10.

REDEEMABLE CONVERTIBLE PREFERRED STOCK

Series A Preferred Stock

In June 2008, the Company authorized a total of 13,764,706 shares of Series A redeemable, convertible preferred stock (Series A Preferred Stock) of which 490,197 shares were issued for $12.24 per share resulting in gross proceeds of $6.0 million and 241,883 shares were issued in connection with the conversion of $2.8 million of bridge notes and related $200,649 of accrued interest.

In connection with the sale of Series A Preferred Stock, in June 2008, the Company recorded a separate preferred stock liability as the investors received the right to purchase from the Company, on the same terms, 248,311 additional shares of Series A Preferred Stock in a second tranche (Series A Rights). The original purchasers of the Series A Preferred Stock in the June transaction had the ability to sell some of the shares of the Series A Preferred Stock and still retained the ability to exercise the right to the future purchase of Series A Preferred Stock and, accordingly, the Series A Rights were determined to be a freestanding derivative liability instrument.

At the time of issuance, the Company recorded a liability for the initial fair value of the Series A Rights. The Series A Rights were valued at $1.5 million using the Black-Scholes pricing model with the following assumptions: two year expected term, a risk-free rate of 2.98% and volatility of 88.57%. The initial value assigned to the rights was recorded as a discount to the Series A Preferred Stock and the discount is being accreted over the period through the earliest redemption date of the Series A Preferred Stock as a non-cash dividend.

As the Series A Rights are exerciseable for shares of a redeemable instrument, they are classified as a liability in accordance with ASC 480, Distinguishing Liabilities from Equity, and are subject to re-measurement at each balance sheet date and changes to fair value are recognized as a component of other income (expense) in the accompanying statement of operations and comprehensive loss.

In February 2010, the Series A Preferred Stock investors exercised their Series A Rights to purchase all of the additional shares of Series A Preferred Stock contemplated under the right in a second tranche sale of Series A Preferred Stock. In connection with the second tranche sale, there were 248,311 shares of Series A Preferred Stock issued, all of which were from the exercise of the Series A Rights. The second tranche sale resulted in gross proceeds to the Company of $3.0 million.

In connection with the exercise of the Series A Rights, the Company performed a final valuation of the Series A Rights immediately prior to exercise resulting in a valuation of approximately $1.9 million and reclassified the fair value on extinguishment to the Series A Preferred Stock purchased in the second tranche.

In connection with a December 2012 preferred stock transaction, certain features of the Series A Preferred Stock were modified. The significant changes included the following:

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Liquidation preference increased from one times the original issue price of the Series A Preferred Stock to three times the original issue price.

•

Participation preference originally capped at three times the original issuance price to no cap on participation.

•

Conversion terms were modified to allow for the conversion price to fully ratchet down to the price on subsequent issuance of equity at a lower price. The terms previously only allowed for a partial ratchet to the lower conversion price.

The change in the terms of the Series A Preferred Stock were evaluated and the change was determined to be a modification. The Company recorded a deemed dividend of $15.7 million for the year ended December 31, 2012 calculated based on the difference in the fair value immediately before and immediately after the modification. This deemed dividend was recognized as an increase to the face value of Series A Preferred Stock with an offset to retained earnings.

Series B Preferred Stock

In December 2012, the Company authorized a total of 36,205,634 shares of Series B redeemable, convertible preferred stock (Series B Preferred Stock) of which 387,499 shares were issued for $5.16 per share resulting in gross proceeds of $2.0 million and 541,496 shares were issued in connection with the conversion of $2.2 million of convertible notes and related $593,474 of accrued interest.

Each investor participating in the December 2012 Series B financings, including those holding the Convertible Notes that were converted in connection with the December Series B Preferred Stock financing, received warrants exercisable for a number of shares of Series B Preferred Stock (Series B Warrants) equal to the 25% of the shares of Series B Preferred Stock purchased in the financing transaction. There was a total of 96,921 shares underlying Series B Warrants issued in connection with the transaction. The Series B Warrants have an exercise price of $5.16 per share, are immediately exercisable and have a term of five years. As the Series B Warrants are exercisable for redeemable shares, the Company recorded a liability in accordance with ASC 480 for the initial fair value of the Series B Warrants. The Series B Warrants were valued at $2.2 million using the Black-Scholes pricing model with the following assumptions: a term of 5 years, a risk-free rate of 0.77%, volatility of 88.57% and fair value on date of issuance of $25.44 per share.

In connection with the sale of Series B Preferred Stock in December 2012, the Company recorded a separate preferred stock liability as the investors received the right to purchase from the Company, on the same terms, 928,995 additional shares of Series B Preferred Stock, in a second tranche (Series B Rights). The Series B Right also provided for warrants (Series B Rights-Warrants) exercisable for Series B Preferred Stock to be issued with the shares exercised under Series B Rights with the same terms and conditions as those warrants issued to the purchasers of the Series B Preferred Stock in the first tranche (Series B Rights-Warrants). The Series B Rights provided warrants for 25% of the shares of the Series B Preferred Stock exercised under the right for purchase in the second tranche. The original purchasers of the Series B Preferred Stock in the December transaction had the ability to sell some of the shares of the Series B Preferred Stock and still retained the ability to exercise the right to the future purchase of Series B Preferred Stock and, accordingly, the Series B Rights were determined to be a freestanding derivative liability instrument.

The Company recorded a preferred stock liability in December 2012 for the initial fair value of the Company’s obligation to sell the convertible preferred stock for the second tranche of Series B Preferred Stock and the associated warrants that would be provided. The Series B Rights preferred stock liability was valued at $18.9 million using the Black-Scholes pricing model with the following assumptions: a 10 month expected term, a risk-free rate of 0.15%, volatility of 88.57% and fair value on date of issuance of $25.44 per share. The Series B Rights-Warrants preferred stock liability was valued at $5.2 million using the Black-Scholes pricing model with the following assumptions: a 10 month expected term, a risk-free rate of 0.13% volatility of 88.57% and fair value on date of issuance of $22.44 per underlying warrant.

The initial values assigned to the Series B Rights, Series B Rights-Warrants and Series B Warrants were recorded as discounts to the Series B Preferred Stock to the extent of gross proceeds received in connection with the financing transaction and those discounts are being accreted over the period through the earliest redemption date of the Series B Preferred Stock via recordings of a non-cash dividend. The amount of value received in excess of issuance price of Series B Preferred Stock of $21.5 million was recorded as an expense in the statements of operations and comprehensive income (loss).

The Series B Rights, Series B Rights-Warrants and Series B Warrants are each exercisable into shares or share options for redeemable stock and are classified as liabilities in accordance with ASC 480 and are subject to re-measurement at each balance sheet date and changes to fair value are recognized as a component of other income (expense) in the statement of operations and comprehensive loss.

In August 2013, the Series B investors exercised their right and purchased 387,686 additional shares of Series B Preferred Stock in connection with the second tranche. The second tranche sale resulted in gross proceeds of $2.0 million. The Company performed a final valuation of the exercised Series B Rights immediately prior to exercise resulting in a valuation of approximately $6.3 million and reclassified the fair value upon extinguishment to the Series B Preferred Stock purchased in the second tranche. The combination of the $2.0 million gross cash proceeds and the $6.3 million fair value of the Series B Rights resulted in an initial fair value of the Series B Preferred Stock issued in August 2013 of $8.3 million, prior to any discounts for direct costs associated with the transaction. The resulting warrants associated with the exercised Series B Rights were initially recorded at the final fair value of the Series B warrant purchase rights on the date of exercise and continued to be carried at fair value and those warrants remain outstanding as of December 31, 2013. The unexercised Series B Rights for 541,309 shares of Series B Preferred Stock and the associated Series B Rights-Warrants expired on October 1, 2013. As the unexercised Series B Rights and associated Series B Rights-Warrants had intrinsic value on the date of expiration, the Company recorded a gain of $10.5 million relating to the final fair value measurement adjustment on the date of expiration.

The following is a summary of the Company’s redeemable convertible preferred stock.

Preferred stock consisted of the following as of March 31, 2014:


	Preferred Shares Authorized		Issuance Date	Preferred Shares Issued and Outstanding		Redemption Value		Carrying Value
Series A - voting		12,000,000	June 2008 and February 2010		875,995	$	10,722,191	$	24,748,667
Series A - nonvoting		12,000,000	June 2008 and February 2010		104,396	$	1,277,807		4,601,310

								$	29,349,977

Series B - voting		19,000,000	December 2012 and August 2013		1,182,854	$	6,102,107	$	7,935,817
Series B - nonvoting		19,000,000	December 2012 and August 2013		133,827	$	690,387		1,223,072

								$	9,158,889

Preferred stock consisted of the following as of December 31, 2013:


	Preferred Shares Authorized		Issuance Date	Preferred Shares Issued and Outstanding		Redemption Value		Carrying Value
Series A - voting		12,000,000	June 2008 and February 2010		875,995	$	10,722,191	$	24,695,300
Series A - nonvoting		12,000,000	June 2008 and February 2010		104,396	$	1,277,807		4,596,565

								$	29,291,865

Series B - voting		19,000,000	December 2012 and August 2013		1,182,854	$	6,102,107	$	7,834,317
Series B - nonvoting		19,000,000	December 2012 and August 2013		133,827	$	690,387		1,191,116

								$	9,025,433

The differences between the respective preferred stock redemption values and carrying values are being accreted over the period from the date of issuance to the earliest redemption date of June 23, 2015. Costs incurred in connection with the issuances of Series A - voting, Series A - nonvoting, Series B - voting and Series B - nonvoting redeemable convertible preferred stock, (collectively, the “Preferred Stock”) through March 31, 2014 and December 31, 2013, were approximately $119,501, which have been recorded as a reduction to the carrying amounts of Preferred Stock, and are being accreted to the carrying value of the applicable preferred stock to the earliest redemption date of June 23, 2015. Upon the closing of the Company’s Initial Public Offering, the remaining issuance costs were accreted to the carrying value of the applicable preferred stock.

Conversion – Each share of Preferred Stock was convertible into either shares of Voting Common Stock or Non-Voting Common Stock, at the election of the holder at any time after the date of issuance of such share. The conversion price was initially defined as the original issue price of $12.24 for Series A Preferred Stock and $5.16 for Series B Preferred Stock. Preferred Stock was subject to adjustments from time to time for stock splits, stock dividends, and recapitalization. Additionally, the conversion price of each of the series of convertible preferred stock was subject to adjustment upon certain deemed sales of common stock at a price less than the then applicable conversion price. The conversion to common stock results from dividing the applicable original issue price by the applicable conversion price. Each share of Voting Preferred Stock and each share of Non-Voting Preferred Stock was convertible into one share of the same such series of Non-Voting Preferred Stock or one share of the same such series of Voting Preferred Stock without the payment of any additional consideration by the holder. The Series A Preferred Stock and Series B Preferred Stock was convertible into shares of Voting Common Stock or Non-Voting Common Stock at the election of the holder and automatically converted into shares of Voting Common Stock or Non-Voting Common Stock in the event of (i) election of holders of at least 67% of the respective outstanding Series A and Series B Preferred Stock (Series A and Series B voting as separate single classes) or (ii) upon the closing of an initial public offering of at least $30.0 million in proceeds to the corporation and a public offering price per share equal to at least $15.4764 (subject to adjustments for stock dividends, splits, combinations and similar events).

As of March 31, 2014 and December 31, 2013, there were no changes in the applicable conversion price for the Series B. As of December 31, 2013, the applicable conversion price for the Series A was reduced to $5.16 as a result of the two issuances of Series B preferred stock.

In connection with the Initial Public Offering, holders of at least 67% of the respective outstanding Series A and Series B Preferred Stock (Series A and Series B voting as separate single classes) elected to automatically convert the Series A Preferred Stock and Series B Preferred Stock into common stock.