| Shareholders' Equity | Note M—Stockholders’ Equity
Common stock
The Company’s amended and restated certificate of incorporation in effect during the six months ended June 30, 2015 and 2014, (the “Restated Certificate of Incorporation”) authorized the Company to issue 80,000,000 shares of $0.00001 par value common stock in the six months ended June 30, 2015 and in the year ended December 31, 2014. Common stockholders were entitled to dividends as and when declared by the board of directors, subject to the rights of holders of all classes of stock outstanding having priority rights as to dividends. There have been no dividends declared to date. The holder of each share of common stock was entitled to one vote.
Preferred stock
The Company’s Restated Certificate of Incorporation authorized the Company to issue 53,496,241 shares of $0.00001 par value preferred stock.
In connection with the IPO in July 2015, all outstanding shares of preferred stock converted into an aggregate of 25,527,505 shares of common stock.
At June 30, 2015, convertible preferred stock consisted of the following (in thousands, except share data):
Series
Shares Authorized
Shares Issued and Outstanding
Liquidation Value
Series A convertible preferred
$
Series B convertible preferred
Series C convertible preferred
Series D convertible preferred
Series E-1 convertible preferred
Series E-2 convertible preferred
$
At December 31, 2014, convertible preferred stock consisted of the following (in thousands, except share data):
Series
Shares Authorized
Shares Issued and Outstanding
Liquidation Value
Series A convertible preferred
$
Series B convertible preferred
Series C convertible preferred
Series D convertible preferred
Series E-1 convertible preferred
Series E-2 convertible preferred
$
Significant terms of the Company’s preferred stock were as follows:
Conversion. At June 30, 2015, each share of preferred stock was convertible into the Company’s common stock at the option of the holder on a two-to-one basis. Additionally, each share of preferred stock was automatically convertible into common stock upon the earlier (1) closing of a firm commitment underwritten public offering from which the aggregate net proceeds equal or exceed $50.0 million and in which the price per share is at least $20.00, or the equivalent price after adjustment for certain events, (2) with respect to the Series A preferred stock, approval of the holders of a majority of the outstanding Series A preferred stock, (3) with respect to the Series B preferred stock, approval of the holders of a majority of the outstanding Series B preferred stock, (4) with respect to the Series C preferred stock, approval of the holders of a majority of the outstanding Series C preferred stock, (5) with respect to the Series D preferred stock, approval of the holders of a majority of the outstanding Series D preferred stock, (6) with respect to the Series E-1 preferred stock, approval of the holders of a majority of the outstanding Series E-1 preferred stock, and (7) with respect to the Series E-2 preferred stock, approval of the holders of a majority of the outstanding Series E-2 preferred stock.
Antidilution Protection. At June 30, 2015, the rate at which shares of preferred stock were convertible into common stock was subject to adjustment for stock dividends, stock splits, reverse stock splits, and similar events. The rate also was subject to broad-based weighted average antidilution protection, subject to exclusions for: (1) the issuance of common stock as approved by the Board of Directors to directors, officers, employees, consultants, and advisors, (2) the issuance of the Company’s capital stock (or rights therefor) in connection with acquisitions and mergers as approved by the Board of Directors, (3) the issuance of the Company’s capital stock (or rights therefor) as approved by the Board of Directors in connection with equipment leasing, real estate, bank financing, or similar transactions, (4) the issuance of the Company’s capital stock (or rights therefor) as approved by the Board of Directors to vendors, customers or strategic business partners, (5) common stock issued upon conversion of preferred stock, (6) the issuance of securities in an underwritten public offering pursuant to an effective registration statement, (7) the issuance of securities pursuant to outstanding warrants as of July 5, 2013, (8) issuances of securities approved by the holders of a majority of the outstanding Series E-1 preferred stock and outstanding Series E-2 preferred stock, voting together as a single class on an as-converted basis, and either unanimously approved by the Company’s Board of Directors or the holders of outstanding shares of preferred stock, voting together as a single class on an as-converted basis, and (9) Series E-1 preferred stock or Series E-2 preferred stock issued or issuable at a purchase price equal to or greater than $8.00 per share.
Dividends. At June 30, 2015, the holders of preferred stock were entitled to receive non-cumulative and non-accruing dividends only when and if declared by the Board of Directors out of funds legally available for that purpose in an amount equal to: $0.10 per share of Series A preferred stock; $0.27 per share of Series B preferred stock; $0.35 per share of Series C preferred stock; $0.60 per share of Series D preferred stock; $0.80 per share of Series E-1 preferred stock; and $1.20 per share of Series E-2 preferred stock (in each case, subject to stock splits, subdivisions, combinations, consolidations and the like with respect to such shares). No dividends could be declared on any series of preferred stock unless dividends were declared on all such preferred stock. After payments of dividends to the holders of preferred stock, dividends may have been declared and distributed among all holders of common stock, provided that no dividend was declared or distributed among the holders of common stock at a greater rate than that at which dividends were paid to the holders of preferred stock (based on the number of shares of common stock into which such preferred stock was convertible on the date the dividend is declared).
Voting rights. At June 30, 2015, the holders of preferred stock were entitled to the number of votes equal to the number of shares of common stock issuable upon conversion of the preferred stock held by such holder, and except as otherwise provided by law or the Restated Certificate of Incorporation, the holders of preferred stock and of common stock voted together on all matters.
Protective provisions. At June 30, 2015, the votes of the holders of a majority of the outstanding shares of each series of preferred stock, voting as a separate class, were required for the approval of certain events relating to (1) authorization or issuance of additional preferred stock having superior preferences or priorities as to dividends, redemption rights, liquidation preferences, conversion rights or voting rights of the given series of preferred stock, and (2) amendments, restatements, modifications or waivers to the Company’s certificate of incorporation or bylaws in a manner that was materially adverse to the given series of preferred stock.
Additionally, the votes of the holders of a majority of the outstanding shares of preferred stock, voting together as a single class, were required for the approval of certain events relating to the liquidation, dissolution, or winding-up of the Company, certain redemptions or repurchases of the Company’s common stock, and the disposition of the securities of any subsidiary (other than to the Company), any authorization, execution, amendment or termination of any material contract, agreement or other arrangement between the Company and any member of the Company’s board of directors, any executive officer or any holder of 10% of the Company’s outstanding capital stock, any increase in the number of shares of the Company’s capital stock reserved under any equity incentive plan, and any change in the Company’s principal business focus to a field of business other than medical devices.
Redemption. At June 30, 2015, none of the preferred stock was redeemable.
Liquidation, dissolution, or winding-up. At June 30, 2015, in the event of any liquidation or winding up of the Company, the holders of Series E-1 preferred stock, Series E-2 preferred stock and Series D preferred stock were entitled to receive, pari passu and in preference to the holders of the Company’s Series C preferred stock, Series B preferred stock, Series A preferred stock and common stock, an amount equal to declared but unpaid dividends on each share of such preferred stock, plus $8.00 per share of Series E-1 preferred stock, $12.00 per share of Series E-2 preferred stock and $6.00 per share of Series D preferred stock. After such payments, the holders of Series C preferred stock were entitled to receive, in preference to the holders of Series B preferred stock, Series A preferred stock and common stock, an amount equal to declared but unpaid dividends on a share of Series C preferred stock plus $3.50 per share.
After such payments, the holders of Series B preferred stock were entitled to receive, in preference to the holders of Series A preferred stock and common stock, an amount equal to declared but unpaid dividends on a share of Series B preferred stock plus $2.69 per share. After such payments, the holders of Series A preferred stock were entitled to receive, in preference to the holders of common stock, an amount equal to declared but unpaid dividends on a share of Series A preferred stock plus $1.00 per share.
After the payments set forth above, proceeds were shared pro rata by the holders of common stock, Series C preferred stock, Series B preferred stock and Series A preferred stock (on an as-converted basis) until such time as the holders of each such series of preferred stock received a total distribution (including the initial preference) of two times their respective original purchase prices. All remaining proceeds thereafter shall be shared pro rata by the holders of common stock. A consolidation or merger of the Company or sale of all or substantially all of its assets or of a majority of its capital stock were deemed to be a liquidation or winding up for purposes of the liquidation preference.
Right of first refusal. At June 30, 2015, for subsequent issuances of equity securities of the Company (excluding certain specified issuances), the Company granted to certain investors holding at least 300,000 shares of preferred stock (or common stock issued upon conversion of preferred stock) and certain other investors (each a “Major Investor”) the right to purchase up to their pro rata share of the new securities. Also, had any Major Investor chosen not to purchase its full pro rata share, certain other Major Investors had the right to purchase a portion of the remaining shares.
Demand registration rights
Beginning six months after the closing of the Company’s IPO, subject to specified limitations set forth in a registration rights agreement, at any time, the holders of at least 25% of the then outstanding registrable shares may at any time demand in writing that the Company register all or a portion of the registrable shares under the Securities Act on a Form other than Form S-3 for an offering of at least 20% of the then outstanding registrable shares or a lesser percentage of the then outstanding registrable shares provided that it is reasonably anticipated the aggregate offering price would exceed $20 million. The Company is not obligated to file a registration statement pursuant to these rights on more than two occasions.
In addition, after such time as the Company is eligible to use Form S-3, subject to specified limitations set forth in the registration rights agreement, the holders of at least 25% of the then outstanding registrable shares may at any time demand in writing that the Company register all or a portion of the registrable shares under the Securities Act on Form S-3 for an offering of at least 25% of the then outstanding registrable shares having an anticipated aggregate offering price to the public, net of selling expenses, of at least $5 million (a “Resale Registration Statement”). The Company is not obligated to effect a registration pursuant to a Resale Registration Statement on more than one occasion.
Incidental registration rights
If, at any time after the IPO the Company proposes to file a registration statement to register any of its common stock under the Securities Act in connection with a public offering of such common stock, other than pursuant to certain specified registrations, the holders of registrable shares are entitled to notice of registration and, subject to specified exceptions, including market conditions, the Company will be required, upon the holder’s request, to register their then held registrable shares.
Warrants
The Company also issued warrants to certain investors and consultants to purchase shares of the Company’s preferred stock and common stock. Based on the Company’s assessment of the warrants granted in 2013 and 2014 relative to ASC 480, Distinguishing Liabilities from Equity , the warrants are classified as equity. No new warrants were issued in the six months ended June 30, 2015. According to ASC 480, an entity shall classify as a liability any financial instrument, other than an outstanding share, that, at inception, both a) embodies an obligation to repurchase the issuer’s equity shares, or is indexed to such obligation and b) requires or may require the issuer to settle the obligation by transferring assets. The warrants do not contain any provision that requires the Company to repurchase the shares and are not indexed to such an obligation. The warrants also do not require the Company to settle by transferring assets.
All warrants were exercisable immediately upon issuance. Upon the conversion of the Company’s preferred stock into common stock in connection with the closing of the Company’s IPO, all outstanding warrants to purchase preferred stock instead became warrants to purchase shares of common stock at a ratio of one share of common stock for every two shares of preferred stock.
The fair value of warrants at date of grant was estimated using the Black-Scholes option pricing model, based on the following assumptions:
Year Ended December 31,
2014
Risk-free interest rate
0.91%-1.71%
Expected term (in years)
2.50-5.00
Dividend yield
0.00%
Expected volatility
50.00%-55.00%
Series C preferred stock warrants
The Company has issued warrants to certain investors to purchase up to 594,774 shares of Series C preferred stock at an exercise price range of $0.01 to $3.50 per share of which warrants to purchase 285,714 shares were outstanding as of June 30, 2015 and December 31, 2014. There was no warrant activity during the six months ended June 30, 2015.
Series D preferred stock warrants
The Company has issued warrants to certain investors and consultants to purchase up to 1,672,529 shares of Series D preferred stock at an exercise price of $6.00 per share, of which warrants to purchase 1,099,260 shares of Series D preferred stock were outstanding as June 30, 2015 and 1,246,367 shares of Series D preferred stock were outstanding at December 31, 2014. For information on the effect of the closing of the Company’s IPO on the Series D preferred stock warrants, see “Note Q – Subsequent Events.”
Summary of Series D preferred stock warrant activity is as follows:
Weighted
Average
Number of
Weighted
Number of
Exercise Price
Warrants
Average Price
Fair
Warrants
Per Share (1)
Exercisable
Per Share
Value
Outstanding December 31, 2014
$
$
$
—
Granted
—
—
—
—
—
Exercised
)
)
—
Cancelled/expired
)
—
)
—
Outstanding June 30, 2015 (unaudited)
$
$
$
—
Series E-1 and E-2 preferred stock warrants
The Company has issued warrants to certain equity investors and consultants to purchase up to 515,866 shares of Series E-1 preferred stock at an exercise price of $8.00 per share. As of June 30, 2015 and December 31, 2014, warrants to purchase 515,866 shares of Series E-1 preferred stock were outstanding. The Company has issued warrants to certain investors and consultants to purchase up to 403,936 shares of Series E-2 preferred stock at an exercise price of $8.00 per share. As of June 30, 2015 and December 31, 2014, warrants to purchase 403,936 shares of Series E-2 preferred stock were outstanding. For information on the effect of the closing of the Company’s IPO on the Series E-1 and E-2 preferred stock warrants, see “Note Q – Subsequent Events.” There was no warrant activity during the six months ended June 30, 2015.
Common stock warrants
The Company also issued warrants to certain investors and consultants to purchase 1,138,424 shares of common stock at an exercise price range of $0.02 to $9.00 per share of which warrants to purchase 204,312 shares were outstanding as of June 30, 2015 and December 31, 2014. The was no warrant activity during the six months ended June 30, 2015.
At June 30, 2015 and December 31, 2014, the range of warrant prices per share for shares under warrants and the weighted average contractual life is as follows:
Weighted
Weighted
Average
Average
Number of
Weighted
Number of
Exercise Price
Remaining
Warrants
Average Price
2015
Warrants
Per Share
Contractual Life
Exercisable
Per Share
Series C
$
2.05
$
Series D
$
(1)
2.61
$
Series E-1
$
4.45
$
Series E-2
$
5.97
$
Common Stock
$
2.77
$
2014
Number of Warrants
Weighted Average Exercise Price Per Share
Weighted Average Remaining Contractual Life
Number of Warrants Exercisable
Weighted Average Price Per Share
Series C
$
$
Series D
$
(1)
$
Series E-1
$
$
Series E-2
$
$
Common Stock
$
$
(1)
This weighted average exercise price does not give effect to the exchange of warrants to purchase shares of Series D preferred stock for shares of common stock for no additional consideration in connection with the IPO. See “Note Q—Subsequent Events.”
Stock option plans
In June 2004, the Company authorized the adoption of the 2004 Stock Option and Incentive Plan (the “2004 Plan”). Under the 2004 Plan, options were granted to persons who were, at the time of grant, employees, officers, or directors of, or consultants or advisors to, the Company. The 2004 Plan provided for the granting of non-statutory options, incentive options, stock bonuses, and rights to acquire restricted stock.
The option price at the date of grant was determined by the Board of Directors and, in the case of incentive options, could not be less than the fair market value of the common stock at the date of grant, as determined by the Board of Directors. Options granted under the 2004 Plan generally vest over a period of four years and are set to expire 10 years from the date of grant. In February 2011, the Company terminated the 2004 Plan and all options outstanding under it were transferred to the 2011 Stock Option/Stock Issuance Plan (the “2011 Plan”).
In February 2011, the Company authorized the adoption of the 2011 Plan. The 2011 Plan is divided into two separate equity programs, Option Grant Program and Stock Issuance Program. Per the 2011 Plan, options can be granted to persons who are, at the time, employees, officers, or directors of, or consultants or advisors to, the Company. The 2011 Plan provides for the granting of non-statutory options, incentive options and common stock. The price at the date of grant is determined by the Board of Directors and, in the case of incentive options and common stock, cannot be less than the fair market value of the common stock at the date of grant, as determined by the Board of Directors. Options granted under the 2011 Plan generally vest over a period of four years and expire 10 years from the date of grant.
In June 2015, the Company terminated the 2011 Plan and all options outstanding under it were transferred to the 2015 Stock Incentive Plan (the “2015 Plan”). The Company had reserved 6,630,242 shares of common stock for issuance under the 2011 Plan including shares previously reserved for under the 2004 Plan, of which 259,403 were still available for grant on June 30, 2015 and transferred to the 2015 Plan.
Activity under the 2011 Plan is as follows:
Number of Options
Price per Share
Weighted Average Exercise Price per Share
Outstanding December 31, 2014
$
0.60 - 10.96
$
Granted
10.96 - 15.26
Exercised
)
1.10 - 10.96
Expired
)
4.32 - 10.96
Cancelled/Forfeited
)
5.26 - 10.96
Outstanding June 30, 2015 (unaudited)
$
0.60 - 15.26
$
Total vested and exercisable
The 2015 Plan provides for the grant of incentive stock options, nonstatutory stock options, stock appreciation rights, restricted stock awards, restricted stock units and other stock-based awards. The number of shares of our common stock that will be reserved for issuance under the 2015 Plan is the sum of: (1) 2,000,000; plus (2) the number of shares equal to the sum of the number of shares of our common stock then available for issuance under the 2011 Plan and the number of shares of our common stock subject to outstanding awards under the 2011 Plan or under the 2004 Plan that expire, terminate or are otherwise surrendered, canceled, forfeited or repurchased by us at their original issuance price pursuant to a contractual repurchase right; plus (3) an annual increase, to be added on the first day of each fiscal year, beginning with the fiscal year ending December 31, 2016 and continuing until, and including, the fiscal year ending December 31, 2025, equal to the least of (a) 3,000,000 shares of our common stock, (b) 3% of the number of shares of our common stock outstanding on the first day of such fiscal year and (c) an amount determined by the Board. Our employees, officers, directors, consultants and advisors will be eligible to receive awards under the 2015 Plan. Incentive stock options, however, may only be granted to our employees. At June 30, 2015, the Company had reserved 2,259,403 shares of common stock for issuance under the 2015 Plan, including shares previously reserved for under the 2004 and 2011 Plans. As of June 30, 2015, 2,244,737 shares of common stock were available for future issuance under the 2015 Plan.
At June 30, 2015, 14,666 shares of restricted stock awards were granted from the 2015 Plan at a price per share of $15.00. No restricted stock awards under the 2015 Plan were vested as of June 30, 2015.
Stock-based compensation
The Company uses the Black-Scholes option pricing model to determine the fair value of stock options. The determination of the fair value of stock-based payment awards on the date of grant using a pricing model is affected by the value of the Company’s common stock as well as assumptions regarding a number of complex and subjective variables. The valuation of the Company’s common stock is performed with the assistance of an independent third-party valuation firm using a methodology that includes various inputs including the Company’s historical and projected financial results, peer company public data and market metrics, such as risk-free interest and discount rates. As the valuation includes unobservable inputs that are primarily based on the Company’s own assumptions, the inputs are considered level 3 inputs within the fair value hierarchy.
The weighted average fair value of options granted was $7.54 per share for the three months ended June 30, 2015, and $4.98 for the six months ended June 30, 2015.
The fair value of options at date of grant was estimated using the Black-Scholes option pricing model, based on the following assumptions:
Three Months Ended June 30,
Six Months Ended June 30,
2015
2014
2015
2014
Risk-free interest rate
1.75%
—
1.37%-1.75%
—
Expected term (in years)
6.02 - 6.25
—
5.47 - 6.45
—
Dividend yield
0.00%
—
0.00%
—
Expected volatility
50.00%
—
50.00%
—
Risk-free interest rate. The risk-free interest rate is based on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term on the options.
Expected term. The expected term of stock options represents the period the stock options are expected to remain outstanding and is based on the “SEC Shortcut Approach” as defined in “Share-Based Payment” (SAB 107) ASC 718-10-S99, “Compensation—Stock Compensation—Overall—SEC Materials ,” which is the midpoint between the vesting date and the end of the contractual term. With certain stock option grants, the exercise price may exceed the fair value of the common stock. In these instances, the Company adjusts the expected term accordingly.
Dividend yield. The Company has never declared or paid any cash dividends and does not plan to pay cash dividends in the foreseeable future, and, therefore, used an expected dividend yield of zero in the valuation model.
Expected volatility. Expected volatility measures the amount that a stock price has fluctuated or is expected to fluctuate during a period. The Company does not have a history of market prices of its common stock as it is not a public company. Therefore, the Company estimates volatility in accordance with Securities and Exchange Commission’s Staff Accounting Bulletin No. 107, SAB 107, using historical volatilities of similar public entities.
Forfeitures. The Company uses historical data to estimate pre-vesting option forfeitures and record stock-based compensation expense only for those awards that are expected to vest. If the Company’s actual forfeiture rate is materially different from its estimate, the stock-based compensation expense could be significantly different from what the Company has recorded in the current period.
Employee stock-based compensation expense recognized was $0.8 million and $0.4 million for the three months ended June 30, 2015 and 2014, respectively, and $1.8 million and $0.9 million for the six months ended June 30, 2015 and 2014, respectively. Stock-based compensation expense was calculated based on awards ultimately expected to vest. To date, the amount of stock-based compensation capitalized as part of inventory was not material.
The following is a summary of stock-based compensation expense (in thousands):
Three Months Ended June 30,
Six Months Ended June 30,
2015
2014
2015
2014
Cost of revenues
$
$
$
$
Sales and marketing
Research and development
General and administrative
$
$
$
$
At June 30, 2015, the Company had $5.2 million of total unrecognized compensation expense that will be recognized over a weighted average period of 2.41 years. |
