7. Redeemable Convertible Preferred Stock and Stockholders’ Deficit

 

Redeemable Convertible Preferred Stock

 

Upon closing of the Company’s initial public offering, the 15,293,960 shares of issued and outstanding redeemable convertible preferred stock were converted into common stock. Each share of redeemable convertible preferred stock, shown as issued and outstanding in the table below, was converted into one share of common stock.  The carrying value of the redeemable preferred stock at August 7, 2013 of $116.3 million was reclassified to common stock and additional paid-in capital.

 

Redeemable convertible preferred stock consisted of the following at December 31, 2012 and August 7, 2013 (in thousands, except share data):

 

		Shares Authorized		Shares Issued and Outstanding		Aggregate Liquidation Preference
Series A		8,150,000		1,567,306		$	4,075
Series B		18,124,230		3,485,425		14,735
Series C		14,215,791		2,726,476		15,000
Series D		7,789,215		1,497,921		15,890
Series E		5,045,662		965,927		11,000
Series F		5,988,024		1,151,542		20,000
Series G		8,677,338		1,668,707		15,450
Series G-1		2,073,148		216,015		2,000
Series H		13,100,000		2,014,641		20,000
		83,163,408		15,293,960		$	118,150

 

Prior to their conversion, the Series A, Series B, Series C, Series D, Series E, Series F, Series G, Series G-1 and Series H redeemable convertible preferred stockholders were entitled to receive, when, as and if declared by the Company’s Board of Directors, dividends at a rate of $0.21, $0.34, $0.44, $0.85, $0.91, $1.39, $0.74, $0.74, and $0.79 per share per year, respectively. To the extent that additional dividends were declared by the Board of Directors, those amounts would have been distributed equally among the Preferred Stockholders and common stockholders. As of September 30, 2013, no dividends had been declared by the Board of Directors.

 

Warrants to Purchase Stock and Preferred Stock Warrant Liability

 

Warrants to purchase common and preferred stock are summarized in the following table:

 

		Number of Shares Subject to Warrant
		December 31,  2012		September 30,  2013		Exercise Price
Warrants to purchase shares of common stock		71,153		—		$	7.49
Warrants to purchase shares of common stock		470,082		—		9.93
Warrants to purchase Series C redeemable convertible preferred stock (1)		7,325		—		5.50
Warrants to purchase Series E redeemable convertible preferred stock (1)		4,390		—		11.39
Warrants to purchase shares of common stock (1)		—		7,325		5.50
Warrants to purchase shares of common stock (1)		—		4,390		11.39
Warrants to purchase Series G-1 redeemable convertible preferred stock		182,666		—		9.26
		735,616		11,715

(1)                                 Warrants to purchase Series C and Series E redeemable convertible preferred stock were converted into warrants to purchase shares of common stock upon the closing of the Company’s initial public offering.

 

Upon the closing of the Company’s initial public offering, warrants to purchase 723,901 shares of the Company’s common and preferred stock were net exercised, and the Company issued 293,232 shares of common stock to the holders of the warrants.

 

In 2009, the Series G-1 investors received warrants to purchase 182,666 shares of Series G-1 redeemable convertible preferred stock at a price of $9.26 per share. The warrants became immediately exercisable upon the closing of the Series G-1 financing and the fair value of $0.4 million was recorded as a liability with the offsetting charge to expense. Because the holders of the preferred stock were able to elect to redeem the shares for cash, the Company’s outstanding preferred stock warrants were classified as liabilities and were revalued at the end of each reporting period using the Black-Scholes option-pricing valuation model. Changes in fair value were reflected in the Company’s statements of operations as other income or expense. The fair market value of the Company’s common stock was used to value the warrant liability using the Black-Scholes option-pricing model. Upon the effective date of the Company’s initial public offering, the Company adjusted the liability based upon the offering price of $16.00 per share. As a result, the Company recognized $29,000 of other income and $0.7 million of other expense during the three- and nine-month periods ended September 30, 2013.

 

As discussed above, upon the closing of the Company’s initial public offering, the warrants to purchase shares of the Company’s redeemable convertible preferred stock were net exercised.  Of the 293,232 shares issued, the Company issued 76,964 shares of common stock to the warrant holder of Series G-1 redeemable convertible preferred stock. The then-current aggregate fair value of the warrant liability of $1.3 million was reclassified from long-term liabilities to additional paid-in capital, a component of stockholders’ equity, and the Company ceased to record any further periodic fair value adjustments relating to the warrant liability.

 

Stock Options

 

In 2003, the Board of Directors adopted the 2003 Equity Incentive Plan (the “2003 Plan”), which provides for the granting of nonqualified and incentive stock options, stock appreciation rights, stock awards and restricted stock. Under the 2003 Plan, the Company may grant nonqualified and incentive stock options to directors, employees and non-employees providing services to the Company. The Board of Directors, on an option-by-option basis, determines the number of shares, terms and exercise period. Options granted generally have a ten-year life and vest over a period of four years. The exercise price of options on the date of grant is equivalent to the estimated fair value of the stock as determined by the Board of Directors based upon information available to it at the time of grant. Because there was no public market for the common stock, prior to the Company’s initial public offering, the Company’s Board of Directors determined the fair value of the Company’s common stock based on a variety of factors, including periodic valuations of the Company’s common stock, arm’s-length sales of the Company’s common stock, the Company’s financial position, historical financial performance, projected financial performance, valuations of publicly traded peer companies and the illiquid nature of the Company’s common stock.

 

On June 11, 2013, the Company’s Board of Directors adopted the 2013 Stock Option and Incentive Plan (the “2013 Plan”), which was subsequently approved by the Company’s stockholders.  The 2013 Plan became effective as of the closing of the Company’s initial public offering. The Company initially reserved 2,390,401 shares of its Common Stock for issuance of awards under the 2013 Plan. To the extent that any awards outstanding under the 2003 Plan are forfeited or lapse unexercised subsequent to August 1, 2013, the shares of common stock subject to such awards will become available for issuance under the 2013 Plan.  As of September 30, 2013, an aggregate of 2,328,805 shares were available for issuance under the 2013 Plan. The 2013 Plan provides for annual increases in the number of reserved shares of up to 5% of the outstanding number of shares of the Company’s Common Stock.

 

A summary of stock option activity for the nine months ended September 30, 2013 is presented below:

 

		Shares Subject to Options Outstanding		Weighted Average Grant Date Fair Value			Weighted Average Exercise Price			Weighted Average Remaining Contractual Life (Years)
Balance at December 31, 2012		4,649,238		$	3.33		$	5.56		7.2
Granted		456,098		10.28			13.63
Exercised		(88,582	)	2.39			4.14
Expired		(31,722	)	3.39			5.62
Forfeited		(35,467	)	4.60			7.33
Balance at September 30, 2013		4,949,565		3.99			6.36			6.7
Exercisable options at September 30, 2013		3,061,051		$	2.79		$	4.65		5.5
Vested and expected to vest at September 30, 2013		4,607,844		3.85			6.19

 

The following table summarizes information about stock options outstanding and exercisable at September 30, 2013:

 

		Options Outstanding							Options Exercisable
Range of Exercise Prices		Weighted Average Exercise Price			Number of Underlying Shares		Weighted- Average Remaining Contractual Life (in years)		Number of Underlying Shares		Weighted- Average Remaining Contractual Life (in years)
$0.26 - 1.30		$	0.56		190,939		1.2		190,939		1.2
1.35 - 2.60		2.18			473,347		2.7		473,347		2.7
2.65 - 3.90		3.23			325,523		3.8		325,523		3.8
3.95 - 5.20		4.87			954,522		5.5		926,448		5.5
5.25 - 6.50		6.19			1,734,885		8.0		933,316		7.9
6.55 - 7.80		7.49			118,947		6.8		95,260		6.8
7.85 - 9.10		8.84			239,893		8.7		81,075		8.7
9.15 – 22.77		11.40			911,509		8.9		35,143		9.1
					4,949,565				3,061,051

 

The following table summarizes the aggregate intrinsic-value of options exercised, outstanding and exercisable (in thousands):

 

		For the nine months ended and as of September 30, 2013
Options Exercised		$	1,130
Options Outstanding		55,147
Options Exercisable		38,783

 

The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:

 

		Three Months Ended September 30,				Nine Months Ended September 30,
		2012		2013		2012		2013
Expected volatility		61	%	57	%	61-63	%	56-59	%
Expected dividends		0	%	0	%	0	%	0	%
Expected terms (in years)		6.0-6.1		5.5-6.1		5.5-6.1		3.3-7.2
Risk-free rate		0.8	%	1.5-1.7	%	0.8-0.9	%	0.8-1.7	%
Forfeiture rate		7.9	%	7.2	%	7.9	%	7.2	%

 

Total stock-based compensation expense has been classified as follows in the accompanying statements of operations (in thousands):

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2012			2013			2012			2013
Cost of revenue		$	18		$	15		$	53		$	46
Research and development		202			419			461			974
Sales and marketing		139			187			421			543
General and administrative		363			319			1,159			1,085
Total stock-based compensation expense		$	722		$	940		$	2,094		$	2,648

 

At September 30, 2013, there was $8.1 million of total unrecognized compensation cost related to non-vested stock option awards that will be recognized over a weighted-average period of 3.1 years.