SIENTRA, INC., 10-K filed on 3/14/2017
Annual Report
Document and Entity Information (USD $)
12 Months Ended
Dec. 31, 2016
Mar. 9, 2017
Jun. 30, 2016
Document and Entity Information
 
 
 
Entity Registrant Name
Sientra, Inc. 
 
 
Entity Central Index Key
0001551693 
 
 
Document Type
10-K 
 
 
Document Period End Date
Dec. 31, 2016 
 
 
Amendment Flag
false 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Entity Well-known Seasoned Issuer
No 
 
 
Entity Voluntary Filers
No 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Filer Category
Accelerated Filer 
 
 
Entity Public Float
 
 
$ 65,626,788 
Entity Common Stock, Shares Outstanding
 
18,833,933 
 
Document Fiscal Year Focus
2016 
 
 
Document Fiscal Period Focus
FY 
 
 
Balance Sheets (USD $)
In Thousands, unless otherwise specified
Dec. 31, 2016
Dec. 31, 2015
Current assets:
 
 
Cash and cash equivalents
$ 67,212 
$ 112,801 
Accounts receivable, net of allowances of $4,329 and $1,116 at December 31, 2016 and December 31, 2015, respectively
3,082 
4,249 
Inventories, net
18,484 
20,602 
Insurance recovery receivable
9,375 
 
Prepaid expenses and other current assets
1,852 
1,473 
Total current assets
100,005 
139,125 
Property and equipment, net
2,986 
1,404 
Goodwill
4,878 
 
Other intangible assets, net
6,186 
53 
Other assets
228 
223 
Total assets
114,283 
140,805 
Current liabilities:
 
 
Accounts payable
3,555 
4,069 
Accrued and other current liabilities
6,507 
6,959 
Legal settlement payable
10,900 
 
Customer deposits
6,559 
9,488 
Total current liabilities
27,521 
20,516 
Warranty reserve and other long-term liabilities
3,145 
1,418 
Total liabilities
30,666 
21,934 
Commitments and contingencies (Note 9)
   
   
Stockholders' equity:
 
 
Preferred Stock, $0.01 par value - Authorized 10,000,000 shares; none issued or outstanding
   
 
Common stock, $0.01 par value — Authorized 200,000,000 shares; issued 18,671,409 and 18,066,143 and outstanding 18,598,682 and 17,993,416 shares at December 31, 2016 and December 31, 2015 respectively
186 
180 
Additional paid-in capital
299,133 
294,227 
Treasury stock, at cost (72,727 shares at December 31, 2016 and December 31, 2015)
(260)
(260)
Accumulated deficit
(215,442)
(175,276)
Total stockholders' equity
83,617 
118,871 
Total liabilities and stockholders' equity
$ 114,283 
$ 140,805 
Balance Sheets (Parenthetical) (USD $)
In Thousands, except Share data, unless otherwise specified
Dec. 31, 2016
Dec. 31, 2015
Balance Sheets
 
 
Accounts receivable, allowances (in dollars)
$ 4,329 
$ 1,116 
Preferred stock, par value (in dollars per share)
$ 0.01 
$ 0.01 
Preferred stock, shares authorized
10,000,000 
10,000,000 
Preferred stock, shares issued
Preferred stock, shares outstanding
Common stock, par value (in dollars per share)
$ 0.01 
$ 0.01 
Common stock, shares authorized
200,000,000 
200,000,000 
Common stock, shares issued
18,671,409 
18,066,143 
Common stock, shares outstanding
18,598,682 
17,993,416 
Treasury stock, shares
72,727 
72,727 
Statements of Operations (USD $)
In Thousands, except Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2016
Dec. 31, 2015
Dec. 31, 2014
Statements of Operations
 
 
 
Net sales
$ 20,734 
$ 38,106 
$ 44,733 
Cost of goods sold
6,880 
10,654 
11,500 
Gross profit
13,854 
27,452 
33,233 
Operating expenses:
 
 
 
Sales and marketing
20,607 
25,762 
23,599 
Research and development
9,704 
7,199 
4,707 
General and administrative
23,577 
18,738 
10,712 
Goodwill impairment
 
14,278 
 
Total operating expenses
53,888 
65,977 
39,018 
Loss from operations
(40,034)
(38,525)
(5,785)
Other income (expense), net:
 
 
 
Interest income
63 
32 
 
Interest expense
(98)
(3,097)
(2,172)
Other (expense) income, net
(36)
360 
2,146 
Total other income (expense), net
(71)
(2,705)
(26)
Loss before income taxes
(40,105)
(41,230)
(5,811)
Income taxes
61 
 
 
Net loss
$ (40,166)
$ (41,230)
$ (5,811)
Basic and diluted net loss per share attributable to common stockholders (in dollars per share)
$ (2.20)
$ (2.61)
$ (2.28)
Weighted average outstanding common shares used for net loss per share attributable to common stockholders:
 
 
 
Basic and diluted (in shares)
18,233,177 
15,770,972 
2,545,371 
Statements of Convertible Preferred Stock and Stockholders' Equity (Deficit) (USD $)
In Thousands, except Share data, unless otherwise specified
Convertible preferred stock
Common stock
Treasury stock
Additional paid-in capital
Accumulated deficit
Total
Balance, beginning of year at Dec. 31, 2013
 
$ 3 
$ (260)
$ 1,819 
$ (128,235)
$ (126,673)
Balance, beginning of year at Dec. 31, 2013
150,456 
 
 
 
 
 
Balance, beginning of year (in shares) at Dec. 31, 2013
 
279,879 
72,727 
 
 
 
Balance, beginning of year (in shares) at Dec. 31, 2013
24,593,087 
 
 
 
 
 
Changes in Temporary Equity
 
 
 
 
 
 
Conversion of convertible preferred stock to common stock
(150,456)
 
 
 
 
 
Conversion of convertible preferred stock to common stock (in shares)
(24,593,087)
 
 
 
 
 
Changes in Stockholders' Equity
 
 
 
 
 
 
Conversion of convertible preferred stock to common stock
 
89 
 
150,367 
 
150,456 
Conversion of convertible preferred stock to common stock (in shares)
 
8,942,925 
 
 
 
 
Proceeds from IPO/follow-on offering, net of costs
 
58 
 
76,977 
 
77,035 
Proceeds from IPO/follow-on offering, net of costs (in shares)
 
5,750,000 
 
 
 
 
Employee stock-based compensation expense
 
 
 
594 
 
594 
Stock option exercises
 
 
 
38 
 
38 
Stock option exercises (in shares)
 
12,900 
 
 
 
 
Net loss
 
 
 
 
(5,811)
(5,811)
Balance, end of year at Dec. 31, 2014
 
150 
(260)
229,795 
(134,046)
95,639 
Balance, end of year (in shares) at Dec. 31, 2014
 
14,985,704 
72,727 
 
 
 
Changes in Stockholders' Equity
 
 
 
 
 
 
Proceeds from IPO/follow-on offering, net of costs
 
30 
 
61,367 
 
61,397 
Proceeds from IPO/follow-on offering, net of costs (in shares)
 
3,000,000 
 
 
 
 
Employee stock-based compensation expense
 
 
 
2,382 
 
2,382 
Stock option exercises
 
 
 
119 
 
119 
Stock option exercises (in shares)
 
36,189 
 
 
 
 
Employee stock purchase program (ESPP)
 
 
 
564 
 
564 
Employee stock purchase program (ESPP) (in shares)
 
44,250 
 
 
 
 
Net loss
 
 
 
 
(41,230)
(41,230)
Balance, end of year at Dec. 31, 2015
 
180 
(260)
294,227 
(175,276)
118,871 
Balance, end of year (in shares) at Dec. 31, 2015
 
18,066,143 
72,727 
 
 
 
Changes in Stockholders' Equity
 
 
 
 
 
 
Employee stock-based compensation expense
 
 
 
3,236 
 
3,236 
Stock option exercises
 
 
918 
 
923 
Stock option exercises (in shares)
 
478,099 
 
 
 
 
Employee stock purchase program (ESPP)
 
 
752 
 
753 
Employee stock purchase program (ESPP) (in shares)
 
122,667 
 
 
 
 
Vested restricted stock (in shares)
 
4,500 
 
 
 
 
Net loss
 
 
 
 
(40,166)
(40,166)
Balance, end of year at Dec. 31, 2016
 
$ 186 
$ (260)
$ 299,133 
$ (215,442)
$ 83,617 
Balance, end of year (in shares) at Dec. 31, 2016
 
18,671,409 
72,727 
 
 
 
Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2016
Dec. 31, 2015
Dec. 31, 2014
Cash flows from operating activities:
 
 
 
Net loss
$ (40,166)
$ (41,230)
$ (5,811)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Goodwill impairment
 
14,278 
 
Depreciation and amortization
1,177 
318 
275 
Provision for doubtful accounts
437 
233 
39 
Provision for warranties
71 
385 
447 
Provision for inventory
1,384 
469 
 
Change in fair value of warrants
39 
(360)
220 
Change in fair value of contingent consideration
37 
 
 
Non-cash interest expense
1,386 
490 
Stock-based compensation expense
3,236 
2,382 
594 
Loss on disposal of property and equipment
124 
 
 
Deferred income taxes
61 
 
 
Changes in assets and liabilities:
 
 
 
Accounts receivable
927 
715 
875 
Prepaid expenses, other current assets and other assets
(529)
147 
(864)
Inventories
2,390 
(898)
1,359 
Insurance recovery receivable
(9,375)
 
 
Accounts payable
(564)
1,546 
(2,266)
Accrued and other liabilities
(1,422)
1,571 
1,385 
Legal settlement payable
10,900 
 
 
Customer deposits
(3,160)
874 
3,707 
Net cash (used in) provided by operating activities
(34,430)
(18,184)
450 
Cash flows from investing activities:
 
 
 
Purchase of property and equipment
(1,126)
(1,128)
(439)
Business acquisition
(11,709)
 
 
Net cash used in investing activities
(12,835)
(1,128)
(439)
Cash flows from financing activities:
 
 
 
Proceeds from exercise of stock options
923 
119 
38 
Proceeds from issuance of common stock, net of underwriters discount
 
62,040 
80,213 
Proceeds from issuance of common stock under ESPP
753 
564 
 
Deferred equity issuance costs, IPO
 
(71)
(3,107)
Deferred equity issuance costs, follow-on offering
 
(643)
 
Proceeds from issuance of long-term debt
 
 
10,000 
Repayment of long-term debt
 
(26,625)
 
Deferred financing costs
 
 
(148)
Net cash provided by financing activities
1,676 
35,384 
86,996 
Net (decrease) increase in cash and cash equivalents
(45,589)
16,072 
87,007 
Cash and cash equivalents at:
 
 
 
Beginning of period
112,801 
96,729 
9,722 
End of period
67,212 
112,801 
96,729 
Supplemental disclosure of cash flow information:
 
 
 
Interest paid
96 
1,884 
1,577 
Supplemental disclosure of non-cash investing and financing activities:
 
 
 
Accrued equity issuance costs
 
 
71 
Property and equipment in accounts payable
939 
22 
44 
Acquisition of business, deferred and contingent consideration obligations at fair value
$ 1,600 
 
 
Formation and Business of the Company
Formation and Business of the Company

1) Formation and Business of the Company

(a)

Formation

Sientra, Inc., or the Company, was incorporated in the State of Delaware on August 29, 2003 under the name Juliet Medical, Inc. and subsequently changed its name to Sientra, Inc. in April 2007. The Company acquired substantially all the assets of Silimed, Inc. on April 4, 2007. The purpose of the acquisition was to acquire the rights to the silicone breast implant clinical trials, related product specifications and pre-market approval, or PMA, assets. Following this acquisition, the Company focused on completing the clinical trials to gain FDA approval to offer its silicone gel breast implants in the United States.

In March 2012, Sientra announced it had received approval from the FDA for its portfolio of silicone gel breast implants, and in the second quarter of 2012 the Company began commercialization efforts to sell its products in the United States. The Company, based in Santa Barbara, California, is a medical aesthetics company that focuses on serving board-certified plastic surgeons and offers a portfolio of silicone shaped and round breast implants, scar management, tissue expanders, and body contouring products.

(b)

Reverse Stock Split

On October 10, 2014, the board of directors and stockholders approved an amendment to the Company’s fourth amended and restated certificate of incorporation, which was filed on October 17, 2014, which effected a 2.75-to-1 reverse stock split of the Company’s issued and outstanding shares of common stock. The par value of the common stock was not adjusted as a result of the reverse stock split. All issued and outstanding shares of common stock, stock options and warrants and the related per share amounts contained in the Company’s financial statements have been retroactively adjusted to reflect this reverse stock split for all periods presented. Also, as a result of the reverse stock split of the common stock, the conversion ratios for all of the Company’s convertible preferred stock have been adjusted such that the preferred stock are now convertible into shares of common stock at a conversion rate of 2.75-to-1 instead of 1-to-1. The number of issued and outstanding shares of preferred stock and their related per share amounts have not been affected by the reverse stock split and therefore have not been adjusted in the Company’s financial statements. However, to the extent that the convertible preferred stock are presented on an as converted to common stock basis, such share and per share amounts contained in the Company’s financial statements have been retroactively adjusted to reflect this reverse stock split for all periods presented.

(c)

Initial Public Offering

On November 3, 2014, the Company completed an initial public offering, or IPO, whereby it sold a total of 5,750,000 shares of common stock at $15.00 per share inclusive of 750,000 shares sold to underwriters for the exercise of their option to purchase additional shares.  The Company received net proceeds from the IPO of approximately $77.0 million, after deducting underwriting discounts and commissions and offering expenses of approximately $9.2 million.  These expenses were recorded against the proceeds received from the IPO.  Common stock is listed on the Nasdaq Stock Exchange under the symbol “SIEN.”

The outstanding shares of convertible preferred stock were converted on a 2.75-to-1 basis into shares of common stock concurrent with the closing of the IPO. All of the outstanding shares of Series A, Series B and Series C preferred stock converted into 8,942,925 shares of common stock. Following the closing of the IPO, there were no shares of preferred stock outstanding.

(d)

Follow-on Offering

On September 23, 2015, the Company closed a follow-on public offering, whereby it sold 3,000,000 shares of its common stock, at a price to the public of $22.00 per share. The Company received net proceeds from the follow-on offering of approximately $61.4 million, after deducting underwriting discounts and commissions of $4.0 million and offering expenses of approximately $0.6 million.

(e)

Regulatory Inquiries Regarding Products Manufactured by Silimed

There have been recent regulatory inquiries related to medical devices manufactured by Silimed Indústria de Implantes Ltda. (formerly, Silimed-Silicone e Instrumental Medico-Cirugio e Hospitalar Ltda.), or Silimed, the Company’s former sole source contract manufacturer for its silicone gel breast implants and certain other products.

On September 23, 2015, the Medicines and Healthcare Products Regulatory Agency, or MHRA, an executive agency of the United Kingdom, or U.K., issued a press release announcing the suspension of sales and implanting in the U.K. of all medical devices manufactured by Silimed following the suspension of the CE and ISO 13485 certifications of these products issued by TÜV SÜD, Silimed’s notified body under European Union, or EU, regulation. The suspension of Silimed’s CE and ISO 13485 certifications by TÜV SÜD followed TÜV SÜD’s inspection at Silimed’s manufacturing facilities in Brazil, relating to the alleged presence of surface particles on Silimed breast products. Breast implants have stringent standards for manufacturing and robust quality systems, but there is no specific or defined standard for surface particles on breast implants. MHRA noted that no risks to patient health have been identified in connection with implanting Silimed-manufactured products, and, accordingly, there is no need to adopt any procedure or action for those patients who have received them.

On October 2, 2015, the Brazilian regulatory agency ANVISA and the Department of the Secretary of State of the State of Rio de Janeiro announced suspension of the manufacturing and shipment of all medical devices made by Silimed, including products manufactured for Sientra, while they continue to review the technical compliance related to cGMP, of Silimed’s manufacturing facility. ANVISA reiterated that no risks to patient health have been identified in connection with implanting Silimed-manufactured products, and, accordingly, there is no need to adopt any procedure or action for those patients who have received them. Furthermore, ANVISA also indicated that, based on its contact to date with foreign regulatory authorities, there have been no reports of adverse events related to this issue.

On October 9, 2015, the Company voluntarily placed a hold on the sale of all Sientra devices manufactured by Silimed and recommended that plastic surgeons discontinue implanting the devices until further notice.  The Company had ongoing discussions with the FDA regarding European and Brazilian regulatory inquiries into Silimed-manufactured products, and the Company conducted its own review of the matter with the assistance of independent experts in quality management systems, cGMP and data-based risk assessment.  The FDA also reiterated that no reports of adverse events and no risks to patient health had been identified in connection with implanting Silimed-manufactured products.

On January 27, 2016, after completing an analysis and risk assessment, ANVISA announced its authorization of Silimed to resume the commercialization and use of its previously manufactured products.  ANVISA concluded there was no evidence to prove that the presence of surface particles on the silicone implants represented risks which are additional to the ones inherent in the product.  However, Silimed would continue to be suspended from manufacturing and commercializing new batches of implants until an inspection was performed to reassess the fulfillment of its GMP compliance.

On March 1, 2016, after the completion of extensive independent, third-party testing and analyses of its devices manufactured by Silimed, the Company lifted the temporary hold on the sale of such devices and informed its Plastic Surgeons of the Company’s controlled market re-entry plan designed to optimize the Company’s inventory supply. The results of the Company’s testing indicate no significant safety concerns with the use of its products, including its breast implants, consistent with their approval status since 2012.

On July 11, 2016, after completing an inspection of Silimed’s facility, ANVISA announced the reinstatement of Silimed’s GMP certificate and their ability to manufacture commercial products. The Brazilian GMP certificate is effective as of July 8, 2016 and is valid for two years. The Silimed facility that has been approved for manufacturing is a different facility from where Sientra breast implants were previously manufactured, which was damaged by a fire on October 22, 2015, and it remains unclear as to whether this different facility is fully equipped to manufacture Sientra’s silicone gel breast implants. Moreover, even if this different facility was equipped to manufacture Sientra’s silicone gel breast implants, such products cannot be sold in the U.S. until a PMA supplement for that facility is submitted, Silimed’s operations have been fully validated to U.S. FDA standards and they have successfully passed an FDA inspection, the timing of which remains uncertain. Additionally, the suspension of Silimed’s CE and ISO 13485 certifications by TÜV SÜD remains in place and continues to limit Silimed’s ability to sell to countries requiring a CE mark. The Company’s existing manufacturing contract with Silimed expires on its terms on April 1, 2017.

 

For more information on the status of the Company’s relationship with Silimed, see Note 9—Commitments and Contingencies.

 

Summary of Significant Accounting Policies
Summary of Significant Accounting Policies

(2) Summary of Significant Accounting Policies

(a)Basis of Presentation and Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America, or GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Assets and liabilities which are subject to significant judgment and use of estimates include the allowance for doubtful accounts, sales return reserves, provision for warranties, valuation of inventories, recoverability of long-lived assets, valuation allowances with respect to deferred tax assets, useful lives associated with property and equipment and finite lived intangible assets, and the valuation and assumptions underlying stock-based compensation and other equity instruments. On an ongoing basis, the Company evaluates its estimates compared to historical experience and trends, which form the basis for making judgments about the carrying value of assets and liabilities. In addition, the Company engages the assistance of valuation specialists in concluding on fair value measurements in connection with stock-based compensation and other equity instruments.

(b)Liquidity

Since inception, the Company has incurred net losses. During the years ended December 31, 2016,  2015, and 2014 the Company incurred net losses of $40.2 million,  $41.2 million, and $5.8 million, respectively. The Company used $34.4 million of cash in operations for the year ended December 31, 2016,  used $18.2 million cash in operations during the year ended December 31, 2015 and provided $0.5 million of cash in operations during the year ended December 31, 2014. At December 31, 2016 and 2015 the Company had an accumulated deficit of $215.4 million and $175.3 million, respectively. At December 31, 2016, the Company had cash and cash equivalents of $67.2 million. The accompanying financial statements have been prepared on a going concern basis, which implies the Company will continue to realize its assets and discharge its liabilities in the normal course of business. As of December 31, 2016, the Company’s existing manufacturing contract with Silimed, the Company’s former sole source, third-party manufacturer of silicone gel breast implants expires on its terms on April 1, 2017, and the Company does not intend to renew that contract with Silimed.  Accordingly, the Company continues to evaluate the availability of alternative manufacturing sources, including with Vesta Intermediate Funding, Inc., or Vesta, a Lubrizol Lifesciences company, which is establishing manufacturing capacity for the Company and with which the Company recently executed a definitive manufacturing agreement for the long-term supply of the Company’s PMA-approved breast implants. The continuation of the Company as a going concern is dependent upon many factors including resolution of any outstanding disputes with Silimed (see Note 9—Commitments and Contingencies), the availability of alternative manufacturing sources, and continued sale of the Company’s products. The Company believes that it has the ability to continue as a going concern for at least 12 months from the date the Company’s financial statements are issued. These financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

(c)Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with an original maturity of three months or less when purchased to be cash equivalents. Cash and cash equivalents consist primarily of cash in checking accounts and interest-bearing money market accounts.

(d)Concentration of Credit and Supplier Risks

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents. The Company’s cash and cash equivalents are deposited in demand accounts at a financial institution that management believes is creditworthy. The Company is exposed to credit risk in the event of default by this financial institution for cash and cash equivalents in excess of amounts insured by the Federal Deposit Insurance Corporation, or FDIC. Management believes that the Company’s investments in cash and cash equivalents are financially sound and have minimal credit risk and the Company has not experienced any losses on its deposits of cash and cash equivalents. 

The Company relies on a limited number of third-party manufacturers for the manufacturing and supply of its products.  This could result in the Company not being able to acquire the inventory needed to meet customer demand, which would result in possible loss of sales and affect operating results adversely.

(e)Fair Value of Financial Instruments

The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, and customer deposits are reasonable estimates of their fair value because of the short maturity of these items. The fair value of the common stock warrant liability is discussed in Note 2.  As of December 31, 2016 and 2015, the Company had no outstanding long-term debt.

(f)Fair Value Measurements

Certain assets and liabilities are carried at fair value under GAAP. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.

Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three levels of the fair value hierarchy, of which the first two are considered observable and the last is considered unobservable:

·

Level 1 — Quoted prices in active markets for identical assets or liabilities.

·

Level 2 — Observable inputs (other than Level 1 quoted prices) such as quoted prices in active markets for similar assets or liabilities, quoted prices in markets that are not active for identical or similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data.

·

Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to determining the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques.

The Company’s common stock warrant liabilities are carried at fair value determined according to the fair value hierarchy described above. The Company has utilized an option pricing valuation model to determine the fair value of its outstanding common stock warrant liabilities. The inputs to the model include fair value of the common stock related to the warrant, exercise price of the warrant, expected term, expected volatility, risk-free interest rate and dividend yield.  The warrants are valued using the fair value of common stock as of the measurement date. The Company historically has been a private company and lacks company-specific historical and implied volatility information of its stock. Therefore, it estimates its expected stock volatility based on the historical volatility of publicly traded peer companies for a term equal to the remaining contractual term of the warrants. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve for time periods approximately equal to the remaining contractual term of the warrants. The Company has estimated a 0% dividend yield based on the expected dividend yield and the fact that the Company has never paid or declared dividends. As several significant inputs are not observable, the overall fair value measurement of the warrants is classified as Level 3.

The Company assessed the fair value of the deferred consideration and contingent consideration for future royalty payments related to the acquisition of bioCorneum® and the contingent consideration for future milestone payments for the acquisition of the tissue expander portfolio from SSP using the Monte-Carlo simulation model. Significant assumptions used in the measurement include future net sales for a defined term and the risk-adjusted discount rate associated with the business. As the inputs are not observable, the overall, fair value measurement of the deferred consideration and contingent consideration is classified as Level 3.

 

 

The following tables present information about the Company’s liabilities that are measured at fair value on a recurring basis as of December 31, 2016 and 2015 and indicate the level of the fair value hierarchy utilized to determine such fair value (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements as of

 

 

 

December 31, 2016 Using:

 

 

    

Level 1

    

 

Level 2

    

 

Level 3

    

 

Total

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Liability for common stock warrants

 

$

 

 

 

 

99

 

 

99

 

Liability for deferred consideration

 

 

 

 

 

 

395

 

 

395

 

Liability for contingent consideration

 

 

 

 

 

 

1,242

 

 

1,242

 

 

 

$

 —

 

 

 —

 

 

1,736

 

 

1,736

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements as of

 

 

 

December 31, 2015 Using:

 

 

    

Level 1

    

 

Level 2

    

 

Level 3

    

 

Total

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Liability for common stock warrants

 

$

 

 

 

 

60

 

 

60

 

 

 

$

 —

 

 

 —

 

 

60

 

 

60

 

 

The liability for common stock warrants is included in “accrued and other current liabilities” and the liability for the deferred consideration and contingent consideration is included in “warranty reserve and other long-term liabilities” in the balance sheet. The following table provides a rollforward of the aggregate fair values of the Company’s common stock warrants, deferred and contingent consideration for which fair value is determined by Level 3 inputs (in thousands):

 

 

 

 

 

Warrant Liability

 

 

 

Balance, December 31, 2015

$

60

 

Increase in fair value through December 31, 2016

 

39

 

Balance, December 31, 2016

$

99

 

 

 

 

 

Deferred Consideration Liability

 

 

 

Balance, December 31, 2015

$

 —

 

Initial fair value of acquisition-related deferred consideration

 

434

 

Change in fair value of deferred consideration

 

(39)

 

Balance, December 31, 2016

$

395

 

 

 

 

 

Contingent Consideration Liability

 

 

 

Balance, December 31, 2015

$

 —

 

Initial fair value of acquisition-related contingent consideration

 

1,166

 

Change in fair value of contingent consideration

 

76

 

Balance, December 31, 2016

$

1,242

 

 

The Company recognizes changes in the fair value of the warrants in “other income (expense), net” in the statement of operations and changes in deferred consideration and contingent consideration are recognized in “general and administrative” expense in the statement of operations.

 

(g)Property and Equipment

Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is computed using the straight‑line method over the estimated useful life of the asset, generally three years. Leasehold improvements are depreciated over the shorter of the lease term or the estimated useful life of the related asset. Upon retirement or sale of an asset, the cost and related accumulated depreciation or amortization are removed from the balance sheet and any resulting gain or loss is reflected in operations in the period realized. Maintenance and repairs are charged to operations as incurred.

(h)Goodwill and Other Intangible Assets

Goodwill represents the excess of the purchase price over the fair value of net assets of purchased businesses. Goodwill is not amortized, but instead is subject to impairment tests on at least an annual basis and whenever circumstances suggest that goodwill may be impaired. The Company’s annual test for impairment is performed as of October 1 of each fiscal year. The Company makes a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the two‑step goodwill impairment test. If the Company concludes that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, it is not required to perform the two‑step impairment test for that reporting unit.

Under the first step of the test, the Company is required to compare the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered impaired and the second step of the test is not performed. If the results of the first step of the impairment test indicate that the fair value of a reporting unit does not exceed its carrying amount, then the second step of the test is required. The second step of the test compares the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. The impairment loss is measured by the excess of the carrying amount of the reporting unit goodwill over the implied fair value of that goodwill.

Management evaluates the Company as a single reporting unit for business and operating purposes as all of the Company’s revenue streams are generated by the same underlying products via sales in the United States of America. In addition, the majority of the Company’s costs are, by their nature, shared costs that are not specifically identifiable to a geography or product line, but relate to all products. As a result, there is a high degree of interdependency among the Company’s net sales and cash flows for the entity and identifiable cash flows for a reporting unit separate from the entity are not meaningful.

The Company tests indefinite-lived intangible assets for impairment on at least an annual basis and whenever circumstances suggest the assets may be impaired. The Company’s annual test for impairment is performed as of October 1 of each fiscal year. If indicators of impairment are present, we evaluate the carrying value of the intangible assets in relation to estimates of future undiscounted cash flows. The Company also evaluates the remaining useful life of an indefinite-lived intangible asset to determine whether events and circumstances continue to support an indefinite useful life.

Judgments about the recoverability of purchased finite‑lived intangible assets are made whenever events or changes in circumstance indicate that impairment may exist. Each fiscal year the Company evaluates the estimated remaining useful lives of purchased intangible assets and whether events or changes in circumstance warrant a revision to the remaining periods of amortization. Recoverability of finite‑lived intangible assets is measured by comparison of the carrying amount of the asset to the future undiscounted cash flows the asset is expected to generate. The intangible asset is amortized to the statement of operations based on estimated cash flows generated from the intangible over its estimated life.

(i)Impairment of Long‑Lived Assets

The Company’s management routinely considers whether indicators of impairment of long‑lived assets are present. If such indicators are present, management determines whether the sum of the estimated undiscounted cash flows attributable to the assets in question is less than their carrying value. If less, the Company will recognize an impairment loss based on the excess of the carrying amount of the assets over their respective fair values. Fair value is determined by discounted future cash flows, appraisals or other methods. If the assets determined to be impaired are to be held and used, the Company will recognize an impairment charge to the extent the present value of anticipated net cash flows attributable to the asset are less than the asset’s carrying value. The fair value of the asset will then become the asset’s new carrying value. There have been no impairments of long‑lived assets recorded during the years ended December 31, 2016,  2015 and 2014. The Company may record impairment losses in future periods if factors influencing its estimates change.

(j)Business Combinations

Business combinations are accounted for using the acquisition method of accounting. Under the acquisition method, assets acquired and liabilities assumed are recorded at their respective fair values as of the acquisition date in our financial statements. The excess of the fair value of consideration transferred over the fair value of the net assets acquired is recorded as goodwill. Contingent consideration obligations incurred in connection with a business combination are recorded at their fair values on the acquisition date and remeasured at their fair values each subsequent reporting period until the related contingencies are resolved. The resulting changes in fair values are recorded in earnings.

(k)Revenue Recognition

The Company sells its product directly to customers in markets where it has regulatory approval. The Company offers a six-month return policy and recognizes revenue net of sales discounts and returns in accordance with the Financial Accounting Standards Board, or FASB, Accounting Standards Codification 605, Revenue Recognition, or ASC 605. ASC 605 requires that six basic criteria must be met before revenue can be recognized when a right of return exists:

·

the seller’s price to the buyer is substantially fixed or determinable at the date of sale;

·

the buyer has paid the seller, or the buyer is obligated to pay the seller and the obligation is not contingent on resale of the product;

·

the buyer’s obligation to the seller would not be changed in the event of theft or physical destruction or damage of the product;

·

the buyer acquiring the product for resale has economic substance apart from that provided by the seller;

·

the seller does not have significant obligations for future performance to directly bring about resale of the product by the buyer; and

·

the amount of future returns can be reasonably estimated.

Appropriate reserves are established for anticipated sales returns based on historical experience, recent gross sales and any notification of pending returns. The Company recognizes revenue when title to the product and risk of loss transfer to customers, provided there are no remaining performance obligations required of the Company or any written matters requiring customer acceptance. The Company allows for the return of product from customers within six months after the original sale and records estimated sales returns as a reduction of sales in the same period revenue is recognized. Sales return provisions are calculated based upon historical experience with actual returns. Actual sales returns in any future period are inherently uncertain and thus may differ from the estimates. If actual sales returns differ significantly from the estimates, an adjustment to revenue in the current or subsequent period would be recorded. The Company has established an allowance for sales returns of $3.9 million and $0.7 million as of December 31, 2016 and 2015, respectively, recorded net against accounts receivable in the balance sheet.

A portion of the Company’s revenue is generated from the sale of consigned inventory of breast implants maintained at doctor, hospital, and clinic locations. The customer is contractually obligated to maintain a specific level of inventory and to notify the Company upon use. For these products, revenue is recognized at the time the Company is notified by the customer that the product has been implanted. Notification is usually through the replenishing of the inventory and the Company periodically reviews consignment inventories to confirm accuracy of customer reporting. FDA regulations require tracking the sales of all implanted breast implant products.

Shipping and handling charges are largely provided to customers free of charge. The associated costs are viewed as part of the Company’s marketing programs and are recorded as a component of sales and marketing expense in the statement of operations as an accounting policy election. For the years ended 2016,  2015 and 2014 these costs amounted to $0.6 million, $1.1 million and $1.3 million, respectively.

In other cases, shipping and handling charges may be invoiced to customers based on the amount of products sold. In such cases, shipping and handling fees collected are recorded as revenue and the related expense as a component of cost of goods sold.

 

(l)Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable are recorded at the invoiced amount and do not bear interest. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability to collect from some of its customers. The allowances for doubtful accounts are based on the analysis of historical bad debts, customer credit‑worthiness, past transaction history with the customer, and current economic trends. If the financial condition of the Company’s customers were to deteriorate, adversely affecting their ability to make payments, additional allowances may be required. The Company has established an allowance for doubtful accounts of $0.4 million and $0.5 million as of December 31, 2016 and 2015, respectively.

(m)Inventories and Cost of Goods Sold

Inventories represent finished goods that are recorded at the lower of cost or market on a first‑in, first‑out basis, or FIFO. The Company periodically assesses the recoverability of all inventories to determine whether adjustments for impairment or obsolescence are required. The Company evaluates the remaining shelf life and other general obsolescence and impairment criteria in assessing the recoverability of the Company’s inventory.

The Company recognizes the cost of inventory transferred to the customer in cost of goods sold when revenue is recognized.

At December 31, 2016 and 2015, approximately $2.0 million and $2.3 million, respectively, of the Company’s inventory was held on consignment at doctors’ offices, clinics, and hospitals. The value and quantity at any one location is not significant.

 

(n)Income Taxes

The Company accounts for income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized.

The Company operates in several tax jurisdictions and is subject to taxes in each jurisdiction in which it conducts business. To date, the Company has incurred cumulative net losses and maintains a full valuation allowance on its net deferred tax assets due to the uncertainty surrounding realization of such assets. However, the Company has deferred tax liabilities associated with indefinite lived intangible assets that cannot be considered sources of income to support the realization of the deferred tax assets, and has provided for tax expense and a corresponding deferred tax liability associated with these indefinite lived intangible assets. Tax expense was $0.1 million and $0.0 million for the years ended December 31, 2016 and 2015, respectively.

 

The Company accounts for uncertain tax position in accordance with ASC 740‑10, Accounting for Uncertainty in Income Taxes. The Company assesses all material positions taken in any income tax return, including all significant uncertain positions, in all tax years that are still subject to assessment or challenge by relevant taxing authorities. Assessing an uncertain tax position begins with the initial determination of the position’s sustainability and is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. As of each balance sheet date, unresolved uncertain tax positions must be reassessed, and the Company will determine whether (i) the factors underlying the sustainability assertion have changed and (ii) the amount of the recognized tax benefit is still appropriate. The recognition and measurement of tax benefits requires significant judgment. Judgments concerning the recognition and measurement of tax benefit might change as new information becomes available.

(o)Research and Development Expenditures

Research and development costs are charged to operating expenses as incurred. Research and development, or R&D, primarily consist of clinical expenses, regulatory expenses, product development, consulting services, outside research activities, quality control and other costs associated with the development of the Company’s products and compliance with Good Clinical Practices, or GCP, requirements. R&D expenses also include related personnel and consultant compensation and stock-based compensation expense.

(p)Advertising

Expenses related to advertising are charged to sales and marketing expense as incurred. Advertising costs were $0.6 million, $1.0 million and $1.5 million for the years 2016,  2015 and 2014, respectively.

(q)Stock‑Based Compensation

The Company applies the fair value provisions of ASC 718, Compensation — Stock Compensation, or ASC 718. ASC 718 requires the recognition of compensation expense, using a fair‑value based method, for costs related to all employee share‑based payments, including stock options, restricted stock units, and the employee stock purchase plan. ASC 718 requires companies to estimate the fair value of share‑based payment awards on the date of grant using an option‑pricing model. We estimate the fair value of our stock‑based awards to employees and directors using the Black‑Scholes option pricing model. The grant date fair value of a stock‑based award is recognized as an expense over the requisite service period of the award on a straight‑line basis. In addition, we use the Monte-Carlo simulation option-pricing model to determine the fair value of market-based awards. The Monte-Carlo simulation option-pricing model uses the same input assumptions as the Black-Scholes model; however, it also further incorporates into the fair-value determination the possibility that the market condition may not be satisfied. Compensation costs related to these awards are recognized regardless of whether the market condition is satisfied, provided that the requisite service has been provided.

The option-pricing models require the input of subjective assumptions, including the risk‑free interest rate, expected dividend yield, expected volatility and expected term, among other inputs. These estimates involve inherent uncertainties and the application of management’s judgment. If factors change and different assumptions are used, our stock‑based compensation expense could be materially different in the future. These assumptions are estimated as follows:

·

Risk‑free interest rate—The risk‑free interest rate is based on the yields of U.S. Treasury securities with maturities similar to the expected term of the options for each option group.

·

Dividend yield—We have never declared or paid any cash dividends and do not presently plan to pay cash dividends in the foreseeable future. Consequently, we used an expected dividend yield of zero.

·

Expected volatility—As we do not have a significant trading history for our common stock, the expected stock price volatility for our common stock was estimated by taking the average of (i) the median historic price volatility and (ii) the median of the implied volatility averages, with a three‑month lookback from the valuation date, for any trading options of industry peers based on daily price observations over a period equivalent to the expected term of the time to a liquidity event. We intend to continue to consistently apply this process using the same or similar public companies until a sufficient amount of historical information regarding the volatility of our own common stock share price becomes available.

·

Expected term—The expected term represents the period that our stock‑based awards are expected to be outstanding.

The following table presents the weighted‑average assumptions used to estimate the fair value of options granted during the periods presented:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31,

 

Stock Options

 

2016

 

2015

 

2014

 

Expected term (in years)

 

5.47

 

to

6.07

 

 

5.27

 

to

6.08

 

 

5.77

 

to

6.08

 

 

Expected volatility

 

51

%

to

53

%

 

45

%

to

52

%

 

52

%

to

57

%

 

Risk-free interest rate

 

1.42

%

to

1.54

%

 

1.48

%

to

1.92

%

 

1.71

%

to

2.00

%

 

Dividend yield

 

 

 

 

In addition to the assumptions used in the option-pricing models, the amount of stock‑based compensation expense we recognize in our financial statements includes an estimate of stock option forfeitures. We estimate our forfeiture rate based on an analysis of our actual forfeitures and will continue to evaluate the appropriateness of the forfeiture rate based on actual forfeiture experience, analysis of employee turnover and other factors. Changes in the estimated forfeiture rate can have a significant impact on our stock‑based compensation expense as the cumulative effect of adjusting the rate is recognized in the period the forfeiture estimate is changed. If a revised forfeiture rate is higher than the previously estimated forfeiture rate, an adjustment is made that will result in a decrease to the stock‑based compensation expense recognized in the financial statements. If a revised forfeiture rate is lower than the previously estimated forfeiture rate, an adjustment is made that will result in an increase to the stock‑based compensation expense recognized in our financial statements.

The following table presents the weighted-average assumptions used to estimate the fair value of the stock purchase rights granted under the employee stock purchase plan:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Year Ended December 31,

 

ESPP

 

2016

 

2015

 

2014

 

Expected term (in years)

 

0.50

 

to

2.10

 

 

0.50

 

to

2.10

 

 

0.63

 

to

2.14

 

 

Expected volatility

 

42

%

to

58

%

 

42

%

to

44

%

 

43

%

to

44

%

 

Risk-free interest rate

 

0.08

%

to

0.85

%

 

0.08

%

to

0.71

%

 

0.08

%

to

0.49

%

 

Dividend yield

 

 

 

 

 

 (r)Product Warranties

The Company offers a limited warranty and a lifetime product replacement program for the Company’s silicone gel breast implants. Under the limited warranty, the Company will reimburse patients for certain out-of-pocket costs related to revision surgeries performed within ten years from the date of implantation in a covered event. Under the lifetime product replacement program, the Company provides no-charge replacement breast implants if a patient experiences a covered event. The programs are available to all patients implanted with the Company’s silicone breast implants after April 1, 2012 and are subject to the terms, conditions, claim procedures, limitations and exclusions. Timely completion of a device tracking and warranty enrollment form by the patient’s Plastic Surgeon is required to activate the programs and for the patient to be able to receive benefits under either program.

 

The following table provides a rollforward of the accrued warranties (in thousands):

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31,

 

    

 

 

2016

 

 

2015

 

Beginning balance as of January 1

 

$

1,332

 

$

961

 

Payments made during the period

 

 

(25)

 

 

(14)

 

Changes in accrual related to warranties issued during the period

 

 

177

 

 

420

 

Changes in accrual related to pre-existing warranties

 

 

(106)

 

 

(35)

 

Balance as of December 31

 

$

1,378

 

$

1,332

 

 

(s)Segment Information

Management has determined that it has one business activity and operates in one segment as it only reports financial information on an aggregate basis to its Chief Executive Officer, who is the Company’s chief operating decision maker. All tangible assets are held in the United States.

(t)Net Loss Per Share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

    

2016

    

2015

    

2014

 

Net loss (in thousands)

 

$

(40,166)

 

$

(41,230)

 

$

(5,811)

 

Weighted average common shares outstanding, basic and diluted

 

 

18,233,177

 

 

15,770,972

 

 

2,545,371

 

Net loss per share attributable to common stockholders

 

$

(2.20)

 

$

(2.61)

 

$

(2.28)

 

 

The Company excluded the following potentially dilutive securities, outstanding as of December 31, 2016,  2015 and 2014 from the computation of diluted net loss per share attributable to common stockholders for the years ended December 31, 2016,  2015 and 2014 because they had an anti-dilutive impact due to the net loss attributable to common stockholders incurred for the periods.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

    

2016

 

2015

 

2014

 

Stock options to purchase common stock

 

 

2,057,296

 

 

1,967,906

 

 

1,613,544

 

Warrants for the purchase of common stock

 

 

47,710

 

 

47,710

 

 

47,710

 

 

 

 

2,105,006

 

 

2,015,616

 

 

1,661,254

 

 

(u)Recent Accounting Pronouncements

Recently Adopted Accounting Standards

 

In November 2015, the Financial Accounting Standards Board, or FASB, issued accounting standard update, or ASU, 2015-17, Balance Sheet Classification of Deferred Taxes, which simplifies the presentation of deferred income taxes. The standard requires that deferred tax assets and liabilities be classified as noncurrent on the balance sheet rather than being separated into current and noncurrent. ASU 2015-17 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. Early adoption is permitted and the standard may be applied either retrospectively or on a prospective basis to all deferred tax assets and liabilities. The Company early adopted ASU 2015-17 during the third quarter of 2016 on a prospective basis. The adoption of this ASU did not have a significant impact on the Company’s financial statements.

 

 In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statement—Going Concern. The standard was issued to provide guidance about management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosures. ASU 2014-15 is effective for fiscal years ending after December 15, 2016. The Company adopted ASU 2014-15 for the year ended December 31, 2016. The adoption of this ASU did not have a significant impact on the Company’s financial statements.

 

Recently Issued Accounting Standards

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers.  The standard was issued to provide a single framework that replaces existing industry and transaction specific GAAP with a five step analysis of transactions to determine when and how revenue is recognized. The accounting standard update will replace most existing revenue recognition guidance in GAAP when it becomes effective. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, to defer the effective date of ASU 2014-09 by one year.  Therefore, ASU 2014-09 will become effective for the Company beginning in fiscal year 2018. Early adoption would be permitted for the Company beginning in fiscal year 2017. The standard permits the use of either the retrospective or cumulative transition method.  In December 2016, the FASB issued ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers. ASU 2016-20 is intended to clarify and suggest improvements to the application of current standards under Topic 606 and other Topics amended by ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The effective date of ASU 2016-20 is the same as the effective date for ASU 2014-09. In preparation for our adoption of the new standard in our fiscal year ending December 31, 2018, we are reviewing contracts and other forms of agreements with our customers and are evaluating the provisions contained therein in light of the five-step model specified by the new guidance. That five-step model includes: (1) determination of whether a contract—an agreement between two or more parties that creates legally enforceable rights and obligations—exists; (2) identification of the performance obligations in the contract; (3) determination of the transaction price; (4) allocation of the transaction price to the performance obligations in the contract; and (5) recognition of revenue when (or as) the performance obligation is satisfied. We are also evaluating the impact of the new standard on certain common practices currently employed by us and by other medical device companies, such as allowance for sales returns, rebates and other pricing programs. We have not yet determined the impact of the new standard on our financial statements or whether we will adopt on a prospective or retrospective basis in the first quarter of our fiscal year ending December 31, 2018.

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) which supersedes FASB Accounting Standard Codification Leases (Topic 840). The standard is intended to increase the transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This accounting standard update will be effective for the Company beginning in fiscal year 2019. The Company is currently evaluating the impact that adoption of the standard will have on the financial statements and related disclosures.

 

In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718). The standard identifies areas for simplification involving several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the statement of cash flows. This accounting standard update will be effective for the Company beginning in fiscal year 2017. The Company is currently evaluating the impact that adoption of the standard will have on the financial statements and related disclosures.

 

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows – Classifications of Certain Cash Receipts and Cash Payments (Topic 230). The standard update addresses eight specific cash flow issues not currently addressed by GAAP, with the objective of reducing the existing diversity in practice of how these cash receipts and payments are presented and classified in the statement of cash flows. This accounting standard update will be effective for the Company beginning in fiscal year 2018. The Company is currently evaluating the impact that adoption of the standard will have on the financial statements and related disclosures.

 

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805) - Clarifying the Definition of a Business. The standard adds guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses by providing a more specific definition of a business. The updated accounting standard will be effective for the Company beginning in fiscal year 2018. This ASU currently has no impact on the Company; however, the Company will evaluate the impact of this ASU on future business acquisitions.

 

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment. The standard update eliminates Step 2 from the goodwill impairment test. The guidance requires an entity to perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. In addition, the guidance eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment. The standard will be effective for the Company beginning in fiscal year 2020. Early adoption is permitted for interim and annual goodwill impairment tests performed after January 1, 2017. The Company is currently evaluating the impact that adoption of the standard will have on the financial statements and related disclosures.

Acquisitions
Acquisitions

(3) Acquisitions

(a)Acquisition of bioCorneum®

 

On March 9, 2016, the Company entered into an asset purchase agreement with Enaltus LLC, or Enaltus, to acquire exclusive U.S. rights to bioCorneum®, an advanced silicone scar treatment marketed exclusively to physicians. The acquisition of bioCorneum® aligns with the Company’s business development objectives and adds a complementary product that serves the needs of its customers. In connection with the acquisition, the Company recorded $0.2 million of professional fees for the year ended December 31, 2016, which is included in general and administrative expense. The aggregate preliminary acquisition date fair value of the consideration transferred was estimated at $7.4 million, which consisted of the following (in thousands):

 

 

 

 

 

 

 

Fair Value

Cash

 

$

6,859

Deferred consideration

 

 

434

Contingent consideration

 

 

116

 

 

$

7,409

 

The deferred consideration and contingent consideration consist of future royalty payments to be paid on a quarterly basis to Enaltus on future bioCorneum® sales for the 4.5 years beginning January 1, 2024. The Company has determined the fair value of the deferred consideration and contingent consideration at the acquisition date using a Monte-Carlo simulation model. The fair value of the deferred consideration is based on the future minimum royalty payments using the risk-free U.S. Treasury yield curve discount rate. The minimum estimated future payments due under the deferred consideration are $0.5 million. The fair value of the contingent consideration is based on projected future bioCorneum® sales and a risk-adjusted discount rate. The terms of the agreement do not provide for a limitation on the maximum potential future payments. The inputs are significant inputs not observable in the market, which are referred to as Level 3 inputs and are further discussed in Note 5. The deferred consideration and contingent consideration components are classified as other long-term liability and are subject to the recognition of subsequent changes in fair value through general and administrative expense in the statement of operations.

 

The Company allocated the total consideration transferred to the tangible and identifiable intangible assets acquired based on their respective fair values on the acquisition date, with the remaining unallocated amount recorded as goodwill. The goodwill arising from the transaction is primarily attributable to expected operational synergies, and all of goodwill will be deductible for income tax purposes. The financial statements for the year ended December 31, 2016 include the results of operations of bioCorneum® from the date of acquisition.

 

The following table summarizes the allocation of the fair value of the consideration transferred by major class for the business combination completed on March 9, 2016 (in thousands):

 

 

 

 

 

 

    

March 9,

 

 

2016

Inventory

 

$

100

Prepaid expenses

 

 

36

Goodwill

 

 

3,273

Intangible assets

 

 

4,000

 

 

$

7,409

 

A summary of the intangible assets acquired, estimated useful lives and amortization method is as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

    

    

 

Estimated useful

 

Amortization

 

 

Amount

 

life (in years)

 

method

Customer relationships

 

$

3,200

 

10

 

Accelerated

Trade name

 

 

800

 

12

 

Straight-line

 

 

$

4,000

 

 

 

 

 

The Company retained an independent third-party appraiser to assist management in its valuation and the purchase price has been finalized. Pro forma results of operations have not been presented because the effect of the acquisition was not material to the Company's results of operations.

 

(b)Acquisition of Tissue Expander Portfolio from Specialty Surgical Products, Inc.

 

On November 2, 2016, the Company entered into an asset purchase agreement with Specialty Surgical Products, Inc., or SSP, to acquire certain assets, consisting of the Dermaspan™, Softspan™, and AlloX2® tissue expanders, from SSP. The acquisition adds a complete portfolio of premium, differentiated tissue expanders and aligns with the Company’s business development plans for growth in the breast reconstruction market. In connection with the acquisition, the Company recorded $0.1 million of professional fees for the year ended December 31, 2016, which is included in general and administrative expense. The aggregate preliminary acquisition date fair value of the consideration transferred was estimated at $6.0 million, which consisted of the following (in thousands):

 

 

 

 

 

 

 

Fair Value

Cash

 

$

4,950

Contingent consideration

 

 

1,050

 

 

$

6,000

 

The contingent consideration consists of future cash payments of a maximum of $2.0 million to be paid to SSP based upon the achievement of certain milestones of future net sales. The Company has determined the fair value of the contingent consideration at the acquisition date using a Monte-Carlo simulation model. The inputs include the estimated amount and timing of future net sales, and a risk-adjusted discount rate. The inputs are significant inputs not observable in the market, which are referred to as Level 3 inputs and are further discussed in Note 5. The contingent consideration components are classified as other long-term liabilities and are subject to the recognition of subsequent changes in fair value through general and administrative expense in the statement of operations.

 

The Company allocated the total consideration transferred to the tangible and identifiable intangible assets acquired and liabilities assumed based on their respective fair values on the acquisition date, with the remaining unallocated amount recorded as goodwill. The goodwill arising from the transaction is primarily attributable to expected operational synergies, and all of goodwill will be deductible for income tax purposes. The financial statements for the year ended December 31, 2016 include the results of operations of the Dermaspan™, Softspan™, and AlloX2® tissue expanders from the date of acquisition.

 

The following table summarizes the allocation of the fair value of the consideration transferred by major class for the business combination completed on November 2, 2016 (in thousands):

 

 

 

 

 

 

    

November 2,

 

 

2016

Accounts receivable, net

 

$

196

Inventory

 

 

1,555

Equipment

 

 

34

Goodwill

 

 

1,605

Intangible assets

 

 

2,860

Liabilities assumed

 

 

(250)

 

 

$

6,000

 

 

 

 

 

A summary of the intangible assets acquired, estimated useful lives and amortization method is as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

    

    

 

Estimated useful

 

Amortization

 

 

Amount

 

life

 

method

Customer relationships

 

$

1,740

 

9 years

 

Accelerated

Regulatory approvals

 

 

670

 

14 months

 

Straight-line

Trade names

 

 

450

 

indefinite-lived

 

 

 

 

$

2,860

 

 

 

 

 

The Company retained an independent third-party appraiser to assist management in its valuation; however, the purchase price allocation has not been finalized. The primary areas of the preliminary purchase price allocation that are not yet finalized relate to the fair values of certain tangible assets and liabilities acquired, the valuation of intangible assets acquired, and residual goodwill. The Company expects to continue to obtain information to assist in determining the fair value of the net assets acquired at the acquisition date during the measurement period. The preliminary allocation of the purchase price is based on the best estimates of management and is subject to revision based on the final valuations and estimates of useful lives.

 

Pro forma results of operations have not been presented because the effect of the acquisition was not material to the Company's results of operations.

Balance Sheet Components
Balance Sheet Components

(4) Balance Sheet Components

Property and equipment, net consist of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

 

2016

 

2015

 

Leasehold improvements

 

$

86

 

$

86

 

Laboratory equipment and toolings

 

 

2,264

 

 

366

 

Computer equipment

 

 

287

 

 

277

 

Software

 

 

669

 

 

655

 

Office equipment

 

 

129

 

 

137

 

Furniture and fixtures

 

 

743

 

 

724

 

 

 

 

4,178

 

 

2,245

 

Less accumulated depreciation

 

 

(1,192)

 

 

(841)

 

 

 

$

2,986

 

$

1,404

 

Depreciation expense for the years ended December 31, 2016,  2015 and 2014 was $0.4 million, $0.3 million and $0.2 million, respectively.

Accrued and other current liabilities consist of the following:

 

 

 

 

 

 

 

 

 

 

    

December 31,

 

 

 

2016

 

2015

 

Accrued clinical trial and research and development expenses

 

$

119

 

$

215

 

Audit, consulting and legal fees

 

 

803

 

 

1,208

 

Payroll and related expenses

 

 

2,592

 

 

2,494

 

Accrued commission

 

 

1,222

 

 

1,960

 

Warrant liability

 

 

99

 

 

60

 

Other

 

 

1,672

 

 

1,022

 

 

 

$

6,507

 

$

6,959

 

 

Goodwill and Other Intangible Assets, net
Goodwill and Other Intangible Assets, net

(5) Goodwill and Other Intangible Assets, net

(a)Goodwill

The Company has determined that it has one reporting unit and evaluates goodwill for impairment at least annually on October 1st and whenever circumstances suggest that goodwill may be impaired.

The changes in the carrying amount of goodwill during the years ended December 31, 2016 and 2015 were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

Balances as of December 31, 2014

 

 

 

 

Goodwill

 

$

14,278

 

Accumulated impairment losses

 

 

 —

 

Goodwill, net

 

$

14,278

 

 

 

 

 

 

Goodwill impairment

 

 

(14,278)

 

 

 

 

 

 

Balances as of December 31, 2015

 

 

 

 

Goodwill

 

$

14,278

 

Accumulated impairment losses

 

 

(14,278)

 

Goodwill, net

 

$

 —

 

 

 

 

 

 

Goodwill acquired (Note 3)

 

 

4,878

 

 

 

 

 

 

Balances as of December 31, 2016

 

 

 

 

Goodwill

 

$

19,156

 

Accumulated impairment losses

 

 

(14,278)

 

Goodwill, net

 

$

4,878

 

 

On September 24, 2015, the Company experienced a significant decline in its common stock price, which was sustained through September 30, 2015. The significant decline in the Company’s common stock price for a sustained period, along with the impact from regulatory inquiries related to medical devices manufactured by Silimed, the Company’s contract manufacturer, were identified as potential indicators of impairment of goodwill and other intangibles. As a result, the Company was required to assess whether or not an impairment of its goodwill had occurred as of September 30, 2015. The Company assessed the impact of the recent downward volatility in the Company's common stock price and concluded that the sustained decline constituted a triggering event requiring an interim goodwill impairment test. The Company conducted the first step of the goodwill impairment test described above for its single reporting unit as of September 30, 2015. The fair value of the reporting unit exceeded its carrying value as of September 30, 2015 by 24.7%, and therefore goodwill was determined to not be impaired as of September 30, 2015.

As a result of the actions taken by the Brazilian regulatory agency ANVISA on October 2, 2015, the Company voluntarily placing a hold on the sale of all Sientra devices manufactured by Silimed on October 9, 2015, and the burning down of Silimed’s facility for manufacturing Sientra’s breast implants on October 22, 2015, the Company experienced a significant decline in its common stock price, which was sustained through December 31, 2015. The significant decline in the Company’s common stock price for a sustained period, along with the impact from recent regulatory inquiries related to medical devices manufactured by Silimed, the Company’s contract manufacturer, and the fire at Silimed’s facility for manufacturing Sientra’s breast implants, were identified as potential indicators of impairment of goodwill and the Company concluded that these events constituted a triggering event requiring a goodwill impairment test. The Company conducted a step one analysis which consists of a comparison of the fair value of the Company as a single reporting unit using a market approach against its carrying amount, including goodwill.  As a result of the step one analysis, it was determined that the carrying value exceeded its fair value; therefore, the Company proceeded to step two of the goodwill impairment analysis. For step two, the Company compared the implied fair value of goodwill with the carrying amount of goodwill and based on the analysis, there was no implied goodwill; therefore, the Company recorded a goodwill impairment charge of $14.3 million for the quarter ended December 31, 2015.

The Company conducted the annual goodwill impairment test in the fourth quarter of 2016 and determined goodwill had not been impaired for the year ended December 31, 2016.

(b)Other Intangible Assets

The components of the Company’s other intangible assets consist of the following definite-lived and indefinite-lived assets (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

December 31, 2016

 

 

Average Amortization

 

 

 

 

 

 

 

 

 

 

 

Period

 

Gross Carrying

 

Accumulated

 

Intangible

Intangibles with definite lives

 

(in years)

 

Amount

 

Amortization

 

Assets, net

Acquired FDA non-gel product approval

 

11

 

$

1,713

 

$

(1,696)

 

$

17

Customer relationships

 

9.5

 

 

4,940

 

 

(602)

 

 

4,338

Trade names - finite life

 

12

 

 

800

 

 

(56)

 

 

744

Regulatory approvals

 

1.17

 

 

670

 

 

(96)

 

 

574

Non-compete agreement

 

2.0

 

 

80

 

 

(17)

 

 

63

Total definite-lived intangible assets

 

 

 

$

8,203

 

$

(2,467)

 

$

5,736

 

 

 

 

 

 

 

 

 

 

 

 

Intangibles with indefinite lives

 

 

 

 

 

 

 

 

 

 

 

Trade names - indefinite life

 

 

 

450

 

 

 —

 

 

450

Total indefinite-lived intangible assets

 

 

 

$

450

 

$

 —

 

$

450

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

December 31, 2015

 

 

Average Amortization

 

 

 

 

 

 

 

 

 

 

 

Period

 

Gross Carrying

 

Accumulated

 

Intangible

Intangibles with definite lives

 

(in years)

 

Amount

 

Amortization

 

Assets, net

Acquired FDA non-gel product approval

 

11

 

$

1,713

 

$

(1,660)

 

$

53

Total definite-lived intangible assets

 

 

 

$

1,713

 

$

(1,660)

 

$

53

 

 

Amortization expense for the year ended December 31, 2016,  2015 and 2014 was $0.8 million, $0.1 million and $0.1 million, respectively. The following table summarizes the estimated amortization expense relating to the Company's intangible assets as of December 31, 2016 (in thousands):

 

 

 

 

 

 

 

Amortization

Period

 

Expense

2017

 

$

1,708

2018

 

 

1,090

2019

 

 

794

2020

 

 

582

2021

 

 

435

 

 

$

4,609

 

Income Taxes
Income Taxes

(6) Income Taxes

The provision for income tax consists of the following:

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended

 

 

December 31,

 

 

 

2016

 

 

2015

 

 

2014

Deferred tax

 

 

 

 

 

 

 

 

 

  Federal

 

$

55

 

$

 —

 

$

 —

  State

 

 

6

 

 

 —

 

 

 —

 

 

$

61

 

$

 —

 

$

 —

Actual income tax expense differs from that obtained by applying the statutory federal income tax rate of 34% to income before income taxes as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended

 

 

 

December 31,

 

 

 

 

2016

 

 

2015

 

 

2014

 

Tax at federal statutory rate

 

$

(13,636)

 

$

(14,018)

 

$

(1,976)

 

State, net of federal benefit

 

 

(1,321)

 

 

(1,624)

 

 

(260)

 

Permanent items

 

 

1,420

 

 

898

 

 

580

 

Research and development credits

 

 

 —

 

 

 —

 

 

(216)

 

Benefit state rate change

 

 

87

 

 

180

 

 

(941)

 

Other

 

 

9

 

 

1

 

 

495

 

Change in valuation allowance

 

 

13,502

 

 

14,563

 

 

2,318

 

 

 

$

61

 

$

 —

 

$

 —

 

 

The tax effects of temporary differences and carryforwards that give rise to significant portions of the deferred tax assets are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

 

2016

 

2015

 

Net operating loss carryforwards

 

$

65,626

 

$

53,244

 

Research and development credits

 

 

2,233

 

 

2,233

 

Depreciation

 

 

 —

 

 

26

 

Accruals and reserves

 

 

4,362

 

 

1,900

 

Intangibles

 

 

8,309

 

 

9,565

 

 

 

 

80,530

 

 

66,968

 

Less valuation allowance

 

 

(80,470)

 

 

(66,968)

 

Total deferred tax assets

 

$

60

 

$

 —

 

 

 

 

 

 

 

 

 

Depreciation

 

 

(60)

 

 

 —

 

Indefinite-lived intangibles (naked credit)

 

 

(61)

 

 

 —

 

Total deferred tax liabilities

 

$

(121)

 

$

 —

 

 

As a result of the realization requirements of ASC 718, the table of deferred tax assets and liabilities does not include approximately $0.1 million and $0.1 million of deferred tax assets, as of December 31, 2016 and December 31, 2015, respectively, that arose directly from tax deductions related to equity compensation that are greater than the compensation recognized for financial reporting.

 

The Company has established a full valuation allowance against its net deferred tax assets due to the uncertainty surrounding realization of such assets.

As of December 31, 2016, the Company had net operating loss carryforwards of approximately $170.9 million and $144.3 million available to reduce future taxable income, if any, for federal and state income tax purposes, respectively. The federal net operating loss carryforward begins expiring in 2027, and the state net operating loss carryforwards begin expiring in 2017. It is possible that the Company will not generate taxable income in time to use these NOLs before their expiration. In addition, under Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, if a corporation undergoes an “ownership change”, the corporation's ability to use its pre-change NOL carryforwards and other pre-change tax attributes to offset its post-change income may be limited.  In general, an “ownership change” occurs if there is a cumulative change in a loss corporation’s ownership by 5% shareholders that exceeds 50 percentage points over a rolling three-year period.  The Company has not performed a detailed analysis to determine whether an ownership change under Section 382 of the Code has previously occurred. As a result, if the Company earns net taxable income, its ability to use their pre-change net operating loss carryforwards to offset U.S. federal taxable income may become subject to limitations, which could potentially result in increased future tax liability to the Company. Until such analysis is completed, the Company cannot be sure that the full amount of the existing federal NOLs will be available to them, even if taxable income is generated before their expiration.

As of December 31, 2016, the Company had research and development credit carryforwards of approximately $1.8 million and $1.8 million available to reduce future taxable income, if any, for federal and California state income tax purposes, respectively. The federal credit carryforwards begin expiring in 2027 and the state credits carryforward indefinitely.

At December 31, 2016, the Company had unrecognized tax benefits of approximately $0.7 million associated with the research and development credits. All of the unrecognized tax benefits that, if recognized, would affect the annual effective rate. The Company does not anticipate that total unrecognized net tax benefits will significantly change over the next twelve months.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):

 

 

 

 

Ending balance at December 31, 2014

 

$

732

Additions based on tax positions taken in the current year

 

 

 —

Ending balance at December 31, 2015

 

 

732

Additions based on tax positions taken in the current year

 

 

 —

Ending balance at December 31, 2016

 

$

732

It is the Company’s policy to include penalties and interest expense related to income taxes as a component of other expense and interest expense, respectively, as necessary. There was no interest expense or penalties related to unrecognized tax benefits recorded through December 31, 2016.

The Company files U.S. federal and state income tax returns in jurisdictions with varying statute of limitations. The years that may be subject to examination will vary by jurisdiction. The Company’s tax years 2012 to 2016 will remain open for examination by the federal and state tax authorities.

Employee Benefit Plans
Emplyoee Benefit Plans

(7)   Employee Benefit Plans

In September 2016, the Company adopted a Section 401(k) Retirement Savings Plan for the benefit of eligible employees. All employees become eligible to participate in the plan the first of the month following their hire date and may contribute their pretax or after–tax salary, up to the Internal Revenue Service annual contribution limit. The Company makes contributions to the 401(k) plan under a safe harbor provision, whereby the Company contributes 3% of each participating employee’s annual compensation. Company contributions vest immediately. The Company contributed and included in operating expense $0.1 million for the year ended December 31, 2016.

Stockholders' Equity
Stockholders' Equity

(8)   Stockholders’ Equity

(a)

Authorized Stock

The Company’s Amended and Restated Certificate of Incorporation authorizes the Company to issue 210,000,000 shares of common and preferred stock, consisting of 200,000,000 shares of common stock with $0.01 par value and 10,000,000 shares of preferred stock with $0.01 par value. As of December 31, 2016, the Company had no preferred stock issued or outstanding.

(b)

Common Stock Warrants

 

On January 17, 2013, the Company entered into a Loan and Security Agreement, or the Original Term Loan Agreement, with Oxford Finance, LLC, or Oxford. On June 30, 2014, the Company entered into the Amended and Restated Loan and Security Agreement, or the Amended Term Loan Agreement, with Oxford. In connection with the Original Term Loan Agreement and the Amended Term Loan Agreement, the Company issued to Oxford (i) seven-year warrants in January 2013 to purchase shares of the Company’s common stock with a value equal to 3.0% of the tranche A, B and C term loans amounts and (ii) seven-year warrants in June 2014 to purchase shares of the Company’s common stock with a value equal to 2.5% of the tranche D term loan amount.  The warrants have an exercise price per share of $14.671. As of December 31, 2016, there were warrants to purchase an aggregate of 47,710 shares of common stock outstanding.

 

 

(c)

Stock Option Plans

In April 2007, the Company adopted the 2007 Equity Incentive Plan, or 2007 Plan. The 2007 Plan provides for the granting of stock options to employees, directors and consultants of the Company. Options granted under the 2007 Plan may either be incentive stock options or nonstatutory stock options. Incentive stock options, or ISOs, may be granted only to Company employees.  Nonstatutory stock options, or NSOs, may be granted to all eligible recipients. A total of 1,690,448 shares of the Company’s common stock were reserved for issuance for the 2007 Plan.

As of December 31, 2016, pursuant to the 2007 Plan, there were 1,054,096 options outstanding and no shares of common stock available for future grants.

The Company’s board of directors adopted the 2014 Equity Incentive Plan, or 2014 Plan, in July 2014, and the stockholders approved the 2014 Plan in October 2014. The 2014 Plan became effective upon completion of the IPO on November 3, 2014, at which time the Company ceased granting awards under the 2007 Plan. Under the 2014 Plan, the Company may issue ISOs, NSOs, stock appreciation rights, restricted stock awards, restricted stock unit awards and other forms of stock awards, or collectively, stock awards, all of which may be granted to employees, including officers, non-employee directors and consultants of the Company and their affiliates. ISOs may be granted only to employees.  A total of 1,027,500 shares of common stock were initially reserved for issuance under the 2014 Plan, subject to certain annual increases.

As of December 31, 2016, pursuant to the 2014 Plan, there were 2,045,495 shares of common stock reserved and 207,381 shares of common stock available for future grants.

Pursuant to a board-approved Inducement Plan, the Company may issue NSOs and restricted stock unit awards, or collectively, stock awards, all of which may only be granted to new employees of the Company and their affiliates in accordance with NASDAQ Stock Market Rule 5635(c)(4) as an inducement material to such individuals entering into employment with the Company.  As of December 31, 2016, inducement grants for 330,000 shares of common stock have been awarded, and 70,000 shares of common stock were reserved for future issuance under the Inducement Plan.

 

Options under the 2007 Plan and the 2014 Plan may be granted for periods of up to ten years as determined by the Company’s board of directors, provided, however, that (i) the exercise price of an ISO shall not be less than 100% of the estimated fair value of the shares on the date of grant, and (ii) the exercise price of an ISO granted to a more than 10% shareholder shall not be less than 110% of the estimated fair value of the shares on the date of grant. An NSO has no such exercise price limitations. NSOs under the Inducement Plan may be granted for periods of up to ten years as determined by the board of directors, provided, the exercise price will be not less than 100% of the estimated fair value of the shares on the date of grant.  Options generally vest with 25% of the grant vesting on the first anniversary and the balance vesting monthly on a straight-lined basis over the requisite service period of three additional years for the award. Additionally, options have been granted to certain key executives that vest upon achievement of performance conditions based on performance targets as defined by the board of directors, which have included net sales targets and defined corporate objectives over the performance period with possible payout ranging from 0% to 100% of the target award.  Compensation expense is recognized on a straight-lined basis over the vesting term of one year based upon the probable performance target that will be met. The vesting provisions of individual options may vary but provide for vesting of at least 25% per year.

The following summarizes all option activity under the 2007 Plan, 2014 Plan and Inducement Plan:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average

 

 

 

 

 

Weighted

 

remaining

 

 

 

 

 

average

 

contractual

 

 

 

Option Shares

 

exercise price

 

term (year)

 

Balances at December 31, 2014

 

1,654,906

 

$

4.25

 

5.48

 

Granted

 

1,253,216

 

 

10.22

 

 

 

Exercised

 

(36,189)

 

 

3.54

 

 

 

Forfeited

 

(86,261)

 

 

13.38

 

 

 

Balances at December 31, 2015

 

2,785,672

 

$

6.66

 

6.60

 

Granted

 

571,753

 

 

7.08

 

 

 

Exercised

 

(478,099)

 

 

1.93

 

 

 

Forfeited

 

(92,349)

 

 

15.35

 

6.28

 

Balances at December 31, 2016

 

2,786,977

 

$

7.27

 

6.28

 

Vested and expected to vest at December 31, 2016

 

2,786,977

 

$

7.27

 

 

 

Vested and exercisable at December 31, 2016

 

1,485,534

 

$

6.53

 

4.50

 

The weighted average grant date fair value of stock options granted to employees and directors during the years ended December 31, 2016, 2015 and 2014 was $3.97,  $4.60, and $6.82 per share, respectively. Stock-based compensation expense for stock options for the years ended December 31, 2016,  2015 and 2014 was $1.7 million, $2.0 million and $0.6 million, respectively. Tax benefits arising from the disposition of certain shares issued upon exercise of stock options within two years of the date of grant or within one year of the date of exercise by the option holder, or Disqualifying Dispositions, provide the Company with a tax deduction equal to the difference between the exercise price and the fair market value of the stock on the date of exercise. When realized, those excess windfall tax benefits are credited to additional paid-in capital. As of December 31, 2016 there was $4.3 million of total unrecognized compensation cost related to stock options granted under the plans. The costs are expected to be recognized over a weighted average period of 2.74 years. The expense is recorded within the operating expense components in the statement of operations based on the employees receiving the awards.

The aggregate intrinsic value of stock options is calculated as the difference between the exercise price of the stock options and the fair value of the Company’s common stock for those stock options that had exercise prices lower than the fair value of the Company’s common stock. The aggregate intrinsic value of stock options exercised was $3.0 million, $0.6 million, and $0.2 million during the years ended December 31, 2016,  2015 and 2014, respectively.

The expected term of employee stock options, risk‑free interest rate and volatility represents the weighted average, based on grant date period, which the stock options are expected to remain outstanding. The Company utilized the simplified method to estimate the expected term of the options pursuant to ASC Subtopic 718‑10 for all option grants to employees. The expected volatility is based upon historical volatilities of an index of a peer group because it is not practicable to make a reasonable estimate of the Company’s volatility. The risk‑free interest rate is based on the U.S. Treasury yield curve in effect at the time of the grant for periods corresponding with the expected term of the option. The dividend yield assumption is based on the Company’s history and expectation of dividend payouts. The Company has never declared or paid any cash dividends on its common stock, and the Company does not anticipate paying any cash dividends in the foreseeable future.

As stock‑based compensation expense recognized in the Company’s statement of operations is based on awards ultimately expected to vest, the amount has been reduced for estimated forfeitures. Forfeitures were estimated based on the Company’s historical experience and future expectations.

For purposes of financial accounting for stock‑based compensation, the Company has determined the fair values of its options based in part on the work of a third‑party valuation specialist. The determination of stock‑based compensation is inherently uncertain and subjective and involves the application of valuation models and assumptions requiring the use of judgment. If the Company had made different assumptions, its stock‑based compensation expense, and its net loss could have been significantly different.

(d)

Restricted Stock Units

 

The Company has issued restricted stock unit awards, or RSUs, under the 2014 Plan. The RSUs issued vest on a straight-line basis, either quarterly over a 4-year requisite service period or annually over a 3-year requisite service period.

 

Activity related to RSUs is set forth below:

 

 

 

 

 

 

 

 

 

 

Weighted average

 

 

 

 

grant date

 

 

Number of shares

 

fair value

Balances at December 31, 2014

 

 —

 

$

 —

Granted

 

17,993

 

 

3.88

Vested

 

 —

 

 

 —

Balances at December 31, 2015

 

17,993

 

$

3.88

Granted

 

557,240

 

 

8.21

Vested

 

(4,500)

 

 

3.88

Forfeited

 

(140,000)

 

 

8.44

Balances at December 31, 2016

 

430,733

 

$

7.99

The weighted average grant date fair value of RSUs granted to employees and directors during the years ended December 31, 2016 and 2015 was $8.21 and $3.88 per share, respectively. Stock-based compensation expense for RSUs for the years ended December 31, 2016 and 2015 was $1.2 million and $2,000, respectively. As of December 31, 2016, there was $2.2 million total unrecognized compensation cost related to non-vested RSU awards. The cost is expected to be recognized over a weighted average period of 1.86 years.

(e)

Employee Stock Purchase Plan

The Company’s board of directors adopted the 2014 Employee Stock Purchase Plan, or ESPP, in July 2014, and the stockholders approved the ESPP in October 2014. The ESPP allows eligible employees to purchase shares of the Company’s common stock at a discount through payroll deductions of up to 15% of their eligible compensation, subject to any plan limitations. The ESPP provides offering periods not to exceed 27 months, and each offering period will include purchase periods, which will be the approximately six-month period commencing with one exercise date and ending with the next exercise date, except that the first offering period commenced on the first trading day following the effective date of the Company’s registration statement.  Employees are able to purchase shares at 85% of the lower of the fair market value of the Company’s common stock on the first trading day of the offering period or on the exercise date.  A total of 255,500 shares of common stock were initially reserved for issuance under the ESPP.  The number of shares available for sale under the ESPP will be increased annually on the first day of each fiscal year, equal to the lesser of i) 1% of the total outstanding shares of the Company’s common stock as of the last day of the immediately preceding fiscal year; ii) 3,000,000 shares of common stock, or iii) such lesser amount as determined by the board of directors.

As of December 31, 2016, the num