EX-99.3 9 iart-20150630xex993.htm EXHIBIT 99.3
Exhibit 99.3
C O N S O L I D A T E D F I N A N C I A L S T A T EME N T S
TEI Biosciences Inc. and Subsidiary
Years Ended December 31, 2014 and 2013
With Report of Independent Auditors

TEI Biosciences Inc. and Subsidiary
Consolidated Financial Statements
Years Ended December 31, 2014 and 2013
Contents
Report of Independent Auditors......................................................................................................................................................1
Consolidated Financial Statements
Consolidated Balance Sheets .........................................................................................................................................................2
Consolidated Statements of Income and Comprehensive Income .................................................................................................3
Consolidated Statements of Stockholders’ Equity .........................................................................................................................4
Consolidated Statements of Cash Flows ........................................................................................................................................5
Notes to Consolidated Financial Statements ..................................................................................................................................6

Report of Independent Auditors
The Board of Directors
TEI Biosciences Inc.
We have audited the accompanying consolidated financial statements of TEI Biosciences Inc. and subsidiary (the Company), which comprise the consolidated balance sheets as of December 31, 2014 and 2013, and the related consolidated statements of income and comprehensive income, stockholders’ equity, and cash flows for the years then ended, and the related notes to the consolidated financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in conformity with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free of material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of TEI Biosciences Inc. and subsidiary at December 31, 2014 and 2013, and the consolidated results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
June 25, 2015
1

TEI Biosciences Inc. and Subsidiary
Consolidated Balance Sheets

| December 31,
| 2014 |  | 2013
| (All amounts in thousands)
ASSETS |  |  |
Current assets: |  |  |
Cash and cash equivalents | $ | 11,402 |  |  | $ | 22,669 |
Trade accounts receivable, net of allowance for doubtful accounts of $111 in 2014 and $262 in 2013 | 9,678 |  |  | 7,450 |
Inventories | 6,469 |  |  | 5,810 |
Prepaid income taxes | 3,415 |  |  | 2,397 |
Prepaid expenses and other current assets | 262 |  |  | 293 |
Deferred income taxes | 236 |  |  | 602 |
Total current assets | 31,462 |  |  | 39,221 |
Property and equipment, net | 1,385 |  |  | 1,052 |
Security deposit | 44 |  |  | 44 |
Deferred tax assets, net | 1,136 |  |  | 1,261 |
Total assets | $ | 34,027 |  |  | $ | 41,578 |
LIABILITIES AND STOCKHOLDERS’ EQUITY |  |  |
Current liabilities: |  |  |
Accounts payable | $ | 396 |  |  | $ | 325 |
Accrued expenses | 1,631 |  |  | 1,803 |
Dividends payable | 11 |  |  | — |
Deferred revenue | 433 |  |  | — |
Current portion of deferred license fees | — |  |  | 125 |
Total current liabilities | 2,471 |  |  | 2,253 |
Deferred tax liability | 40 |  |  | — |
Deferred license fees, net of current portion | — |  |  | 219 |
Deferred rent | 318 |  |  | 293 |
Commitments and contingencies (Note 12) |  |  |
Stockholders’ equity: |  |  |
Common stock; $0.001 par value; 20,000 authorized shares; 7,455 shares issued and outstanding in 2014 and 7,453 shares issued and outstanding in 2013 | 7 |  |  | 7 |
Additional paid-in capital | 14,131 |  |  | 13,776 |
Notes receivable - officer | (2,862 | ) |  | (2,862 | )
Retained earnings | 13,028 |  |  | 22,893 |
Total stockholders’ equity | 24,304 |  |  | 33,814 |
Non-controlling interest | 6,894 |  |  | 4,999 |
Total Equity | 31,198 |  |  | 38,813 |
Total liabilities and equity | $ | 34,027 |  |  | $ | 41,578 |
See accompanying notes. |  |  |
|  |  | 2 |

TEI Biosciences Inc. and Subsidiary
Consolidated Statements of Income and Comprehensive Income

| Year Ended December 31,
| 2014 |  | 2013
| (All amounts in thousands)
Revenues: |  |  |
Product sales | $ | 62,868 |  |  | $ | 64,839 |
Royalty income | 244 |  |  | 273 |
License fee | 344 |  |  | 125 |
Total revenues | 63,456 |  |  | 65,237 |
Cost of goods sold | 7,386 |  |  | 5,413 |
Gross profit | 56,070 |  |  | 59,824 |
Operating expenses: |  |  |
Research and development | 2,728 |  |  | 3,015 |
General and administrative | 7,404 |  |  | 6,457 |
Sales and marketing | 26,182 |  |  | 22,885 |
Total operating expenses | 36,314 |  |  | 32,357 |
Operating income | 19,756 |  |  | 27,467 |
Other income and expense: |  |  |
Interest income | 70 |  |  | 70 |
interest expense | (6 | ) |  | (56 | )
| 64 |  |  | 14 |
Income before income tax expense | 19,820 |  |  | 27,481 |
Income tax expense | 7,452 |  |  | 10,069 |
Net income | $ | 12,368 |  |  | $ | 17,412 |
Net income attributable to non-controlling interest | $ | 1,900 |  |  | $ | 1,655 |
Net income attributable to controlling interest | $ | 10,468 |  |  | $ | 15,757 |
Other comprehensive income: |  |  |
Net income | $ | 12,368 |  |  | $ | 17,412 |
Comprehensive income | $ | 12,368 |  |  | $ | 17,412 |
See accompanying notes. |  |  |
|  |  | 3 |

TEI Biosciences Inc. and Subsidiary
Consolidated Statements of Stockholders’ Equity
(All amounts in thousands)

| Common Stock |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Number of Shares |  | $0.001 Par Value |  | Additional Paid-In Capital |  | Notes Receivable - Officer |  | Accumulated Other Comprehensive Income (Loss) |  | Retained Earnings |  | Total Stockholders' Equity |  | Non-Controlling Interest |  | Total Equity
Balance at January 1, 2013 | 7,473 |  |  | $ | 7 |  |  | $ | 13,633 |  |  | $ | (2,862 | ) |  | $ | — |  |  | $ | 7,379 |  |  | $ | 18,157 |  |  | $ | 3,339 |  |  | $ | 21,496 |
Net income | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 15,757 |  |  | 15,757 |  |  | 1,655 |  |  | 17,412 |
Stock-based compensation expense | 3 |  |  | — |  |  | 143 |  |  | — |  |  | — |  |  | — |  |  | 143 |  |  | 13 |  |  | 156 |
Repurchase and cancellation of shares | (23 | ) |  | — |  |  | — |  |  | — |  |  | — |  |  | (243 | ) |  | (243 | ) |  | (8 | ) |  | (251 | )
Balance at December 31, 2013 | 7,453 |  |  | 7 |  |  | 13,776 |  |  | (2,862 | ) |  | — |  |  | 22,893 |  |  | 33,814 |  |  | 4,999 |  |  | 38,813 |
Net income | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 10,468 |  |  | 10,468 |  |  | 1,900 |  |  | 12,368 |
Exercise of stock options, including excess tax benefit and deductions of $60 | 24 |  |  | — |  |  | 202 |  |  | — |  |  | — |  |  | — |  |  | 202 |  |  | — |  |  | 202 |
Declaration of dividends | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (19,972 | ) |  | (19,972 | ) |  | — |  |  | (19,972 | )
Stock-based compensation expense | 3 |  |  | — |  |  | 153 |  |  | — |  |  | — |  |  | — |  |  | 153 |  |  | 12 |  |  | 165 |
Repurchase and cancellation of shares | (25 | ) |  | — |  |  | — |  |  | — |  |  | — |  |  | (361 | ) |  | (361 | ) |  | (17 | ) |  | (378 | )
Balance at December 31, 2014 | 7,455 |  |  | $ | 7 |  |  | $ | 14,131 |  |  | $ | (2,862 | ) |  | $ | — |  |  | $ | 13,028 |  |  | $ | 24,304 |  |  | $ | 6,894 |  |  | $ | 31,198 |

See accompanying notes.
4

TEI Biosciences Inc. and Subsidiary
Consolidated Statements of Cash Flows

| Year Ended December 31,
| 2014 |  | 2013
| (All amounts in thousands)
OPERATING ACTIVITIES: |  |  |
Net income | $ | 12,368 |  |  | $ | 17,412 |
Adjustments to reconcile net income to net cash provided by operating activities: |  |  |
Depreciation and amortization | 249 |  |  | 210 |
Stock-based compensation expense for equity awards | 165 |  |  | 156 |
Excess tax benefit and deductions from stock-based compensation | (60 | ) |  | — |
Provision for doubtful accounts | (72 | ) |  | 222 |
Deferred income tax expense | 513 |  |  | 365 |
Deferred rent | 25 |  |  | 64 |
Changes in operating assets and liabilities: |  |  |
Trade Accounts receivable | (2,156 | ) |  | (783 | )
Prepaid income taxes | (940 | ) |  | 517 |
Inventories | (659 | ) |  | (1,815 | )
Prepaid expenses and other current assets | 31 |  |  | (170 | )
Accounts payable | 71 |  |  | (200 | )
Accrued expenses | (172 | ) |  | 262 |
Deferred revenue | 433 |  |  | — |
Deferred license fees | (344 | ) |  | (125 | )
Net cash provided by operating activities | 9,452 |  |  | 16,115 |
INVESTING ACTIVITIES: |  |  |
Purchases of property and equipment | (582 | ) |  | (453 | )
Net cash used in investing activities | (582 | ) |  | (453 | )
FINANCING ACTIVITIES: |  |  |
Payment of dividends | (19,961 | ) |  | — |
Repurchase and retirement of shares | (378 | ) |  | (251 | )
Proceeds received from exercise of stock options | 142 |  |  | — |
Excess tax benefit and deductions from stock-based compensation | 60 |  |  | — |
Repayments made on term note payable | — |  |  | (5,500 | )
Net cash used in financing activities | (20,137 | ) |  | (5,751 | )
Net (decrease) increase in cash and cash equivalents | (11,267 | ) |  | 9,911 |
Cash and cash equivalents at beginning of year | 22,669 |  |  | 12,758 |
Cash and cash equivalents at end of year | $ | 11,402 |  |  | $ | 22,669 |
See accompanying notes. |  |  |
|  |  | 5 |

TEI Biosciences Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
December 31, 2014
(All amounts in thousands)
1. Operations
TEI Biosciences Inc. (the Company) is a biomedical company developing, manufacturing, marketing, and selling biologic devices for the repair, reinforcement, or reconstruction of human tissues that have failed due to aging, injury or disease. TEI Medical Inc. (TEI Medical) is a biomedical company developing, marketing, and selling biologic devices for the repair, reinforcement, or reconstruction of human tissues that have failed due to aging, injury or disease.
The Company has developed a family of collagen-based soft tissue repair products that have been cleared by the United States Food and Drug Administration for use in a broad spectrum of tissue repair applications. The Company’s principal sales and marketing partners include Medtronic Neurosurgery for Durepair® and Boston Scientific for Xenform®. The Company also sells SurgiMend® in the U.S. through its sales force and in certain foreign countries through a network of independent agents. TEI Medical’s principal sales and marketing partners include Stryker Orthopaedics (Stryker) for TissueMend®. TEI Medical also sells PriMatrix® in the U.S. through its sales force and in certain foreign countries through a network of independent agents.
2. Summary of Significant Accounting Policies
Principles of Consolidation and Variable-Interest Entity (VIE)
The consolidated financial statements include the accounts of TEI Biosciences Inc. and its 100% wholly owned subsidiary, TEI Biosciences (UK) Limited. All significant intercompany accounts and transactions have been eliminated.
The consolidated financial statements also include the accounts of TEI Medical Inc. (TEI Medical), which was established in a spin-off transaction in 2011 (see Note 3), and has been determined to be a VIE to which the Company is the primary beneficiary. TEI Medical is under largely the same common ownership as the Company, and, as further discussed in Note 3, the operations of TEI Medical in 2014 and 2013 were fully dependent on the product distribution, which was amended in January 2014, license agreement, manufacturing and supply, and operational services agreements established with the Company. All significant transactions between the Company and TEI Medical have been eliminated in consolidation.
6

TEI Biosciences Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
December 31, 2014
(All amounts in thousands)
2. Summary of Significant Accounting Policies (continued)
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less at the date of purchase to be cash equivalents. Cash equivalents consist of money market funds totaling $3,545 and $9,572 at December 31, 2014 and 2013, respectively.
Investments with maturities in excess of three months but less than one year are either classified as held-to-maturity securities or available for sale. Management determines the appropriate classification of debt securities at the time of purchase, and reevaluates such designation as of each balance sheet date. Debt securities are classified as held to maturity when the Company has the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are stated at amortized cost, adjusted for amortization of premiums and accretion of discounts to maturity computed under the effective-interest method. Such amortization is included in interest income. Interest on securities classified as held to maturity is included in interest income.
Trade Accounts Receivable and Allowance for Doubtful Accounts
The Company carries its receivables at invoiced amounts less an allowance for doubtful accounts. The Company provides for an allowance for doubtful accounts based on management’s periodic review for recoverability of accounts receivable of its customers, as well as history of past write-offs, collections and current credit conditions.
The Company’s policy is not to accrue interest on past-due trade receivables.
7

TEI Biosciences Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
December 31, 2014
(All amounts in thousands)
2. Summary of Significant Accounting Policies (continued)
Inventories
Inventories are stated at the lower of cost or market value, with cost being determined on a first-in, first-out basis. Inventories consist of raw material, work in process, and finished goods. Raw material includes unprocessed raw animal skins on hand, chemicals used for processing raw animal skins, and miscellaneous purchased components. Work in process includes: (a) processed animal skins before and after lyophilization, but before cutting; (b) lyophilized material cut and ready for sterilization; and (c) sterilized material, but before final packaging. Finished goods represent packaged product available to be shipped to fulfill customer orders. At each balance sheet date, the Company assesses the need to record a provision for excess and obsolete inventory based on the evaluation of inventories for excess quantities, obsolescence or shelf-life expiration. This evaluation includes analyses of historical sales levels by product, projections of future demand, new product launches, the risk of technological or competitive obsolescence for products, general market conditions, and a review of the shelf-life expiration dates for products, as well as the feasibility of reworking or using excess or obsolete products or components in the production or assembly of other products that are not obsolete, or for which there are not excess quantities in inventory. Any such provisions are recorded as cost of sales.
Property and Equipment
Property and equipment are recorded at cost and depreciated over the estimated useful life of the asset using the straight-line method. Details of the components of property and equipment are as follows at December 31:

|  | 2014 |  | 2013
Leasehold improvements |  | $ | 2,165 |  |  | $ | 2,157 |
Furniture and laboratory equipment |  | 2,802 |  |  | 2,421 |
Computer and office equipment |  | 825 |  |  | 778 |
Motor vehicles |  | 20 |  |  | 20 |
Equipment under lease obligations |  | 93 |  |  | 93 |
|  | 5,905 |  |  | 5,469 |
Less: accumulated depreciation and amortization |  | (4,520 | ) |  | (4,417 | )
|  | $ | 1,385 |  |  | $ | 1,052 |

8

TEI Biosciences Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
December 31, 2014
(All amounts in thousands)
2. Summary of Significant Accounting Policies (continued)
Property and Equipment (continued)
The estimated useful life of various assets is as follows:

Asset Classification |  | Estimated Useful Life
Leasehold improvements |  | Shorter of remaining life of lease or useful life
Furniture and laboratory equipment |  | 7 years
Computer and office equipment |  | 4 years
Motor vehicles |  | 4 years

Repairs and maintenance costs are charged to expense as incurred.
Revenue Recognition
License fees, where the Company has an ongoing involvement or performance obligation, are generally recorded as deferred revenue in the consolidated balance sheet and amortized into license fee revenue in the consolidated income statement over the term of the performance obligation. The Company also recognizes revenues from royalties, which are recognized as earned on an accrual basis.
The Company recognizes revenue from product sales to its marketing partners and sales directly to end customers upon shipment, provided that there is evidence of a final arrangement, passage of title and risk of loss, there are no uncertainties surrounding acceptance, collectability is probable, and the price is fixed or determinable. The Company recognizes revenue from product sales through its sales force and independent agents upon delivery to the end customer provided that there is evidence of a final arrangement, passage of title and risk of loss, there are no uncertainties surrounding acceptance, collectability is probable, and the price is fixed or determinable. Amounts billed to customers for shipping and handling are included in revenue at the time the related product revenue is recognized. Shipping and handling costs included in sales and marketing expenses amounted to $309 in 2014 and $293 in 2013.
9

TEI Biosciences Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
December 31, 2014
(All amounts in thousands)
2. Summary of Significant Accounting Policies (continued)
Concentrations of Credit Risk and Significant Customers
The Company has no financial instruments with off-balance sheet risk. The Company invests its cash and cash equivalents in financial institutions that federally insure up to $250 of deposits. At December 31, 2014, such amounts were in excess of FDIC limits by approximately $10,996.
Seven customers represented 33% of the total trade accounts receivable and 32% of total product revenues in 2014. Seven customers represented 22% of the total trade accounts receivable and 36% of total product revenues in 2013.
Reclassifications
The consolidated statement of cash flows for 2013 includes a reclassification between accounts payable of ($200) and accrued expenses of $262. These amounts were previously reported as one line on the consolidated statement of cash flows as $62. These amounts were reclassified to conform to the current year’s presentation, with no impact on financial condition.
Foreign Currency Translation and Transactions
The financial statements of the Company’s United Kingdom subsidiary, TEI Biosciences (UK) Limited, are measured using the Great Britain Pound (GBP) as the functional currency. Assets and liabilities of this subsidiary are translated at the rate of exchange in effect at the balance sheet date. Income and expense items are translated at the average daily rate of exchange during the reporting period. Resulting gains or losses are recognized as a component of other comprehensive income (loss), but have not been material to date.
Transactions denominated in currencies other than the local currency are recorded based on exchange rates at the time such transactions arise. Subsequent changes in exchange rates result in transaction gains and losses, which are reflected in income as unrealized (based on period-end translations) or realized upon settlement of the transaction. Transaction gains or losses were not material for the years ended December 31, 2014 and 2013.
10

TEI Biosciences Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
December 31, 2014
(All amounts in thousands)
2. Summary of Significant Accounting Polices (continued)
Fair Value of Financial Instruments
Accounting Standards Codification (ASC) 820 Fair Value Measurements and Disclosures establishes the following fair value hierarchy for the use of observable inputs and unobservable inputs in valuing assets and liabilities:
Level 1: Quoted prices in active markets for identical assets or liabilities. An active market for an asset or liability is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2: Observable inputs other than Level 1 inputs. Examples of Level 2 inputs include quoted prices in active markets for similar assets or liabilities and quoted prices for identical assets or liabilities in markets that are not active.
Level 3: Unobservable inputs based on the Company’s assessment of the assumptions that market participants would use in pricing the asset or liability.
The Company’s investment strategy is focused on capital preservation. The Company invests in instruments that meet credit quality standards as outlined in the Company’s investment policy guidelines. These guidelines also limit the amount of credit exposure to any one issue or type of instrument. Currently, the company’s investments are limited to money market accounts.
As of December 31, 2014 and 2013, all of the Company’s financial assets that were subject to fair value measurements were valued using observable inputs, and the Company had no financial liabilities that were subject to fair value measurement. The Company’s financial assets, valued based on Level 2 inputs, consisted of money market instruments:
11

TEI Biosciences Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
December 31, 2014
(All amounts in thousands)
2. Summary of Significant Accounting Polices (continued)
Fair Value of Financial Instruments (continued)

|  |  |  | Fair Value Measurements at Reporting Date Using
|  |  |  | Quoted Prices in Active Markets for Identical Assets |  | Significant Other Observable Inputs |  | Significant Unobservable Inputs
Description |  | December 31, 2014 |  | (Level 1) |  | (Level 2) |  | (Level 3)
Money market |  | $ | 3,545 |  |  | $ | — |  |  | $ | 3,545 |  |  | $ | — |
|  | $ | 3,545 |  |  | $ | — |  |  | $ | 3,545 |  |  | $ | — |

|  |  |  | Fair Value Measurements at Reporting Date Using
|  |  |  | Quoted Prices in Active Markets for Identical Assets |  | Significant Other Observable Inputs |  | Significant Unobservable Inputs
Description |  | December 31, 2014 |  | (Level 1) |  | (Level 2) |  | (Level 3)
Money market |  | $ | 9,572 |  |  | $ | — |  |  | $ | 9,572 |  |  | $ | — |
|  | $ | 9,572 |  |  | $ | — |  |  | $ | 9,572 |  |  | $ | — |

12

TEI Biosciences Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
December 31, 2014
(All amounts in thousands)
2. Summary of Significant Accounting Policies (continued)
Research and Development Expenses
The Company expenses research and development costs as incurred.
Research and development costs primarily comprise salaries and fringe benefits, professional fees (excluding legal expenses), pre-clinical studies, testing costs, supplies and facilities costs.
Impairment of Long-Lived Assets
The Company reviews its long-lived assets, which represent property, plant and equipment, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets. The Company does not believe that any events have occurred that would indicate that its long-lived assets were impaired at December 31, 2014.
Income Taxes
The Company provides for federal and state income taxes whereby a deferred tax asset or liability is measured at the enacted tax rates that would be in effect when any differences between the financial statement and tax bases of assets and liabilities are expected to reverse.
Advertising Costs
Advertising costs are expensed as incurred. Advertising expense totaled $1,106 in 2014 and $711 in 2013.
Comprehensive Income
Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. The foreign currency gain was immaterial in 2014 and 2013.
13

TEI Biosciences Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
December 31, 2014
(All amounts in thousands)
2. Summary of Significant Accounting Policies (continued)
Accounting for Stock-Based Compensation
All share-based payments to employees are recognized as compensation in the consolidated income statement based on their fair values. The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model. The risk-free interest rate used is the rate for a U.S. Treasury zero coupon issue with a remaining life consistent with the expected life of the option. The Company did pay a dividend in 2014 but has no scheduled expected dividend in the future. The expected life of options granted represents the period of time that option grants are expected to be outstanding. The Company uses the short-cut method as permitted under Staff Accounting Bulletin No. 107, Share-Based Payment, to estimate the expected life of options granted as the Company does not have a sufficient history of stock option exercises to derive an exclusive term. Expected volatilities are based on historical volatilities from guideline companies since there is no active market for the Company’s common stock.
Weighted-average assumptions used for grants are as follows:

Assumption |  | 2014 |  | 2013
Risk-free interest rates |  | 1.87% |  | 1.16%
Expected dividend yield |  | —% |  | —%
Expected life in years |  | 5.50 |  | 5.50
Expected volatility |  | 55% |  | 56%
Weighted-average fair value of options granted during the year |  | $7.32 |  | $5.35

Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers ASU 2014-09 affects all entities — public, private, and not-for-profit—that have contracts with customers, except for certain items, which include leases, insurance contracts; most financial instruments, and guarantees (other than product or service warranties). The new revenue recognition standard eliminates the transaction- and industry-specific revenue recognition guidance under current U.S. GAAP and replaces it with a principle-based approach for determining revenue recognition.
14

TEI Biosciences Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
December 31, 2014
(All amounts in thousands)
2. Summary of Significant Accounting Policies (continued)
Recent Accounting Pronouncements (continued)
All nonpublic entities are required to apply the revenue recognition standard for annual reporting periods beginning on or after December 15, 2017, and interim reporting periods within annual reporting periods beginning after December 15, 2018. Nonpublic entities may elect to apply the requirements of the revenue standard earlier as of the following dates: (a) An annual reporting period beginning after December 15, 2016, including interim reporting periods within that reporting period (public entity effective date); (b) an annual reporting period beginning after December 15, 2016, and interim reporting periods within annual reporting periods beginning after December 15, 2017; and (c) an annual reporting period beginning after December 15, 2017, including interim reporting periods within that reporting period. The implementation of ASU 2014-09 has not been fully evaluated as to the effect on the Company's consolidated financial statements.
3. Spin-Off Transaction
On October 31, 2011, TEI Medical was established as a wholly owned subsidiary through the issuance of 999 voting shares of common stock and 3 million non-voting shares of preferred stock to the Company in exchange for a license of the Company’s intellectual property in the orthopedic and wound management fields of use, and for certain assets, including tradenames, regulatory clearance, third-party distribution agreements and $357 of cash.
On November 15, 2011, TEI Medical commenced operations and, simultaneously, all the common shares of TEI Medical were distributed in the form of a dividend to each shareholder of the Company based on a 1-to-10 ratio of common shares held in the Company. The Company maintains ownership of all non-voting preferred shares of TEI Medical.
In connection with the spin-off, TEI Medical obtained a royalty-free, perpetual, irrevocable, exclusive, worldwide, and fully paid license to all the Company’s intellectual property, technology, know-how, products, and product concepts in the fields of use consisting of orthopedics (excluding spine surgery) and wound management (including burn care). The Company entered into a Distribution Agreement with TEI Medical whereby the Company has been a non-exclusive distributor for sales of PriMatrix and TissueMend (the Products). Under the Distribution Agreement, the Company has been selling: (a) PriMatrix to domestic accounts, primarily through its direct sales force, and internationally through a network of independent sales agents, and (b) TissueMend to Stryker. In exchange, the Company has been paying a
15

TEI Biosciences Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
December 31, 2014
(All amounts in thousands)
3. Spin-Off Transaction (continued)
distribution fee to TEI Medical based on Product revenues. The Company incurred and recorded total distribution fee expense of $279 and $8,742 to TEI Medical in 2014 and 2013, respectively, which were herein eliminated in consolidation.
The Company also entered into an Operational Services Agreement (the Services Agreement) with TEI Medical under which it has and continues to provide certain administrative, operational, and regulatory services to TEI Medical for a fee. The Company charged TEI Medical $1,310 and $5,955 for services rendered in 2014 and 2013, respectively, which were also eliminated herein in consolidation. Any technology or manufacturing developments or improvements made by the Company during the term of the Services Agreement, which are applicable to the TEI Medical Field of Use, will be licensed to TEI Medical on an exclusive basis, at no additional cost.
On January 11, 2014, the Company and TEI Medical amended and restated the November 15, 2011, Distribution Agreement. Prior to this amendment, the Company sold PriMatrix directly to customers and TissueMend to Stryker and paid TEI Medical a distribution fee. On January 11, 2014, the Company transferred its entire wound healing sales reps and other wound healing employees to TEI Medical, and the distribution fee arrangement stopped. Subsequent to January 11, 2014 the Company continues to manufacture products for TEI Medical and ship such products to customers on behalf of TEI Medical with a cost plus 30% mark up. TEI Medical is responsible for all sales and marketing activities related to PriMatrix and for sales of TissueMend to Stryker. On May 1 and again on October 1, 2014, the Company and TEI Medical amended the Manufacturing and Supply Agreement between the parties to increase the transfer price charged
by the Company to TEI Medical for the manufacturing, storage and shipping of TEI Medical products to $4 and $5 per sq cm, respectively, from the original transfer price of cost plus 30%. All amounts have been eliminated in consolidation.
16

TEI Biosciences Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
December 31, 2014
(All amounts in thousands)
4. Inventories
Inventories consisted of the following as of December 31:

|  | 2014 |  | 2013
Raw material |  | $ | 1,254 |  |  | $ | 1,167 |
Work in process |  | 2,781 |  |  | 2,153 |
Finished goods |  | 2,434 |  |  | 2,490 |
|  | $ | 6,469 |  |  | $ | 5,810 |

5. Line of Credit
The Company had a $6,000 bank line of credit. The line bore interest at a fluctuating rate per annum determined by the bank to be 2.00% above the Daily One-Month London Interbank Offered Rate (LIBOR) in effect from time to time. The line-of-credit was secured by all Company assets. The line of credit was terminated in July 2013 when the term note payable (see Note 6) was repaid in full.
6. Term Note Payable
The Company had a $6,000 term note payable with a bank. The term note payable bore interest at a fluctuating rate per annum determined by the bank to be 2.00% above the Daily One-Month LIBOR in effect from time to time. The Company repaid this note in full in July 2013.
7. Deferred Compensation
The Company’s founder had agreed, through July 1999, to defer the payment of part of his annual compensation. In 2001, he agreed to accept a contingent future issuance of 441 shares of the Company’s common stock in lieu of a deferred compensation obligation of $1,764, contingent on: (a) the sale of the Company to a third party or (b) the first public offering of shares of common stock in which he would be able to participate and sell a sufficient number of shares of common stock to satisfy any federal or state tax obligation arising as the result of the Company’s payment of the deferred compensation obligation.
17

TEI Biosciences Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
December 31, 2014
(All amounts in thousands)
8. Income Tax
Income tax expense consists of the following for the year ended December 31:

|  | 2014 |  | 2013
Current: |  |  |  |
Federal |  | $ | 5,762 |  |  | $ | 8,088 |
State |  | 1,177 |  |  | 1,616 |
|  | 6,939 |  |  | 9,704 |
Deferred: |  |  |  |
Federal |  | 470 |  |  | 352 |
State |  | 43 |  |  | 13 |
|  | 513 |  |  | 365 |
Total income tax expense |  | $ | 7,452 |  |  | $ | 10,069 |

The components of deferred tax assets are as follows at December 31:

|  | 2014 |  | 2013
Deferred compensation |  | $ | 683 |  |  | $ | 680 |
Depreciation and amortization |  | 523 |  |  | 761 |
Share-based compensation |  | 374 |  |  | 468 |
License fee revenue |  | — |  |  | 133 |
Inventory reserves |  | 195 |  |  | 238 |
Other temporary differences |  | 240 |  |  | 263 |
|  | 2,015 |  |  | 2,543 |
Valuation allowance |  | (683 | ) |  | (680 | )
Net deferred tax asset |  | $ | 1,332 |  |  | $ | 1,863 |

18

TEI Biosciences Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
December 31, 2014
(All amounts in thousands)
8. Income Tax (continued)
The utilization of federal tax credit carryforwards is subject to review and possible adjustment by the Internal Revenue Service. Internal Revenue Code (IRC) Section 382 contains provisions that may limit the amount of net operating loss and tax credit carryforwards that the Company may utilize in any one year in the event of certain changes in ownership, as defined.
The Company is subject to federal income tax audits for 2011 and beyond, and state income tax audits for all open periods under the statute of limitations. The Company includes interest and penalties, when necessary, in income tax expense.
The valuation allowance relates to deferred compensation, which has been deemed an indefinitely reversing deferred tax asset. The Company’s valuation allowance at December 31, 2014, increased by $3 from the balance at December 31, 2013, due primarily to the change in the Company’s deferred state tax rate.
The Company’s income tax rate in 2014 and 2013 differed from the statutory rate mainly due to state income taxes.
Income taxes paid for both the Company and TEI Medical amounted to $7,913 in 2014 and $9,630 in 2013.
During 2014, the Company identified an error in its historical income tax provisions and tax filings whereby the Company failed to appropriately consider certain deductions related to its domestic production activities. The Company amended its historical tax filings to claim these deductions. The Company concluded that the financial reporting effects of the missed deductions were not material to any of the Company’s historical financial statements. The cumulative effect of correcting the historical misstatements in the current year would be material to the 2014 financial statements. As such, the historical financial information included herein has been restated to reflect the correction of these immaterial errors. Retained earnings as of January 1, 2013 was increased by $1,362 to reflect the cumulative effect of the corrections through that date. Additionally, income tax expense for 2013 was decreased by $720 and prepaid income taxes as of December 31, 2013 was increased by $2,082.
19

TEI Biosciences Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
December 31, 2014
(All amounts in thousands)
9. Stockholders’ Equity – TEI Biosciences Inc.
Common Stock
The holders of common stock are entitled to one vote for each share held of record on all matters submitted to a vote of the stockholders. The stockholders do not have cumulative voting rights in the election of directors. Accordingly, holders of a majority of the shares voting are able to elect all the directors. Holders of common stock are entitled to receive ratably only those dividends as may be declared by the Board out of funds legally available thereon. In the event of a liquidation, dissolution, or winding up of the Company, holders of common stock are entitled to share ratably in all of the Company’s assets remaining after outstanding liabilities are paid. Holders of common stock have no preemptive or other subscription or conversion rights. There are no redemption or sinking fund provisions applicable to the common stock.
Common Stock Repurchase Transactions and Dividends
In 2014, the Company repurchased approximately 25 shares of common stock for approximately $361. The Company also retired these repurchased shares in 2014.
On March 13, 2014, the Board of Directors of the Company declared a cash dividend on all shares of capital stock outstanding as of the close of business on March 14, 2014. The amount of the dividend was $2.67 per share, subject to any required tax withholding. The total amount of the dividend the Company declared to its shareholders was $19,972 and was paid in March and April of 2014.
In 2013, the Company repurchased 23 shares of common stock for $243. The Company also retired these repurchased shares in 2013.
20

TEI Biosciences Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
December 31, 2014
(All amounts in thousands)
9. Stockholders’ Equity – TEI Biosciences Inc. (continued)
Stock Option Plan
On June 8, 2006, the stockholders of the Company approved the Company’s 2006 Equity Incentive Plan (the 2006 Plan), which provides for the issuance of shares of common stock up to the greater of 2.5 million shares or 23% of the number of shares outstanding as of January 1 of each year, subject to certain adjustments.
The 2006 Plan is in addition to the 1997 Stock Option Plan (the 1997 Plan) that provided for the issuance of options to purchase a maximum of 2 million shares of common stock. The 1997 Plan expired in February 2007. The options under the 2006 Plan may be granted to employees, directors or consultants. Options under the 2006 Plan vest over a maximum of a four-year period, and expire ten years from the date of grant.
The Board may suspend or terminate the 2006 Plan at any time and, unless previously terminated, the 2006 Plan shall terminate on June 8, 2016. As of December 31, 2014 and 2013, 255 and 250 shares, respectively, were available for grant under the 2006 Plan. Activity under the Stock Option Plans is as follows:

|  | Number of Shares |  | Weighted-Average Exercise Price |  | Weighted-Average Remaining Contractual Life (Years)
Outstanding at December 31, 2013 |  | 372 |  | $5.81 |  | 4.71 |
Granted |  | 6 |  | 14.40 |  | — |
Exercised |  | (24) |  | 5.93 |  | — |
Cancelled |  | (15) |  | 8.27 |  | — |
Outstanding at December 31, 2014 |  | 339 |  | 5.85 |  | 3.54 |
Exercisable at December 31, 2014 |  | 330 |  | 5.76 |  | 3.42 |
Vested and expected to vest at |  |  |  |  |  |
December 31, 2014 |  | 338 |  | 5.84 |  | 3.53 |

21

TEI Biosciences Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
December 31, 2014
(All amounts in thousands)
9. Stockholders’ Equity – TEI Biosciences Inc. (continued)
Stock Option Plan (continued)
At December 31, 2014, there was $67 of total unrecognized compensation expense related to non-vested stock option arrangements. The unrecognized compensation expense is calculated by applying an estimated forfeiture rate of 14% to the unvested options. This cost is being amortized on the straight-line method and is expected to be recognized over a weighted-average period of 1.21 years.
Restricted Stock
In March 2011, the Company’s Board of Directors approved amendments to an agreement that covered an award of 600 shares of restricted stock units (RSUs) granted to an officer of the Company in 2008. Each unit represents one share of the Company’s common stock. The arrangement was treated as a share-based liability award due to certain tax-related withholding features, and all restricted stock units have vested.
The amendments include, among other things, a loan (RSU Loan) to the officer in an amount equal to all applicable income and payroll taxes due upon the delivery of the 600 shares of common stock pursuant to the grant. The RSU Loan is due and payable in nine years from the date of issuance along with the related interest.
The second amendment grants the officer the right to require the Company to purchase shares of the underlying common stock at the current fair market value of the shares on the day of notice. The market value is determined by the Company’s Board of Directors solely for the purpose of paying the principal and unpaid interest of the RSU Loan outstanding and the applicable taxes due for the sale of these shares to the Company.
In April 2012, the officer took delivery of the RSUs and entered into a loan of $2,096 with the Company to pay for the applicable income and payroll taxes associated with the receipt of the shares. The loan is collateralized by the underlying shares.
No further compensation expense will be recognized under this share-based liability award as the officer of the Company took delivery of the actual shares in 2012.
22

TEI Biosciences Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
December 31, 2014
(All amounts in thousands)
9. Stockholders’ Equity – TEI Biosciences Inc. (continued)
Restricted Stock (continued)
On June 4, 2009, the Board approved the grant of 300 shares of restricted stock to an officer of the Company. The fair value of the restricted stock was based on the market price of the Company’s stock on the date of grant, and the fair value of these shares is being recorded as compensation expense based on the vesting terms of the award. The fair value per share of the restricted stock units at the date of the grant was $4.00. The restricted shares vested in quarterly installments over a three-year period from the grant date. As of December 31, 2014, all 300 restricted shares were vested. No further compensation expense will be recognized related to this award.
Notes Receivable – Officer
In connection with the 2009 restricted stock grant of 300 shares issued to an officer on June 4, 2009, noted above, the Company issued a note receivable in the amount of $300 in order to pay the related personal income taxes on the issuance. The loan is collateralized by 100 shares of common stock owned by the officer. All principal and accrued interest (2.25%) was due on the earliest of June 4, 2014, termination of employment of the officer, a significant equity event, or an event of default. Accrued and unpaid interest is due on June 4 of each year; however, the Company intends to provide a bonus amount to offset the accrued interest due. The Company has presented this note receivable as a reduction of stockholders’ equity.
In March 2011, the Company’s Board of Directors approved an amendment to the restricted stock grant $300 note receivable agreement. The amendment grants the officer the right to require the Company to purchase shares of the underlying common stock at the current fair market value of the shares on the day of notice by the officer as most recently determined by the Company’s Board of Directors solely for the purpose of paying the principal and unpaid interest of the note receivable outstanding and the applicable taxes due for the sale of these shares to the Company.
On March 7, 2013, the Board of Directors approved an amendment to the $300 note receivable. The amendment states that the maturity date of the note receivable would be extended from its original maturity date of June 4, 2014 to April 21, 2021.
23

TEI Biosciences Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
December 31, 2014
(All amounts in thousands)
9. Stockholders’ Equity – TEI Biosciences Inc. (continued)
Notes Receivable – Officer (continued)
On September 8, 2011, the same officer exercised fully vested options to purchase 292 shares. The Company issued a note receivable to the officer in the amount of $1,635, which is collateralized by the underlying shares of common stock. All principal and accrued interest (1.63% for the first three years of the note) is due on the earliest of September 8, 2016, termination of employment of the officer, a significant equity event or an event of default. Accrued and unpaid interest is due on September 8 of each year. The components of the $1,635 note receivable represent $1,169 for the exercise of the options to purchase the shares of common stock and $466 for income taxes associated with the exercise of the options to purchase the shares. Under this arrangement, the officer also has the right to put the stock to the Company at the current fair market value of the shares on the day of notice as most recently determined by the Company’s Board of Directors, at a purchase price not to exceed the note receivable balance outstanding, any accrued but unpaid interest, and the associated taxes.
The Company has disclosed the amounts in the notes to the accompanying consolidated financial statements herein and has excluded the note receivable for the exercise of the options and corresponding potential liability ($1,169) from the accompanying consolidated balance sheet as the substance of the transaction is a fully vested stock option. The loan of $466 is collateralized by the underlying shares received by the officer upon exercise of these stock options and has been presented as a reduction of stockholders’ equity.
On March 7, 2013, the Board of Directors approved an amendment to the $1,635 September 8, 2011, note receivable. The amendment states that the maturity date of the note receivable would be extended from its original maturity date of September 8, 2016 to April 21, 2021.
In connection with the delivery of 600 restricted shares to the Officer of the Company on April 21, 2012, which was granted in April 2008 as restricted stock units, the Company issued a note receivable in the amount of $2,096 in order to pay the related personal income taxes on the issuance. The loan is collateralized by the 600 fully vested shares of common stock that were delivered to the officer. All principal and accrued interest (1.15%) is due on the earliest of April 21, 2021, termination of employment of the officer, a significant equity event, or an event of default. Accrued and unpaid interest is due on April 21 of each year. The Company has presented this note receivable as a reduction of stockholders’ equity.
24

TEI Biosciences Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
December 31, 2014
(All amounts in thousands)
9. Stockholders’ Equity – TEI Biosciences Inc. (continued)
Notes Receivable – Officer (continued)
On March 7, 2013, the Board of Directors approved an amendment to the officer’s employment agreement as defined in conjunction with the $2,096 April 21, 2012, note receivable. The amendment included, among other things, that the Company shall pay to the officer a bonus payment equal to the principal balance of the note plus all accrued but unpaid interest upon the first occurrence of a change in control that results in payments to the holders of the Company’s common stock of at least $20 per share, provided that the officer has been continuously employed by the Company (except for incapacity or mutually agreed leaves of absences) from the date of the employment agreement until such change in control. The bonus shall be offset
against and used first to repay all outstanding principal and accrued but unpaid interest on this note. All payments to the officer must be paid by the Company within 60 days after the occurrence of a change in control. Also under this amendment, the officer has the right to put stock to the Company at the current fair market value of the common shares on the day of notice as most recently determined by the Company’s Board of Directors at a purchase price not to exceed the note receivable balance outstanding, any accrued but unpaid interest, and the associated taxes.
Common Stock Reserved for Future Issuances
As of December 31, 2014, the Company had reserved 1.035 million common stock shares for issuance upon exercise of stock options.
10. Stockholders’ Equity – TEI Medical Inc.
Preferred Stock
TEI Medical was authorized to issue three million shares of non-voting preferred stock with a par value of $0.001 per share. All three million shares were issued to the Company.
In the event of any voluntary or involuntary liquidation, dissolution or winding up of TEI Medical or a deemed liquidation event, the holders of the preferred shares then outstanding shall be entitled to receive a preferred stock liquidation amount which equals the preferred stock original issue price of $1.00 per share, plus any dividends declared but unpaid.
25

TEI Biosciences Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
December 31, 2014
(All amounts in thousands)
10. Stockholders’ Equity – TEI Medical Inc. (continued)
Preferred Stock (continued)
Upon the closing of a sale of the common shares of TEI Medical to the public in a public offering under the Securities Act of 1933, all outstanding shares of preferred stock shall be automatically converted into such number of shares of common stock as determined by dividing the preferred stock original issue price of $1.00 by the public offering price.
All preferred stock outstanding is owned by the Company and is eliminated in consolidation.
Common Stock
TEI Medical was authorized to issue 10million shares of voting common stock with a par value of $0.001 per share. The common shares of TEI Medical were issued so that each shareholder of the Company received one tenth of one share of TEI Medical stock for every share of the Company held by virtue of a dividend, as well as an additional 60 shares of common stock of TEI Medical that the Company will retain to satisfy its distribution obligations with respect to the restricted stock units currently held by an officer. These shares were reissued to the officer of the Company on April 21, 2012, at the same time as the officer took delivery of the 600 shares of restricted stock of the Company as described in Note 9.
The liquidation rights of the holders of the common stock are subject to and qualified by the rights, powers and preferences of the holders of the preferred stock.
The holders of the common stock are entitled to one vote for each share of common stock held at all meetings of stockholders and written actions in lieu of meetings.
All common stock is eliminated in consolidation and accounted for as non-controlling interest.
Common Stock Repurchase Transactions
In 2014, TEI Medical repurchased approximately 2.5 shares of common stock for $17. The Company retired these shares in 2014.
In 2013, TEI Medical repurchased approximately 2 shares of common stock for $8. The Company retired these shares in 2013.
26

TEI Biosciences Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
December 31, 2014
(All amounts in thousands)
10. Stockholders’ Equity – TEI Medical Inc. (continued)
Stock Option Plan
On November 14, 2011, the stockholders of TEI Medical approved the 2011 Equity Incentive Plan (the 2011 Plan), which provides for the issuance of up to one million shares of common stock.
The Board may suspend or terminate the 2011 Plan at any time and, unless previously terminated, the 2011 Plan shall terminate on November 14, 2021. As of December 31, 2014 and 2013, 817 shares were available for grant under the 2011 Plan.
On November 14, 2011, the Board of TEI Medical approved the grant of 9 stock options with a one-year vesting period at the fair value per share of $0.2258 at the date of grant.
Activity under the stock option plans is as follows:

|  | Number of Shares |  | Weighted-Average Exercise Price |  | Weighted-Average Remaining Contractual Life (Years)
Outstanding at December 31, 2013 |  | 9 |  | $0.2258 |  | — |
Granted |  | — |  | — |  | — |
Exercised |  | — |  | — |  | — |
Cancelled |  | — |  | — |  | — |
Outstanding at December 31, 2014 |  | 9 |  | 0.2258 |  | 6.87 |
Exercisable at December 31, 2014 |  | 9 |  | 0.2258 |  | 6.87 |
Vested and expected to vest at |  |  |  |  |  |
December 31, 2014 |  | 9 |  | 0.2258 |  | 6.87 |

At December 31, 2014, there was no unrecognized compensation expense related to non-vested stock option arrangements.
27

TEI Biosciences Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
December 31, 2014
(All amounts in thousands)
10. Stockholders’ Equity – TEI Medical Inc. (continued)
Restricted Stock
On November 14, 2011, the Board of TEI Medical approved the grant of 174.5 shares of restricted stock to an officer of TEI Medical. The fair value of the restricted stock was based on the market price of TEI Medical’s stock on the date of grant and the fair value of these shares is being recorded as compensation expense based on the vesting terms of the award. The fair value per share of the restricted stock shares at the date of the grant was $0.2258. The restricted shares vested in quarterly installments over a three-year period from the grant date.
As of December 31, 2014, all restricted shares are vested. The Company recorded an expense of $11 in 2014 and $13 in 2013, respectively, relative to this restricted stock grant. At December 31, 2014, there was no unrecognized compensation expense related to any non-vested portion of this restricted stock arrangement.
11. Employee Benefit Plan
The Company has a savings plan for its employees that is designed to be qualified under Section 401(k) of the IRC. Eligible employees are permitted to contribute to the 401(k) plan through payroll deductions within statutory and plan limits. The participants can select from a variety of investment options. The Company currently matches the lesser of $0.40 for each dollar contributed by the participating employee up to 5% of the employee contributions, or 2% of the eligible compensation of each participating employee. Employees received matching contributions of $272 in 2014 and $221 in 2013.
12. Commitments and Contingencies
The Company entered into a sublease on December 5, 2012, for its corporate office facilities, which expires on March 30, 2018. The Company, as part of this sublease, also paid a $44 security deposit.
The Company’s manufacturing facilities lease expires on December 31, 2017, with a five-year extension at the Company’s option.
28

TEI Biosciences Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
December 31, 2014
(All amounts in thousands)
12. Commitments and Contingencies (continued)
Rent expense was $736 in 2014 and 2013. Future minimum lease payments associated with the leases above are as follows:

|  | Commitment
Year: |  |
2015 |  | $ | 723 |
2016 |  | 891 |
2017 |  | 891 |
2018 |  | 68 |

13. Subsequent Events
The Company evaluated subsequent events occurring after the consolidated balance sheet date and up to the time the consolidated financial statements were available to be issued, June 25, 2015, and noted no subsequent events, except:
The Company entered into an amendment of its manufacturing facilities lease on May 1, 2015, to lease an additional 4 square feet of space through December 31, 2017.
29