UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2016
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                        to     
Commission File Number: 001-37725

MIRAMAR LABS, INC.
(Exact Name of Registrant as Specified in its Charter)

Delaware
80-0884221
( State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
2790 Walsh Avenue
Santa Clara, California 95051
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (408) 579-8700

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  x    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
o
Accelerated filer
o
Non-accelerated filer
o  (Do not check if a small reporting company)
Small reporting company
x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes o    No  x
As of November 8, 2016, the registrant had 9,380,653 shares of common stock, $0.001 par value per share, outstanding.
 

MIRAMAR LABS, INC.
FORM 10-Q
TABLE OF CONTENTS
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

“Miramar Labs”, “miraDry”, “miraDry and Design”, “Drop Design”, “miraWave”, “miraSmooth”, “miraFresh”, and “ML Stylized mark” are trademarks of our company. Our logo and our other trade names, trademarks and service marks appearing int his document are our property. Other trade names, trademarks and service marks appearing in this document are the property of their respective owners. Solely for convenience, our trademarks and trade names referred to in the document, appear without the TM or the (R) symbol, but those references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights, or the rights of the applicable licensor to these trademarks and trade names.
2

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, or this Report, contains forward-looking statements, including, without limitation, in the sections captioned “Management’s Discussion and Analysis of Financial Condition and Plan of Operations,” and elsewhere. Any and all statements contained in this Report that are not statements of historical fact may be deemed forward-looking statements. Terms such as “may,” “might,” “would,” “should,” “could,” “project,” “estimate,” “pro-forma,” “predict,” “potential,” “strategy,” “anticipate,” “attempt,” “develop,” “plan,” “help,” “believe,” “continue,” “intend,” “expect,” “future” and terms of similar import (including the negative of any of the foregoing) may be intended to identify forward-looking statements. However, not all forward-looking statements may contain one or more of these identifying terms. Forward-looking statements in this Report may include, without limitation, statements regarding (i) the plans and objectives of management for future operations, including plans or objectives relating to the development of our miraDry System, (ii) a projection of income (including income/loss), earnings (including earnings/loss) per share, capital expenditures, dividends, capital structure or other financial items, (iii) our future financial performance, including any such statement contained in a discussion and analysis of financial condition by management or in the results of operations included pursuant to the rules and regulations of the Securities and Exchange Commission, or the SEC, and (iv) the assumptions underlying or relating to any statement described in points (i), (ii) or (iii) above.
The forward-looking statements are not meant to predict or guarantee actual results, performance, events or circumstances and may not be realized because they are based upon our current projections, plans, objectives, beliefs, expectations, estimates and assumptions and are subject to a number of risks and uncertainties and other influences, many of which we have no control over. Actual results and the timing of certain events and circumstances may differ materially from those described by the forward-looking statements as a result of these risks and uncertainties. Factors that may influence or contribute to the inaccuracy of the forward-looking statements or cause actual results to differ materially from expected or desired results may include, without limitation:
market acceptance of the miraDry energy based treatment;
the benefits of the miraDry treatment versus other solutions;
our ability to successfully sell and market the miraDry System in our existing and expanded geographies;
the performance of the miraDry System in clinical settings;
competition from existing technologies or products or new technologies and products that may emerge;
the implementation of our business model and strategic plans for our business and the miraDry System;
the scope of protection we are able to establish and maintain for intellectual property rights covering the miraDry System;
our ability to obtain regulatory approval in targeted markets for the miraDry System;
our financial performance;
developments relating to our competitors and the healthcare industry; and
other risks and uncertainties, including those risk factors identified in “Risk Factors” of our registration statement on Form S-1 filed with the United States Securities and Exchange Commission, or the SEC, on October 14, 2016.
Readers are cautioned not to place undue reliance on forward-looking statements because of the risks and uncertainties related to them and to the risk factors. We disclaim any obligation to update the forward-looking statements contained in this Report to reflect any new information or future events or circumstances or otherwise, except as required by law.
Readers should read this Report in conjunction with those risk factors identified in “Risk Factors” of our registration statement on Form S-1 filed with the SEC on October 14, 2016, and the financial statements and notes thereto contained in that report, as well as the financial statements and the related notes thereto in this Report, and other documents which we may file from time to time with the SEC.

3

PART I—FINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated Financial Statements
MIRAMAR LABS, INC.
Condensed Consolidated Balance Sheets

 
September 30,
2016
 
December 31,
2015
 
(Unaudited)
 
(Audited)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
6,073,680

 
$
2,642,509

Accounts receivable, net
3,102,629

 
2,683,053

Inventories
5,613,145

 
4,791,741

Prepaid expenses and other current assets
641,220

 
290,481

Total current assets
15,430,674

 
10,407,784

Property and equipment, net
783,942

 
1,211,129

Restricted cash
295,067

 
295,067

Other noncurrent assets
13,976

 
11,860

TOTAL ASSETS
$
16,523,659

 
$
11,925,840

LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK, AND STOCKHOLDERS’ EQUITY (DEFICIT)
 
 
 
Current liabilities:
 
 
 
Notes payable, net of discount
$
9,939,261

 
$
10,829,375

Accounts payable
1,432,136

 
1,288,107

Accrued and other current liabilities
4,513,318

 
3,572,441

Deferred revenue
228,955

 
739,786

Total current liabilities
16,113,670

 
16,429,709

Warrant liability
54,029

 
499,616

Deferred rent, noncurrent
87,010

 
112,065

Capital lease payable, noncurrent

 
16,865

TOTAL LIABILITIES
16,254,709

 
17,058,255

Commitments and contingencies (Note 6)


 


Redeemable convertible preferred stock, $.001 par value – 40,000,000 shares authorized and 2,826,981 shares issued and outstanding at December 31, 2015 (Liquidation preference of $61,179,942). No shares authorized or outstanding at September 30, 2016

 
61,179,942

Stockholders’ equity (deficit):
 
 
 
Blank check preferred stock, $0.001 par value – 5,000,000 shares authorized. No shares issued and outstanding at September 30, 2016 and December 31, 2015.

 

Series A convertible preferred stock, $0.001 par value – 2,100,000 shares authorized and 147,864 shares issued and outstanding at December 31, 2015 (Liquidation preference of $2,000,000). No shares authorized or outstanding at September 30, 2016

 
148

Series B convertible preferred stock, $0.001 par value – 9,000,000 shares authorized and 589,784 shares issued and outstanding at December 31, 2015 (Liquidation preference of $14,359,244). No shares authorized or outstanding at September 30, 2016

 
590

Common stock, $0.001 par value – 100,000,000 and 105,500,000 shares authorized and 9,380,653 and 398,540 shares issued and outstanding at September 30, 2016 and December 31, 2015
9,381

 
399

Additional paid-in capital
110,711,248

 
27,133,634

Accumulated deficit
(110,451,679
)
 
(93,447,128
)
TOTAL STOCKHOLDERS’ EQUITY (DEFICIT)
268,950

 
(66,312,357
)
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
$
16,523,659

 
$
11,925,840

The accompanying notes are an integral part of these condensed consolidated financial statements.
4

MIRAMAR LABS, INC.
Condensed Consolidated Statements of Operations and Comprehensive Loss
(Unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Revenue
$
4,303,307

 
$
3,793,241

 
$
16,035,338

 
$
11,822,320

Cost of revenue
1,787,770

 
1,742,357

 
7,211,110

 
5,745,297

Gross margin
2,515,537

 
2,050,884

 
8,824,228

 
6,077,023

Operating expenses:
 
 
 
 
 
 
 
Research and development
817,488

 
1,192,019

 
2,562,481

 
3,941,360

Selling and marketing
3,448,976

 
2,736,610

 
9,975,248

 
8,980,820

General and administrative
1,871,739

 
1,313,436

 
4,716,991

 
3,907,822

Total operating expenses
6,138,203

 
5,242,065

 
17,254,720

 
16,830,002

Loss from operations
(3,622,666
)
 
(3,191,181
)
 
(8,430,492
)
 
(10,752,979
)
Interest income
4,035

 
1,214

 
7,764

 
5,001

Interest expense
(285,615
)
 
(481,194
)
 
(948,662
)
 
(1,025,013
)
Loss on debt conversion

 

 
(8,062,001
)
 

Other income, net
(9,929)

 
11,252

 
438,148

 
88,104

Net loss before provision for income taxes
(3,914,175)

 
(3,659,909)

 
(16,995,243)

 
(11,684,887)

Provision for income taxes
(7,783
)
 
(7,297
)
 
(9,308
)
 
(8,722
)
Net and comprehensive loss
(3,921,958)

 
(3,667,206)

 
(17,004,551)

 
(11,693,609)

Accretion of redeemable convertible preferred stock

 
(20,000
)
 

 
(63,117
)
Net loss attributable to common stockholders
$
(3,921,958
)
 
$
(3,687,206
)
 
$
(17,004,551
)
 
$
(11,756,726
)
Weighted-average common shares used in computing net loss per share attributable to common stockholders, basic and diluted
9,256,362

 
385,271

 
4,030,810

 
385,271

Net loss per share attributable to common stockholders, basic and diluted
$
(0.42
)
 
$
(9.57
)
 
$
(4.22
)
 
$
(30.52
)
The accompanying notes are an integral part of these condensed consolidated financial statements.

5

MIRAMAR LABS, INC.
Condensed Consolidated Statements of Redeemable
Convertible Preferred Stock and Stockholders’ Equity (Deficit)
(Unaudited)
 
Redeemable Convertible
Preferred Stock
 
 
Convertible
Preferred Stock
 
Common Stock
 
 
 
 
 
 
 
Shares
 
Amount
 
 
Shares
 
Amount
 
Shares
 
Amount
 
Additional
Paid-In
Capital
 
Accumulated
Deficit
 
Total
Stockholders’
Equity (Deficit)
Balances at December 31, 2014
2,826,981

 
$
61,179,942

 
 
737,648

 
$
738

 
385,294

 
$
385

 
$
26,478,755

 
$
(78,952,880
)
 
$
(52,473,002
)
Exercise of stock options at $1.35- $8.66 per share for cash in October 2015

 

 
 

 

 
13,246

 
14

 
51,079

 

 
51,093

Series D redeemable preferred stock issuance cost

 
(3,117
)
 
 

 

 

 

 
 
 

 

Accretion of redeemable convertible preferred stock to redemption value

 
3,117

 
 

 

 

 

 
(3,117
)
 

 
(3,117
)
Stock-based compensation

 

 
 

 

 

 

 
606,917

 

 
606,917

Net and comprehensive loss

 

 
 

 

 

 

 

 
(14,494,248
)
 
(14,494,248
)
Balances at December 31, 2015
2,826,981

 
$
61,179,942

 
 
737,648

 
$
738

 
398,540

 
$
399

 
$
27,133,634

 
$
(93,447,128
)
 
$
(66,312,357
)
Exercise of stock options at $6.63 – $8.66 per share for cash in April 2016

 

 
 

 

 
3,267

 
3

 
24,619

 

 
24,622

Exercise of stock options at $1.36 per share for cash in September 2016

 

 
 

 

 
18,483

 
19

 
25,118

 

 
25,137

Issuance of restricted common stock at $5.5925 per share for consulting services in August 2016

 

 
 

 

 
63,636

 
63

 
355,822

 

 
355,885

Issuance of common stock, net of offering costs of $831,117

 

 
 

 

 
1,568,726

 
1,569

 
7,055,608

 

 
7,057,177

Issuance of common stock for conversion of February 2016 convertible notes

 

 
 

 

 
2,418,628

 
2,418

 
12,090,633

 

 
12,093,051

Issuance of common stock for conversion of May 2016 convertible notes

 

 
 

 

 
409,841

 
410

 
2,048,884

 

 
2,049,294

Issuance of common stock to KTL Bamboo International Corp

 

 
 

 

 
900,000

 
900

 
(900
)
 

 

Conversion of preferred stock to common stock in connection with the merger
(2,826,981
)
 
(61,179,942
)
 
 
(737,648
)
 
(738
)
 
3,611,857

 
3,612

 
61,177,068

 

 
61,179,942

Common stock repurchased in connection with the merger

 

 
 

 

 
(12,325
)
 
(12
)
 
(61,684
)
 

 
(61,696
)
Conversion of convertible preferred stock warrants to common stock warrants

 

 
 

 

 

 

 
53,436

 

 
53,436

Issuance of common stock warrants for issuance costs

 

 
 

 

 

 

 
(44,663
)
 

 
(44,663
)
Stock-based compensation

 

 
 

 

 

 

 
853,673

 

 
853,673

Net and comprehensive loss

 

 
 

 

 

 

 

 
(17,004,551
)
 
(17,004,551
)
Balances at September 30, 2016

 
$

 
 

 
$

 
9,380,653

 
$
9,381

 
$
110,711,248

 
$
(110,451,679
)
 
$
268,950

The accompanying notes are an integral part of these condensed consolidated financial statements.

MIRAMAR LABS, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)

 
Nine Months Ended September 30,
 
2016
 
2015
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net loss
$
(17,004,551
)
 
$
(11,693,609
)
Adjustments to reconcile net loss to net cash used in operating activities
 
 
 
Depreciation and amortization
411,132

 
526,904

Loss on debt conversion
8,062,001

 

Loss on disposal of fixed assets

 
1,475

Stock-based compensation
853,673

 
464,792

Issuance of restricted common stock
355,885

 

Change in preferred stock warrant value
(436,814
)
 
(92,596
)
Amortization of debt discount and issuance costs
290,549

 
138,612

Changes in operating assets and liabilities
 
 
 
Accounts receivable
(419,576
)
 
728,321

Inventories
(653,261
)
 
163,739

Prepaid expenses and other current assets
(350,739
)
 
6,806

Other noncurrent assets
(2,116
)
 

Accounts payable
144,029

 
(73,576
)
Accrued and other current liabilities
927,918

 
410,171

Deferred revenue
(510,831
)
 
(207,578
)
Net cash used in operating activities
(8,332,701
)
 
(9,626,539
)
CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Purchase of property and equipment
(152,088
)
 
(156,466
)
Net cash used in investing activities
(152,088
)
 
(156,466
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Net proceeds from issuance of common stock
7,106,936

 

Repurchase of common stock
(61,696
)
 

Redeemable convertible preferred stock issuance costs

 
(63,117
)
Proceeds from issuance of notes payable
5,145,067

 
2,296,079

Principal payments on capital leases
(28,961
)
 
(40,872
)
Payments on notes payable
(245,386
)
 
(2,252,127
)
Net cash provided by (used in) financing activities
11,915,960

 
(60,037
)
Net increase (decrease) in cash and cash equivalents
3,431,171

 
(9,843,042
)
Cash and cash equivalents at beginning of period
2,642,509

 
13,484,740

Cash and cash equivalents at end of period
$
6,073,680

 
$
3,641,698

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
 
 
 
Cash paid for interest
$
598,385

 
$
909,021

Cash paid for taxes
$
9,308

 
$
8,722

DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
 
 
 
Accretion of redeemable preferred stock to redemption value
$

 
$
63,117

Net transfer to inventory from leased equipment
$
(168,143
)
 
$
(138,351
)
Conversion of preferred stock and warrants to common stock and warrants
$
76,827,313

 
$

Common stock issued to convert notes payable
$
14,142,345

 
$

Issuance of common stock warrants for issuance costs
$
44,663

 
$
234,719

The accompanying notes are an integral part of these condensed consolidated financial statements.
7

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, 2015. 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 September 30, 2016, Miramar Labs, Inc. had an accumulated deficit of $110,451,679. 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.
8

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 and valuation of equity and equity-linked instruments (common stock, options and warrants).
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 September 30, 2016, the Company’s uninsured cash balances totaled $6,101,499.
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
 
Nine Months Ended September 30,
 
September 30,
 
December 31,
 
2016
 
2015
 
2016
 
2015
Customer A
12%
 
*
 
*
 
*
Customer B
*
 
*
 
28%
 
*
Customer C
*
 
*
 
11%
 
12%
Customer D
*
 
15%
 
*
 
20%
Customer E
*
 
*
 
*
 
23%
Sales in North America consisted of 46% and 44% of total revenue, in the nine month periods ended in September 30, 2016 and 2015, respectively. The remainder of the Company’s sales came primarily from Asia-Pacific and Europe/Middle East. Generally, the second quarter tends to be stronger than the third quarter, when vacations and holidays are more prevalent in North America and Europe.
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 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.
9

Significant Accounting Policies
There have been no material changes to the Company’s significant accounting policies during the nine months ended September 30, 2016, as compared to the significant accounting policies described in the Company’s financial statements for the year ended December 31, 2015, filed on Form 8-K on June 13, 2016.
Recent Accounting Pronouncements
There were no changes to the new accounts pronouncements as described in the Company’s financial statements for the year ended December 31, 2015, filed on Form 8-K on June 13, 2016, except for the following:
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” This update provides guidance on the required presentation and classification in the statement of cash flows for various issues for which there has been diversity in practice in the past. For public entities, the new standard is effective for annual periods beginning after December 15, 2017, and interim periods within those years, with early adoption permitted. The Company is currently evaluating the effect that the standard will have on the consolidated financial statements.
3.
Balance Sheet Components
Inventories

 
September 30, 2016
 
December 31, 2015
 
(Unaudited)
 
 
Raw materials
$
2,365,170

 
$
2,132,655

Work in progress
1,960,245

 
1,263,019

Finished goods
1,287,730

 
1,396,067

 
$
5,613,145

 
$
4,791,741

Property and Equipment, Net
 
September 30, 2016
 
December 31, 2015
 
(Unaudited)
 
 
Leasehold Improvements
$
844,360

 
$
844,360

Machinery and equipment
1,508,074

 
1,355,986

Computer and office equipment
241,291

 
241,291

Software
326,992

 
326,992

Furniture and fixtures
114,564

 
114,564

Leased equipment

 
168,143

 
3,035,281

 
3,051,336

Less: Accumulated depreciation and amortization
(2,251,339
)
 
(1,840,207
)
 
$
783,942

 
$
1,211,129

No capital leases were entered into during the year ended December 31, 2015 or the nine month period ended September 30, 2016. Depreciation and amortization expense was $411,132 and $526,904 for the nine-month periods ended September 30, 2016 and 2015, respectively. There was no leased equipment at September 30, 2016 due to the discontinuation of the Market Validation Program.
At September 30, 2016 and December 31, 2015, substantially all of the property and equipment was located at the Company’s corporate headquarters in the United States.
10

Accrued Liabilities
 
September 30, 2016
 
December 31, 2015
 
(Unaudited)
 
 
Accrued payroll and related expenses
$
1,795,317

 
$
1,457,534

Accrued royalty
1,740,520

 
1,226,973

Accrued warranty
181,000

 
217,000

Accrued marketing
286,620

 
165,600

Accrued clinical expenses
11,500

 
2,600

Accrued legal
67,200

 
112,000

Capital lease payable, current
21,814

 
33,909

Deferred rent, current
30,705

 
18,672

Accrued other expenses
378,642

 
338,153

 
$
4,513,318

 
$
3,572,441

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 September 30, 2016 and December 31, 2015 consisted of the following activity:
Warranty accrual, December 31, 2014
$
253,000

Accruals for product warranty
427,467

Cost of warranty claims
(463,467
)
Warranty accrual, December 31, 2015
$
217,000

Accruals for product warranty
303,738

Cost of warranty claims
(339,738
)
Warranty accrual, September 30, 2016
$
181,000

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;
11

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 September 30, 2016 and December 31, 2015, were as follows:
 
September 30, 2016
 
Level 1
 
Level 2
 
Level 3
 
Total
Liabilities
 
 
 
 
 
 
 
Warrant liability
$

 
$

 
$
54,029

 
$
54,029

 
December 31, 2015
 
Level 1
 
Level 2
 
Level 3
 
Total
Liabilities
 
 
 
 
 
 
 
Warrant liability
$

 
$

 
$
499,616

 
$
499,616

There were no transfers between Level 1, 2 and 3 of the fair value hierarchy during the nine months ended September 30, 2016 and 2015.
Assumptions used in valuing the warrant liabilities are discussed in Note 10 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, 2014
$
371,039

Fair value of warrants issued during the year
234,719

Change in fair value recorded in interest and other income, net
(106,142
)
Fair value at December 31, 2015
$
499,616

Fair value of warrants issued during the year
44,663

Conversion to common stock warrants
(53,436
)
Change in fair value recorded in interest and other income, net
(436,814
)
Fair value at September 30, 2016
$
54,029

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 $46,976 and $47,051, for the nine months ended September 30, 2016 and 2015, 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 September 30, 2016 and December 31, 2015 was $1,740,520 and $1,226,973, 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 nine months ended September 30, 2016 or in the year ended December 31, 2015.
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 September 30, 2016 or December 31, 2015.
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 September 30,

2016 or December 31, 2015, 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. While we believe that the claim lacks legal basis and that we would prevail on the merits, the outcome is somewhat uncertain until the matter is finally resolved or adjudicated. The Company is insured,with a deductible payment immaterial to our operating results, to cover such claims.
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.
FDA Inspection
The FDA performed a routine inspection from July 25, 2016 through August 1, 2016. A Form FDA 483 listing one observation related to complaint handling and reporting and a second observation related to the documentation of CAPA activities was issued. The observations were corrected with a response letter submitted to FDA. FDA has indicated the issues will be reviewed during the next routine inspection. 
Operating and Capital Leases
Rent expense under the Company’s operating leases was $429,685 and $424,912 for the nine-month periods ended September 30, 2016 and 2015, 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
Three months ended December 31, 2016
$
135,014

 
$
5,256

Year ending December 31, 2017
552,207

 
17,249

Year ending December 31, 2018
568,773

 

Year ending December 31, 2019
241,592

 

Total minimum lease payments
$
1,497,586

 
22,505

Less: Amount representing interest
 
 
(691
)
Present value of minimum lease payments
 
 
21,814

Less: current portion of capital leases
 
 
(21,814
)
Long term portion of capital leases
 
 
$

7.
Notes Payable
In August 2015, the Company refinanced the outstanding balance of the $10 million loan and security agreement entered into in June 2013. 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 financial milestones. 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 will commence on January 1, 2017.

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 September 30, 2016, the Company was in compliance with the debt covenants.
In December 2015, the Company entered into a note purchase agreement with existing private investors to draw down up to $1.5 million for working capital purposes. The Company subsequently issued $1.3 million of convertible promissory notes (“December 2015 Notes”). In February 2016, the Company entered into another note purchase agreement (“February 2016 NPA”) with existing private investors to draw down up to $2.7 million for working capital purposes. If the investors agreed to purchase the full amount available under the February 2016 NPA, the December 2015 Notes would be canceled and the February 2016 NPA would be increased by the outstanding principal and interest due on the December 2015 Notes. The Company subsequently canceled and reissued $1.3 million of the December 2015 Notes and issued $2.7 million of convertible promissory notes (“February 2016 Notes”). In May 2016, the Company increased the aggregate principal amount of the notes that may be issued under the February 2016 Notes from $2.7 million to $4.85 million and subsequently issued $2.0 million of additional convertible promissory notes.
Per the terms of the notes, interest was accrued at 8% per year and were due at the earliest of a liquidation event or one year from date of issuance. In the event of a qualified equity financing, the outstanding principal and interest on the notes payable would automatically convert into shares of the qualified financing shares at a price equal to the price per share paid by the investors in the qualified equity financing. In the event of a non-qualified financing, the shares would be converted at the option of the majority of the investors. If there was no financing event prior to the maturity date, the outstanding principal and interest on the notes payable would automatically convert into shares of Series D preferred stock at $21.64 per share.
In June 2016, in connection with the Merger, $6 million of outstanding notes were converted into 2,828,469 shares of common stock. The notes that were not converted according to their original conversion terms incurred a loss on debt conversion of $8,062,001.
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 $217,038 at September 30, 2016 and $40,889 at December 31, 2015.
Annual future principal payments under the notes payable are as follows:
Three months ended December 31, 2016
$
131,293

Year ending December 31, 2017
3,477,349

Year ending December 31, 2018
3,665,814

Year ending December 31, 2019
2,942,582

      Total payments
10,217,038

Less: Unamortized debt discount
(277,777
)
    Carrying value of notes payable
$
9,939,261

8.
Common Stock
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 September 30, 2016, no dividends have been declared to date. In connection with the Merger, 1,568,726 shares of common stock were issued in exchange for cash proceeds, net of issuance costs, of $7,057,177 and 900,000 shares were issued to the shareholders of KTL Bamboo International Corp.
At September 30, 2016, the Company had reserved common stock for future issuance as follows:
15

Exercise of options under stock plan
1,378,546

Issuance of options under stock plan
103,703

Exercise of common stock warrants
84,428

Common stock reserved for future issuance
1,566,677

9.
Convertible Preferred Stock
In June 2016, upon the closing of the Merger, all of the Company’s outstanding preferred stock of 3,564,629 shares was converted into 3,611,857 shares of common stock and the authorized preferred stock was decreased to 5,000,000 shares of “blank check” preferred stock, par value of $0.001 per share.
Convertible preferred stock at December 31, 2015 consisted of the following:
Series
Shares
Authorized
 
Shares
Issued and
Outstanding
 
Per Share
Liquidation
Preference
 
Aggregate
Liquidation
Amount
 
Carrying
Value
Series A
2,100,000

 
147,864

 
$
13.53

 
$
2,000,000

 
$
1,966,935

Series B
9,000,000

 
589,784

 
24.35

 
14,359,244

 
14,261,779

Series C
23,000,000

 
1,625,203

 
21.64

 
35,171,735

 
35,171,735

Series D
17,000,000

 
1,201,778

 
21.64

 
26,008,207

 
26,008,207

 
51,100,000

 
3,564,629

 
 
 
$
77,539,186

 
$
77,408,656

10.
Stock Warrants
From June to August 2016, the Company issued warrants to purchase 17,504 shares of the common stock in conjunction with the Merger at an exercise price of $5.00. The Company determined the value of the warrants on the date of issuance to be $44,663 using the Black-Scholes option pricing model. Assumptions used were dividend yield 0%, fair value of common stock ranging from $5.00 to $6.10 , volatility of 56%, risk-free interest rate ranging from 1.01% to 1.23%, and a contractual life of five years. The fair value of the warrants was recorded as a warrant liability. The estimated value, which represents issuance costs, is recorded to additional paid in capital. The warrants expire 5 years from the issuance date.
Total outstanding warrants as of September 30, 2016 are as follows:
 
Number of Warrants
 
Exercise Price
 
Fair Value at date of issuance
Equity classified
 
 
 
 
 
  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

  December 2011 warrants issued with Series A convertible preferred stock
1,109

 
13.53

 
6,930

  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

Liability classified
 
 
 
 
 
  June to August 2016 warrants issued with in conjunction with merger
17,504

 
5.00

 
44,663

Total outstanding warrants
84,428

 
 
 
 
For the nine month period ended September 30, 2016 and 2015, respectively, $436,814 and $92,596 were recorded to other income from the revaluation of the warrants to fair market value. In June 2016, in connection with the Merger, 66,924 of the outstanding warrants valued at $53,436 were reclassified from warrant liability to additional paid-in capital in the accompanying consolidated balance sheets.

The following assumptions were used in the Black-Scholes model to value the outstanding warrants:

 
Nine Months Ended September 30, 2016
 
Year Ended December 31, 2015
Expected term (years)
4.68 – 4.85
 
.94 – 9.60
Expected volatility
53%
 
57%
Risk-free interest rate
1.14%
 
.65% – 2.27%
Annual dividend rate
—%
 
—%
Stock Price
$6.10
 
$11.50- $22.05
11.
Stock Option Plan
In June 2016, the Board approved repricing of outstanding stock options to current employee and consultant option holders. In exchange for extending the vesting of options for an additional six months, the price of the outstanding stock grants was amended to $5.00 per share. The offer expired on July 12, 2016. Outstanding option shares of 744,133, ranging in grant prices from $6.36 to $8.66, were approved by the Board on July 14, 2016 and were repriced as part of the program. The expense related to the repricing during the quarter ended September 30, 2016 was $173,512.
The following table summarizes activity under the 2006 Stock Option Plan (the “Plan”) for the nine month period ended September 30, 2016 and year ended December 31, 2015:

 
 
 
Outstanding Options
 
Shares
Available
for Grant
 
Number of
Options
 
Weighted
Average
Exercise
Price
Balance, December 31, 2014
66,354

 
629,559

 
$
6.49

Additional shares reserved
221,797

 
 
 
 
Options granted
(271,414
)
 
271,414

 
7.57

Options exercised
 
 
(13,246
)
 
3.92

Options forfeited
31,823

 
(31,823
)
 
7.17

Balance, December 31, 2015
48,560

 
855,904

 
$
6.76

Additional shares reserved
599,535

 
 
 
 
Options granted
(563,810
)
 
563,810

 
5.63

Options exercised
 
 
(21,750
)
 
2.28

Options forfeited
19,418

 
(19,418
)
 
7.38

Balance, September 30, 2016
103,703

 
1,378,546

 
$
5.21

The following table summarizes information about stock options outstanding at September 30, 2016:
 
 
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

 
1.16
 
$
1.3600

 
$
70,417

 
14,856

 
$
1.3600

 
$
70,417

2.4400

 
8,501

 
1.55
 
2.4400

 
31,114

 
8,501

 
2.4400

 
31,114

4.3300

 
29,553

 
3.35
 
4.3300

 
52,309

 
29,553

 
4.3300

 
52,309

5.0000

 
743,736

 
7.57
 
5.0000

 
818,110

 
355,652

 
5.0000

 
391,217

5.5700

 
433,615

 
9.90
 
5.5700

 
229,816

 
63,209

 
5.5700

 
33,501

5.5925

 
112,651

 
9.90
 
5.5925

 
57,170

 
2,345

 
5.5925

 
1,190

6.3600

 
20,248

 
2.12
 
6.3600

 

 
20,248

 
6.3600

 

6.6300

 
2,290

 
7.79
 
6.6300

 

 
2,290

 
6.6300

 

7.4400

 
8,166

 
5.35
 
7.4400

 

 
8,166

 
7.4400

 

7.5800

 
1,289

 
8.79
 
7.5800

 

 
1,289

 
7.5800

 

8.6600

 
3,641

 
6.43
 
8.6600

 

 
3,641

 
8.6600

 

 
 
1,378,546

 
8.20
 
$
5.2100

 
$
1,258,936

 
509,750

 
$
5.0200

 
$
579,748

Stock-Based Compensation Associated with Awards to Employees
During the nine month period ended September 30, 2016, the Company granted stock options to employees to purchase 563,810 shares of common stock with a weighted-average grant date fair value of $5.63. Stock-based employee compensation expense recognized during the nine-month periods ended September 30, 2016 and 2015 was $748,807 and $425,303, respectively. As of September 30, 2016, there were total unrecognized compensation costs of $1,607,851 related to these stock options. These costs are expected to be recognized over a period of approximately 2.59 years.
The total fair value of employee options vested during the nine-month periods ended September 30, 2016 and 2015 was $666,843 and $587,843, respectively.
18

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:
 
Nine months ended September 30, 2016
 
Year ended December 31, 2015
Expected term (in years)
5.22 years
 
5.65 years
Expected volatility
46%
 
49%
Risk-free interest rate
1.17%-1.54%
 
1.43% -1.74%
Dividend yield
—%
 
—%
Stock-Based Compensation Associated with Awards to Non-employees
In April 2015, the Company granted stock options to a board advisor to purchase 99,312 shares of common stock at $7.57. In July 2016, these shares were repriced to $5.00. In August 2016, the Company granted stock options to purchase an additional 40,608 shares of common stock at $5.57 to a board advisor and 112,651 shares of common stock at $5.5925 to the Company’s Board of Directors. Stock-based compensation expense recognized during the nine-month periods ended September 30, 2016 and 2015 was $104,866 and $39,489, respectively. As of September 30, 2016, there was total unrecognized compensation costs of $580,947 related to these stock options. These costs are expected to be recognized over a period of approximately 3.29 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:
 
Nine months ended September 30, 2016
 
Year ended December 31, 2015
Expected term (in years)
5.97 years
 
5.67 years
Expected volatility
47%
 
49%
Risk-free interest rate
1.29% -1.35%
 
1.43%
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 September 30, 2016 and December 31, 2015, the Company had accrued $41,496 and $48,183, respectively, for employer contributions.
13.
Net Loss per Share
The Company’s basic and diluted net loss per share are as follows:

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Net loss
$
(3,921,958
)
 
$
(3,667,206
)
 
$
(17,004,551
)
 
$
(11,693,609
)
Accretion of redeemable convertible preferred stock

 
(20,000
)
 

 
(63,117
)
Net loss attributable to common stockholders
(3,921,958
)
 
(3,687,206
)
 
(17,004,551
)
 
(11,756,726
)
Weighted-average common shares used in computing net loss per share attributable to common stockholders, basic and diluted
9,256,362

 
385,271

 
4,030,810

 
385,271

Net loss per share attributable to common stockholders, basic and diluted
$
(0.42
)
 
$
(9.57
)
 
$
(4.22
)
 
$
(30.52
)
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 September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Convertible preferred stock (if converted)

 
3,611,857

 

 
3,611,857

Stock warrants
84,428

 
66,924

 
84,428

 
66,924

Options to purchase common stock
1,378,546

 
873,107

 
1,378,546

 
873,107

14.
Subsequent Events
Management has evaluated all transactions and events through November 9, 2016, 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.

19

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, 2015 and 2014, (as filed on Form 8-K on June 13, 2016, as amended on June 14, 2016) and the unaudited consolidated condensed financial statements of Miramar for the nine months ended September 30, 2016 and 2015, 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 September 30, 2016, we had an installed base of approximately 830 miraDry Systems worldwide and over 80,000 miraDry procedures have been performed. We generated revenues of $17.2 million for the year ended December 31, 2015, and $4.3 million and $16.0 million for the three and nine months ended September 30, 2016, respectively. We had net losses of $14.5 million, $3.9 million, and $17.0 million, respectively, for the same periods. The net loss for the nine months ended September 30, 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 57% of our total revenues for the year ended December 31, 2015 and 54% for the nine months ended September 30, 2016. 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. In addition, we will continue to incur significant expenses for the foreseeable future as we expand our commercialization and other business activities, and as a result, we cannot guarantee that we will be able to achieve or maintain our profitability.
We generated revenue of $4.3 million and $3.8 million, and had net losses of $3.9 million and $3.7 million, for the three months ended September 30, 2016 and 2015, respectively.
We expect to continue to incur significant expenses and operating losses for the foreseeable future. We expect our expenses will increase in connection with our ongoing activities as we:
increase sales and marketing personnel to support our targeted sales growth particularly in the United States and expansion in Asia-Pacific;
21

add personnel and outside services to support our product development and clinical efforts;
seek regulatory approval of new products and indications in the United States and in foreign countries;
scale our manufacturing operations; and
operate as a public company.
Accordingly, we may seek to fund our operations through public or private equity, debt financings or other sources. However, we may be unable to raise additional funds or enter into such other arrangements when needed on favorable terms, if at all. Our failure to raise capital or enter into such other arrangements as and when needed would have a negative impact on our financial condition and our ability to develop enhancements to and integrate new applications into our miraDry System. Such conditions raise substantial doubt about our ability to continue as a going concern.
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. In addition, general and administrative expenses
22

include the medical device tax fee (through December 2015), 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.
Loss on Debt Conversion. The loss on debt conversion consists of losses incurred upon the conversion of convertible promissory notes into common stock in conjunction with the Merger in June 2016.
Other Income, Net. Other income, net consists primarily of the re-measurement of outstanding convertible preferred stock warrants 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 September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
(Unaudited)
 
(Unaudited)
Revenue
$
4,303,307

 
$
3,793,241

 
$
16,035,338

 
$
11,822,320

Cost of revenue
1,787,770

 
1,742,357

 
7,211,110

 
5,745,297

Gross margin
2,515,537

 
2,050,884

 
8,824,228

 
6,077,023

Operating expenses:
 
 
 
 
 
 
 
Research and development
817,488

 
1,192,019

 
2,562,481

 
3,941,360

Selling and marketing
3,448,976

 
2,736,610

 
9,975,248

 
8,980,820

General and administrative
1,871,739

 
1,313,436

 
4,716,991

 
3,907,822

Total operating expenses:
6,138,203

 
5,242,065

 
17,254,720

 
16,830,002

Loss from operations
(3,622,666
)
 
(3,191,181
)
 
(8,430,492
)
 
(10,752,979
)
Interest income
4,035

 
1,214

 
7,764

 
5,001

Interest expense
(285,615
)
 
(481,194
)
 
(948,662
)
 
(1,025,013
)
Loss on debt conversion

 

 
(8,062,001
)
 

Other income, net
(9,929)

 
11,252

 
438,148

 
88,104

Loss before provision for income taxes
(3,914,175)

 
(3,659,909)

 
(16,995,243)

 
(11,684,887)

Provision for income taxes
(7,783
)
 
(7,297
)
 
(9,308
)
 
(8,722
)
Net and comprehensive loss
(3,921,958)

 
(3,667,206)

 
(17,004,551)

 
(11,693,609)

Accretion of redeemable convertible preferred stock

 
(20,000
)
 

 
(63,117
)
Net loss attributable to common stockholders
$
(3,921,958
)
 
$
(3,687,206
)
 
$
(17,004,551
)
 
$
(11,756,726
)
Net loss per share attributable to common stockholders, basic and diluted
$
(0.42
)
 
$
(9.57
)
 
$
(4.22
)
 
$
(30.52
)
23

Comparison of the Three and Nine Months Ended September 30, 2016 and 2015
Revenue
 
Three months ended September 30,
 
Nine months ended September 30,
 
2016
 
2015
 
Change
 
2016
 
2015
 
Change
Capital systems
$
2,175,900

 
$
1,979,742

 
$
196,158

 
$
8,635,335

 
$
6,196,157

 
$
2,439,178

Consumable
1,989,415

 
1,669,250

 
320,165

 
6,934,420

 
5,228,532

 
1,705,888

Other
137,992

 
144,249

 
(6,257
)
 
465,583

 
397,631

 
67,952

Total revenue
$
4,303,307

 
$
3,793,241

 
$
510,066

 
$
16,035,338

 
$
11,822,320

 
$
4,213,018

Total revenue during the three and nine months ended September 30, 2016 increased $0.5 million and $4.2 million, respectively compared to the three and nine months ended September 30, 2015. Sales of capital systems increased by $0.2 million and $2.4 million for these three and nine months ended September 30, 2015, respectively, over the same period in the prior year. North America capital systems sales increased by $0.3 million and $0.7 million, for the three and nine months ended September 30, 2016 as compared to the same periods for 2015 as we continued to see momentum of system sales as a result of increased market awareness. Asia-Pacific capital sales increased by $0.8 million and $1.6 million for the three and nine months ended September 30, 2016 as compared to the same periods for 2015 primarily due to shipments to China. Sales of consumables increased by $0.3 million and $1.7 million for the three and nine months ended September 30, 2016 as compared to the same periods for 2015 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 growth of 17.1% for the nine months ended September 30, 2016 as compared to the same period for 2015, which offset a quarterly decline of 4.3% for the three months ended September 30, 2016 as compared to the same period in 2015. The nine month year over year increase was due to a larger number of extended warranty contracts which offset the quarterly decrease which was due to expiration of extended warranties, primarily in Asia-Pacific.
 
Three months ended September 30,
 
Nine months ended September 30,
 
2016
 
2015
 
Change
 
2016
 
2015
 
Change
North America
$
2,402,739

 
$
1,722,816

 
$
679,923

 
$
7,456,080

 
$
5,148,209

 
$
2,307,871

Asia-Pacific
1,362,164

 
1,219,416

 
142,748

 
5,568,435

 
3,899,788

 
1,668,647

Europe/Middle East
520,820

 
746,961

 
(226,141
)
 
2,954,167

 
2,515,065

 
439,102

South America
17,584

 
104,048

 
(86,464
)
 
56,656

 
259,258

 
(202,602
)
Total revenue
$
4,303,307

 
$
3,793,241

 
$
510,066

 
$
16,035,338

 
$
11,822,320

 
$
4,213,018

Total revenue for the three and nine months ended September 30, 2016, continued to be driven primarily from North America and Asia-Pacific which represented collectively 87% and 81% of the total revenue, respectively. North America revenue for the three and nine months ended September 30, 2016 grew 39% and 45%, respectively, as compared to the same periods in 2015. 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 and nine months ended September 30, 2016 grew 12% and 43%, respectively, as compared to the same periods in 2015. The growth for both periods was due to increased capital system sales offset partially by lower consumable sales due primarily to the change in distributors for certain countries. Europe/Middle East revenue for the three months ended September 30, 2016 declined 30% as compared to the same period in 2015 primarily due to fewer console system sales due to the typically slow third quarter and the stronger than expected results from our second quarter. Revenue for the nine months ended September 30, 2016 grew 17% as compared to the same period in 2015 which was all attributed to very strong consumable demand, partially offset by a small decline in capital system sales.

Cost of Revenue/Gross Margin
24

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
Change
 
2016
 
2015
 
Change
Capital systems cost of revenue
$
1,480,508

 
$
1,509,278

 
$
(28,770
)
 
$
6,086,543

 
$
5,052,704

 
$
1,033,839

Consumable cost of revenue
181,979

 
124,813

 
57,166

 
655,540

 
352,154

 
303,386

Royalty
125,283

 
108,266

 
17,017

 
469,027

 
340,439

 
128,588

Total cost of revenue
$
1,787,770

 
$
1,742,357

 
$
45,413

 
$
7,211,110

 
$
5,745,297

 
$
1,465,813

Gross margin %
58.5
%
 
54.1
%
 
4.4
%
 
55.0
%
 
51.4
%
 
3.6
%
Gross margin percentage for the three and nine months ended September 30, 2016 was 58.5% and 55.0%, reflecting an increase over the same prior year periods of 4.4% and 3.6%. The increase in gross margin for both the third quarter and year-to-date is primarily attributable to a higher percentage of sales for North America and Asia-Pacific in 2016, where we have higher selling prices, as well as lower cost of revenue per unit of our capital systems due to higher production volumes and favorable labor efficiencies in 2016 as compared to 2015.
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 September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
Change
 
2016
 
2015
 
Change
Research and development
817,488

 
1,192,019

 
$
(374,531
)
 
2,562,481

 
3,941,360

 
$
(1,378,879
)
Selling and marketing
3,448,976

 
2,736,610

 
$
712,366

 
9,975,248

 
8,980,820

 
$
994,428

General and administrative
1,871,739

 
1,313,436

 
$
558,303

 
4,716,991

 
3,907,822

 
$
809,169

Total operating expenses
$
6,138,203

  
$
5,242,065

 
$
896,138

 
$
17,254,720

  
$
16,830,002

 
$
424,718

Research and Development. Research and development (R&D) expenses during the three and nine months ended September 30, 2016 totaled $0.8 million and $2.6 million, respectively. This reflects a decrease of $0.4 million and $1.4 million compared to the three and nine months ended September 30, 2015, respectively. 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 and nine months ended September 30, 2016 totaled $3.4 million and $10.0 million, respectively. This reflects an increase of $0.7 million and $1.0 million, compared to the three and nine months ended September 30, 2015, respectively.  This increase was primarily attributable to an increase in compensation, travel and entertainment and marketing expenses associated with higher sales.
General and Administrative. General and administrative expenses during the three and nine months ended September 30, 2016 totaled $1.9 million and $4.7 million, respectively. This represents an increase of $0.6 million and $0.8 million, compared to the three and nine months ended September 30, 2015. 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 September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
Change
 
2016
 
2015
 
Change
Interest expense
$
285,615

 
$
481,194

 
$
(195,579
)
 
$
948,662

 
$
1,025,013

 
$
(76,351
)
Interest expense decreased by $0.2 million and $0.1 million during the three and nine months ended September 30, 2016 compared to the three and nine months ended September 30, 2015, respectively. The decrease was due to the refinancing of the SVB/Oxford debt in August 2015 which was partially offset by interest expense on convertible note agreements with current investors, which were converted in June 2016 to common stock in conjunction with the Merger.
Other Income, Net
25

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
Change
 
2016
 
2015
 
Change
Other income (expense), net
$
(9,929
)
 
$
11,252

 
$
(21,181
)
 
$
438,148

 
$
88,104

 
$
350,044

Loss on debt conversion

 

 

 
(8,062,001
)
 

 
(8,062,001
)
Other income (expense), net, increased by $0.4 million during the nine months ended September 30, 2016, as compared to the same period in 2015, primarily due to the revaluation of the convertible preferred stock warrants in conjunction with the Merger in June 2016. In the three months ended September 30, 2016, other income (expense), net, decreased slightly as compared to the same period in 2015, due to a decrease in outstanding convertible stock w