SIENTRA, INC., 10-K filed on 3/14/2019
Annual Report
v3.19.1
Document and Entity Information - USD ($)
$ in Thousands
12 Months Ended
Dec. 31, 2018
Mar. 04, 2019
Jun. 30, 2018
Document And Entity Information [Abstract]      
Entity Registrant Name Sientra, Inc.    
Entity Central Index Key 0001551693    
Document Type 10-K    
Document Period End Date Dec. 31, 2018    
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 Shell Company false    
Entity Small Business true    
Entity Emerging Growth Company true    
Entity Ex Transition Period true    
Entity Public Float     $ 442,698,000
Entity Common Stock, Shares Outstanding   29,211,896  
Document Fiscal Year Focus 2018    
Document Fiscal Period Focus FY    
Trading Symbol SIEN    
v3.19.1
Consolidated Balance Sheets - USD ($)
$ in Thousands
Dec. 31, 2018
Dec. 31, 2017
Current assets:    
Cash and cash equivalents $ 86,899 $ 26,588
Accounts receivable, net of allowances of $2,428 and $4,816 at December 31, 2018 and December 31, 2017, respectively 22,527 6,569
Inventories, net 24,085 20,896
Prepaid expenses and other current assets 2,612 1,512
Total current assets 136,123 55,565
Property and equipment, net 2,536 4,763
Goodwill 12,507 12,507
Other intangible assets, net 16,495 18,803
Other assets 698 575
Total assets 168,359 92,213
Current liabilities:    
Current portion of long-term debt 6,866 24,639
Accounts payable 13,184 5,811
Accrued and other current liabilities 27,697 13,474
Legal settlement payable 410 1,000
Customer deposits 9,936 5,423
Sales return liability 6,048  
Total current liabilities 64,141 50,347
Long-term debt 27,883  
Deferred and contingent consideration 6,481 12,597
Warranty reserve and other long-term liabilities 2,976 1,646
Total liabilities 101,481 64,590
Commitments and contingencies (Note 11)
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 28,701,494 and 19,474,702 and outstanding 28,628,767 and 19,401,975 shares at December 31, 2018 and December 31, 2017 respectively 286 194
Additional paid-in capital 428,949 307,159
Treasury stock, at cost (72,727 shares at December 31, 2018 and December 31, 2017) (260) (260)
Accumulated deficit (362,097) (279,470)
Total stockholders’ equity 66,878 27,623
Total liabilities and stockholders’ equity $ 168,359 $ 92,213
v3.19.1
Consolidated Balance Sheets (Parenthetical) - USD ($)
$ in Thousands
Dec. 31, 2018
Dec. 31, 2017
Statement Of Financial Position [Abstract]    
Accounts receivable, allowances (in dollars) $ 2,428 $ 4,816
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 0 0
Preferred stock, shares outstanding 0 0
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 28,701,494 19,474,702
Common stock, shares outstanding 28,628,767 19,401,975
Treasury stock, shares 72,727 72,727
v3.19.1
Consolidated Statements of Operations - USD ($)
12 Months Ended
Dec. 31, 2018
Dec. 31, 2017
Dec. 31, 2016
Income Statement [Abstract]      
Net sales $ 68,126,000 $ 36,542,000 $ 20,734,000
Cost of goods sold 26,822,000 14,171,000 6,880,000
Gross profit 41,304,000 22,371,000 13,854,000
Operating expenses:      
Sales and marketing 67,715,000 33,911,000 20,607,000
Research and development 10,945,000 9,813,000 9,704,000
General and administrative 42,418,000 31,537,000 21,959,000
Legal settlement   10,000,000 1,618,000
Total operating expenses 121,078,000 85,261,000 53,888,000
Loss from operations (79,774,000) (62,890,000) (40,034,000)
Other income (expense), net:      
Interest income 532,000 172,000 63,000
Interest expense (3,428,000) (1,232,000) (98,000)
Other income (expense), net 39,000 (95,000) (36,000)
Total other income (expense), net (2,857,000) (1,155,000) (71,000)
Loss before income taxes (82,631,000) (64,045,000) (40,105,000)
Income tax (benefit) expense (4,000) (17,000) 61,000
Net loss $ (82,627,000) $ (64,028,000) $ (40,166,000)
Basic and diluted net loss per share attributable to common stockholders $ (3.25) $ (3.34) $ (2.20)
Weighted average outstanding common shares used for net loss per share attributable to common stockholders:      
Basic and diluted 25,402,241 19,159,057 18,233,177
v3.19.1
Consolidated Statements of Stockholders' Equity - USD ($)
$ in Thousands
Total
Common stock
Treasury stock
Additional paid-in capital
Accumulated deficit
Balance, beginning of year at Dec. 31, 2015 $ 118,871 $ 180 $ (260) $ 294,227 $ (175,276)
Balance, beginning of year (in shares) at Dec. 31, 2015   18,066,143 72,727    
Employee stock-based compensation expense 3,236     3,236  
Stock option exercises 923 $ 5   918  
Stock option exercises (in shares)   478,099      
Employee stock purchase program (ESPP) 753 $ 1   752  
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 83,617 $ 186 $ (260) 299,133 (215,442)
Balance, end of year (in shares) at Dec. 31, 2016   18,671,409 72,727    
Employee stock-based compensation expense 6,766     6,766  
Stock option exercises 1,346 $ 5   1,341  
Stock option exercises (in shares)   480,236      
Employee stock purchase program (ESPP) 647 $ 1   646  
Employee stock purchase program (ESPP) (in shares)   108,081      
Vested restricted stock   $ 3   (3)  
Vested restricted stock (in shares)   293,910      
Shares withheld for tax obligations on vested RSUs (725) $ (1)   (724)  
Shares withheld for tax obligations on vested RSUs, shares   (78,934)      
Net loss (64,028)       (64,028)
Balance, end of year at Dec. 31, 2017 27,623 $ 194 $ (260) 307,159 (279,470)
Balance, end of year (in shares) at Dec. 31, 2017   19,474,702 72,727    
Proceeds from follow-on offering, net of costs 107,551 $ 85   107,466  
Proceeds from follow-on offering, net of costs (in shares)   8,518,519      
Employee stock-based compensation expense 13,824     13,824  
Stock option exercises 1,149 $ 1   1,148  
Stock option exercises (in shares)   147,463      
Employee stock purchase program (ESPP) 993 $ 2   991  
Employee stock purchase program (ESPP) (in shares)   145,616      
Vested restricted stock   $ 5   (5)  
Vested restricted stock (in shares)   523,257      
Shares withheld for tax obligations on vested RSUs (1,635) $ (1)   (1,634)  
Shares withheld for tax obligations on vested RSUs, shares   (108,063)      
Net loss (82,627)       (82,627)
Balance, end of year at Dec. 31, 2018 $ 66,878 $ 286 $ (260) $ 428,949 $ (362,097)
Balance, end of year (in shares) at Dec. 31, 2018   28,701,494 72,727    
v3.19.1
Consolidated Statements of Cash Flows - USD ($)
$ in Thousands
12 Months Ended
Dec. 31, 2018
Dec. 31, 2017
Dec. 31, 2016
Cash flows from operating activities:      
Net loss $ (82,627) $ (64,028) $ (40,166)
Adjustments to reconcile net loss to net cash used in operating activities:      
Depreciation and amortization 3,321 3,034 1,177
Provision for doubtful accounts 2,043 493 437
Provision for warranties 325 294 71
Provision for inventory 955 3,125 1,323
Amortization of acquired inventory step-up 106 999 61
Change in fair value of warrants (81) 95 39
Change in fair value of deferred consideration 24 (110) 37
Change in fair value of contingent consideration 2,528 1,135  
Change in deferred revenue 627    
Non-cash portion of debt extinguishment loss   17  
Amortization of debt discount and issuance costs 174 140  
Non-cash interest expense   1 3
Stock-based compensation expense 13,824 6,766 3,236
Loss on disposal of property and equipment 74 25 124
Deferred income taxes (8) (21) 61
Payments of contingent consideration liability in excess of acquisition-date fair value (320)    
Changes in assets and liabilities, net of effects from acquisitions:      
Accounts receivable (14,094) (1,890) 927
Inventories (4,250) 527 2,390
Prepaid expenses, other current assets and other assets (1,302) 712 (529)
Insurance recovery receivable 39 9,336 (9,375)
Accounts payable 8,502 1,290 (564)
Accrued and other liabilities 7,885 3,218 (1,422)
Legal settlement payable (590) (9,900) 10,900
Customer deposits 4,513 (1,136) (3,160)
Sales return liability 2,142    
Net cash used in operating activities (56,190) (45,878) (34,430)
Cash flows from investing activities:      
Purchase of property and equipment (855) (1,864) (1,126)
Business acquisitions, net of cash and restricted cash acquired   (18,150) (11,709)
Net cash used in investing activities (855) (20,014) (12,835)
Cash flows from financing activities:      
Net proceeds from issuance of common stock 107,551    
Proceeds from exercise of stock options 1,149 1,346 923
Proceeds from issuance of common stock under ESPP 993 647 753
Tax payments related to shares withheld for vested restricted stock units (RSUs) (1,635) (725)  
Gross borrowings under the Term Loan 10,000 25,000  
Gross borrowings under the Revolving Loan 12,109 5,000  
Repayment of the Revolving Loan (12,109) (5,000)  
Payments of contingent consideration up to acquisition-date fair value (680)    
Deferred financing costs (22) (657)  
Net cash provided by financing activities 117,356 25,611 1,676
Net increase (decrease) in cash, cash equivalents and restricted cash 60,311 (40,281) (45,589)
Cash, cash equivalents and restricted cash at:      
Beginning of period 26,931 67,212 112,801
End of period 87,242 26,931 67,212
Reconciliation of cash, cash equivalents, and restricted cash to the consolidated balance sheets      
Cash and cash equivalents 86,899 26,588 $ 67,212
Restricted cash included in other assets $ 343 $ 343  
Restricted Cash Noncurrent Asset Statement Of Financial Position Extensible List us-gaap:OtherNoncurrentAssetsMember us-gaap:OtherNoncurrentAssetsMember us-gaap:OtherNoncurrentAssetsMember
End of period $ 87,242 $ 26,931 $ 67,212
Supplemental disclosure of cash flow information:      
Interest paid 3,120 870 96
Supplemental disclosure of non-cash investing and financing activities:      
Property and equipment in accounts payable and accrued liabilities 679 1,088 939
Acquisition of business, deferred and contingent consideration obligations at fair value   10,912 $ 1,600
Non-cash deferred consideration settlement 1,000    
Non-cash settlement of assets held for sale in accounts payable $ 2,674    
Forgiveness of SVB Loan commitment fee   750  
Deferred financing costs in accrued liabilities   $ 6  
v3.19.1
Formation and Business of the Company
12 Months Ended
Dec. 31, 2018
Organization Consolidation And Presentation Of Financial Statements [Abstract]  
Formation and Business of the Company

(1) Formation and Business of the Company

(a)

Formation

Sientra, Inc. (“Sientra”, the “Company,” “we,” “our” or “us”), 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, the Company 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.

In November 2014, the Company completed an initial public offering, or IPO, and its common stock is listed on the Nasdaq Stock Exchange under the symbol “SIEN.”

(b)

Acquisition of miraDry

 

On June 11, 2017, Sientra entered into an Agreement and Plan of Merger, or the Merger Agreement, with miraDry (formerly Miramar Labs), pursuant to which Sientra commenced a tender offer to purchase all of the outstanding shares of miraDry’s common stock for (i) $0.3149 per share, plus (ii) the contractual right to receive one or more contingent payments upon the achievement of certain future sales milestones. The total merger consideration was $18.7 million in upfront cash and the contractual rights represent potential contingent payments of up to $14 million. The transaction, which closed on July 25, 2017, added the miraDry System to Sientra’s aesthetics portfolio.

 

(c)

Regulatory Review of Vesta Manufacturing

The Company has engaged Vesta Intermediate Funding, Inc., or Vesta, a Lubrizol Lifesciences company, for the manufacture and supply of the Company’s breast implants. On March 14, 2017, the Company announced it had submitted a site-change pre-market approval, or PMA, supplement to the FDA for the manufacture of the Company’s PMA-approved breast implants at the Vesta manufacturing facility. On January 30, 2018, the Company announced the FDA has granted approval of the site-change supplement for the Company’s contract manufacturer, Vesta, to manufacture its silicone gel breast implants.  In support of the move to the Vesta manufacturing facility, the Company also implemented new manufacturing process improvements which, in consultation with the FDA, required three (3) additional PMA submissions.  In addition to approving the manufacturing site-change PMA supplement, the FDA approved the Company’s three (3) process enhancement submissions on January 10, 2018, January 19, 2018 and April 17, 2018.

(d)

Follow-on Offering

 

On May 7, 2018, the Company completed an underwritten follow-on public offering of 7,407,408 shares of its common stock at $13.50 per share, as well as 1,111,111 additional shares of its common stock pursuant to the full exercise of the over-allotment option granted to the underwriters. Net proceeds to the Company were approximately $107.6 million after deducting underwriting discounts and commissions of $6.9 million and offering expenses of approximately $0.5 million.

(e)

Regulatory Inquiries Regarding Products Manufactured by Silimed

 

There have been 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. Following extensive independent, third-party testing and analyses of its devices manufactured by Silimed, which tests indicated no significant safety concerns with the use of Silimed’s products, the Company lifted the temporary hold on the sale of such devices. While the Company continues to sell its remaining inventory of devices manufactured by Silimed, its existing manufacturing contract with Silimed expired on its terms in April 2017 and the Company did not renew the contract.

v3.19.1
Summary of Significant Accounting Policies
12 Months Ended
Dec. 31, 2018
Accounting Policies [Abstract]  
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 the Company’s inception, it has incurred significant net operating losses and the Company anticipates that losses will continue in the near term. The Company expects its operating expenses will continue to grow as they expand operations. The Company will need to generate significant net sales to achieve profitability. To date, the Company has funded operations primarily with proceeds from the sales of preferred stock, borrowings under term loans, sales of products since 2012, and the proceeds from the sale of common stock in public offerings.

The accompanying consolidated 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. At December 31, 2018, the Company had cash and cash equivalents of $86.9 million. Since inception, the Company has incurred recurring losses from operations and cash outflows from operating activities. During the years ended December 31, 2018, 2017 and 2016 the Company incurred net losses of $82.6 million, $64.0 million and $40.2 million, respectively. The Company used $56.2 million of cash in operations for the year ended December 31, 2018, $45.9 million for the year ended December 31, 2017 and $34.4 million for the year ended December 31, 2016. At December 31, 2018 and 2017 the Company had an accumulated deficit of $362.1 million and $279.5 million, respectively. The continuation of the Company as a going concern is dependent upon many factors including liquidity and the ability to raise capital. The Company received FDA approval of their PMA supplement on April 17, 2018 and was then able to access a $10.0 million term loan pursuant to an amendment to the credit agreement with MidCap Financial Trust, or MidCap. In addition, in February 2018, the Company entered into an At-The-Market Equity Offering Sales Agreement with Stifel, Nicolaus & Company, Incorporated, or Stifel, as sales agent pursuant to which the Company may sell, from time to time, through Stifel, shares of its common stock having an aggregate gross offering price of up to $50.0 million. As of December 31, 2018, the Company has not sold any common stock pursuant to the sales agreement. Further, on May 7, 2018, the Company completed a public offering of its common stock, raising approximately $107.6 million in net proceeds after deducting underwriting discounts and commissions and other offering expenses.

(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, customer deposits and sales return liability are reasonable estimates of their fair value because of the short maturity of these items. The fair value of the common stock warrant liability, deferred and contingent consideration are discussed in Note 2. The fair value of the debt is based on the amount of future cash flows associated with the instrument discounted using the Company’s market rate. At December 31, 2018, the carrying value of the long-term debt was not materially different from the fair value.

(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 contingent consideration for future royalty payments related to the acquisition of BIOCORNEUM, the contingent consideration for future milestone payments for the acquisition of the tissue expander portfolio from SSP and the contingent consideration for the future milestone payments related to the acquisition of miraDry using a 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 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, 2018 and 2017 and indicate the level of the fair value hierarchy utilized to determine such fair value (in thousands):

 

 

 

Fair Value Measurements as of

 

 

 

December 31, 2018 Using:

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liability for common stock warrants

 

$

 

 

 

 

 

 

113

 

 

 

113

 

Liability for contingent consideration

 

 

 

 

 

 

 

 

13,847

 

 

 

13,847

 

 

 

$

 

 

 

 

 

 

13,960

 

 

 

13,960

 

 

 

 

Fair Value Measurements as of

 

 

 

December 31, 2017 Using:

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liability for common stock warrants

 

$

 

 

 

 

 

 

194

 

 

 

194

 

Liability for contingent consideration

 

 

 

 

 

 

 

 

12,319

 

 

 

12,319

 

 

 

$

 

 

 

 

 

 

12,513

 

 

 

12,513

 

 

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

 

Warrant Liability

 

 

 

 

Balance, December 31, 2017

 

$

194

 

Change in fair value of warrant liability

 

 

(81

)

Balance, December 31, 2018

 

$

113

 

Contingent Consideration Liability

 

 

 

 

Balance, December 31, 2017

 

$

12,319

 

Payments of contingent consideration

 

 

(1,000

)

Change in fair value of contingent consideration

 

 

2,528

 

Balance, December 31, 2018

 

$

13,847

 

 

In connection with the acquisition of miraDry on July 25, 2017, contingent consideration of up to an aggregate of $14.0 million may be payable upon achieving certain future sales milestones and had a fair value of $12.7 million and $10.4 million at December 31, 2018 and 2017, respectively.

 

In connection with the acquisition of the tissue expander portfolio from Specialty Surgical Products, Inc., or SSP, on November 2, 2016, contingent consideration of up to an aggregate of $2.0 million is payable upon achieving certain future sales milestones and had a fair value of $1.0 million and $1.8 million at December 31, 2018 and 2017, respectively. For the period ended December 31, 2018, the Company achieved one of two milestones and made a payment of $1.0 million to SSP.

 

The Company recognizes changes in the fair value of the warrants in “other income (expense), net” in the consolidated statement of operations and changes in contingent consideration are recognized in “general and administrative” expense in the consolidated 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 to five 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 consolidated 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. After the acquisition of miraDry, management began evaluating the Company as two reporting units, Breast Products and miraDry. 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. If the Company concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying amount from the qualitative assessment, the Company performs a quantitative analysis to compare the fair value of the reporting unit to its carrying amount. The Company recognizes impairment charges for the amount by which the carrying amount exceeds the reporting unit’s fair value.

The Company’s fair value analysis of goodwill utilizes the income approach and market approach, which requires the use of estimates about a reporting unit’s future revenues and free cash flows, market multiples, enterprise value, control risk premiums, discount rates, terminal value and enterprise value to determine the estimated fair value. The Company’s future revenues and free cash flow assumptions are determined based upon actual results giving effect to management’s expected changes in operating results in future years. The market multiples, enterprise value, control risk premiums, discount rates and terminal value are based upon market participant assumptions using a defined peer group. Changes in these assumptions can materially affect these estimates. Thus, to the extent the market changes, discount rates increase significantly or the Company does not meet its projected performance, the Company could recognize impairments, and such impairments could be material.

The Company performed its annual goodwill impairment test on October 1, 2018 for the Breast Products and miraDry reporting units. The miraDry reporting unit had a negative carrying value and $7.6 million of allocated goodwill. The Company performed a quantitative assessment and determined the fair value was greater than the carrying value. For the Breast Products reporting unit, the Company performed a qualitative analysis and determined fair value was more likely than not greater than carrying value. For the years ended December 31, 2018, 2017 and 2016 the Company did not record any goodwill impairment charges.

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, the Company evaluates the carrying value of the intangible assets in relation to estimates of future undiscounted cash flows. If the carrying value of the intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to the difference. 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. For the years ended December 31, 2018, 2017 and 2016 the Company did not record any indefinite-lived intangible assets impairment charges.

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 consolidated 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, 2018, 2017 and 2016. 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 the 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)

Segment Reporting

Reportable segments represent components for which separate financial information is available that is utilized on a regular basis by the Chief Executive Officer, who has been identified as the Chief Operating Decision Maker, or CODM, as defined by authoritative guidance on segment reporting, in determining how to allocate resources and evaluate performance. The segments are determined based on several factors, including client base, homogeneity of products, technology, delivery channels and similar economic characteristics. Based on the financial information presented to and reviewed by the CODM, the Company has determined that it has two reportable segments: Breast Products and miraDry.

(l)

Revenue Recognition

The Company generates revenue primarily through the sale and delivery of promised goods or services to customers and recognizes revenue when control is transferred to customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for the goods or services. Performance obligations typically include the delivery of promised products, such as breast implants, tissue expanders, BIOCORNEUM, miraDry Systems and bioTips, along with service-type warranties and deliverables under certain marketing programs. Other deliverables are sometimes promised, but are ancillary and insignificant in the context of the contract as a whole. Sales prices are documented in the executed sales contract, purchase order or order acknowledgement prior to the transfer of control to the customer. Customers may enter into a separate extended service agreement to purchase an extended warranty for miraDry products from the Company whereby the payment is due at the inception of the agreement. Typical payment terms are 30 days for Breast Products and direct sales of consumable miraDry products, and tend to be longer for capital sales of miraDry Systems and sales to miraDry distributors, but do not extend beyond one year. For delivery of promised products, control transfers and revenue is recognized upon shipment, unless the contractual arrangement requires transfer of control when products reach their destination, for which revenue is recognized once the product arrives at its destination. Revenue for extended service agreements are recognized ratably over the term of the agreements.

The Company introduced its Platinum20 Limited Warranty Program, or Platinum20, in May 2018 on all OPUS breast implants implanted in the United States or Puerto Rico on or after May 1, 2018.  Platinum20 provides for financial assistance for revision surgeries and no-charge contralateral replacement implants upon the occurrence of certain qualifying events. The Company considers Platinum20 to have an assurance warranty component and a service warranty component. The assurance component is recorded as a warranty liability at the time of sale (as discussed in Note 2(s)). The Company considers the service warranty component as an additional performance obligation and defers revenue at the time of sale based on the relative estimated selling price, by estimating a standalone selling price using the expected cost plus margin approach for the performance obligation. Inputs into the expected cost plus margin approach include historical incidence rates, estimated replacement costs, estimated financial assistance payouts and an estimated margin. The liability for unsatisfied performance obligations under the service warranty as of December 31, 2018 was $0.4 million, of which $0.2 million is considered a short-term obligation and is included in “accrued and other current liabilities” and $0.3 million is considered a long-term obligation and is included in “warranty reserve and other long-term liabilities” on the consolidated balance sheet. The performance obligation is satisfied at the time that Platinum20 benefits are provided and are expected to be satisfied over the following 6 to 24 month period for financial assistance and 20 years for product replacement. Revenue recognized for the service warranty performance obligations for the year ended December 31, 2018 was immaterial.

The Company also leverages a distributor network for selling the miraDry System internationally. The Company recognizes revenue when control of the goods or services is transferred to the distributors. Standard terms in these agreements do not allow for trial periods, right of return, refunds, payment contingent on obtaining financing or other terms that could impact the customer’s payment obligation. Contract liabilities are included in “accrued and other current liabilities” in the consolidated 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. For these products, revenue is recognized at the time the Company is notified by the customer that the product has been implanted, not when the consigned products are delivered to the customer’s location.

For Breast Products, with the exception of the Company’s BIOCORNEUM scar management products, the Company allows for the return of products from customers within six months after the original sale, which is accounted for as variable consideration. Reserves are established for anticipated sales returns based on the expected amount calculated with historical experience, recent gross sales and any notification of pending returns. The estimated sales return is recorded as a reduction of revenue and as a sales return liability in the same period revenue is recognized. 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 $6.0 million and $3.9 million as of December 31, 2018 and December 31, 2017, respectively, recorded as “sales return liability” on the consolidated balance sheet under Topic 606 as of December 31, 2018 and recorded in “accounts receivable, net of allowances,” at December 31, 2017 on the consolidated balance sheet, as indicated below in “Recently Adopted Accounting Standards.”

Arrangements with Multiple Performance Obligations

The Company has determined that the delivery of each unit of product in the Company’s revenue contracts with customers is a separate performance obligation. The Company’s revenue contracts may include multiple products or services, each of which is considered a separate performance obligation. For such arrangements, the Company allocates revenue to each performance obligation based on its relative standalone selling price. The Company generally determines standalone selling prices based on observable prices or using an expected cost plus margin approach when an observable price is not available. The Company invoices customers once products are shipped or delivered to customers depending on the negotiated shipping terms.

The Company defers the value of the service warranty revenue and recognizes it once the performance obligation has been met.

Practical Expedients and Policy Election

The Company generally expenses sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within sales and marketing expenses.

The Company does not adjust accounts receivable for the effects of any significant financing components as customer payment terms are shorter than one year.

The Company has elected to account for shipping and handling activities performed after a customer obtains control of the products as activities to fulfill the promise to transfer the products to the customer. Shipping and handling activities are largely provided to customers free of charge for the Breast Products segment. The associated costs were $1.3 million, $0.9 million and $0.6 million for the years ended December 31, 2018, 2017 and 2016, respectively. These costs are viewed as part of the Company’s marketing programs and are recorded as a component of sales and marketing expense in the consolidated statement of operations as an accounting policy election. For the miraDry segment, shipping and handling charges are typically billed to customers and recorded as revenue. The shipping and handling costs incurred are recorded as a component of cost of goods sold in the consolidated statement of operations. The associated costs were $0.4 million and $35,000 for the years ended December 31, 2018, and 2017 from the acquisition date July 25, 2017, respectively.

(m)

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 $2.4 million and $0.9 million as of December 31, 2018 and 2017, respectively.

(n)

Inventories and Cost of Goods Sold

Inventories represent raw materials, work in process and 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, 2018 and 2017, approximately $1.4 million and $1.6 million, respectively, of the Company’s Breast Products segment inventory was held on consignment at doctors’ offices, clinics, and hospitals. The value and quantity at any one location is not significant.

(o)

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 that cannot be considered sources of income to support the realization of the deferred tax assets, and has provided for tax expense (or benefit) and a corresponding deferred tax liability. Tax benefit for the year ended December 31, 2018 and 2017 was $4,000 and $17,000, respectively. Tax expense for the year ended December 31, 2016 was $0.1 million.

The Company accounts for uncertain tax position in accordance with Account Standards Codification, or 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.

(p)

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.

(q)

Advertising

Expenses related to advertising are charged to sales and marketing expense as incurred. Advertising costs were $1.3 million, $1.8 million and $0.6 million for the years ended December 31, 2018, 2017 and 2016, respectively.

(r)

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. In the absence fo an observable market price for an award, 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

 

2018

 

2017

 

2016

Expected term (in years)

 

 

4.47

 

to

6.07

 

 

5.47

 

to

6.07

 

Expected volatility

 

 

45

%

to

56

%

 

51

%

to

53

%

Risk-free interest rate

 

 

1.24

%

to

2.45

%

 

1.42

%

to

1.54

%

Dividend yield

 

 

 

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

 

2018

 

2017

 

2016

Expected term (in years)

 

 

0.50

 

 

to

 

2.00

 

 

 

 

0.50

 

 

to

 

2.10

 

 

 

 

0.50

 

 

to

 

2.10

 

 

Expected volatility

 

36

 

%

to

42

 

%

 

46

 

%

to

55

 

%

 

42

 

%

to

58

 

%

Risk-free interest rate

 

1.27

 

%

to

3.03

 

%

 

0.08

 

%

to

 

1.30

 

%

 

0.08

 

%

to

0.85

 

%

Dividend yield

 

 

 

 

(s)

Product Warranties

The Company offers a product replacement and limited warranty program for the Company’s silicone gel breast implants, and a product warranty for the Company’s miraDry Systems and consumable bioTips. For silicone gel breast implant surgeries occurring prior to May 1, 2018, the Company provides lifetime replacement implants and up to $3,600 in financial assistance for revision surgeries, for covered rupture events that occur within ten years of the surgery date. The Company introduced its Platinum20 Limited Warranty Program in May 2018, covering OPUS silicone gel breast implants implanted in the United States or Puerto Rico on or after May 1, 2018. The Company considers the program to have an assurance warranty component and a service warranty component. The service warranty component is discussed in Note 2(l) above. The assurance component is related to the lifetime no-charge contralateral replacement implants and up to $5,000 in financial assistance for revision surgeries, for covered rupture events that occur within twenty years of the surgery date.  Under the miraDry warranty, the Company provides a standard product warranty for the miraDry System and bioTips, which the Company considers an assurance-type warranty.

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

 

 

 

Year Ended December 31,

 

 

 

2018

 

 

2017

 

Beginning balance as of January 1

 

$

1,642

 

 

$

1,378

 

Acquired warranty liability

 

 

 

 

 

137

 

Warranty costs incurred during the period

 

 

(572

)

 

 

(167

)

Changes in accrual related to warranties issued during the period

 

 

891

 

 

 

301

 

Changes in accrual related to pre-existing warranties

 

 

(566

)

 

 

(7

)

Balance as of December 31

 

$

1,395

 

 

$

1,642

 

 

(t)

Net Loss Per Share

 

 

 

December 31,

 

 

 

2018

 

 

2017

 

 

2016

 

Net loss (in thousands)

 

$

(82,627

)

 

$

(64,028

)

 

$

(40,166

)

Weighted average common shares outstanding, basic

   and diluted

 

 

25,402,241

 

 

 

19,159,057

 

 

 

18,233,177

 

Net loss per share attributable to common stockholders

 

$

(3.25

)

 

$

(3.34

)

 

$

(2.20

)

 

The Company excluded the following potentially dilutive securities, outstanding as of December 31, 2018, 2017 and 2016 from the computation of diluted net loss per share attributable to common stockholders for the years ended December 31, 2018, 2017 and 2016 because they had an anti-dilutive impact due to the net loss attributable to common stockholders incurred for the periods.

 

 

 

December 31,

 

 

 

2018

 

 

2017

 

 

2016

 

Stock options to purchase common stock

 

 

1,625,778

 

 

 

1,867,627

 

 

 

2,057,296

 

Warrants for the purchase of common stock

 

 

47,710

 

 

 

47,710

 

 

 

47,710

 

 

 

 

1,673,488

 

 

 

1,915,337

 

 

 

2,105,006

 

 

(u)

Recent Accounting Pronouncements

Recently Adopted Accounting Standards

 

In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation (Topic 718), to simplify the accounting for non-employee share-based payment transactions by expanding the scope of ASC Topic 718 to include share-based payment transactions for acquiring goods and services from non-employees. Under the new standard, most of the guidance on stock compensation payments to non-employees would be aligned with the requirements for share-based payments granted to employees. ASU 2018-07 supersedes Subtopic 505-50, Equity—Equity-Based Payments to Non-Employees, and is effective for all public entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted, but no earlier than a company’s adoption date of Topic 606, Revenue from Contracts with Customers. The Company early adopted ASU 2018-07 in the third quarter of 2018 and there was no material impact on its consolidated financial statements from the adoption.

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). Topic 606 supersedes the revenue recognition requirements in Topic 605 Revenue Recognition (Topic 605) and requires entities to recognize revenue when control of the promised goods or services is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The Company adopted Topic 606 in the first quarter of 2018 to all contracts using the modified retrospective method. The adoption of Topic 606 did not have a material impact on the Company’s historical net losses and, therefore, no adjustment was made to the opening balance of retained earnings. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.

In accordance with Topic 606 disclosure requirements, the impact of adoption on the Company’s consolidated balance sheet was as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As Reported

 

 

Total

 

 

Adjusted

 

 

 

December 31, 2017

 

 

Adjustment

 

 

January 1, 2018

 

Balance Sheet

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable, net of allowances

 

$

6,569

 

 

 

3,906

 

 

 

10,475

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Sales return liability

 

$

 

 

 

3,906

 

 

 

3,906

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As Reported

 

 

Total

 

 

Amounts Under

 

 

 

December 31, 2018

 

 

Adjustment

 

 

Previous Standards

 

Balance Sheet

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable, net of allowances

 

$

22,527

 

 

 

(6,048

)

 

 

16,479

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Sales return liability

 

$

6,048

 

 

 

(6,048

)

 

 

 

 

Additionally, in accordance with Topic 606, the balance of breast product inventory estimated to be returned as of December 31, 2018 is included in the components of the Company’s inventory as “finished goods – right of return” in Note 4. Prior to the adoption of Topic 606, the inventory impact of estimated returns for breast products was included in the “finished goods” inventory balance and was not separately disclosed.

 

The adoption of Topic 606 did not have a material impact on the Company’s consolidated statement of operations.

 

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. The ASU requires a retrospective approach to adoption. The Company adopted the ASU in the first quarter of 2018. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

 

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows – Restricted Cash (Topic 230), which clarifies the presentation requirements of restricted cash within the statement of cash flows. ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash and restricted cash equivalents. Therefore, amounts generally described as restricted cash and cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The ASU requires a retrospective approach to adoption. The Company adopted the ASU in 2018 and the cash and cash equivalents at the beginning-of-period and end-of-period total amounts in our condensed consolidated statements of cash flows have been adjusted to include $0.3 million of restricted cash for the years ending December 31, 2018 and 2017.

 

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 Company adopted the ASU in the first quarter of 2018 on a prospective basis. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

In May 2017, the FASB issued ASU 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting. The standard provides clarification on when modification accounting should be used for changes to the terms or conditions of a share-based payment award to which an entity would be required to apply modification accounting under Accounting Standard Codification, or ASC, 718. The Company adopted the ASU in the first quarter of 2018 on a prospective basis. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

 

Recently Issued Accounting Standards

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This ASU requires a company to recognize lease assets and liabilities arising from operating leases in the statement of financial position. This ASU does not significantly change the previous lease guidance for how a lessee should recognize the recognition, measurement, and presentation of expenses and cash flows arising from a lease. Additionally, the criteria for classifying a finance lease versus an operating lease are substantially the same as the previous guidance. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and early adoption is permitted. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842) Targeted Improvements, amending certain aspects of the new leasing standard. The amendment allows an additional optional transition method whereby an entity records a cumulative effect adjustment to opening retained earnings in the year of adoption without restating prior periods. The Company will adopt this ASU on January 1, 2019 electing the optional transition method and the Company does not expect to record a cumulative effect adjustment to the opening accumulated deficit balance. The Company will also elect the package of practical expedients permitted under the transition guidance, which allows the Company to carry forward the historical lease classification, the assessment on whether a contract is or contains a lease, and the initial direct costs for any leases that exist prior to adoption of the new standard. The Company is currently evaluating the impact that adoption of the standard will have on the consolidated financial statements, but believes the primary effect of adopting will be to record right-of-use assets and obligations for our leases currently classified as operating leases. See Note 11 for a summary of our undiscounted minimum rental commitments under operating leases as of December 31, 2018.

In February 2018, the FASB issued ASU 2018-02, Income Taxes (Topic 740), which allows for an entity to elect to reclassify the income tax effects on items within accumulated other comprehensive income resulting from U.S. Tax Cuts and Jobs Act to retained earnings. The guidance is effective for fiscal years beginning after December 15, 2018 with early adoption permitted, including interim periods within those years. The Company does not expect to elect to reclassify the income tax effects under ASU 2018-05, as it does not have a material impact on the consolidated financial statements.

 

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) - Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. The amendment modifies, removes, and adds certain disclosure requirements on fair value measurements. The ASU is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted. The Company is currently evaluating the impact that adoption of the standard will have on the consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40) - Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract. The amendment aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendment. The ASU is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2019. Early adoption is permitted. The Company is currently evaluating the impact that adoption of the standard will have on the consolidated financial statements.

 

(v)Reclassifications

 

Certain reclassifications have been made to prior year amounts to conform to the current year presentation.

v3.19.1
Acquisitions
12 Months Ended
Dec. 31, 2018
Business Combinations [Abstract]  
Acquisitions

(3) Acquisitions

 

(a)

Acquisition of miraDry

On June 11, 2017, Sientra entered into the Merger Agreement with miraDry, pursuant to which Sientra commenced a tender offer to purchase all of the outstanding shares of miraDry’s common stock for (i) $0.3149 per share, plus (ii) the contractual right to receive one or more contingent payments upon the achievement of certain future sales milestones. The total merger consideration was $18.7 million in upfront cash and the contractual rights represent potential contingent payments of up to $14 million. The transaction, which closed on July 25, 2017, or the Acquisition Date, added the miraDry System, the only FDA cleared device to reduce underarm sweat, odor and permanently reduce hair of all colors, to Sientra’s aesthetics portfolio.  In connection with the acquisition, the Company recorded $3.1 million of professional fees for the year ended December 31, 2017, which are included in general and administrative expense. The aggregate preliminary acquisition date fair value of the consideration transferred was approximately $29.6 million, consisting of the following (in thousands):

 

 

 

 

Fair Value

 

Cash consideration at Acquisition Date (other than debt payoff)

 

$

6,193

 

Cash consideration at Acquisition Date (debt payoff)

 

 

12,467

 

Deferred consideration

 

 

966

 

Contingent consideration

 

 

9,946

 

Total purchase consideration

 

$

29,572

 

 

The Company funded the cash consideration, including the debt payoff amount with cash on hand. The cash consideration included the payoff of miraDry’s existing term loan, or the Note Purchase Agreement dated January 27, 2017 and bridge loan, or the January 2017 Bridge Loan, including interest. The deferred consideration relates to cash held back to be used for either potential litigation-related expenses or for payments to certain former investors of miraDry, as defined in the Note Purchase Agreement dated January 27, 2017, one year following the Acquisition Date. Upon reaching one year, the deferred consideration has been classified as $0.4 million of legal settlement payable in the consolidated balance sheet and $0.6 million has offset legal fees paid that the Company had previously included in “prepaid expenses and other current assets” on the consolidated balance sheet. Contingent consideration of future cash payments of a maximum of $14.0 million represents the contractual right of certain former miraDry shareholders to receive one or more contingent payments upon achievement of certain future sales milestones and includes certain amounts due to investors related to the remaining balances on the January 2017 Bridge Note and accrued royalty obligations, with certain amounts held back for potential litigation-related expenses. The fair value of the contingent consideration at the acquisition date was determined 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 2. The contingent consideration component is subject to the recognition of subsequent changes in fair value through general and administrative expense in the consolidated statement of operations.

 

In accordance with ASC 805, the Company has recorded the acquired assets (including identifiable intangible assets) and liabilities assumed at their respective fair value. The preliminary allocation of the total purchase price is as follows (in thousands):

 

 

 

July 25,

 

 

 

2017

 

Cash

 

$

205

 

Accounts receivable, net

 

 

2,091

 

Inventories, net

 

 

7,064

 

Other current assets

 

 

170

 

Property and equipment, net

 

 

528

 

Goodwill

 

 

7,629

 

Intangible assets

 

 

14,800

 

Restricted cash

 

 

305

 

Other assets

 

 

12

 

Liabilities assumed:

 

 

 

 

Accounts payable

 

 

(908

)

Accrued and other current liabilities

 

 

(2,294

)

Other current liabilities

 

 

(30

)

Net assets acquired

 

$

29,572

 

 

Goodwill has been allocated to the miraDry reportable segment. The goodwill recognized is attributable primarily to the assembled workforce and additional market opportunities. Goodwill is not deductible for tax purposes.

 

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

 

 

 

 

 

 

 

Estimated useful

 

Amortization

 

 

Amount

 

 

life

 

method

Developed technology

 

$

3,000

 

 

15 years

 

Accelerated

Customer relationships

 

 

6,300

 

 

14 years

 

Accelerated

Distributor relationships

 

 

500

 

 

9 years

 

Accelerated

Trade name

 

 

5,000

 

 

15 years

 

Accelerated

 

 

$

14,800

 

 

 

 

 

 

The Company retained an independent third-party appraiser to assist management in its valuation and the purchase price has been finalized.

Unaudited Pro Forma Information

 

The following unaudited pro forma financial information presents combined results of operations as if miraDry had been acquired as of the beginning of fiscal year 2017. The pro forma information includes adjustments to amortization for intangible assets acquired, the purchase accounting effect on inventory acquired, interest expense for the additional indebtedness incurred to complete the acquisition, restructuring charges in connection with the acquisition and acquisition costs. The pro forma data are for informational purposes only and are not necessarily indicative of the consolidated results of operations of the combined business had the merger actually occurred at the beginning of fiscal year 2017 or of the results of future operations of the combined business. Consequently, actual results differ from the unaudited pro forma information presented below (in thousands, except per share amount):

 

 

 

December 31,

 

 

 

2017

 

 

 

Pro Forma

 

Net sales

 

$

46,747

 

Net loss

 

 

(74,110

)

Pro forma loss per share attributable to ordinary shares - basic and diluted

 

$

(3.96

)

 

 

(b)

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 consolidated financial statements for the years ended December 31, 2018, 2017 and 2016 include the results of operations of BIOCORNEUM from the date of acquisition.

(c)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 acquisition date fair value of the consideration transferred was approximately $6.0 million.

The consolidated financial statements for the years ended December 31, 2018, 2017 and 2016 include the results of operations of the Dermaspan, Softspan, and AlloX2 tissue expanders from the date of acquisition.

v3.19.1
Balance Sheet Components
12 Months Ended
Dec. 31, 2018
Balance Sheet Related Disclosures [Abstract]  
Balance Sheet Components

(4) Balance Sheet Components

Inventories, net consist of the following (in thousands):

 

 

 

December 31,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Raw materials

 

$

2,147

 

 

$

1,642

 

Work in progress

 

 

2,110

 

 

 

3,956

 

Finished goods

 

 

18,335

 

 

 

15,298

 

Finished goods - right of return

 

 

1,493

 

 

 

 

 

 

$

24,085

 

 

$

20,896

 

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

 

 

 

December 31,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Leasehold improvements

 

$

402

 

 

$

402

 

Manufacturing equipment and toolings

 

 

1,928

 

 

 

4,260

 

Computer equipment

 

 

682

 

 

 

387

 

Software

 

 

1,039

 

 

 

797

 

Office equipment

 

 

156

 

 

 

142

 

Furniture and fixtures

 

 

826

 

 

 

816

 

 

 

 

5,033

 

 

 

6,804

 

Less accumulated depreciation

 

 

(2,497

)

 

 

(2,041

)

 

 

$

2,536

 

 

$

4,763

 

 

Depreciation expense for the years ended December 31, 2018, 2017 and 2016 was $1.1 million, $0.9 million and $0.4 million, respectively.

 

Under the terms of the manufacturing agreement with Vesta, upon the commencement of Contract Year One (as defined in the agreement) which occurred following FDA-approval of all submissions related to the site-change PMA supplement for the Vesta manufacturing facility, Vesta was obligated to purchase the manufacturing equipment and tooling that Sientra had originally purchased for the manufacture of Sientra’s breast implant inventory at Vesta’s manufacturing facility. Vesta repurchased the equipment with a net book value of $2.7 million in the third quarter of 2018 through a reduction in the Company’s accounts payable balance owed to Vesta.

Accrued and other current liabilities consist of the following:

 

 

 

December 31,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Payroll and related expenses

 

$

6,466

 

 

$

3,579

 

Accrued commissions

 

 

5,321

 

 

 

3,297

 

Accrued equipment

 

 

18

 

 

 

1,091

 

Deferred and contingent consideration, current portion

 

 

7,645

 

 

 

977

 

Audit, consulting and legal fees

 

 

703

 

 

 

920

 

Accrued sales and marketing expenses

 

 

1,374

 

 

 

794

 

Other

 

 

6,170

 

 

 

2,816

 

 

 

$

27,697

 

 

$

13,474

 

v3.19.1
Long-Term Debt and Revolving Loan
12 Months Ended
Dec. 31, 2018
Debt Disclosure [Abstract]  
Long-Term Debt and Revolving Loan

(5) Long-Term Debt and Revolving Loan

 

On July 25, 2017, the Company entered into a Credit and Security Agreement, or the Term Loan Credit Agreement, and a Credit and Security Agreement, or the Revolving Credit Agreement with Midcap, and, together with the Term Loan Credit Agreement, the Credit Agreements, which replaced the Company’s then-existing Silicon Valley Bank Loan Agreement, or the SVB Loan Agreement.

 

Under the terms of the Term Loan Credit Agreement, as of July 25, 2017, MidCap funded $25.0 million to the Company, or the Closing Date Term Loan. MidCap also made available to the Company until March 31, 2018, a $10.0 million term loan, or the March 2018 Term Loan, subject to the satisfaction of certain conditions, including FDA certifications of the manufacturing facility operated by Vesta, and an additional $5.0 million term loan, subject to the satisfaction of certain conditions, including evidence that the Company’s Net Revenue for the past 12 months was greater than or equal to $75.0 million, as defined in the Term Loan Credit Agreement, collectively the Term Loans.  On April 18, 2018, the Company amended the Term Loan Credit Agreement pursuant to which the parties agreed to adjust the date by which the Company must obtain FDA approval of its PMA supplement in order to access the March 2018 Term Loan until April 30, 2018. In April 2018, upon FDA approval of the Company’s PMA supplement, MidCap funded the $10.0 million March Term Loan. Under the Revolving Credit Agreement, MidCap made available to the Company a revolving line of credit, or the Revolving Loan.  The amount of loans available to be drawn is based on a borrowing base equal to 85% of the net collectible value of eligible accounts receivable plus 40% of eligible finished goods inventory, or the Borrowing Base, provided that availability from eligible finished goods inventory does not exceed 20% of the Borrowing Base. The Company used a portion of the $25.0 million of proceeds from the Closing Date Term Loan to repay in full the Company’s then-existing indebtedness under its SVB Loan Agreement and to pay fees and expenses in connection with the foregoing and the Company intends to use the remainder of the proceeds for general corporate purposes.

 

Any indebtedness under the Term Loan Credit Agreement bears interest at a floating per annum rate equal to the LIBOR as reported by MidCap with a floor of 1.00%, which as of December 31, 2018 was 2.35%, plus 7.50%. The Term Loans have a scheduled maturity date of December 1, 2021, or the Maturity Date. Subject to an election to delay principal payments, the Company made monthly payments of accrued interest under the Term Loans from the funding date of the Term Loans, until December 31, 2018, to be followed by monthly installments of principal and interest through the Maturity Date. Under the terms of the Term Loan Credit Agreement, the Company had the option to extend the interest only period an additional six months to June 30, 2019 as long as the Company remains in compliance with the Term Loan Agreement. The Company has elected to extend the interest only period through June 30, 2019. The Company may prepay all of the Term Loans prior to its maturity date provided the Company pays MidCap a prepayment fee. The Company paid an origination fee of 0.50% of the Term Loans total amount of $40.0 million on the closing date. As of December 31, 2018, there was $35.0 million outstanding related to the Term Loans. As of  December 31, 2018, the unamortized debt issuance costs on the Term Loans were approximately $0.1 million current portion and approximately $0.1 million long-term portion and are included as a reduction to debt on the consolidated balance sheet.

 

Any indebtedness under the Revolving Credit Agreement bears interest at a floating per annum rate equal to the LIBOR as reported by Midcap with a floor of 1.00%, plus 4.50%. The Company may make and repay borrowings from time to time under the Revolving Credit Agreement until the maturity of the facility on December 1, 2021. The Company is required to pay an annual collateral management fee of 0.50% on the outstanding balance, and an annual unused line fee of 0.50% of the average unused portion. The Company paid an origination fee of 0.50% of the Revolving Loan amount of $10.0 million on the closing date. The Company classifies the amounts borrowed under the Revolving Loan as short term because it is the Company's intention to use the line of credit to borrow and pay back funds over short periods of time. As of December 31, 2018, there were no borrowings outstanding related to the Revolving Loan. As of December 31, 2018, the unamortized debt issuance costs related to the Revolving Loan was approximately $0.1 million and was included in prepaid expenses and other current assets on the consolidated balance sheet.

 

The amortization of debt issuance costs for the years ended December 31, 2018 and 2017 was $0.2 million and  $0.1 million, respectively, and was included in interest expense in the consolidated statements of operations.

 

The Credit Agreements includes customary affirmative and restrictive covenants and representations and warranties, including a financial covenant for minimum revenues, a financial covenant for minimum cash requirements, a covenant against the occurrence of a “change in control,” financial reporting obligations, and certain limitations on indebtedness, liens, investments, distributions, collateral, mergers or acquisitions, taxes, and deposit accounts. Upon the occurrence of an event of default, a default interest rate of an additional 5.0% may be applied to any outstanding principal balances, and Midcap may declare all outstanding obligations immediately due and payable and take such other actions as set forth in the Credit Agreements. The Company’s obligations under the Credit Agreements are secured by a security interest in substantially all of the Company’s assets.

 

Future Principal Payments of Debt

 

The future schedule of principal payments for the outstanding Term Loans as of December 31, 2018 was as follows (in thousands):

 

Fiscal Year

 

 

 

 

2019

 

$

7,000

 

2020

 

 

14,000

 

2021

 

 

14,000

 

2022

 

 

 

2023

 

 

 

Thereafter

 

 

 

Total

 

$

35,000

 

 

v3.19.1
Goodwill and Other Intangible Assets, net
12 Months Ended
Dec. 31, 2018
Goodwill And Intangible Assets Disclosure [Abstract]  
Goodwill and Other Intangible Assets, net

(6) Goodwill and Other Intangible Assets, net

(a)

Goodwill

The Company has determined that it has two reporting units, Breast Products and miraDry, 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, 2018 and 2017 were as follows (in thousands):

 

 

 

Breast

Products

 

 

miraDry

 

 

Total

 

Balances as of December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

$