9,587

 

Less accumulated amortization

 

(5,274

)

 

 

(4,899

)

 

$

4,313

 

 

$

4,688

 

 

Based on the recorded intangibles at September 30, 2014, the estimated amortization expense is expected to be $126,000 during the remainder of 2014 and approximately $501,000 per year through 2018 and $1.8 million thereafter.

 

5. Fair Value Measurements

Financial Instruments Measured and Recorded at Fair Value on a Recurring Basis

The Company measures and records certain financial instruments at fair value on a recurring basis. Fair value is based on the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, under a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value as follows:

 

Level 1

 - 

quoted market prices for identical assets or liabilities in active markets.

 

Level 2

 

 - 

 

observable prices that are based on inputs not quoted on active markets, but corroborated by market data.

 

Level 3

 

 - 

 

unobservable inputs reflecting management’s assumptions, consistent with reasonably available assumptions made by other market participants. These valuations require significant judgment.

The Company classifies assets and liabilities measured at fair value in their entirety based on the lowest level of input that is significant to their fair value measurement. No financial assets were measured on a recurring basis at September 30, 2014 and December 31, 2013. The following tables set forth the financial liabilities measured at fair value on a recurring basis by level within the fair value hierarchy at September 30, 2014 and December 31, 2013:

 

 

 

Fair Value Measurements at September 30, 2014

 

Description

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Derivative liability

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stock warrants

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

Common stock warrants

 

 

-

 

 

 

-

 

 

 

127

 

 

 

127

 

Conversion feature of notes

 

 

-

 

 

 

-

 

 

 

1,918

 

 

 

1,918

 

Total derivative liability

 

$

-

 

 

$

-

 

 

$

2,045

 

 

$

2,045

 

 

 

 

 

Fair Value Measurements at December 31, 2013

 

Description

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Derivative liability

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Preferred stock warrants

 

$

-

 

 

$

-

 

 

$

11

 

 

$

11

 

  Common stock warrants

 

 

-

 

 

 

-

 

 

 

199

 

 

 

199

 

Total derivative liability

 

$

-

 

 

$

-

 

 

$

210

 

 

$

210

 

 

8


The Company did not have any transfers of assets and liabilities between Level 1 and Level 2 of the fair value measurement hierarchy during the nine months ended September 30, 2014 and 2013. The following table presents a reconciliation of the derivative liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the nine months ended September 30, 2014 and 2013:

 

 

Common Stock

Warrants

 

 

Preferred Stock

Warrants

 

 

Conversion Feature of Notes

 

 

Total Derivative

Liability

 

Balance at December 31, 2012

$

(2,783

)

 

$

(526

)

 

$

-

 

 

$

(3,309

)

Issuances of derivatives

 

(871

)

 

 

-

 

 

 

-

 

 

 

(871

)

Modification of terms

 

(339

)

 

 

-

 

 

 

-

 

 

 

(339

)

Change in fair value

 

116

 

 

 

73

 

 

 

-

 

 

 

189

 

Balance at September 30, 2013

$

(3,877

)

 

$

(453

)

 

$

-

 

 

$

(4,330

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2013

$

(199

)

 

$

(11

)

 

$

-

 

 

$

(210

)

Issuances of derivatives

 

(1,235

)

 

 

-

 

 

 

(1,930

)

 

 

(3,165

)

Reclassification from liability to equity

 

-

 

 

 

5

 

 

 

-

 

 

 

5

 

Change in fair value

 

1,307

 

 

 

6

 

 

 

12

 

 

 

1,325

 

Balance at September 30, 2014

$

(127

)

 

$

-

 

 

$

(1,918

)

 

$

(2,045

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock Warrants

The Company has issued certain warrants to purchase shares of common stock, which are considered mark-to-market liabilities and are re-measured to fair value at each reporting period in accordance with ASC 815, Derivatives and Hedging.

The assumptions used in estimating the common stock warrant liability at September 30, 2014 and December 31, 2013 were as follows:

 

 

September 30,

2014

 

 

December 31,

2013

 

Estimated fair value of common share

$

1.61

 

 

$

5.75

 

Weighted-average risk free interest rate

 

1.19

%

 

 

1.26

%

Weighted-average expected life (in years)

 

3.4

 

 

 

4.1

 

Expected dividend yield

 

0

%

 

 

0

%

Weighted average expected volatility

 

35

%

 

 

47

%

 

Preferred Stock Warrants

The Company had issued warrants to purchase shares of convertible preferred stock in prior periods. The Company accounted for these warrants under the provisions of ASC Topic 480, Distinguishing Liabilities from Equity. Accordingly, the Company initially recorded a liability for the fair value of these warrants and then re-measured the liability at the end of each reporting period.

Upon completion of the IPO in February 2014, all outstanding warrants exercisable for 2,344,731 warrants, representing all outstanding warrants exercisable for shares of preferred stock, were converted into 159,834 warrants exercisable for shares of common stock and the convertible preferred stock warrant liability was reclassified to stockholders’ equity. There were no warrants exercisable for shares of preferred stock outstanding at September 30, 2014.

9


The assumptions used in estimating the preferred stock warrant liability at December 31, 2013 were as follows:

 

 

December 31,

2013

 

 

 

 

 

Estimated fair value of common share

$

5.75

 

Weighted-average risk free interest rate

 

1.11

%

Weighted-average expected life (in years)

 

3.6

 

Expected dividend yield

 

0

%

Weighted average expected volatility

 

44

%

 

Conversion Feature of Notes

The Company entered into convertible notes in 2014.  The conversion features of the notes were evaluated and determined to be derivatives under ASC Topic 815, Derivatives and Hedging, and are re-measured to fair value at each reporting period.

The assumptions used in estimating the conversion feature of the notes at September 30, 2014 were as follows:

 

 

September 30,

2014

 

Estimated fair value of common share

$

1.61

 

Weighted-average risk free interest rate

 

0.58

%

Weighted-average expected life (in years)

 

1.8

 

Expected dividend yield

 

0

%

Weighted average expected volatility

 

32

%

 

Other Financial Instruments

The Company’s recorded values of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their fair values based on their short-term nature. The recorded value of notes payable approximates the fair value as the interest rate approximates market interest rates.

 

6. Accrued Liabilities

Accrued liabilities consisted of the following (in thousands):

 

 

 

September 30,

2014

 

 

December 31,

2013

 

Commissions

 

$

936

 

 

$

989

 

Payroll and related expenses

 

 

1,907

 

 

 

645

 

Royalties

 

 

285

 

 

 

277

 

Interest payable

 

 

249

 

 

 

119

 

Final loan payment fees

 

 

116

 

 

 

1,281

 

Offering costs

 

 

-

 

 

 

323

 

Deferred rent

 

 

50

 

 

 

32

 

Other

 

 

110

 

 

 

45

 

 

 

$

3,653

 

 

$

3,711

 

 

7. Debt  

In December 2012, the Company closed on a $21.5 million senior secured credit facility with a bank consortium led by GE Capital (the “GE Secured Lending Facility”). The facility consisted of a term loan in the original principal amount of $18.0 million and an up to $3.5 million revolving line of credit secured by the Company’s accounts receivable, based on certain defined criteria, and was to mature in May 2016. The term loan included interest only payments for a period of 12 months, followed by monthly principal payments of approximately $600,000 for a period of 30 months, which the Company commenced paying in January 2014. The term loan bore interest at the fixed rate of 7.5% per annum. There was no amount outstanding under the revolving line of credit at December 31, 2013 and on June 30, 2014 when the GE Secured Lending Facility was extinguished. The facility required a non-refundable final payment fee of $720,000, as well as an annual management fee of $15,000 per year.

10


At the time of extinguishment on June 30, 2014, the total outstanding principal of the GE Secured Lending Facility was $14.4 million, although the financial statements reflected a carrying value of $14.3 million due to the bifurcated value of warrants issued in connection with the GE Secured Lending Facility, which was being amortized to interest expense over the life of the loan. The Company had been in covenant default with regards to the liquidity covenant of the GE Secured Lending Facility several times during 2013. The Company entered into four amendments to its agreement with GE Capital during 2013 to forego the liquidity covenant testing required under the facility. The fourth amendment to the agreement, which was entered into in December 2013, stipulated the liquidity covenant would not be tested by GE through January 31, 2014. In January 2014, the Company entered into a fifth amendment to the agreement that extended the time through which the liquidity covenant would not be tested to February 28, 2014. In connection with these amendments, the Company incurred amendment fees which were being amortized to interest expense over the remaining life of the loans. The unamortized deferred financing costs were $1.1 million at the time of extinguishment.    

On June 30, 2014, the Company entered into a Loan and Security Agreement with Hercules in connection with the Hercules Term Loan.  The Hercules Term Loan provided the Company with a $20 million term loan, of which $15.3 million of the proceeds from the Hercules Term Loan were used to repay in full and terminate the GE Secured Lending Facility. The termination of the GE Secured Lending Facility was accounted for as an extinguishment of debt resulting in a $1.6 million loss on extinguishment of debt, which was calculated as the difference between the reacquisition price and the net carrying amount of the GE Secured Lending Facility. On June 30, 2014, the Company also entered into a Securities Purchase Agreement with MG Partners II Ltd. (“Magna”) pursuant to which the Company sold to Magna an initial convertible note (“Initial Convertible Note”) with an original principal amount of $2.9 million for a purchase price of $2.5 million. Additionally, on August 11, 2014, the Company sold to Magna an additional unsecured senior convertible note (“Additional Convertible Note”) with an original principal amount of $3.5 million for a purchase price of $3.5 million. The Initial Convertible Note and the Additional Convertible Note are collectively referred to as the Magna Convertible Notes.

Hercules Term Loan

The Hercules Term Loan matures on January 1, 2018. The Hercules Term Loan included a $200,000 closing fee, which was paid to Hercules Technology on the closing date of the loan.  The closing fee has been recorded as a debt discount and will be amortized to interest expense over the life of the loan. The Hercules Term Loan also includes a non-refundable final payment fee of $1.5 million.  The final payment fee is being accrued and recorded to interest expense over the life of the loan. In addition, the Company issued a warrant to Hercules Technology (“Hercules Warrant”) to purchase 516,129 shares of the Company’s common stock at an initial exercise price of $4.65, subject to adjustment.  The Hercules Warrant was determined to be a derivative and the $900,000 estimated fair value of the Hercules Warrant was recorded as a debt discount and derivative liability. The debt discount is being amortized to interest expense over the life of the loan and the derivative liability will be marked to market at each reporting period. The Hercules Warrant expires on June 30, 2019. Financing costs were $1.1 million, which were recorded as deferred financing costs and are being amortized to interest expense over the life of the loan. The Hercules Term Loan also has an early termination fee of $1.2 million if the loan is paid prior to July 1, 2015.

 

The Hercules Term Loan bears interest at the rate of the greater of either (i) the prime rate plus 7.7%, and (ii) 10.95%.  Interest accrues from the closing date of the loan and interest payments are due monthly. Principal payments are required commencing August 1, 2015 and are to be made in 30 equal installments of approximately $700,000, with the remainder due at maturity.  If, however, the Company meets certain revenue conditions, the interest only period may be extended through February 1, 2016, reducing the number of required principal payments to 24 equal installments. Additionally, under certain circumstances the Company may, or Hercules Technology may, require that $1.5 million of the principal be paid in the form of shares of common stock at a fixed conversion price of $5.72 per share.  The conversion feature was evaluated and determined to be conventional convertible debt with no beneficial conversion feature.

 

The Hercules Term Loan contains certain covenants related to restrictions on payments to certain Company affiliates, financial reporting requirements and a minimum liquidity covenant that requires the Company to maintain cash and cash equivalents of not less than $9.0 million.  Although the Company was in compliance with the liquidity covenant at September 30, 2014, the Company anticipates that it will be non-compliant with the liquidity covenant during the fourth quarter of 2014 if additional financing is not obtained, and has therefore classified the entire obligation as a current liability.  

Magna Convertible Notes

The Initial Convertible Note and the Additional Convertible Note mature on June 30, 2016 and August 11, 2016, respectively, (subject to extension by the holder) and accrue interest at an annual rate of 6.0%. With respect to the Initial Convertible Note, $150,000 of the outstanding principal amount (together with any accrued and unpaid interest with respect to such portion of the principal amount) was automatically extinguished when the Company filed a registration statement registering the shares issued in connection with the Securities Purchase Agreement on July 17, 2014.  In addition, $250,000 of the outstanding principal amount of the Initial Convertible Note (together with any accrued and unpaid interest with respect to such portion of the principal amount) was automatically

11


extinguished when the registration statement was declared effective on August 6, 2014.  At September 30, 2014, the outstanding principal amounts of the Initial Convertible Note and the Additional Convertible Note were $2.5 million and $3.5 million, respectively.

 

The Company issued 50,853 shares of its common stock to Magna as a commitment fee.  The estimated fair value of the shares of common stock was $229,000 and was recorded as a debt discount and is being amortized to interest expense over the life of the loan.

 

The Magna Convertible Notes are convertible at any time after issuance, in whole or in part, at Magna’s option, into shares of common stock at an initial fixed conversion price equal to $3.75 per share (“Initial Fixed Price”).  Because the closing sale price of the Company’s common stock was below 110% of the Initial Fixed Price, or $4.13 per share, for two consecutive trading days on August 1, 2014, either:

 

 

(1)

the Company could have redeemed the Magna Convertible Notes in full at a 127.5% premium of the entire principal and interest remaining on the Magna Convertible Notes within sixty (60) days of such occurrence, or September 30, 2014, but elected to not redeem the Magna Convertible Notes; or

 

 

(2)

beginning on the 61st day following such occurrence, or October 1, 2014, Magna will be able to convert the Magna Convertible Notes, in whole or in part, at the lessor of: (i) the Initial Fixed Price or (ii) a price equal to 80% of the lowest daily volume weighted average price, or VWAP, of the Company’s common stock during the five trading days prior to conversion.

 

The conversion features embedded in the Initial Convertible Note and the Additional Convertible Note were determined to be derivatives and the estimated fair value of the conversion features of $848,000 and $1.1 million, respectively, were recorded as a debt discount and derivative liability. The debt discount is being amortized to interest expense over the life of the notes and the derivative liability is marked to market at each reporting period.

 

In addition, the Company issued a warrant to Magna (“Magna Warrant”) to purchase up to 568,889 shares of its common stock at an initial exercise price of $4.65 per share. The Magna Warrant was determined to be a derivative and the estimated fair value of the warrant associated with the Magna Convertible Notes was $290,000 and was recorded as a debt discount and derivative liability. The debt discount is being amortized to interest expense over the life of the loans and the derivative liability is marked to market at each reporting period.

 

Outstanding long-term debt consisted of the following (in thousands):

 

 

September 30, 2014

 

 

December 31, 2013

 

 

Outstanding Principal

 

 

Unamortized Discount

 

 

Net Carrying Amount

 

 

Outstanding Principal

 

 

Unamortized Discount

 

 

Net Carrying Amount

 

GE Secured Lending Facility

$

-

 

 

$

-

 

 

$

-

 

 

$

18,000

 

 

$

(75

)

 

$

17,925

 

Hercules Term Loan

 

20,000

 

 

 

(1,016

)

 

 

18,984

 

 

 

-

 

 

 

-

 

 

 

-

 

Convertible Note

 

6,000

 

 

 

(2,282

)

 

 

3,718

 

 

 

-

 

 

 

-

 

 

 

-

 

Total debt

 

26,000

 

 

 

(3,298

)

 

 

22,702

 

 

 

18,000

 

 

 

(75

)

 

 

17,925

 

Less: Current portion

 

(20,000

)

 

 

1,016

 

 

 

(18,984

)

 

 

(18,000

)

 

 

75

 

 

 

(17,925

)

Long-term debt

$

6,000

 

 

$

(2,282

)

 

$

3,718

 

 

$

-

 

 

$

-

 

 

$

-

 

 

 

12


The following summarizes by year the future principal payments as of September 30, 2014 (in thousands):

 

Years Ending December 31,

Hercules Term Loan

 

 

Magna Convertible Notes

 

 

Total

 

2014

$

-

 

 

$

-

 

 

$

-

 

2015

 

3,333

 

 

 

-

 

 

 

3,333

 

2016

 

8,000

 

 

 

6,000

 

 

 

14,000

 

2017

 

8,000

 

 

 

-

 

 

 

8,000

 

2018

 

667

 

 

 

-

 

 

 

667

 

Total future principal payments

$

20,000

 

 

$

6,000

 

 

$

26,000

 

 

8. Equity

Authorized Stock

In February 2014, prior to the completion of the IPO, the Company’s certificate of incorporation was amended and restated to increase the number of authorized common shares from 150,000,000 to 250,000,000 and the number of authorized preferred shares from 100,000,000 to 130,000,000.

Initial Public Offering

On February 12, 2014, the Company completed an IPO of its common stock, in which the Company sold and issued 3,682,900 shares of common stock, including 182,900 shares sold pursuant to the exercise by the underwriters of their over-allotment option, at an issuance price of $5.75 per share, less underwriting discounts and commissions. As a result of the offering, the Company received proceeds of approximately $15.4 million, net of approximately $5.8 million in underwriting and other offering costs.

On February 11, 2014, the holders of a majority of the outstanding shares of the Company’s Series F convertible preferred stock agreed to waive the conversion adjustment under the Company’s Restated Certificate of Incorporation such that in no event would the denominator used to calculate the conversion ratio be less than $8.00, provided that the Company completed its IPO on or before June 30, 2014. Upon completion of the IPO in February 2014, all 80,910,394 outstanding shares of preferred stock converted into 8,029,779 shares of common stock and the value of the convertible preferred stock of $161.5 million was reclassified to stockholders’ equity. Furthermore, upon completion of the IPO, 2,344,731 warrants representing all outstanding warrants exercisable for shares of preferred stock converted into warrants exercisable for 159,834 shares of common stock and the convertible preferred stock warrant liability was reclassified to stockholders’ equity. Following the completion of the IPO, there were no shares of preferred stock or warrants exercisable for shares of preferred stock outstanding.

The conversion ratio of each series of convertible preferred stock at time of conversion was as follows:

 

Series

 

Conversion Ratio

 

Series A

 

 

0.0388

 

Series A-1

 

 

0.0582

 

Series B

 

 

0.0414

 

Series B-1

 

 

0.0591

 

Series C

 

 

0.0435

 

Series C-1

 

 

0.0631

 

Series D

 

 

0.0505

 

Series D-1

 

 

0.0653

 

Series E

 

 

0.0441

 

Series F

 

 

0.2500

 

 

Other Issuances

During the nine months ended September 30, 2014, the Company issued 50,583 shares of common stock to Magna as a commitment fee associated with the convertible notes and 50,000 shares of restricted common stock as consideration for termination of a consulting agreement. Furthermore, 467,474 shares of common stock were issued upon the vesting of restricted stock units.

 

13


9. Stock-Based Compensation

Option and Equity Plans

In January 2014, the Company’s board of directors increased the aggregate number of shares issuable under the 2012 Employee, Director and Consultant Equity Incentive Plan (the “2012 Plan”) to 3,000,000, which was approved by the shareholders in February 2014.

The total number of shares available for grant under the 2012 Plan at September 30, 2014 was 178,343.

Stock Options

A summary of the Company’s stock option activity for the nine months ended September 30, 2014 was as follows:

 

 

Options

 

 

Weighted-Average

Exercise Price

 

Outstanding at December 31, 2013

 

106,544

 

 

$

28.90

 

Granted

 

1,248,751

 

 

$

3.69

 

Exercised

 

-

 

 

 

-

 

Forfeited

 

(18,635

)

 

$

5.47

 

Expired

 

(10,524

)

 

$

8.57

 

Outstanding at September 30, 2014

 

1,326,136

 

 

$

5.65

 

Exercisable at September 30, 2014

 

343,141

 

 

$

11.46

 

Vested and expected to vest at September 30, 2014

 

1,262,325

 

 

$

5.76

 

 

 

The Company estimates the fair value of each stock option on the grant date using the Black-Scholes-Merton valuation model, which requires several estimates including an estimate of the fair value of the underlying common stock on grant date. The expected volatility was based on an average of the historical volatility of a peer group of similar companies. The expected term was calculated utilizing the simplified method. The risk-free interest rate was based on the U.S. Treasury yield curve in effect at the time of grant for the expected term of the option. There were no options granted to employees during the nine months ended September 30, 2013. The following weighted average assumptions were used in the calculation to estimate the fair value of options granted to employees during the nine months ended September 30, 2014:

 

 

Weighted-average risk-free interest rate

 

1.84

%

Weighted-average expected life (in years)

 

6.30

 

Expected dividend yield

 

0

%

Weighted-average expected volatility

 

47

%

 

 

Restricted Stock Units

Restricted stock unit (“RSU”) activity for the nine months ended September 30, 2014 was as follows:

 

 

Number of Awards

 

 

Weighted-Average

Grant Date

Fair Value

 

Unvested at December 31, 2013

 

168,832

 

 

$

14.36

 

Granted

 

1,730,714

 

 

$

5.75

 

Vested

 

(506,272

)

 

$

6.45

 

Forfeited

 

(333,529

)

 

$

5.97

 

Unvested at September 30, 2014

 

1,059,745

 

 

$

6.00

 

 

 

 

14


 

The total fair value of RSUs vested during the nine months ended September 30, 2014 was $1.3 million.

 

The Company recorded $9.4 million of stock-based compensation for RSUs during the nine months ended September 30, 2014.  In August 2014, certain executives agreed to extend the sale and other restrictions set forth in the lock-up agreements entered into in connection with the IPO with respect to an aggregate of 1,059,745 RSUs until the earlier of November 15, 2014 or the filing of this quarterly report. These RSUs were not vested at September 30, 2014.  Pursuant to their terms, the RSUs vest upon termination of employment and accordingly, all of the stock-based compensation related to these RSUs was recorded during the nine months ended September 30, 2014.  

 

In February 2013, employees of the Company elected to exchange 93,968 stock options for an equal number of RSUs pursuant to a one-time tender offer approved by the board of directors. The RSUs vested upon the expiration of a lock-up period in connection with an underwritten public offering of shares of the Company’s common stock. The incremental fair value on the date of the exchange, representing the difference between the value of the original stock options and the value of the RSUs issued of approximately $758,000 was recognized during the nine months ended September 30, 2014.

Stock-Based Awards Granted to Nonemployees

The Company from time to time grants options to purchase common stock or restricted stock to non-employees for services rendered and records expense ratably over the vesting period of each award. The Company estimates the fair value of the stock options using the Black-Scholes-Merton valuation model at each reporting date. No options were granted to non-employees during the nine months ended September 30, 2013. The Company granted 165,387 options and 50,000 restricted shares to non-employees and recorded stock-based compensation expense of $711,000 during the nine months ended September 30, 2014.

 

The following assumptions were used in the Black-Scholes-Merton valuation model related to non-employee stock options granted during the nine months ended September 30, 2014:

 

Weighted-average risk-free interest rate

 

2.66

%

Weighted-average expected life (in years)

 

9.9

 

Expected dividend yield

 

0

%

Weighted-average expected volatility

 

44

%

 

Summary of Stock-Based Compensation Expense

Total stock-based compensation expense included in the condensed consolidated statements of operations and comprehensive loss was allocated as follows (in thousands):

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Cost of revenue

$

10

 

 

$

(2

)

 

$

225

 

 

$

-

 

Research and development

 

505

 

 

 

(10

)

 

 

1,304