Item 1. Unaudited Condensed Consolidated Financial Statements
MIRAMAR LABS, INC.
Condensed Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
March 31,
2017
|
|
December 31,
2016
|
|
(Unaudited)
|
|
(Audited)
|
ASSETS
|
|
|
|
Current assets:
|
|
|
|
Cash and cash equivalents
|
$
|
1,058,383
|
|
|
$
|
2,203,639
|
|
Accounts receivable, net
|
2,948,241
|
|
|
3,159,423
|
|
Inventories
|
6,869,402
|
|
|
6,649,840
|
|
Prepaid expenses and other current assets
|
331,300
|
|
|
341,048
|
|
Total current assets
|
11,207,326
|
|
|
12,353,950
|
|
Property and equipment, net
|
628,884
|
|
|
714,797
|
|
Restricted cash
|
295,067
|
|
|
295,067
|
|
Other non-current assets
|
13,976
|
|
|
13,976
|
|
TOTAL ASSETS
|
$
|
12,145,253
|
|
|
$
|
13,377,790
|
|
LIABILITIES AND STOCKHOLDERS’ DEFICIT
|
|
|
|
Current liabilities:
|
|
|
|
Notes payable, net of discount
|
$
|
9,498,670
|
|
|
$
|
9,916,626
|
|
Derivative liability
|
6,000,209
|
|
|
—
|
|
Accounts payable
|
1,638,216
|
|
|
1,582,145
|
|
Accrued and other current liabilities
|
4,815,482
|
|
|
4,567,076
|
|
Deferred revenue
|
138,480
|
|
|
182,160
|
|
Total current liabilities
|
22,091,057
|
|
|
16,248,007
|
|
Warrant liability
|
—
|
|
|
7,342
|
|
Deferred rent, non-current
|
67,607
|
|
|
77,309
|
|
TOTAL LIABILITIES
|
22,158,664
|
|
|
16,332,658
|
|
Commitments and contingencies (Note 6)
|
|
|
|
|
|
Stockholders’ deficit:
|
|
|
|
Blank check preferred stock, $0.001 par value - 5,000,000 shares authorized. No shares issued and outstanding at March 31, 2017 and December 31, 2016
|
—
|
|
|
—
|
|
Common stock, $0.001 par value - 100,000,000 shares authorized and 9,334,857 shares issued and outstanding at March 31, 2017 and December 31, 2016
|
9,335
|
|
|
9,335
|
|
Additional paid-in capital
|
111,120,122
|
|
|
110,918,412
|
|
Accumulated deficit
|
(121,142,868
|
)
|
|
(113,882,615
|
)
|
TOTAL STOCKHOLDERS’ DEFICIT
|
(10,013,411
|
)
|
|
(2,954,868
|
)
|
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT
|
$
|
12,145,253
|
|
|
$
|
13,377,790
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
MIRAMAR LABS, INC.
Condensed Consolidated Statements of Operations and Comprehensive Loss
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2017
|
|
2016
|
Revenue
|
$
|
3,814,867
|
|
|
$
|
4,287,333
|
|
Cost of revenue
|
1,692,761
|
|
|
2,028,557
|
|
Gross margin
|
2,122,106
|
|
|
2,258,776
|
|
Operating expenses:
|
|
|
|
Research and development
|
752,676
|
|
|
921,589
|
|
Selling and marketing
|
3,003,655
|
|
|
3,023,009
|
|
General and administrative
|
1,540,117
|
|
|
1,337,996
|
|
Total operating expenses
|
5,296,448
|
|
|
5,282,594
|
|
Loss from operations
|
(3,174,342
|
)
|
|
(3,023,818
|
)
|
Interest income
|
853
|
|
|
1,140
|
|
Interest expense
|
(3,940,855
|
)
|
|
(315,748
|
)
|
Other income, net
|
(143,434)
|
|
|
25,355
|
|
Net loss before provision for income taxes
|
(7,257,778)
|
|
|
(3,313,071)
|
|
Provision for income taxes
|
(2,475
|
)
|
|
(1,525
|
)
|
Net and comprehensive loss attributable to common stockholders
|
$
|
(7,260,253
|
)
|
|
$
|
(3,314,596
|
)
|
Weighted-average common shares used in computing net loss per share attributable to common stockholders, basic and diluted
|
9,334,857
|
|
|
398,541
|
|
Net loss per share attributable to common stockholders, basic and diluted
|
$
|
(0.78
|
)
|
|
$
|
(8.32
|
)
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
MIRAMAR LABS, INC.
Condensed Consolidated Statements of Stockholders’ Deficit
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Additional
Paid-In
Capital
|
|
Accumulated
Deficit
|
|
Total
Stockholders’
Equity (Deficit)
|
Balances at December 31, 2016
|
9,334,857
|
|
|
$
|
9,335
|
|
|
$
|
110,918,412
|
|
|
$
|
(113,882,615
|
)
|
|
$
|
(2,954,868
|
)
|
Conversion of convertible preferred stock warrants to common stock warrants
|
—
|
|
|
—
|
|
|
7,094
|
|
|
—
|
|
|
7,094
|
|
Offering costs for issuance of common stock
|
—
|
|
|
—
|
|
|
(47,388
|
)
|
|
—
|
|
|
(47,388
|
)
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
242,004
|
|
|
—
|
|
|
242,004
|
|
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
(7,260,253
|
)
|
|
(7,260,253
|
)
|
Balances at March 31, 2017
|
9,334,857
|
|
|
$
|
9,335
|
|
|
$
|
111,120,122
|
|
|
$
|
(121,142,868
|
)
|
|
$
|
(10,013,411
|
)
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
MIRAMAR LABS, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2017
|
|
2016
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
Net loss
|
$
|
(7,260,253
|
)
|
|
$
|
(3,314,596
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities
|
|
|
|
Depreciation and amortization
|
118,212
|
|
|
147,448
|
|
Stock-based compensation
|
242,004
|
|
|
142,766
|
|
Change in warrant liability value
|
(248
|
)
|
|
(23,878
|
)
|
Amortization of debt discount and issuance costs
|
3,690,454
|
|
|
63,378
|
|
Revaluation of derivative liability
|
142,371
|
|
|
—
|
|
Changes in operating assets and liabilities
|
|
|
|
Accounts receivable
|
211,182
|
|
|
(130,246
|
)
|
Inventories
|
(219,562
|
)
|
|
146,253
|
|
Prepaid expenses and other current assets
|
9,748
|
|
|
12,948
|
|
Other non-current assets
|
—
|
|
|
(7,700
|
)
|
Accounts payable
|
56,071
|
|
|
(408,742
|
)
|
Accrued and other current liabilities
|
243,729
|
|
|
60,021
|
|
Deferred revenue
|
(43,680
|
)
|
|
(498,583
|
)
|
Net cash used in operating activities
|
(2,809,972
|
)
|
|
(3,810,931
|
)
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
Purchase of property and equipment
|
(32,299
|
)
|
|
(48,581
|
)
|
Net cash used in investing activities
|
(32,299
|
)
|
|
(48,581
|
)
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
Offering costs for issuance of common stock
|
(47,388
|
)
|
|
—
|
|
Proceeds from issuance of notes payable
|
2,680,567
|
|
|
2,682,394
|
|
Principal payments on capital leases
|
(5,025
|
)
|
|
(12,481
|
)
|
Payments on notes payable
|
(931,139
|
)
|
|
(25,925
|
)
|
Net cash provided by financing activities
|
1,697,015
|
|
|
2,643,988
|
|
Net decrease in cash and cash equivalents
|
(1,145,256
|
)
|
|
(1,215,524
|
)
|
Cash and cash equivalents at beginning of period
|
2,203,639
|
|
|
2,642,509
|
|
Cash and cash equivalents at end of period
|
$
|
1,058,383
|
|
|
$
|
1,426,985
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
Cash paid for interest
|
$
|
598,385
|
|
|
$
|
195,881
|
|
Cash paid for taxes
|
$
|
1,525
|
|
|
$
|
1,525
|
|
DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
Net transfer to inventory from leased equipment
|
$
|
—
|
|
|
$
|
(168,143
|
)
|
Conversion of warrant liabilities to equity
|
$
|
7,904
|
|
|
$
|
—
|
|
Bifurcation of embedded derivative liability from convertible notes payable
|
$
|
5,857,838
|
|
|
$
|
—
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
MIRAMAR LABS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
|
|
1.
|
Background and Organization
|
On June 7, 2016 (the “
Closing Date
”), the Company, Acquisition Sub and Miramar entered into an Agreement and Plan of Merger and Reorganization (the “
Merger Agreement
”). Pursuant to the terms of the Merger Agreement, Acquisition Sub merged with and into Miramar, and Miramar became the surviving corporation and thus became the Company’s wholly-owned subsidiary (the “
Merger
”). Prior to the Merger, the Company discontinued its prior business of distributing water filtration systems produced in China, and acquired the business of Miramar, which designs, manufactures and markets the miraDry System, which is designed to eliminate axillary, or underarm, sweat.
At the Closing Date, each of the shares of Miramar’s common stock and preferred stock issued and outstanding immediately prior to the closing of the Merger was converted into shares of the Company’s common stock at a ratio of 1:
0.07393
(the “
Conversion Ratio
”). Additionally, warrants to purchase shares of Miramar’s Series A Preferred Stock, Series C Preferred Stock and Series D Preferred Stock issued and outstanding immediately prior to the closing of the Merger were converted into warrants to purchase shares of the Company’s common stock at the Conversion Ratio.
The Merger was treated as a recapitalization and reverse acquisition of the Company for financial accounting purposes. Miramar is considered the acquirer for accounting purposes, and the Company’s historical financial statements before the Merger will be replaced with the historical financial statements of Miramar before the Merger in future filings with the SEC. For more details on the Merger, please see Item 2.01 of our Current Report on Form 8-K filed with the SEC on June 13, 2016, as amended on June 14, 2016.
The Company and its wholly-owned subsidiary, Miramar, develop clinical systems to address hyperhidrosis. In January 2011, Miramar received approval from the U.S. Food and to Drug Administration (the “
FDA
”), to market the miraDry System to eliminate underarm sweat glands. The Company’s principal markets are the United States, Asia-Pacific and Europe/Middle East. During 2012, Miramar Technologies, Inc. commercially launched its first product, the miraDry System, a clinical system to address hyperhidrosis.
Miramar has a wholly-owned subsidiary, Miramar Labs HK Limited, which was incorporated under the laws of Hong Kong in January 2013. Miramar Labs HK Limited commenced its operations during 2013 to oversee operations in Asia and is located in Hong Kong.
The accompanying unaudited condensed financial statements have been prepared in accordance with the rules and regulations of the SEC, for interim financial information and, accordingly, do not include all of the information and footnotes required by generally accepted accounting principles in the United States (“
GAAP
”) for complete financial statements. These condensed consolidated financial statements are prepared on the same basis and should be read in conjunction with the audited financial statements and related notes included in the Company’s financial statements for the year ended December 31, 2016. Interim results are not necessarily indicative of the results to be expected for the full year, and no representation is made thereto.
In the opinion of management, these financial statements include all adjustments necessary to state fairly the financial position and results of operations for each interim period shown. All such adjustments occur in the ordinary course of business and are of a normal, recurring nature.
The accompanying financial statements are prepared on a going concern basis which contemplates the realization of assets and discharge of liabilities in the normal course of business. Since inception, Miramar Labs, Inc. had incurred net losses and negative cash flows from operations. From April 4, 2006 (date of inception) to
March 31, 2017
, Miramar Labs, Inc. had an accumulated deficit of
$121,142,868
. The Company has not achieved positive cash flows from operations. To date, the Company has been funded primarily by preferred stock and debt financings. In order to continue its operations, the Company must raise additional equity or debt financing and achieve profitable operations. These factors raise substantial doubt about the Company’s ability to continue as a going concern. There can be no assurance that the Company will be able to obtain additional equity or debt financing on terms acceptable to the Company, or at all. The failure to obtain sufficient funds on acceptable terms, when needed, could have a material, adverse effect on the Company’s business, results of operations, and future cash flows.
To achieve profitable operations, the Company must successfully continue to develop, enhance, manufacture, and market its products. There can be no assurance that any such products can continue to be developed or manufactured at an acceptable cost and with appropriate performance characteristics, or that such products will be successfully marketed. These factors could have a material adverse effect upon the Company’s financial results, financial position and future cash flows.
|
|
2.
|
Summary of Significant Accounting Policies
|
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary. Intercompany balances have been eliminated in consolidation.
Use of Estimates
The preparation of 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 as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company’s most significant estimates relate to inventory valuation and reserves, warranty accruals, deferred tax asset valuation allowance, valuation of equity and equity-linked instruments (common stock, options and warrants) and the valuation of the derivative liability.
Our management believes that we consistently apply these judgments and estimates and the consolidated financial statements and accompanying notes fairly represent all periods presented. However, any differences between these judgments and estimates and actual results could have a material impact on our consolidated statements of income and financial position.
Concentration of Credit Risk and Other Risks and Uncertainties
Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash and cash equivalents. The Company’s cash and cash equivalents are deposited with one financial institution in the United States of America. Deposits in this institution may exceed the amount of insurance provided on such deposits. The Company has not experienced any losses on its deposits of cash and cash equivalents. At
March 31, 2017
, the Company’s uninsured cash balances totaled
$733,793
.
The Company performs periodic credit evaluations of its customers’ financial condition and generally requires deposits from its customers. The Company generally does not charge interest on past due accounts. The Company’s customers representing greater than 10% of accounts receivable and revenue were as follows:
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
Accounts Receivable
|
|
Three Months Ended March 31,
|
|
March 31,
|
|
December 31,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Customer A
|
*
|
|
15%
|
|
*
|
|
*
|
Customer B
|
12%
|
|
10%
|
|
*
|
|
*
|
Customer C
|
*
|
|
*
|
|
15%
|
|
20%
|
Customer D
|
*
|
|
*
|
|
*
|
|
16%
|
Sales in North America consisted of
54%
and
41%
of total revenue, in the
three
month periods ended in
March 31, 2017
and
2016
, respectively. The remainder of the Company’s sales came primarily from Asia-Pacific and Europe/Middle East.
Amplifiers used in the production of the miraDry system are manufactured in the United States and consumables (“
bioTips
”) are manufactured in China. These single source suppliers of these critical components may not be replaced without significant effort and could cause delay in production. If the operations of these manufacturers are interrupted or if they are unable to meet our delivery requirements due to capacity limitations or other constraints, the Company may be limited in its ability to fulfill customer orders or to repair equipment at current customer sites.
Significant Accounting Policies
There have been no material changes to the Company’s significant accounting policies during the
three
months ended
March 31, 2017
, as compared to the significant accounting policies described in the Company’s financial statements for the year ended December 31, 2016, filed on Form 10-K on March 17, 2017.
Recent Accounting Pronouncements
In July 2015, the FASB issued ASU 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory”. This update requires inventory that is recorded using the first-in, first-out (FIFO) or average cost method to be measured at the lower of cost or net realizable value (defined as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation), as opposed to the existing requirement to measure such inventory at the lower of cost or market value. This update is effective for annual periods beginning after December 15, 2016, and interim periods within that year, with early adoption permitted. Adoption of this standard in the quarter ended
March 31, 2017
did not have any significant impact on the Company’s financial statements.
In March 2016, the FASB issued ASU 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”. This update will require all income tax effects of awards to be recognized in the income statement when the awards vest or are settled. It will also allow an employer to repurchase more of an employee’s shares than it can today for tax withholding purposes without triggering liability accounting and to make a policy election to account for forfeitures as they occur. For public entities, the new standard is effective for annual periods beginning after December 15, 2016, and interim periods within that year, with early adoption permitted. Adoption of this standard in the quarter ended
March 31, 2017
did not have any significant impact on the Company’s financial statements.
There were no other changes to the new accounting pronouncements as described in the Company’s financial statements for the year ended December 31, 2016, filed on Form 10-K on March 17, 2017.
|
|
3.
|
Balance Sheet Components
|
Inventories
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
|
(Unaudited)
|
|
|
Raw materials
|
$
|
2,327,896
|
|
|
$
|
2,554,853
|
|
Work in progress
|
2,481,557
|
|
|
2,343,898
|
|
Finished goods
|
2,059,949
|
|
|
1,751,089
|
|
|
$
|
6,869,402
|
|
|
$
|
6,649,840
|
|
Purchase commitments for inventory as of
March 31, 2017
were
$870,711
.
Property and Equipment, Net
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
|
(Unaudited)
|
|
|
Leasehold Improvements
|
$
|
844,360
|
|
|
$
|
844,360
|
|
Machinery and equipment
|
1,592,473
|
|
|
1,560,174
|
|
Computer and office equipment
|
241,291
|
|
|
241,291
|
|
Software
|
326,992
|
|
|
326,992
|
|
Furniture and fixtures
|
114,564
|
|
|
114,564
|
|
|
3,119,680
|
|
|
3,087,381
|
|
Less: Accumulated depreciation and amortization
|
(2,490,796
|
)
|
|
(2,372,584
|
)
|
|
$
|
628,884
|
|
|
$
|
714,797
|
|
No capital leases were entered into during the year ended
December 31, 2016
or the
three
month period ended
March 31, 2017
. Depreciation and amortization expense was
$118,212
and
$147,448
for the
three
-month periods ended
March 31, 2017
and
2016
, respectively.
At
March 31, 2017
and
December 31, 2016
, substantially all of the property and equipment was located at the Company’s corporate headquarters in the United States.
Accrued Liabilities
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
|
(Unaudited)
|
|
|
Accrued payroll and related expenses
|
$
|
1,592,457
|
|
|
$
|
1,605,214
|
|
Accrued royalty
|
2,018,797
|
|
|
1,887,426
|
|
Accrued warranty
|
149,000
|
|
|
161,000
|
|
Accrued marketing
|
385,400
|
|
|
366,000
|
|
Accrued clinical expenses
|
13,500
|
|
|
9,500
|
|
Accrued legal
|
73,816
|
|
|
41,800
|
|
Capital lease payable, current
|
11,841
|
|
|
16,865
|
|
Deferred rent, current
|
38,806
|
|
|
34,756
|
|
Accrued other expenses
|
531,865
|
|
|
444,515
|
|
|
$
|
4,815,482
|
|
|
$
|
4,567,076
|
|
Accrued Warranty
The Company regularly reviews the accrued warranty balance and updates as necessary based on sales and warranty trends. The warranty accrual as of
March 31, 2017
and
December 31, 2016
consisted of the following activity:
|
|
|
|
|
Warranty accrual, December 31, 2015
|
$
|
217,000
|
|
Accruals for product warranty
|
342,474
|
|
Cost of warranty claims
|
(398,474
|
)
|
Warranty accrual, December 31, 2016
|
$
|
161,000
|
|
Accruals for product warranty
|
29,903
|
|
Cost of warranty claims
|
(41,903
|
)
|
Warranty accrual, March 31, 2017
|
$
|
149,000
|
|
|
|
4.
|
Fair Value of Financial Instruments
|
Fair Value Measurements are determined under a three-level hierarchy for fair value measurements that prioritizes the inputs to valuation techniques used to measure fair value, distinguishing between market participant assumptions developed based on market data obtained from sources independent of the reporting entity (the observable inputs) and the reporting entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (the unobservable inputs). Fair value is the price that would be received to sell an asset or would be paid to transfer a liability (i.e., the exit price) in an orderly transaction between market participants at the measurement date. In determining fair value, the Company primarily uses prices and other relevant information generated by market transactions involving identical or comparable assets. The Company also considers the impact of a significant decrease in volume and level of activity for an asset or liability when compared with normal activity to identify transactions that are not orderly.
The highest priority is given to unadjusted quoted prices in active markets for identical assets (
Level 1
measurements) and the lowest priority to unobservable inputs (
Level 3
measurements). Securities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
The three hierarchy levels are defined as follows:
|
|
Level 1
|
Quoted prices in active markets that are unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities identical assets and liabilities;
|
|
|
Level 2
|
Quoted prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in active markets or financial instruments for which significant inputs are observable, either directly or indirectly;
|
|
|
Level 3
|
Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
|
The fair value of the Company’s financial assets and liabilities measured on a recurring basis, as of
March 31, 2017
and
December 31, 2016
, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Liabilities
|
|
|
|
|
|
|
|
Warrant liability
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Derivative liability
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,000,209
|
|
|
$
|
6,000,209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Liabilities
|
|
|
|
|
|
|
|
Warrant liability
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7,342
|
|
|
$
|
7,342
|
|
There were
no
transfers between Level 1, 2 and 3 of the fair value hierarchy during the
three
months ended
March 31, 2017
and
2016
.
Assumptions used in valuing the warrant liabilities are discussed in Note 9 below. The principal assumptions used, and their impact on valuations were as follows:
Stock Price
- As a private company, there was no actively traded market for the Company’s stock and the Company used commonly accepted valuation techniques such as the discounted cash flows, market comparables and recent actual stock sales to derive an estimate of the fair value of its stock. An increase in value of the stock will increase the value of the warrant liability. Upon closing of the Merger, the Company became a publicly traded company and began using its publicly traded stock price.
Risk-Free Interest Rate
- This is the U.S. Treasury rate for the measurement date having a term equal to the weighted average expected remaining term of the instrument. An increase in the risk-free interest rate will increase the fair value of the warrant liability.
Expected Remaining Term
- This is the period of time over which the instrument is expected to remain outstanding and is based on management’s estimate, taking into consideration the remaining contractual life, historical experience and the possibility of liquidation. An increase in the expected remaining term will increase the fair value of the warrant liability.
Expected Volatility
- This is a measure of the amount by which the Company’s common stock price has fluctuated or is expected to fluctuate. The Company uses the historic volatility of a group of comparable peer publicly traded companies over the retrospective period corresponding to the expected remaining term of the instrument on the measurement date. An increase in the expected volatility will increase the fair value of the warrant liability. Since the Company is newly public, it does not have sufficient trading history to estimate it’s own volatility.
Dividend Yield
- The Company has not made any dividend payments and does not plan to pay dividends in the foreseeable future. An increase in the dividend yield will decrease the fair value of the warrant liability.
The changes in the warrant liability are summarized below:
|
|
|
|
|
Fair value at December 31, 2015
|
$
|
499,616
|
|
Fair value of warrants issued during the year
|
44,663
|
|
Conversion to common stock warrants
|
(80,703
|
)
|
Change in fair value recorded in other income (expense), net
|
(456,234
|
)
|
Fair value at December 31, 2016
|
$
|
7,342
|
|
Conversion to common stock warrants
|
(7,094
|
)
|
Change in fair value recorded in other income (expense), net
|
(248
|
)
|
Fair value at March 31, 2017
|
$
|
—
|
|
Assumptions used in valuing the derivative liabilities are discussed in Note 8 below. The principal assumptions used, and their impact on valuations were as follows:
Valuation method
- the Company net present valued the probability weighted outcomes
Conversion date
- Estimated date of the occurance of each identified possible outcomes
Probability
- The percentage likelihood of each of the four identified possible outcomes discussed in Note 7 below
The changes in the derivative liability are summarized below:
|
|
|
|
|
Fair value at December 31, 2016
|
$
|
—
|
|
Fair value of derivative issued during the year
|
5,857,838
|
|
Change in fair value recorded in other income (expense), net
|
142,371
|
|
Fair value at March 31, 2017
|
$
|
6,000,209
|
|
|
|
5.
|
Related Party Transactions
|
Miramar Technologies, Inc. was formed at an incubator, The Foundry, LLC, or The Foundry, a company which provides seed capital and management services to its investees. Certain employees of The Foundry serve as members of the Company’s Board of Directors (the “
Board
”) and own shares of our common stock. The total amount reimbursed to The Foundry for services provided as members of the Board was
$0
and
$16,191
, for the
three
months ended
March 31, 2017
and
2016
, respectively.
In February 2008, Miramar Technologies, Inc. entered into a technology license and royalty agreement with The Foundry wherein Miramar Technologies, Inc. agreed to pay The Foundry a royalty of
1.5%
of sales of the licensed products and
1.5%
of the patented products, up to a maximum of
$30 million
. In March 2013, the total royalty percentage increased from
1.5%
to
3.0%
due to the issuance of a patent covering certain products of the Company. The total amount payable to The Foundry as of
March 31, 2017
and
December 31, 2016
was
$2,020,888
and
$1,887,426
, respectively, which included interest accrued at the
annual interest rate of the prime rate quoted by the Wall Street Journal plus
1%
beginning on the first day of the calendar quarter to which such payment relates.
No
royalties were paid during the
three
months ended
March 31, 2017
or in the year ended
December 31, 2016
.
|
|
6.
|
Commitments and Contingencies
|
Indemnification Agreements
The Company enters into standard indemnification arrangements in the ordinary course of business. Pursuant to these arrangements, the Company indemnifies, holds harmless, and agrees to reimburse the indemnified parties for losses suffered or incurred by the indemnified party, in connection with any trade secret, copyright, patent or other intellectual property infringement claim by any third party with respect to its technology. The term of these indemnification agreements is generally perpetual any time after the execution of the agreement. The maximum potential amount of future payments the Company could be required to make under these arrangements is not determinable. The Company has never incurred costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, the Company believes the estimated fair value of these agreements is minimal.
The Company has entered into indemnification agreements with its directors and certain executive officers that may require the Company to indemnify its directors and officers against liabilities that may arise by reason of their status or service as directors and officers, other than liabilities arising from willful misconduct of the individual.
No
liability associated with such indemnifications has been recorded at
March 31, 2017
or
December 31, 2016
.
Legal Claims
On July 20, 2015, a lawsuit alleging product liability, breach of warranty and negligence was filed against the Company in the Orange County Superior Court. The plaintiff alleged, among other things, that the Company was liable to plaintiff for injuries suffered due to defects in a certain miraDry device. We believe that there is no merit to the claims against the Company and the Company intends to vigorously defend the lawsuit, but the outcome of any potential litigation matter is uncertain. Management does not believe that resolution of this matter will have a material negative effect on our operating results. As of
March 31, 2017
or
December 31, 2016
,
no
amounts have been accrued related to the matters as we believe the risk of material loss to be remote.
In September 2016, the Company received a demand from an attorney in Japan who represents a terminated employee claiming wrongful termination. The Company is insured,with a deductible payment immaterial to our operating results, to cover such claims. The matter was settled in March 2017.
Occasionally, the Company may be involved in claims and legal proceedings arising from the ordinary course of its business. The Company records a provision for a liability when it believes that it is probable that a liability has been incurred, and when the amount can be reasonably estimated. If these estimates and assumptions change or prove to be incorrect, it could have a material impact on the Company’s consolidated financial statements. Contingencies are inherently unpredictable and the assessments of the value can involve a series of complex judgments about future events and can rely heavily on estimates and assumptions.
Other than the foregoing, we are currently not aware of any other pending legal proceedings to which we are a party or of which any of our property is the subject, nor are we aware of any such proceedings that are contemplated by any governmental authority.
Operating and Capital Leases
Rent expense under the Company’s operating leases was
$142,305
and
$143,273
for the
three
-month periods ended
March 31, 2017
and
2016
, respectively. The Company recognizes rent expense on a straight-line basis over the lease period. The difference between rent payable and rent expense on a straight-line basis is recorded as deferred rent and amortized over the period of the lease.
The aggregate future minimum lease payments under all leases are as follows:
|
|
|
|
|
|
|
|
|
|
Operating Lease
|
|
Capital Leases
|
Nine months ending December 31, 2017
|
$
|
405,042
|
|
|
$
|
11,993
|
|
Year ending December 31, 2018
|
568,773
|
|
|
—
|
|
Year ending December 31, 2019
|
241,592
|
|
|
—
|
|
Total minimum lease payments
|
$
|
1,215,407
|
|
|
11,993
|
|
Less: Amount representing interest
|
|
|
(152
|
)
|
Present value of minimum lease payments
|
|
|
11,841
|
|
Less: current portion of capital leases
|
|
|
(11,841
|
)
|
Long term portion of capital leases
|
|
|
$
|
—
|
|
In August 2015, the Company refinanced the outstanding balance of the
$10 million
loan and security agreement entered into in June 2013 (the “
Loan and Security Agreement
”). The new agreement provided for the issuance of secured promissory notes in the aggregate principal amount of up to
$20 million
to be drawn down in two additional tranches of
$5 million
each, subject to certain milestones. The additional two tranches of
$5 million
expired in April and October 2016. The refinanced
$10 million
promissory note accrues interest at
7.80%
per annum and monthly interest payments commenced on September 1, 2015. Principal and interest payments commenced on January 1, 2017. In March 2017, the Company entered into the Third Amendment to Loan and Security Agreement granting a security interest in the Company’s intellectual property.
All borrowings under the agreement are collateralized by substantially all of the Company’s assets. There are no significant financial covenants. The agreement contains a subjective acceleration clause. Failure to comply with the loan covenants may result in the acceleration of payment of all outstanding principal and interest amounts plus a prepayment fee. Due to the subjective acceleration clause, the outstanding notes payable are classified as current in the accompanying Consolidated Balance Sheets. As of
March 31, 2017
, the Company was in compliance with the debt covenants.
In January 2017, the Company entered into a note purchase agreement (the “
Note Purchase Agreement
”) with existing investors to draw down up to
$3.0 million
for working capital purposes. During the quarter ended
March 31, 2017
, the
Company issued
$2.7 million
of convertible promissory notes (the “
Notes
”) that accrue interest at
10%
per year and are due at the earliest of an event of default, liquidation or dissolution event or January 26, 2018 (the “
Maturity Date
”). In the event of an equity financing with an aggregate sales price of not less than
$10 million
prior to the Maturity Date and prior to a change of control event, the outstanding balance of each note (principal amount together with accrued but unpaid interest) will be multiplied by five (
5
) and automatically convert into shares of securities issued in such equity financing at the price per share paid by investors in such equity financing. In the event of an equity financing with an aggregate sales price of less than
$10 million
prior to the Maturity Date and prior to a change of control event, at the election of holders of the Notes holding a majority of the aggregate outstanding principal amount of the Notes, the Outstanding Balance of each Note will be multiplied by five (
5
) and converted into shares of securities issued in such equity financing at the price per share paid by investors in such equity financing. In the event of a change of control event and prior to repayment of the notes or conversion (i) in the case of a stock-for-stock merger, three (
3
) times the Outstanding Balance of each Note will automatically convert into shares of the acquiring company at the price per share as determined by (A) the
ten
-day average closing price of the common stock of the acquiring company if it is a public company or (B) our board of directors good faith determination of fair value, if it is a private company, or (ii) in the case of a cash-for-stock merger or sale of all or substantially all of our assets, holders of the Notes will be entitled to receive the amount of cash equal to three (
3
) times the Outstanding Balance. The Notes are secured by certain assets of the Company pursuant to the security agreement dated January 27, 2017 by and among us and certain investors named therein and subordinated to our obligations under the Loan and Security Agreement pursuant to the subordination agreement dated January 27, 2017 by and among us, Oxford Finance LLC and certain creditors named therein. As a result, the Notes have a second priority security interest in our assets behind the security interest held by Oxford Finance LLC and Silicon Valley Bank. The Notes are also subject to standard event of default provisions that would accelerate the Maturity Date. These conversion premiums represent an embedded derivative liability which has been bifurcated. See Note 8 for further discussion.
The Company entered into short term financing agreements for insurance premiums with
nine
month payment terms and interest rates ranging from
2.25%
to
4.95%
. The outstanding balance of the financing agreements was
$17,894
at
March 31, 2017
and
$125,691
at
December 31, 2016
.
Annual future principal payments under the notes payable, which have been adjusted due to the Fourth and Fifth Amendments to the
$10 million
Loan and Security Agreement as discussed in Note 14 below, are as follows:
|
|
|
|
|
Nine months ended December 31, 2017
|
$
|
4,601,296
|
|
Year ending December 31, 2018
|
4,034,940
|
|
Year ending December 31, 2019
|
3,238,883
|
|
Total payments
|
11,875,119
|
|
Less: Unamortized debt discount
|
(2,376,449
|
)
|
Carrying value of notes payable
|
$
|
9,498,670
|
|
The Company issued the Notes as described in Note 7 above. Given the terms and structure of the Notes, management concluded that the redemption premium embedded in the Notes was a bifurcatable derivative (the “
Derivative Liability
”) under ASC 480, “
Distinguishing Liabilities from Equity
” and ASC 815, “
Derivatives and Hedging
” guidance.
Management noted that there were multiple possible outcomes, all that had a fixed, determinable amount that would only vary depending upon which outcome occurred and the timing of the conversion. The Company used a valuation model that net present valued (at
10%
interest rate of the Notes) the weighted average of the probability of the various outcomes to determine the value of the Derivative Liability. The board and management agreed to certain probabilities associated with each of these possible outcomes (ranging from
5%
to
80%
), and identified a likely date of occurrence (ranging from July 2017 to January 2018) for such possible outcomes. Based upon these factors, the Company calculated a probability weighted expected value for this financial instrument. Each outcome was evaluated based upon where the Company was at the time of the execution of the Note Purchase Agreement and as of March 31, 2017.
As of the date of the Note Purchase Agreement, the Derivative Liability, based upon the above valuation analysis, was valued at
$5.9 million
, and was recorded as a debt discount and a warrant liability with the value in excess of the face value of the Notes charged to interest expense. As of March 31, 2017, the Derivative Liability was valued at
$6.0 million
and the change in fair value of
$0.1 million
was charged to other income (expense), net.
The Company’s amended Articles of Incorporation authorize the Company to issue
100,000,000
shares of
$0.001
common stock. The common stockholders are entitled to elect
three
members to the Board. The holders of common stock are also entitled to receive dividends whenever funds are legally available, as, when, and if declared by the Board. As of
March 31, 2017
,
no
dividends have been declared to date.
At
March 31, 2017
, the Company had reserved common stock for future issuance as follows:
|
|
|
|
Exercise of options under stock plan
|
1,372,584
|
|
Options available for grant under stock plan
|
109,665
|
|
Exercise of common stock warrants
|
83,319
|
|
Common stock reserved for future issuance
|
1,565,568
|
|
Common stock contingently issuable upon the conversion of the Notes is not included in the above table as such amount is not determinable.
Total outstanding warrants as of
March 31, 2017
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Warrants
|
|
Exercise Price
|
|
Fair Value at date of issuance
|
November 2010 warrants issued with Series C convertible preferred stock
|
12,117
|
|
|
$
|
21.64
|
|
|
$
|
212,409
|
|
January 2011 warrants issued with Series C convertible preferred stock
|
19,042
|
|
|
21.64
|
|
|
259,355
|
|
June 2013 warrants issued in conjunction with note purchase agreement
|
9,241
|
|
|
21.64
|
|
|
152,750
|
|
April 2014 warrants issued in conjunction with drawdown on note purchase agreement
|
9,242
|
|
|
21.64
|
|
|
149,250
|
|
August 2015 warrants issued with refinance of note purchase agreement
|
16,173
|
|
|
21.64
|
|
|
234,719
|
|
June to August 2016 warrants issued with in conjunction with merger
|
17,504
|
|
|
5.00
|
|
|
44,663
|
|
Total outstanding warrants
|
83,319
|
|
|
|
|
|
For the
three
month period ended
March 31, 2017
and
2016
, respectively,
$248
and
$23,878
were recorded to other income from the revaluation of the warrants to fair market value. During the
three
month period ended
March 31, 2017
,
4,488
of the outstanding warrants valued at
$7,094
were reclassified from warrant liability to additional paid-in capital in the accompanying consolidated balance sheets. As of
March 31, 2017
, all outstanding warrants were classified as additional paid- capital.
The following assumptions were used in the Black-Scholes model to value the outstanding warrants:
|
|
|
|
|
|
Three Months Ended March 31, 2017
|
|
Year Ended December 31, 2016
|
Expected term (years)
|
4.31 - 4.35
|
|
4.56 - 4.60
|
Expected volatility
|
55%
|
|
55%
|
Risk-free interest rate
|
1.81% - 1.95%
|
|
1.96%
|
Annual dividend rate
|
—%
|
|
—%
|
Stock Price
|
$4.00
|
|
$4.00
|
The following table summarizes activity under the 2006 Stock Option Plan (the “
Plan
”) for the
three
month period ended
March 31, 2017
and year ended
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Options
|
|
Shares
Available
for Grant
|
|
Number of
Options
|
|
Weighted
Average
Exercise
Price
|
Balance, December 31, 2015
|
48,560
|
|
|
855,904
|
|
|
$
|
6.76
|
|
Additional shares reserved
|
599,535
|
|
|
|
|
|
Options granted
|
(579,460
|
)
|
|
579,460
|
|
|
5.62
|
|
Options exercised
|
|
|
(21,750
|
)
|
|
2.28
|
|
Options forfeited
|
30,119
|
|
|
(30,119
|
)
|
|
6.48
|
|
Balance, December 31, 2016
|
98,754
|
|
|
1,383,495
|
|
|
$
|
5.20
|
|
Options granted
|
(375
|
)
|
|
375
|
|
|
4.00
|
|
Options forfeited
|
11,286
|
|
|
(11,286
|
)
|
|
5.09
|
|
Balance, March 31, 2017
|
109,665
|
|
|
1,372,584
|
|
|
$
|
5.21
|
|
The following table summarizes information about stock options outstanding at
March 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Options Vested
|
Exercise
Price
|
|
Number
Outstanding
|
|
Weighted
Average
Remaining
Contractual
Life
(in years)
|
|
Weighted
Average
Exercise
Price
|
|
Aggregate
Intrinsic
Value
|
|
Number
Vested
|
|
Weighted
Average
Exercise
Price
|
|
Aggregate
Intrinsic
Value
|
$
|
1.3600
|
|
|
14,856
|
|
|
0.66
|
|
$
|
1.3600
|
|
|
$
|
13,965
|
|
|
14,856
|
|
|
$
|
1.3600
|
|
|
$
|
13,965
|
|
2.4400
|
|
|
8,501
|
|
|
1.05
|
|
2.4400
|
|
|
—
|
|
|
8,501
|
|
|
2.4400
|
|
|
—
|
|
4.0000
|
|
|
375
|
|
|
9.85
|
|
4.0000
|
|
|
—
|
|
|
—
|
|
|
4.0000
|
|
|
—
|
|
4.3300
|
|
|
29,553
|
|
|
2.85
|
|
4.3300
|
|
|
—
|
|
|
29,553
|
|
|
4.3300
|
|
|
—
|
|
5.0000
|
|
|
725,592
|
|
|
7.06
|
|
5.0000
|
|
|
—
|
|
|
433,762
|
|
|
5.0000
|
|
|
—
|
|
5.4800
|
|
|
15,650
|
|
|
9.65
|
|
5.4800
|
|
|
—
|
|
|
1,250
|
|
|
5.4800
|
|
|
—
|
|
5.5700
|
|
|
430,233
|
|
|
9.41
|
|
5.5700
|
|
|
—
|
|
|
116,860
|
|
|
5.5700
|
|
|
—
|
|
5.5925
|
|
|
112,651
|
|
|
9.40
|
|
5.5925
|
|
|
—
|
|
|
16,422
|
|
|
5.5925
|
|
|
—
|
|
6.3600
|
|
|
20,248
|
|
|
1.63
|
|
6.3600
|
|
|
—
|
|
|
20,248
|
|
|
6.3600
|
|
|
—
|
|
6.6300
|
|
|
2,109
|
|
|
7.30
|
|
6.6300
|
|
|
—
|
|
|
2,109
|
|
|
6.6300
|
|
|
—
|
|
7.4400
|
|
|
8,166
|
|
|
4.85
|
|
7.4400
|
|
|
—
|
|
|
8,166
|
|
|
7.4400
|
|
|
—
|
|
7.5800
|
|
|
1,205
|
|
|
8.29
|
|
7.5800
|
|
|
—
|
|
|
1,205
|
|
|
7.5800
|
|
|
—
|
|
8.6600
|
|
|
3,445
|
|
|
5.95
|
|
8.6600
|
|
|
—
|
|
|
3,445
|
|
|
8.6600
|
|
|
—
|
|
|
|
1,372,584
|
|
|
7.73
|
|
$
|
5.2100
|
|
|
$
|
13,965
|
|
|
656,377
|
|
|
$
|
5.0700
|
|
|
$
|
13,965
|
|
Stock-Based Compensation Associated with Awards to Employees
During the
three
month period ended
March 31, 2017
, the Company granted stock options to employees to purchase
375
shares of common stock with a weighted-average grant date fair value of
$1.58
. Stock-based employee compensation expense recognized during the
three
-month periods ended
March 31, 2017
and
2016
was
$209,676
and
$120,839
, respectively. As of
March 31, 2017
, there were total unrecognized compensation costs of
$1,491,347
related to stock options. These costs are expected to be recognized over a period of approximately
2.40
years.
The total fair value of employee options vested during the
three
-month periods ended
March 31, 2017
and
2016
was
$214,012
and
$127,870
, respectively.
The Company estimated the fair value of stock options using the Black-Scholes option valuation model. The fair value of employee stock options is being amortized on a straight-line basis over the requisite service period of the awards. The fair value of employee stock options granted was estimated using the following weighted average assumptions:
|
|
|
|
|
|
Three months ended March 31, 2017
|
|
Year ended December 31, 2016
|
Expected term (in years)
|
4.75 years
|
|
5.21 years
|
Expected volatility
|
44%
|
|
46%
|
Risk-free interest rate
|
1.85%
|
|
1.17% -1.69%
|
Dividend yield
|
—%
|
|
—%
|
Stock-Based Compensation Associated with Awards to Non-employees
The Company did not grant stock options to non-employees during the
three
-month period ended
March 31, 2017
. Stock-based compensation expense recognized during the
three
-month periods ended
March 31, 2017
and
2016
was
$32,328
and
$21,927
, respectively. As of
March 31, 2017
, there was total unrecognized compensation costs of
$265,025
related to these stock options. These costs are expected to be recognized over a period of approximately
2.31
years.
The fair value of the stock options granted to non-employees is calculated at each reporting date using the Black-Scholes options pricing model. The fair value of stock options granted to non-employees was estimated using the following weighted average assumptions:
|
|
|
|
|
|
Three months ended March 31, 2017
|
|
Year ended December 31, 2016
|
Expected term (in years)
|
5.67 years
|
|
5.89 years
|
Expected volatility
|
49%
|
|
47%
|
Risk-free interest rate
|
1.43%
|
|
1.29% -1.69%
|
Dividend yield
|
—%
|
|
—%
|
|
|
12.
|
Employee Benefit Plan
|
The Company sponsors a 401(k) plan covering all employees. Contributions made by the Company are discretionary and are determined annually by the Board. The Company accrues for a
100%
match for employee contributions up to
$1,000
. As of
March 31, 2017
and
December 31, 2016
, the Company had accrued
$21,600
and
$44,385
, respectively, for employer contributions.
The Company’s basic and diluted net loss per share are as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2017
|
|
2016
|
Net and comprehensive loss attributable to common stockholders
|
$
|
(7,260,253
|
)
|
|
$
|
(3,314,596
|
)
|
Weighted-average common shares used in computing net loss per share attributable to common stockholders, basic and diluted
|
9,334,857
|
|
|
398,541
|
|
Net loss per share attributable to common stockholders, basic and diluted
|
$
|
(0.78
|
)
|
|
$
|
(8.32
|
)
|
The following weighted-average common stock equivalents were excluded from the calculation of diluted net loss per share for the periods presented due to their anti-dilutive effect:
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2017
|
|
2016
|
Convertible preferred stock (if converted)
|
—
|
|
|
3,611,876
|
|
Stock warrants
|
83,319
|
|
|
66,924
|
|
Options to purchase common stock
|
1,372,584
|
|
|
865,802
|
|
Common stock contingently issuable upon the conversion of the convertible notes is not included in above table as such amount is not determinable.
In April 2017, the Company entered into the Fourth and Fifth Amendments (the “
Amendments
”) to the
$10 million
Loan and Security Agreement that allow for the deferment of principal payments upon the achievement of a certain milestone as set forth in the Amendments. The deferment period was extended through June 2017.
In March 2017, the board of directors approved a Key Employee Retention Plan (the “
Plan
”) that represents a
10%
carve-off from Net Proceeds (as defined under the Plan). The purpose of the Plan is to establish a bonus pool for designated Key Employees (as defined under the Plan) payable upon the occurrence of a Change of Control (as defined under the Plan) to (i) assure that the Company will have the continued dedication and objectivity of Key Employees, notwithstanding the possibility, threat or occurrence of a Change of Control, (ii) provide Key Employees with an incentive to continue their service with the Company, or any subsidiary of the Company, prior to a Change of Control and to motivate the team to maximize the value of the Company upon a Change of Control for the benefit of its stockholders, and (iii) provide Key Employees with enhanced financial security, incentive and encouragement to remain with the Company, or any subsidiary of the Company, notwithstanding the possibility of a Change of Control.
Management has evaluated all transactions and events through
May 16, 2017
, the date on which these financial statements were issued, and did not note any items that would adjust the financial statements or require additional disclosures.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following management’s discussion and analysis should be read in conjunction with the historical financial statements and the related notes thereto contained in this Report. The management’s discussion and analysis contains forward-looking statements, such as statements of our plans, objectives, expectations and intentions. Any statements that are not statements of historical fact are forward-looking statements. When used, the words “believe,” “plan,” “intend,” “anticipate,” “target,” “estimate,” “expect” and the like, and/or future tense or conditional constructions (“will,” “may,” “could,” “should,” etc.), or similar expressions, identify certain of these forward-looking statements. These forward-looking statements are subject to risks and uncertainties, including those under “Risk Factors” discussed in our Current Report on Form 8-K filed with the SEC on June 13, 2016, which is incorporated by reference herein, that could cause actual results or events to differ materially from those expressed or implied by the forward-looking statements. The Company’s actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of several factors. The Company does not undertake any obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this report.
References in this section to “Miramar,” “we,” “us,” “our,” “the Company” and “our Company” refer to Miramar Labs, Inc. and its consolidated subsidiary, Miramar Technologies, Inc.
On June 7, 2016, our wholly-owned subsidiary, Miramar Acquisition Corp., a corporation formed in the State of Delaware on June 2, 2016, or the Acquisition Sub, merged with and into Miramar Technologies, Inc., a corporation incorporated on April 2006 in the state of Delaware (the “
Merger
”). Pursuant to the Merger, Miramar Technologies, Inc. was the surviving corporation and became Miramar Labs, Inc.’s wholly-owned subsidiary. All of the outstanding stock of Miramar Technologies, Inc. was converted into shares of our common stock.
Prior to the Merger and pursuant to the Split-Off Agreement, we transferred our pre-Merger assets and liabilities to our pre-Merger majority stockholder, in exchange for the surrender by him and the cancellation of
3,603,602
shares of our common stock. This transaction was accounted for as a reverse acquisition and recapitalization with Miramar Technologies, Inc. being the accounting acquirer.
As a result of the Merger and Split-Off, we discontinued our pre-Merger business and acquired the business of Miramar and will continue the existing business operations of Miramar as a publicly-traded company under the name Miramar Labs, Inc.
As the result of the Merger and the change in business and operations of the Company, a discussion of the past financial results of the Company is not pertinent, and under applicable accounting principles, the historical financial results of Miramar, the accounting acquirer, prior to the Merger are considered the historical financial results of the Company.
The following discussion highlights Miramar’s results of operations and the principal factors that have affected our financial condition as well as our liquidity and capital resources for the periods described, and provides information that management believes is relevant for an assessment and understanding of the statements of financial condition and results of operations presented herein.
The following discussion and analysis are based on Miramar’s audited and unaudited financial statements contained in this Report, which we have prepared in accordance with GAAP.
You should read the discussion and analysis together with such financial statements and the related notes thereto.
Basis of Presentation
The audited consolidated financial statements of Miramar for the fiscal years ended
December 31, 2016
and
2015
, (as filed on Form 10-K on March 17, 2017) and the unaudited consolidated condensed financial statements of Miramar for the
three
months ended
March 31, 2017
and
2016
, contained herein include a summary of our significant accounting policies and should be read in conjunction with the discussion below.
In the opinion of management, all material adjustments necessary to present fairly the results of operations for such unaudited interim periods have been included in these unaudited financial statements.
All such adjustments are of a normal recurring nature.
Company Overview
We are a medical technology company focused on developing and commercializing products utilizing our proprietary microwave technology platform.
Our first commercial product, the miraDry System, is designed to ablate axillary, or underarm, sweat glands through the precise and non-invasive delivery of energy to the region where sweat glands reside. The energy generates heat which results in thermolysis of the sweat glands. At the same time, a continuous hydro-ceramic cooling system protects the superficial dermis and keeps the heat focused at the sweat glands. Because sweat glands do not regenerate after the treatment, we believe the results are lasting. Microwaves are the ideal technology as the energy can be focused directly at the fat and dermal junction where the glands reside.
We received clearance from the FDA in January 2011 and received CE mark approval in December 2013 to market miraDry for the treatment of primary axillary hyperhidrosis and for axillary hair removal in June 2015. In October 2016, we received clearance from the FDA to market miraDry in the United States as a device that may reduce underarm odor when used for the treatment of primary axillary hyperhidrosis. We sell our miraDry System to dermatologists, plastic surgeons, aesthetic specialists and physicians specializing in the treatment of hyperhidrosis. We generate revenue from sales of our miraDry System and the sale of consumables to our customers who are required to use a new consumable for each patient they treat.
As of
March 31, 2017
, we had an installed base of approximately 900 miraDry Systems worldwide and over 90,000 miraDry procedures have been performed.
We generated revenues of
$20.4 million
for the year ended
December 31, 2016
, and $
3.8 million
for the
three
months ended
March 31, 2017
. We had net losses of
20.4 million
and $
7.3 million
, respectively, for the same periods. The net loss for the year ended
December 31, 2016
included a non-cash charge of $8.0 million for the loss associated with the debt conversion as part of the APO transaction.
We utilize our direct sales organization to selectively market and sell miraDry in our North American market, which includes the United States and Canada. In our markets located outside of North America, we market and sell miraDry through a network of distributors. Our sales force and distributors target dermatologists, plastic surgeons, aesthetic specialists and physicians specializing in the treatment of hyperhidrosis who express a willingness to position miraDry as a premium and differentiated treatment and to participate in our global marketing and support programs.
Revenues from markets outside of North America comprised
50%
of our total revenues for the year ended
December 31, 2016
and
46%
for the
three
months ended
March 31, 2017
. We have agreements with multiple distributors with the authorization to sell and market in over
40
international countries outside of North America in Asia-Pacific, Europe, the Middle East and South America.
We are driving growth in miraDry procedures through our physician marketing programs, which provide physicians with sales training, practice marketing, and support services through our direct selling in North America. For sales outside of North America, we are working with our distributors by sharing our marketing materials and programs that may be applicable to certain markets in addition to investing in marketing support in each of these markets. After we establish a significant installed base of miraDry Systems in specific markets, we plan to use targeted consumer marketing, advertising, and promotional activities in these markets to increase demand for miraDry.
Our business is dependent upon the success of miraDry, and we cannot guarantee that we will be successful in significantly expanding physician and patient demand for miraDry procedures. Given the limited financial resources of the company, we are prioritizing our spending in the areas of customer marketing programs and sales initiatives, to drive new systems placements and increased utilization of each installed system.
We generated revenue of
$3.8 million
and
$4.3 million
, and had net losses of $
7.3 million
and
$3.3 million
, for the three months ended
March 31, 2017
and
2016
, respectively.
We expect to continue to incur operating losses for the foreseeable future.
Components of Statements of Operations
Revenue
Product revenue consists of sales of miraDry Systems, as well as consumables (referred to as “
bioTips
”), accessories, warranty, service and freight charges, net of returns, discounts and allowances.
Once a sales order is negotiated and received by customer service, the product can be shipped generally at the time the order is received or when the financial considerations are met.
Standard warranties are offered at no cost to customers to cover parts, labor and maintenance for up to two years for product defects.
In addition, we offer extended warranty or post-installation service and support contracts that provide various levels of service support, which enables our customers to select the level of on-going support services, including parts and labor, which they require.
These post-installation contracts are for a period of one to two years. Revenue for extended warranty and service contracts is recognized on a straight-line basis over the term during which the contracted services are provided.
Cost of Revenue
Product cost of revenue primarily consists of the cost of materials, labor and overhead associated with the manufacture of the miraDry Systems and bioTips, as well as variable manufacturing costs and royalty payments to The Foundry.
We expect our cost of revenue per unit to decrease as we continue to scale our operations, improve product designs and work with our third-party suppliers to lower costs.
Operating Expenses
Research and Development
.
Research and development (R&D) expenses consist primarily of compensation and related costs for personnel, including stock-based compensation and employee benefits.
Other significant R&D costs include third-party consulting services, laboratory supplies, research materials and supplies, and depreciation and amortization of medical and computer equipment and software.
We expense R&D expenses as incurred.
As we continue to invest in improving the miraDry System and developing our technology for new products, we expect R&D expenses to increase in absolute dollars but to decline as a percent of revenue.
Sales and Marketing
.
Sales and marketing expenses consist primarily of compensation and related costs for personnel, including stock-based compensation, employee benefits and travel associated with our direct sales force, practice development managers, sales management and our marketing personnel.
Sales and marketing expenses also include costs associated with our support of business development efforts with distributors in Europe/Middle East and Asia-Pacific, and costs related to trade shows and marketing programs. Marketing programs include reimbursement to customers for qualified submissions of marketing expenses with a separately identifiable benefit, and where they provide us evidence of payment.
We expense sales and marketing costs as incurred.
We expect sales and marketing expenses to increase in future periods as we grow revenue and expand our sales force and our marketing organization, in addition to increased participation in global trade shows and marketing programs, including consumer marketing.
General and Administrative
.
Our general and administrative expenses consist primarily of compensation and related costs for personnel, including stock-based compensation, employee benefits and travel and third-party consulting, which include legal, audit, accounting and tax services.
We expect general and administrative expenses to increase in absolute dollars following the consummation of the Merger due to additional legal, accounting, insurance, investor relations and other costs associated with being a public company, as well as other costs associated with growing our business.
Interest Income
.
Interest income consists primarily of interest income received on our cash and cash equivalents.
Interest Expense
.
Interest expense consists primarily of interest and amortization of related costs associated with the senior debt with Silicon Valley Bank Financial Group and Oxford Finance, or together, SVB/Oxford. Additionally it includes interest expense associated with financing leases for certain equipment in our business, short term financing agreements for insurance premiums, bridge loan financing and royalty payables with The Foundry. Finally, it includes non-cash interest expense associated with the bifurcation of the derivative liability related to the convertible promissory notes issued in January 2017 and related discount amortization.
Other Income, Net
.
Other income, net consists primarily of the re-measurement of outstanding convertible preferred stock warrants and derivative liability at each balance sheet date. Additionally, it includes gains and losses from the disposal of fixed assets and foreign currency exchange gains and losses.
Results of Operations
The following tables set forth our results of operations for the periods presented:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2017
|
|
2016
|
|
(Unaudited)
|
Revenue
|
$
|
3,814,867
|
|
|
$
|
4,287,333
|
|
Cost of revenue
|
1,692,761
|
|
|
2,028,557
|
|
Gross margin
|
2,122,106
|
|
|
2,258,776
|
|
Operating expenses:
|
|
|
|
Research and development
|
752,676
|
|
|
921,589
|
|
Selling and marketing
|
3,003,655
|
|
|
3,023,009
|
|
General and administrative
|
1,540,117
|
|
|
1,337,996
|
|
Total operating expenses:
|
5,296,448
|
|
|
5,282,594
|
|
Loss from operations
|
(3,174,342
|
)
|
|
(3,023,818
|
)
|
Interest income
|
853
|
|
|
1,140
|
|
Interest expense
|
(3,940,855
|
)
|
|
(315,748
|
)
|
Loss on debt conversion
|
—
|
|
|
—
|
|
Other income, net
|
(143,434)
|
|
|
25,355
|
|
Loss before provision for income taxes
|
(7,257,778)
|
|
|
(3,313,071)
|
|
Provision for income taxes
|
(2,475
|
)
|
|
(1,525
|
)
|
Net and comprehensive loss
|
(7,260,253)
|
|
|
(3,314,596)
|
|
Accretion of redeemable convertible preferred stock
|
—
|
|
|
—
|
|
Net loss attributable to common stockholders
|
$
|
(7,260,253
|
)
|
|
$
|
(3,314,596
|
)
|
Net loss per share attributable to common stockholders, basic and diluted
|
$
|
(0.78
|
)
|
|
$
|
(8.32
|
)
|
Comparison of the
Three
Months Ended
March 31, 2017
and
2016
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
2017
|
|
2016
|
|
Change
|
Capital systems
|
$
|
1,475,650
|
|
|
$
|
2,099,310
|
|
|
$
|
(623,660
|
)
|
Consumable
|
2,226,676
|
|
|
2,023,180
|
|
|
203,496
|
|
Other
|
112,541
|
|
|
164,843
|
|
|
(52,302
|
)
|
Total revenue
|
$
|
3,814,867
|
|
|
$
|
4,287,333
|
|
|
$
|
(472,466
|
)
|
Total revenue during the
three
months ended
March 31, 2017
decreased
$0.5 million
, respectively compared to the
three
months ended
March 31, 2016
. Sales of capital systems decreased by
$0.6 million
for the
three
months ended
March 31, 2017
, over the same period in the prior year. North America capital systems sales increased by
$0.1 million
for the
three
months ended
March 31, 2017
as compared to the same period for
2016
as we continued to see momentum of system sales as a result of increased market awareness. Asia-Pacific capital sales decreased by
$0.8 million
for the
three
months ended
March 31, 2017
as compared to the same period for
2016
, primarily due to shipments to China. Sales of consumables increased by
$0.2 million
for the
three
months ended
March 31, 2017
as compared to the same period for
2016
, primarily due to increased utilization in North America and Europe/Middle East. Other revenue, which is primarily for extended warranty agreements and service contracts, reflected a decrease of
31.7%
for the
three
months ended
March 31, 2017
as compared to the same period for
2016
, which was due to expiration of extended warranties, primarily in Asia-Pacific.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
2017
|
|
2016
|
|
Change
|
North America
|
$
|
2,076,452
|
|
|
$
|
1,754,484
|
|
|
$
|
321,968
|
|
Asia-Pacific
|
824,796
|
|
|
1,791,444
|
|
|
(966,648
|
)
|
Europe/Middle East
|
913,619
|
|
|
723,333
|
|
|
190,286
|
|
South America
|
—
|
|
|
18,072
|
|
|
(18,072
|
)
|
Total revenue
|
$
|
3,814,867
|
|
|
$
|
4,287,333
|
|
|
$
|
(472,466
|
)
|
Total revenue for the
three
months ended
March 31, 2017
, continued to be driven primarily from North America and Asia-Pacific which represented collectively
76%
of the total revenue. North America revenue for the
three
months ended
March 31, 2017
grew
18%
as compared to the same period in
2016
. Growth for each of these periods was driven by both strong new capital system placements and increased consumable utilization. Capital system sales growth was primarily attributed to both a greater number of units placed and higher average selling prices. Consumable sales growth was primarily attributed to increasing utilization being driven by increasing consumer awareness through expanded marketing efforts. Asia-Pacific revenue for the
three
months ended
March 31, 2017
decreased
54%
, as compared to the same period in
2016
. The decrease was due to lower capital system sales and lower consumable sales due primarily to the change in distributors for certain countries. Europe/Middle East revenue for the three months ended
March 31, 2017
increased
26%
as compared to the same period in
2016
, due primarily to strong consumable utilization. Revenue for the
three
months ended
March 31, 2017
decreased
11%
as compared to the same period in
2016
, due to a decline in capital systems sales which was partially offset by strong consumable demand.
Cost of Revenue/Gross Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2017
|
|
2016
|
|
Change
|
Capital systems cost of revenue
|
$
|
1,420,140
|
|
|
$
|
1,713,647
|
|
|
$
|
(293,507
|
)
|
Consumable cost of revenue
|
161,304
|
|
|
190,083
|
|
|
(28,779
|
)
|
Royalty
|
111,317
|
|
|
124,827
|
|
|
(13,510
|
)
|
Total cost of revenue
|
$
|
1,692,761
|
|
|
$
|
2,028,557
|
|
|
$
|
(335,796
|
)
|
Gross margin %
|
55.6
|
%
|
|
52.7
|
%
|
|
2.9
|
%
|
Gross margin percentage for the
three
months ended
March 31, 2017
was
55.6%
, reflecting an increase over the same prior year period of
2.9%
. The increase in gross margin for the
first
quarter is primarily attributable to a higher percentage of sales of consumables worldwide, especially in North America and Europe, where we have a higher gross margin as compared to capital sales.
We currently expect that cost of revenue on current orders will show improvements from historic costs due to scaling of our operation closer to the optimal capacity of our manufacturing facility, introducing cost improvements from R&D, and increasing our production efficiencies.
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2017
|
|
2016
|
|
Change
|
Research and development
|
752,676
|
|
|
921,589
|
|
|
$
|
(168,913
|
)
|
Selling and marketing
|
3,003,655
|
|
|
3,023,009
|
|
|
$
|
(19,354
|
)
|
General and administrative
|
1,540,117
|
|
|
1,337,996
|
|
|
$
|
202,121
|
|
Total operating expenses
|
$
|
5,296,448
|
|
|
$
|
5,282,594
|
|
|
$
|
13,854
|
|
Research and Development.
Research and development (R&D) expenses during the
three
months ended
March 31, 2017
totaled
$0.8 million
. This reflects a decrease of
$0.2 million
compared to the
three
months ended
March 31, 2016
. This decrease was primarily attributable to lower headcount and the associated employee related expenses, outside services and supplies due to reduced activities associated with clinical studies.
Selling and Marketing.
Selling
and marketing expenses during the
three
months ended
March 31, 2017
totaled
$3.0 million
, which was a slight decrease compared to the
three
months ended
March 31, 2016
. This decrease was primarily attributable to a decrease in compensation associated with lower sales and lower headcount.
General and Administrative.
General and administrative expenses during the
three
months ended
March 31, 2017
totaled
$1.5 million
. This represents an increase of
$0.2 million
, compared to the
three
months ended
March 31, 2016
. This increase was primarily due to increased outside contractor and support costs related to our alternative public offering and other public company related costs.
Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2017
|
|
2016
|
|
Change
|
Interest expense
|
$
|
3,940,855
|
|
|
$
|
315,748
|
|
|
$
|
3,625,107
|
|
Interest expense increased by
$3.6 million
during the
three
months ended
March 31, 2017
, as compared to the
three
months ended
March 31, 2016
, primarily due to then non-cash interest expense of $3.2 million associated with the derivate liability related to the issuance of convertible promissory notes of $2.7 million in January 2017 and amortization of the related discount. Interest expense for both quarters consisted of similar amounts for bridge financing on convertible note agreements with current investors and SVB/Oxford debt.
Other Income, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2017
|
|
2016
|
|
Change
|
Other income (expense), net
|
$
|
(143,434
|
)
|
|
$
|
25,355
|
|
|
$
|
(168,789
|
)
|
Other income (expense), net, decreased
$(0.2) million
during the
three
months ended
March 31, 2017
, as compared to the same period in
2016
, primarily due to the revaluation of the derivative liability at
March 31, 2017
.
Liquidity and Capital Resources
Since our inception in 2006 as a Delaware corporation, we have incurred significant net losses and negative cash flows from operations. During
2016
and the
three
months ended
March 31, 2017
, we had net losses of
$20.4 million
and
$7.3 million
, respectively. At
March 31, 2017
, we had an accumulated deficit of
$121.1 million
.
As discussed in the audit report for the year ended
December 31, 2016
, certain factors raise substantial doubt about our ability to continue as a going concern. Such factors continue to exist as of
March 31, 2017
. At
March 31, 2017
, we had cash and cash equivalents of
$1.1 million
. To date, we have financed our operations principally through private placements of our preferred stock, issuances of senior secured debt and receipts of customer deposits for new orders and payments from customers for systems and consumables sold. Through
March 31, 2017
, we have received proceeds of
$100.5 million
from the issuance of shares of our preferred and common stock.
Loan and Security Agreement
On August 7, 2015, we restructured our loan agreement from June 2014, and entered into a new loan and security agreement (the “
Loan and Security Agreement
”) among us, Oxford Finance LLC, as collateral agent and a lender, the other lenders from time to time a party thereto and Silicon Valley Bank. The Loan and Security Agreement provides for a
$20 million
secured term loan facility split into three tranches as follows: (i)
$10 million
in term loans (the “
Term Loan A
”), (ii)
$5 million
in term loans (the “
Term Loan B
”) and (iii)
$5 million
in term loans (the “
Term Loan C
”). The Term Loan A was drawn on August 7, 2015. The Term Loan B and the Term Loan C have expired.
The term loans bear interest at a fixed rate, determined on the funding date, equal to the greater of (i)
7.80%
and (ii) the rate published by The Wall Street Journal as the “Prime Rate” in the United States plus
4.55%
. Interest is due and payable monthly in arrears. A default interest rate shall apply during any event of default under the Loan and Security Agreement at a rate per annum equal to
5.00%
above the applicable interest rate.
The term loans are payable in equal monthly installments amortizing over either
33
months or
27
months depending on when we meet certain revenue targets. Any remaining outstanding amounts of principal and/or interest are payable on September 1, 2019, the maturity date, together with a final payment equal to
2.25%
multiplied by the original principal amount of the term loans (the “
Final Payment
”).
We may prepay the term loans in whole, not in part, at any time, provided that such payment is accompanied by an amount equal to the sum of (i) the principal amount of the term loans prepaid multiplied by: (A)
2.00%
for any prepayment made on or prior to the second anniversary of the funding date of such term loans and (B)
1.00%
for any prepayment made after the second anniversary of the funding date of such term loans and (ii) the Final Payment. We are also obligated to pay customary fees for a loan facility of this size and type.
The term loans are subject to financial covenants and are collateralized by substantially all of our assets (other than our intellectual property) and limits the our ability with respect to additional indebtedness, investments or dividends, among other things, subject to customary exceptions. The Loan and Security Agreement includes customary events of default and a subjective acceleration clause. Failure to comply with the loan covenants may result in the acceleration of payment terms on all outstanding principal and interest amounts plus a prepayment fee.
In March 2017, the Company entered into the Third Amendment to Loan and Security Agreement granting a security interest in the Company’s intellectual property.
The following table summarizes our cash flows for the periods presented:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2017
|
|
2016
|
Cash used in operating activities
|
$
|
(2,809,972
|
)
|
|
$
|
(3,810,931
|
)
|
Cash used in investing activities
|
(32,299
|
)
|
|
(48,581
|
)
|
Cash provided by financing activities
|
1,697,015
|
|
|
2,643,988
|
|
Operating Activities
We have historically experienced negative cash outflows as we developed our miraDry and miraWave technology, and continued to expand our business. Our net cash used in operating activities primarily results from our net loss adjusted for non-cash expenses and changes in working capital components as we have grown our business, and is influenced by the timing of cash payments for inventory purchases and cash receipts from our customers.
Our primary source of cash flow from operating activities is cash receipts from customers including sales of miraDry Systems. Our primary uses of cash from operating activities are employee-related expenditures and amounts due to vendors for purchased inventory components. Our cash flows from operating activities will continue to be affected principally by our working capital requirements, and the extent to which we build up our inventory balances and increase spending on personnel and other operating activities as our business grows.
During the
three
months ended
March 31, 2017
, operating activities used
$2.8 million
in cash, a decrease of
$1.0 million
from cash used in the
three
months ended
March 31, 2016
of
$3.8 million
. The decrease was primarily attributable to higher expense and accrued liabililities from prior periods.
Investing Activities
Cash used in investing activities was
$32,299
and
$48,581
for the
three
months ended
March 31, 2017
and
2016
, respectively. This was primarily for purchases of capital equipment used for operations and production.
Financing Activities
Cash provided by financing activities during the
three
months ended
March 31, 2017
and
2016
was
$1.7 million
and
$2.6 million
, respectively. Cash provided by financing activities was primarily from the issuance of convertible notes which was offset by payments due under the Loan and Security Agreement in 2017.
Off-Balance Sheet Arrangements
During the
three
months ended
March 31, 2017
and
2016
and years ended
December 31, 2016
and
2015
, we did not have any off-balance sheet arrangements as defined by applicable SEC regulations.
Critical Accounting Policies and Estimates
Our financial statements are prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates.
We believe that the assumptions and estimates have the greatest potential impact on our financial statements. Therefore, we consider these to be our critical accounting policies and estimates. For further information on all of our significant accounting policies, see the notes to our financial statements.
Inventories
Inventories are stated at lower of cost or market value and consist of raw materials, work in process, and finished goods. Cost is determined using standard costs, which approximates actual cost on a first-in, first-out basis. Market value is determined as the lower of replacement cost or net realizable value. The Company writes down its inventory for estimated excess or obsolete inventory equal to the difference between the cost and the estimated market value based upon assumptions about future demands and market conditions.
Revenue Recognition
The Company’s revenue is derived from the sale of the miraDry system, related consumables and accessories, and separately priced extended warranties. The Company recognizes revenue in accordance with FASB Accounting Standards Codification 605,
Revenue Recognition
, or ASC 605. Under ASC 605, revenue is recognized when persuasive evidence of an arrangement exists, title and risk of loss has transferred to the customer, the sales price is fixed or determinable, and collectability is reasonably assured.
The Company has distributor agreements with several international distributors. Certain distributor agreements contain product repurchase provisions. The Company defers revenue for its potential exposure for product repurchases.
The Company provides marketing development programs as part of certain customer purchase agreements and qualification through marketing rewards programs. The programs generally provide for reimbursement of qualifying marketing expenditures that promote the Company’s products and brand. In order to qualify for the reimbursement, the customer must (1) adhere to the established brand style guidelines and only feature miraDry Systems and the customer’s practice and (2) submit the invoice for the marketing expenses. Through this review, the Company ensures that the fair value of the separately identifiable benefit received is equal to or greater than the amount being reimbursed. The Company’s reimbursement of marketing expenditures under these programs is recorded in sales and marketing expenses in the accompanying Consolidated Statements of Operations and Comprehensive Loss.
Product Warranty
The Company warrants the miraDry System for a period of one to two years, depending on the territory. The Company accrues for warranty costs at the time of sale based on an estimate of total repair costs for all miraDry Systems under the warranty period. An extended warranty may be purchased for additional fees.
Allowance for Doubtful Accounts
The Company regularly reviews accounts receivable balances, including an analysis of customers’ payment history and information regarding the customers’ creditworthiness, and records an allowance for doubtful accounts based upon this evaluation. The Company writes off accounts against the allowance when all attempts at collection have been exhausted.
Freestanding Preferred Stock Warrants
Freestanding warrants and other similar instruments related to shares that are redeemable are accounted for in accordance with ASC 480, “
Distinguishing Liabilities from Equity
.” The freestanding warrants are exercisable into the Company’s convertible preferred stock and are classified as liabilities on the balance sheet. The warrants are subject to re-measurement at each balance sheet date and the change in fair value, if any, is recognized as other income (expense). The Company will continue to adjust the liability for changes in fair value until the earlier of (i) exercise of the warrants, (ii) conversion into warrants to purchase common stock (upon conversion of the preferred stock to common), or (iii) expiration of the warrants.
Derivative Liability
Derivative liability related to convertible notes are evaluated under ASC 480, “
Distinguishing Liabilities from Equity
” and ASC 815, “
Derivatives and Hedging
.” The fair value of the derivative liability is measured at each period end by using the net present value of the weighted average of the probability of the various outcomes. If any of the assumptions used in the model change significantly, changes in the fair value of the derivative liability may differ materially in the future from that recorded in the current period.
Income Taxes
The Company accounts for income taxes under the liability method, whereby deferred tax assets and liabilities are recorded for the difference between the financial statement and tax bases of assets and liabilities and for net operating loss and tax credit carryforwards using the enacted tax rates in effect for the year in which the differences are expected to affect taxable income. A valuation allowance is established when necessary to reduce deferred tax assets to the amounts expected to be realized.
The Company adheres to the provisions of Financial Accounting Standards Board (“
FASB
”) Accounting Standards Codification (“
ASC
”) 740-10, “
Accounting for Uncertainty in Income Taxes
.” ASC 740-10 prescribes a comprehensive model for the recognition, measurement, presentation and disclosure in financial statements of any uncertain tax positions that have been taken or expected to be taken on a tax return.
It is the Company’s policy to include penalties and interest expense related to income taxes as a component of other expense, net, as necessary.
Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with ASC 718, “
Compensation - Stock Compensation.
” ASC 718 requires the recognition of compensation expense, using a fair-value based method, for costs related to all share-based payments including stock options. ASC 718 requires companies to estimate the fair value of all share-based payment awards on the date of grant using an option pricing model. All option grants valued since inception are expensed on a straight-line basis over the requisite service period.
The Company accounts for equity instruments issued to non-employees in accordance with ASC 505-50, “
Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling Goods or Services.
” Equity instruments issued to non-employees are recorded at their fair value on the measurement date and are subject to periodic adjustments as the underlying equity instruments vest.
Preferred Stock
Preferred shares subject to mandatory redemption (if any) are classified as liability instruments and are measured at fair value. The Company classifies conditionally redeemable preferred shares, which includes preferred shares that feature
redemption
rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within the Company’s control, as temporary equity. At all other times, the Company classifies its preferred shares in stockholders’ equity.
JOBS Act Accounting Election
We are an “emerging growth company” within the meaning of the JOBS Act. Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended (the “
Securities Act
”) for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this extended transition period and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies that are not emerging growth companies.
Recently Issued and Adopted Accounting Pronouncements
See Note 2, “Summary of Significant Accounting Policies,” to the condensed consolidated financial statements for a description of new accounting pronouncements.