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1. |
Formation and Business of the Company |
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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 premarket approval, or PMA, assets. Following this acquisition, the Company focused on completing the clinical trials to gain Food and Drug Administration, or 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.
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.”
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b. |
Acquisition of Miramar Labs, Inc. |
On June 11, 2017, Sientra entered into an Agreement and Plan of Merger, or the Merger Agreement, with Miramar Labs, Inc., or Miramar, pursuant to which Sientra commenced a tender offer to purchase all of the outstanding shares of Miramar’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.
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c. |
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.
On October 9, 2015, following the suspension of sales in the United Kingdom and the suspension of the manufacturing and shipment of all medical devices made by Silimed in Brazil, 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.
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 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 indicated no significant safety concerns with the use of its products, including its breast implants, consistent with their approval status since 2012. Additionally, the FDA reiterated prior statements of Medicines and Healthcare Products Regulatory Agency, or MHRA, an executive agency of the United Kingdom, and by the Brazilian regulatory agency ANVISA that no reports of adverse events and no risks to patient health had been identified in connection with implanting Silimed-manufactured products. The Company’s existing manufacturing contract with Silimed expired on its terms in April 2017 and the Company did not renew the contract. 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 PMA supplement to the FDA for the manufacturing of the Company’s PMA-approved breast implants by Vesta.
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2. |
Summary of Significant Accounting Policies |
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a. |
Basis of Presentation |
The accompanying unaudited condensed consolidated financial statements in this Quarterly Report on Form 10-Q have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP, and the rules and regulations of the U.S. Securities and Exchange Commission, or SEC. Accordingly, they do not include certain footnotes and financial presentations normally required under accounting principles generally accepted in the United States of America for complete financial reporting. The interim financial information is unaudited, but reflects all normal adjustments and accruals which are, in the opinion of management, considered necessary to provide a fair presentation for the interim periods presented. The accompanying condensed consolidated financial statements should be read in conjunction with the Company’s audited condensed consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 filed with the SEC on March 14, 2017, or the Annual Report. The results for the three and nine months ended September 30, 2017 are not necessarily indicative of results to be expected for the year ending December 31, 2017, any other interim periods, or any future year or period.
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b. |
Going Concern |
The accompanying condensed 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. The Company’s manufacturing contract with Silimed expired on its terms on April 1, 2017, and the Company did not renew that contract. Accordingly, the Company continues to evaluate the availability of alternative manufacturing sources, including with Vesta, which is establishing manufacturing capacity for the Company and with which the Company executed a definitive manufacturing agreement for the long-term supply of the Company’s PMA-approved silicone gel breast implants. The continuation of the Company as a going concern is dependent upon many factors including the availability of alternative manufacturing sources and continued sale of the Company’s products. Since inception, the Company has incurred net losses. As of September 30, 2017, the Company had cash and cash equivalents of $37.6 million. On July 25, 2017, the Company acquired Miramar and also entered into certain credit agreements with MidCap Financial Trust, or MidCap, which are further discussed in Note 9.
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 condensed consolidated financial statements are issued. These condensed consolidated 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.
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c. |
Use of Estimates |
The preparation of the condensed consolidated financial statements, in conformity with GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
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d. |
Significant Accounting Policies |
There have been no significant changes to the accounting policies during the three and nine months ended September 30, 2017, as compared to the significant accounting policies described in the “Notes to Financial Statements” in the Annual Report.
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e. |
Recent Accounting Pronouncements |
Recently Adopted Accounting Standards
In April 2015, the FASB issued accounting standard update 2015-03, Interest — Imputation of Interest. The standard was issued to simplify the presentation of debt issuance costs and require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The Company adopted ASU 2015-03 in fiscal year 2016. The adoption resulted in $0 and $0.4 million being classified as a direct deduction to debt on the Company’s condensed consolidated balance sheet as of December 31, 2016 and September 30, 2017, respectively.
In July 2015, the FASB issued accounting standard update, or ASU, 2015-11, Inventory - Simplifying the Measurement of Inventory. The standard simplifies the subsequent measurement of inventory by requiring inventory to be measured at the lower of cost and net realizable value, thereby simplifying the previous guidance under which an entity must measure inventory at the lower of cost or market. The accounting standards update will not apply to inventories that are measured by using either the last-in, first-out method or the retail inventory method. The Company adopted ASU 2015-11 in the first quarter of 2017 on a prospective basis. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.
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 consolidated statement of cash flows. The Company adopted ASU 2016-09 in the first quarter of 2017 on a prospective basis. The Company has made an accounting policy election to account for forfeitures when they occur. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.
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 Company adopted ASU 2017-04 in the first quarter of 2017 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 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 the adoption of the new standard for fiscal year ending December 31, 2018, the Company is reviewing contracts and other forms of agreements with customers and 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. The Company is also evaluating the impact of the new standard on certain common practices currently employed by the Company and by other medical device companies, such as allowance for sales returns, rebates, warranty and other pricing programs. The Company has not yet determined the impact of the new standard on the Company’s consolidated financial statements or whether the Company will adopt on a full retrospective or modified retrospective basis in the first quarter of the Company’s fiscal year ending December 31, 2018.
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. The Company will evaluate the impact of this ASU on future acquisitions.
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 ASC 718. The ASU is effective for the Company beginning in fiscal year 2018. The Company does not expect the adoption of this guidance will have a material impact on its consolidated financial statements and related disclosures.
In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815). The standard is broken in to two parts. Part I addresses the complexity of accounting for certain financial instruments with down round features. Part II addresses the difficulty of navigating Topic 480 because of the existence of extensive pending content in the FASB Accounting Standards Codification. The ASU is effective for the Company beginning in fiscal year 2019. The Company has not yet determined the impact of the new standard on the Company’s consolidated financial statements.
f.Reclassifications
Certain reclassifications have been made to prior year amounts to conform to the current year presentation.
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3. |
Acquisitions |
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a. |
Acquisition of Miramar Labs, Inc. |
On June 11, 2017, Sientra entered into the Merger Agreement with Miramar, pursuant to which Sientra commenced a tender offer to purchase all of the outstanding shares of Miramar’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 $2.6 million and $3.0 million of professional fees for the three and nine months ended September 30, 2017, respectively, which are included in general and administrative expense. The aggregate preliminary acquisition date fair value of the consideration transferred was approximately $29.6 million, consisting of the following (in thousands):
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Fair Value |
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Cash consideration at Acquisition Date (other than debt payoff) |
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$ |
6,193 |
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Cash consideration at Acquisition Date (debt payoff) |
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12,467 |
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Deferred consideration |
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|
966 |
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Contingent consideration |
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9,946 |
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Total purchase consideration |
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$ |
29,572 |
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The Company funded the cash consideration, including the debt payoff amount with cash on hand. The cash consideration included the payoff of Miramar’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 Miramar, as defined in the Note Purchase Agreement dated January 27, 2017, one year following the Acquisition Date. Contingent consideration of future cash payments of a maximum of $14.0 million represents the contractual right of certain former Miramar shareholders to receive one or more contingent payments upon achievement of certain future sales milestones and includes certain amounts due to investors related to the remaining balances on the January 2017 Bridge Note and accrued royalty obligations, with certain amounts held back for potential litigation-related expenses. The fair value of the contingent consideration at the acquisition date was determined using a Monte-Carlo simulation model. The inputs include the estimated amount and timing of future net sales, and a risk-adjusted discount rate. The inputs are significant inputs not observable in the market, which are referred to as Level 3 inputs and are further discussed in Note 5. The contingent consideration component is subject to the recognition of subsequent changes in fair value through general and administrative expense in the condensed consolidated statement of operations.
In accordance with ASC 805, the Company has recorded the acquired assets (including identifiable intangible assets) and liabilities assumed at their respective fair value. The preliminary allocation of the total purchase price is as follows (in thousands):
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July 25, |
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2017 |
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Cash |
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$ |
205 |
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Accounts receivable, net |
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2,091 |
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Inventories, net |
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7,064 |
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Other current assets |
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170 |
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Property and equipment, net |
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528 |
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Goodwill |
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7,629 |
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Intangible assets |
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14,800 |
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Restricted cash |
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305 |
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Other assets |
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12 |
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Liabilities assumed: |
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Accounts payable |
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|
(908 |
) |
Accrued and other current liabilities |
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(2,294 |
) |
Other current liabilities |
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(30 |
) |
Net assets acquired |
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$ |
29,572 |
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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 expected to be deductible for tax purposes.
A summary of the intangible assets acquired, estimated useful lives and amortization method is as follows (in thousands):
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Estimated useful |
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Amortization |
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Amount |
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|
life |
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method |
|
Developed technology |
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$ |
3,000 |
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|
15 years |
|
Accelerated |
Customer relationships |
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|
6,300 |
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14 years |
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Accelerated |
Distributor relationships |
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500 |
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9 years |
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Accelerated |
Trade name |
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|
5,000 |
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|
15 years |
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Accelerated |
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|
$ |
14,800 |
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|
|
|
|
The Company retained an independent third-party appraiser to assist management in its valuation; however, the purchase price allocation has not been finalized. This could result in adjustments to the carrying value of the assets acquired and liabilities assumed, the useful lives of intangible assets and residual amount allocated to goodwill. 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.
Unaudited Pro Forma Information
The following unaudited pro forma financial information presents combined results of operations for each of the periods presented, as if Miramar had been acquired as of the beginning of fiscal year 2016. 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 2016 or of the results of future operations of the combined business. Consequently, actual results will differ from the unaudited pro forma information presented below (in thousands):
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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2017 |
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2016 |
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2017 |
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2016 |
|
||||
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Pro Forma |
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Pro Forma |
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Net sales |
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$ |
10,668 |
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$ |
10,834 |
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|
$ |
35,681 |
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|
$ |
30,280 |
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Net loss |
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|
(12,131 |
) |
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|
(14,975 |
) |
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|
(51,844 |
) |
|
|
(56,732 |
) |
Pro forma loss per share attributable to ordinary shares - basic and diluted |
|
$ |
(0.63 |
) |
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$ |
(0.82 |
) |
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$ |
(2.72 |
) |
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$ |
(3.13 |
) |
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b. |
Acquisition of BIOCORNEUM® |
On March 9, 2016, the Company entered into an assets 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 $2,000 and $0.2 million of professional fees for the three and nine months ended September 30, 2016, respectively, which are included in general and administrative expense. The company did not record any professional fees related to the acquisition for the three and nine months ended September 30, 2017. The aggregate acquisition date fair value of the consideration transferred was estimated at $7.4 million, which consisted of the following (in thousands):
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Fair Value |
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Cash |
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$ |
6,859 |
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Deferred consideration |
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|
434 |
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Contingent consideration |
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|
116 |
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|
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$ |
7,409 |
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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 subject to the recognition of subsequent changes in fair value through general and administrative expense in the condensed consolidated 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 condensed consolidated financial statements for the three and nine months ended September 30, 2017 and 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):
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March 9, |
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|
|
|
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):
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|
|
|
|
|
Estimated useful |
|
|
Amortization |
|
|
|
Amount |
|
|
life |
|
|
method |
||
Customer relationships |
|
$ |
3,200 |
|
|
|
10 years |
|
|
Accelerated |
Trade name |
|
|
800 |
|
|
|
12 years |
|
|
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.
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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. The Company did not record any professional fees for the three and nine months ended September 30, 2017 and 2016 in connection with the acquisition. 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 subject to the recognition of subsequent changes in fair value through general and administrative expense in the condensed consolidated 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 condensed consolidated financial statements for the three and nine months ended September 30, 2017 include the results of operations of the Dermaspan™, Softspan™, and AlloX2® tissue expanders.
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 and the purchase price allocation 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.
|
4. |
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. See Note 5 for discussion of the fair value of the common stock warrant liability, deferred consideration and contingent consideration. The fair value of the long-term debt is based on the amount of future cash flows associated with the instrument discounted using the Company’s market rate. As of September 30, 2017, the carrying value of the long-term debt was not materially different from the fair value.
|
5. |
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:
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• |
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 both the acquisition of the tissue expander portfolio from SSP and the acquisition of Miramar 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 September 30, 2017 and December 31, 2016 and indicate the level of the fair value hierarchy utilized to determine such fair value (in thousands):
|
|
Fair Value Measurements as of |
|
|||||||||||||
|
|
September 30, 2017 Using: |
|
|||||||||||||
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability for common stock warrants |
|
$ |
— |
|
|
|
— |
|
|
|
250 |
|
|
|
250 |
|
Liability for deferred consideration |
|
|
— |
|
|
|
— |
|
|
|
1,351 |
|
|
|
1,351 |
|
Liability for contingent consideration |
|
|
— |
|
|
|
— |
|
|
|
11,956 |
|
|
|
11,956 |
|
|
|
$ |
— |
|
|
|
— |
|
|
|
13,557 |
|
|
|
13,557 |
|
|
|
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 |
|
The liability for common stock warrants and the current portion of deferred consideration is included in “accrued and other current liabilities” and the long-term liabilities for the deferred consideration and contingent consideration are included in “deferred consideration and contingent consideration” 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, 2016 |
|
$ |
99 |
|
Fair value of warrants to be issued upon borrowing under the SVB Loan Agreement (Note 9) |
|
|
88 |
|
Warrants extinguished upon termination of SVB Loan Agreement |
|
|
(88 |
) |
Change in fair value through September 30, 2017 |
|
|
151 |
|
Balance, September 30, 2017 |
|
$ |
250 |
|
Deferred Consideration Liability |
|
|
|
|
Balance, December 31, 2016 |
|
$ |
395 |
|
Initial fair value of acquisition-related deferred consideration |
|
|
966 |
|
Change in fair value of deferred consideration |
|
|
(10 |
) |
Balance, September 30, 2017 |
|
$ |
1,351 |
|
Contingent Consideration Liability |
|
|
|
|
Balance, December 31, 2016 |
|
$ |
1,242 |
|
Initial fair value of acquisition-related contingent consideration |
|
|
9,946 |
|
Change in fair value of contingent consideration |
|
|
768 |
|
Balance, September 30, 2017 |
|
$ |
11,956 |
|
The Company recognizes changes in the fair value of the warrants in “other income (expense), net” in the condensed consolidated statement of operations and changes in deferred consideration and contingent consideration are recognized in “general and administrative” expense in the condensed consolidated statement of operations.
|
6. |
Product Warranties |
The Company offers a limited warranty and a lifetime product replacement program for the Company’s silicone gel breast implants and a product warranty for the Company’s miraDry® Systems. Under the breast implant 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 breast implant lifetime product replacement program, the Company provides no-charge replacement breast implants if a patient experiences a covered event. Under the miraDry® warranty, the Company currently provides a standard product warranty for two years to cover the consoles, hand pieces and accessories. Additionally, the warranty covers the shelf-life of the miraDry® consumables, or bioTips™. Additionally, an extended warranty may be purchased to provide additional protection of the miraDry® System.
The following table provides a rollforward of the accrued warranties (in thousands):
|
|
Nine Months Ended September 30, |
|
|||||
|
|
2017 |
|
|
2016 |
|
||
Beginning balance as of January 1 |
|
$ |
1,378 |
|
|
$ |
1,332 |
|
Acquired warranty liability |
|
|
137 |
|
|
|
— |
|
Payments made during the period |
|
|
(11 |
) |
|
|
(19 |
) |
Changes in accrual related to warranties issued during the period |
|
|
125 |
|
|
|
134 |
|
Changes in accrual related to pre-existing warranties |
|
|
8 |
|
|
|
(1 |
) |
Balance as of September 30 |
|
$ |
1,637 |
|
|
$ |
1,446 |
|
|
8. |
Balance Sheet Components |
|
a. |
Allowance for Sales Returns and Doubtful Accounts |
The Company has established an allowance for sales returns of $4.2 million and $3.9 million as of September 30, 2017 and December 31, 2016, respectively, recorded net against accounts receivable in the balance sheet.
The Company has established an allowance for doubtful accounts of $0.5 million and $0.4 million as of September 30, 2017 and December 31, 2016, respectively, recorded net against accounts receivable in the balance sheet.
|
b. |
Inventories |
Upon the acquisition of Miramar, the Company now has raw materials and work in progress, in addition to finished goods.
Inventories, net consist of the following (in thousands):
|
|
September 30, |
|
|
December 31, |
|
||
|
|
2017 |
|
|
2016 |
|
||
Raw materials |
|
$ |
1,784 |
|
|
$ |
— |
|
Work in progress |
|
|
2,865 |
|
|
|
— |
|
Finished goods |
|
|
18,420 |
|
|
|
18,484 |
|
|
|
$ |
23,069 |
|
|
$ |
18,484 |
|
|
c. |
Prepaid Expenses and Other Current Assets |
Prepaid expenses and other current assets consist of the following (in thousands):
|
|
September 30, |
|
|
December 31, |
|
||
|
|
2017 |
|
|
2016 |
|
||
Prepaid expenses |
|
$ |
2,046 |
|
|
$ |
1,145 |
|
Other current assets |
|
|
2,028 |
|
|
|
707 |
|
Total |
|
$ |
4,074 |
|
|
$ |
1,852 |
|
|
d. |
Property and Equipment |
Property and equipment, net consist of the following (in thousands):
|
|
September 30, |
|
|
December 31, |
|
||
|
|
2017 |
|
|
2016 |
|
||
Leasehold improvements |
|
$ |
940 |
|
|
$ |
86 |
|
Laboratory equipment and toolings |
|
|
5,049 |
|
|
|
2,264 |
|
Computer equipment |
|
|
594 |
|
|
|
287 |
|
Software |
|
|
1,077 |
|
|
|
669 |
|
Office equipment |
|
|
134 |
|
|
|
129 |
|
Furniture and fixtures |
|
|
885 |
|
|
|
743 |
|
|
|
|
8,679 |
|
|
|
4,178 |
|
Less accumulated depreciation |
|
|
(4,319 |
) |
|
|
(1,192 |
) |
|
|
$ |
4,360 |
|
|
$ |
2,986 |
|
Depreciation expense for the three months ended September 30, 2017 and 2016 was $0.2 million and $0.1 million, respectively. Depreciation expense for the nine months ended September 30, 2017 and 2016 was $0.6 million and $0.2 million, respectively.
|
e. |
Goodwill and Other Intangible Assets, net |
Goodwill represents the excess of the purchase price over the fair value of net assets of purchased businesses. Goodwill is not amortized, but instead 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. 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 impairment assessment for that reporting unit.
The applicable accounting guidance requires the Company 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. The impairment loss is measured by the excess of the carrying amount of the reporting unit goodwill over the fair value of that goodwill.
The changes in the carrying amount of goodwill during the nine months ended September 30, 2017 were as follows (in thousands):
Balances as of December 31, 2016 |
|
|
|
|
Goodwill |
|
$ |
19,156 |
|
Accumulated impairment losses |
|
|
(14,278 |
) |
Goodwill, net |
|
$ |
4,878 |
|
|
|
|
|
|
Goodwill acquired (Note 3) |
|
|
7,629 |
|
|
|
|
|
|
Balances as of September 30, 2017 |
|
|
|
|
Goodwill |
|
$ |
26,785 |
|
Accumulated impairment losses |
|
|
(14,278 |
) |
Goodwill, net |
|
$ |
12,507 |
|
The components of the Company’s other intangible assets consist of the following (in thousands):
|
|
|
|
|
|
September 30, 2017 |
|
|||||||||
|
|
Average Amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period |
|
|
Gross Carrying |
|
|
Accumulated |
|
|
Intangible |
|
||||
|
|
(in years) |
|
|
Amount |
|
|
Amortization |
|
|
Assets, net |
|
||||
Intangibles with definite lives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships |
|
|
11 |
|
|
$ |
11,240 |
|
|
$ |
(1,464 |
) |
|
$ |
9,776 |
|
Trade names - finite life |
|
|
14 |
|
|
|
5,800 |
|
|
|
(146 |
) |
|
|
5,654 |
|
Developed technology |
|
|
15 |
|
|
|
3,000 |
|
|
|
(40 |
) |
|
|
2,960 |
|
Distributor relationships |
|
|
9 |
|
|
|
500 |
|
|
|
(17 |
) |
|
|
483 |
|
Regulatory approvals |
|
|
1 |
|
|
|
670 |
|
|
|
(526 |
) |
|
|
144 |
|
Non-compete agreement |
|
|
2 |
|
|
|
80 |
|
|
|
(47 |
) |
|
|
33 |
|
Acquired FDA non-gel product approval |
|
|
11 |
|
|
|
1,713 |
|
|
|
(1,709 |
) |
|
|
4 |
|
Total definite-lived intangible assets |
|
|
|
|
|
$ |
23,003 |
|
|
$ |
(3,949 |
) |
|
$ |
19,054 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangibles with indefinite lives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade names - indefinite life |
|
— |
|
|
|
450 |
|
|
|
— |
|
|
|
450 |
|
|
Total indefinite-lived intangible assets |
|
|
|
|
|
$ |
450 |
|
|
$ |
— |
|
|
$ |
450 |
|
|
|
|
|
|
|
December 31, 2016 |
|
|||||||||
|
|
Average Amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period |
|
|
Gross Carrying |
|
|
Accumulated |
|
|
Intangible |
|
||||
|
|
(in years) |
|
|
Amount |
|
|
Amortization |
|
|
Assets, net |
|
||||
Intangibles with definite lives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships |
|
|
10 |
|
|
$ |
4,940 |
|
|
$ |
(602 |
) |
|
$ |
4,338 |
|
Trade names - finite life |
|
|
12 |
|
|
|
800 |
|
|
|
(56 |
) |
|
|
744 |
|
Regulatory approvals |
|
|
1 |
|
|
|
670 |
|
|
|
(96 |
) |
|
|
574 |
|
Non-compete agreement |
|
|
2 |
|
|
|
80 |
|
|
|
(17 |
) |
|
|
63 |
|
Acquired FDA non-gel product approval |
|
|
11 |
|
|
|
1,713 |
|
|
|
(1,696 |
) |
|
|
17 |
|
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 |
|
Amortization expense for the three months ended September 30, 2017 and 2016 was $1.0 million and $0.2 million, respectively. Amortization expense for the nine months ended September 30, 2017 and 2016 was $1.8 million and $0.5 million, respectively. The following table summarizes the estimated amortization expense relating to the Company's definite-lived intangible assets as of September 30, 2017 (in thousands):
|
|
Amortization |
|
|
Period |
|
Expense |
|
|
Remainder of 2017 |
|
$ |
705 |
|
2018 |
|
|
2,308 |
|
2019 |
|
|
2,321 |
|
2020 |
|
|
2,197 |
|
2021 |
|
|
1,996 |
|
Thereafter |
|
|
9,527 |
|
|
|
$ |
19,054 |
|
|
f. |
Accrued and Other Current Liabilities |
Accrued and other current liabilities consist of the following (in thousands):
|
|
September 30, |
|
|
December 31, |
|
||
|
|
2017 |
|
|
2016 |
|
||
Payroll and related expenses |
|
$ |
4,369 |
|
|
$ |
2,592 |
|
Audit, consulting and legal fees |
|
|
3,060 |
|
|
|
812 |
|
Accrued commissions |
|
|
2,024 |
|
|
|
1,222 |
|
Deferred consideration, current portion |
|
|
966 |
|
|
|
— |
|
Accrued marketing and sales expenses |
|
|
482 |
|
|
|
31 |
|
Warrant liability |
|
|
250 |
|
|
|
99 |
|
Accrued clinical trial and research and development expenses |
|
|
183 |
|
|
|
119 |
|
Other |
|
|
2,335 |
|
|
|
1,632 |
|
|
|
$ |
13,669 |
|
|
$ |
6,507 |
|
|
9. |
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. Upon executing the Credit Agreements, the Company repaid in full its indebtedness under the SVB Loan Agreement, which totaled approximately $5.0 million related to a revolving line of credit, or the Revolving Line of Credit. In connection with the refinancing, the Company was forgiven a commitment fee payable of approximately $0.8 million, which was included in long term liabilities, net of the current portion included in accrued and other current liabilities in the condensed consolidated balance sheet, and extinguishment of corresponding warrants of approximately $0.1 million related to the SVB Loan Agreement. The Company also recorded an expense of approximately $16,000 related to the write-off of related issuance costs, which has been included in interest expense in the condensed consolidated statements of operations. Unamortized debt issuance costs from the SVB Loan Agreement related to the modification will be amortized over the term of the new Credit Agreements.
Under the terms of the Term Loan Credit Agreement, as of July 25, 2017, Midcap funded $25.0 million to the Company, 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. 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 the proceeds 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 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 September 30, 2017 was 1.24%, plus 7.50%. The Term Loans have a scheduled maturity date of December 1, 2021, or the Maturity Date. The Company must make monthly payments of accrued interest under the Term Loans from the funding date of the Term Loans, until December 31, 2018, followed by monthly installments of principal and interest through the Maturity Date. 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 September 30, 2017, there was $25.0 million outstanding related to the Term Loans. As of September 30, 2017, the unamortized debt issuance costs on the Term Loans was approximately $0.1 million current portion and approximately $0.3 million long-term portion and are included as a reduction to debt on the condensed 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 may prepay all of the outstanding balance prior to the maturity date provided the Company pays Midcap a prepayment fee. The Company paid an origination fee of 0.50% of the Revolving Loan amount of $10.0 million on the closing date. As of September 30, 2017, there were no borrowings outstanding related to the Revolving Loan or any material outstanding letters of credit. As of September 30, 2017, the unamortized debt issuance costs related to the Revolving Loan was approximately $0.2 million and was included in other long-term assets on the condensed consolidated balance sheet.
The amortization of debt issuance costs for the three months ended September 30, 2017 was $28,500, relating to the Term Loans and Revolving Loan. The amortization of debt issuance costs for the nine months ended September 30, 2017 was $0.1 million, relating to the Revolving Line of Credit, the Term Loans, and the Revolving Loan and were included in interest expense in the condensed 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, other than intellectual property.
Future Principal Payments of Debt
The future schedule of principal payments for the outstanding Term Loan as of September 30, 2017 was as follows (in thousands):
Fiscal Year |
|
|
|
|
Remainder of 2017 |
|
$ |
— |
|
2018 |
|
|
— |
|
2019 |
|
|
8,333 |
|
2020 |
|
|
8,333 |
|
2021 |
|
|
8,334 |
|
Thereafter |
|
|
— |
|
Total |
|
$ |
25,000 |
|
|
10.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 September 30, 2017 and 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 an 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 September 30, 2017, 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 the 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 initially reserved for issuance under the 2007 Plan.
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 September 30, 2017, a total of 361,637 shares of the Company’s common stock were available for issuance under the 2014 Plan.
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 September 30, 2017, inducement grants for 330,000 shares of common stock have been awarded, and 34,000 shares of common stock were available 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 not be 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, 2016 |
|
|
2,786,977 |
|
|
$ |
7.27 |
|
|
|
6.28 |
|
Granted |
|
|
180,000 |
|
|
|
9.12 |
|
|
|
|
|
Exercised |
|
|
(475,171 |
) |
|
|
2.79 |
|
|
|
|
|
Forfeited |
|
|
(286,880 |
) |
|
|
12.82 |
|
|
|
|
|
Balances at September 30, 2017 |
|
|
2,204,926 |
|
|
$ |
7.66 |
|
|
|
7.51 |
|
For stock-based awards the Company recognizes compensation expense based on the grant date fair value using the Black-Scholes option valuation model. Stock-based compensation expense was $0.5 million and $0.4 million for the three months ended September 30, 2017 and 2016, respectively. Stock-based compensation expense was $1.6 million and $1.2 million for the nine months ended September 30, 2017 and 2016, respectively. As of September 30, 2017, there was $3.2 million of unrecognized compensation costs related to stock options. The expense is recorded within the operating expense components in the condensed consolidated statement of operations based on the recipients receiving the awards. These costs are expected to be recognized over a weighted average period of 2.12 years.
|
d. |
Restricted Stock Units |
The Company has issued restricted stock unit awards, or RSUs, under the 2014 Plan and the Inducement Plan. The RSUs issued generally 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, 2016 |
|
|
430,733 |
|
|
$ |
7.99 |
|
Granted |
|
|
761,345 |
|
|
|
8.61 |
|
Vested |
|
|
(252,285 |
) |
|
|
7.74 |
|
Forfeited |
|
|
(39,416 |
) |
|
|
8.46 |
|
Balances at September 30, 2017 |
|
|
900,377 |
|
|
$ |
8.57 |
|
Stock-based compensation expense for RSUs for the three months ended September 30, 2017 and 2016 was $1.0 million and $0.5 million, respectively. Stock-based compensation expense for RSUs for the nine months ended September 30, 2017 and 2016 was $2.8 million and $1.1 million, respectively. As of September 30, 2017, there was $6.0 million of total unrecognized compensation costs related to non-vested RSU awards. The cost is expected to be recognized over a weighted average period of 1.88 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 for 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. 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, subject to certain annual increases.
As of September 30, 2017, the number of shares of common stock reserved for issuance under the ESPP was 770,549. During the nine months ended September 30, 2017, employees purchased 108,081 shares of common stock at a weighted average price of $5.98 per share. As of September 30, 2017, the number of shares of common stock available for future issuance was 495,551.
The Company estimated the fair value of employee stock purchase rights using the Black-Scholes model. Stock-based compensation expense related to the ESPP was $0.1 million for both the three months ended September 30, 2017 and 2016. Stock-based compensation expense related to the ESPP was $0.3 million for both the nine months ended September 30, 2017 and 2016.
|
11. |
Income Taxes |
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 $16,000 and $48,000 for the three months ended September 30, 2017 and 2016, respectively. Tax expense was $0.1 million and $48,000 for the nine months ended September 30, 2017 and 2016, respectively.
|
12. |
Segment Information |
Reportable Segments
The Company has two reportable segments: Breast Product and miraDry®. The Breast Product segment focuses on sales of silicone gel breast implants, tissue expanders and scar management products under the brands Sientra®, AlloX2®, Dermaspan™, Softspan™ and BIOCORNEUM®. The miraDry® segment focuses on sales of the miraDry® System, consisting of a console and a handheld device which uses consumable single-use bioTips™. These segments align with the Company’s principal target markets. On July 25, 2017, the Company acquired Miramar. See Note 3a – Acquisitions for additional details. Miramar has been included in the consolidated results of operations as of the Acquisition Date and financial performance of the acquired business is reported in the miraDry® segment. The 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.
The Company’s CODM assesses the performance of each segment and allocates resources to those segments based on net sales and operating income (loss). Operating income (loss) by segment includes items that are directly attributable to each segment, including sales and marketing functions, as well as finance, information technology, human resources, legal and related corporate infrastructure costs, along with certain benefit-related expenses. There are no unallocated expenses for the two segments.
The following tables present the net sales and net operating loss by reportable segment for the periods presented (in thousands):
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
September 30, |
|
|
September 30, |
|
||||||||||
|
|
2017 |
|
|
2016 |
|
|
2017 |
|
|
2016 |
|
||||
Net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Breast Product |
|
$ |
7,655 |
|
|
$ |
6,531 |
|
|
$ |
23,313 |
|
|
$ |
14,246 |
|
miraDry® |
|
|
2,164 |
|
|
|
— |
|
|
|
2,164 |
|
|
|
— |
|
Total net sales |
|
$ |
9,819 |
|
|
$ |
6,531 |
|
|
$ |
25,477 |
|
|
$ |
14,246 |
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||||
|
|
September 30, |
|
|
September 30, |
|
||||||||||||
|
|
2017 |
|
|
2016 |
|
|
2017 |
|
|
|
|
2016 |
|
||||
Loss from operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Breast Product |
|
$ |
(11,253 |
) |
|
$ |
(9,774 |
) |
|
$ |
(42,878 |
) |
|
|
|
$ |
(31,921 |
) |
miraDry® |
|
|
(2,602 |
) |
|
|
— |
|
|
|
(2,602 |
) |
|
|
|
|
— |
|
Total loss from operations |
|
$ |
(13,855 |
) |
|
$ |
(9,774 |
) |
|
$ |
(45,480 |
) |
|
|
|
$ |
(31,921 |
) |
|
13. |
Commitments and Contingencies |
|
a. |
Operating Leases |
The Company’s leases for its general office facilities are in Santa Barbara, California and Santa Clara, California, with leases expiring February 2020 and May 2019, respectively. The Company also leases additional industrial space for warehouse, research and development and additional general office use. Rent expense was $0.2 million and $0.1 million for the three months ended September 30, 2017 and 2016, respectively. Rent expense was $0.5 million and $0.4 million for the nine months ended September 30, 2017 and 2016, respectively. The Company recognizes rent expense on a straight-line basis over the lease term.
|
b. |
Contingencies |
The Company is subject to claims and assessment from time to time in the ordinary course of business. The Company accrues a liability for such matters when it is probable that future expenditures will be made and such expenditures can be reasonably estimated.
Class Action Shareholder Litigation
On September 25, 2015, a lawsuit styled as a class action of the Company’s stockholders was filed in the United States District Court for the Central District of California naming the Company and certain of its officers as defendants for allegedly false and misleading statements concerning the Company’s business, operations, and prospects. On October 28, November 5, and November 19, 2015, three lawsuits styled as class actions of the Company’s stockholders were filed in the Superior Court of California for the County of San Mateo naming the Company, certain of its officers and directors, and the underwriters associated with the Company’s follow-on public offering that closed on September 23, 2015 as defendants for allegedly false and misleading statements in the Company’s offering documents associated with the follow-on offering concerning its business, operations, and prospects. On September 13, 2016, the parties to the actions pending in the San Mateo Superior Court and the United States District Court for the Central District of California signed a memorandum of understanding that sets forth the material deal points of a settlement that covers both actions and includes class-wide relief. Following a final fairness hearing in the federal court, on May 23, 2017, the federal court extended an order granting final approval of the settlement and dismissing the federal court action with prejudice. Following a final fairness hearing in the state court, on May 31, 2017, the state court entered an order granting final approval of the settlement and dismissing the state court action with prejudice.
As a result of these developments, the Company determined a probable loss had been incurred and recognized a net charge to earnings of approximately $1.6 million for the nine months ended September 30, 2016 within general and administrative expense which was comprised of the loss contingency of approximately $10.9 million, net of expected insurance proceeds of approximately $9.4 million. In the first quarter of 2017, the Company received $9.3 million in insurance proceeds and paid the $10.9 million loss contingency. The remaining insurance proceeds receivable is classified as “insurance recovery receivable” on the accompanying condensed consolidated balance sheets.
Silimed Litigation
On July 27, 2017, the Company entered into a settlement agreement, or the Settlement Agreement, with Silimed to settle outstanding litigations with Silimed. Pursuant to the Settlement Agreement, in exchange for a mutual release of claims and covenants not to sue or pursue certain litigation, Sientra paid Silimed a lump sum of $9.0 million on September 7, 2017 and agreed to further pay $1.0 million on or by July 1, 2018. In addition, should the Company enter into international markets using certain breast implant specifications, the Company has agreed to make royalty payments of $12.50 on each of its net sales of such products, up to a maximum royalty of $5.0 million. (See Part II – Item 1. Legal Proceedings – Silimed Litigation.)
It is possible that additional suits will be filed, or allegations made by stockholders, with respect to these same or other matters and also naming the Company and/or its officers and directors as defendants. The Company believes it has meritorious defenses and intends to defend these lawsuits vigorously.
|
|
a. |
Basis of Presentation |
The accompanying unaudited condensed consolidated financial statements in this Quarterly Report on Form 10-Q have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP, and the rules and regulations of the U.S. Securities and Exchange Commission, or SEC. Accordingly, they do not include certain footnotes and financial presentations normally required under accounting principles generally accepted in the United States of America for complete financial reporting. The interim financial information is unaudited, but reflects all normal adjustments and accruals which are, in the opinion of management, considered necessary to provide a fair presentation for the interim periods presented. The accompanying condensed consolidated financial statements should be read in conjunction with the Company’s audited condensed consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 filed with the SEC on March 14, 2017, or the Annual Report. The results for the three and nine months ended September 30, 2017 are not necessarily indicative of results to be expected for the year ending December 31, 2017, any other interim periods, or any future year or period.
|
b. |
Going Concern |
The accompanying condensed 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. The Company’s manufacturing contract with Silimed expired on its terms on April 1, 2017, and the Company did not renew that contract. Accordingly, the Company continues to evaluate the availability of alternative manufacturing sources, including with Vesta, which is establishing manufacturing capacity for the Company and with which the Company executed a definitive manufacturing agreement for the long-term supply of the Company’s PMA-approved silicone gel breast implants. The continuation of the Company as a going concern is dependent upon many factors including the availability of alternative manufacturing sources and continued sale of the Company’s products. Since inception, the Company has incurred net losses. As of September 30, 2017, the Company had cash and cash equivalents of $37.6 million. On July 25, 2017, the Company acquired Miramar and also entered into certain credit agreements with MidCap Financial Trust, or MidCap, which are further discussed in Note 9.
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 condensed consolidated financial statements are issued. These condensed consolidated 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. |
Use of Estimates |
The preparation of the condensed consolidated financial statements, in conformity with GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
|
d. |
Significant Accounting Policies |
There have been no significant changes to the accounting policies during the three and nine months ended September 30, 2017, as compared to the significant accounting policies described in the “Notes to Financial Statements” in the Annual Report.
|
e. |
Recent Accounting Pronouncements |
Recently Adopted Accounting Standards
In April 2015, the FASB issued accounting standard update 2015-03, Interest — Imputation of Interest. The standard was issued to simplify the presentation of debt issuance costs and require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The Company adopted ASU 2015-03 in fiscal year 2016. The adoption resulted in $0 and $0.4 million being classified as a direct deduction to debt on the Company’s condensed consolidated balance sheet as of December 31, 2016 and September 30, 2017, respectively.
In July 2015, the FASB issued accounting standard update, or ASU, 2015-11, Inventory - Simplifying the Measurement of Inventory. The standard simplifies the subsequent measurement of inventory by requiring inventory to be measured at the lower of cost and net realizable value, thereby simplifying the previous guidance under which an entity must measure inventory at the lower of cost or market. The accounting standards update will not apply to inventories that are measured by using either the last-in, first-out method or the retail inventory method. The Company adopted ASU 2015-11 in the first quarter of 2017 on a prospective basis. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.
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 consolidated statement of cash flows. The Company adopted ASU 2016-09 in the first quarter of 2017 on a prospective basis. The Company has made an accounting policy election to account for forfeitures when they occur. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.
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 Company adopted ASU 2017-04 in the first quarter of 2017 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 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 the adoption of the new standard for fiscal year ending December 31, 2018, the Company is reviewing contracts and other forms of agreements with customers and 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. The Company is also evaluating the impact of the new standard on certain common practices currently employed by the Company and by other medical device companies, such as allowance for sales returns, rebates, warranty and other pricing programs. The Company has not yet determined the impact of the new standard on the Company’s consolidated financial statements or whether the Company will adopt on a full retrospective or modified retrospective basis in the first quarter of the Company’s fiscal year ending December 31, 2018.
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. The Company will evaluate the impact of this ASU on future acquisitions.
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 ASC 718. The ASU is effective for the Company beginning in fiscal year 2018. The Company does not expect the adoption of this guidance will have a material impact on its consolidated financial statements and related disclosures.
In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815). The standard is broken in to two parts. Part I addresses the complexity of accounting for certain financial instruments with down round features. Part II addresses the difficulty of navigating Topic 480 because of the existence of extensive pending content in the FASB Accounting Standards Codification. The ASU is effective for the Company beginning in fiscal year 2019. The Company has not yet determined the impact of the new standard on the Company’s consolidated financial statements.
f.Reclassifications
Certain reclassifications have been made to prior year amounts to conform to the current year presentation.
|
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 |
|
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 |
|
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 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 2016 or of the results of future operations of the combined business. Consequently, actual results will differ from the unaudited pro forma information presented below (in thousands):
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
September 30, |
|
|
September 30, |
|
||||||||||
|
|
2017 |
|
|
2016 |
|
|
2017 |
|
|
2016 |
|
||||
|
|
Pro Forma |
|
|
Pro Forma |
|
||||||||||
Net sales |
|
$ |
10,668 |
|
|
$ |
10,834 |
|
|
$ |
35,681 |
|
|
$ |
30,280 |
|
Net loss |
|
|
(12,131 |
) |
|
|
(14,975 |
) |
|
|
(51,844 |
) |
|
|
(56,732 |
) |
Pro forma loss per share attributable to ordinary shares - basic and diluted |
|
$ |
(0.63 |
) |
|
$ |
(0.82 |
) |
|
$ |
(2.72 |
) |
|
$ |
(3.13 |
) |
The aggregate 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 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 |
|
|
method |
||
Customer relationships |
|
$ |
3,200 |
|
|
|
10 years |
|
|
Accelerated |
Trade name |
|
|
800 |
|
|
|
12 years |
|
|
Straight-line |
|
|
$ |
4,000 |
|
|
|
|
|
|
|
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 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 following tables present information about the Company’s liabilities that are measured at fair value on a recurring basis as of September 30, 2017 and December 31, 2016 and indicate the level of the fair value hierarchy utilized to determine such fair value (in thousands):
|
|
Fair Value Measurements as of |
|
|||||||||||||
|
|
September 30, 2017 Using: |
|
|||||||||||||
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability for common stock warrants |
|
$ |
— |
|
|
|
— |
|
|
|
250 |
|
|
|
250 |
|
Liability for deferred consideration |
|
|
— |
|
|
|
— |
|
|
|
1,351 |
|
|
|
1,351 |
|
Liability for contingent consideration |
|
|
— |
|
|
|
— |
|
|
|
11,956 |
|
|
|
11,956 |
|
|
|
$ |
— |
|
|
|
— |
|
|
|
13,557 |
|
|
|
13,557 |
|
|
|
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 |
|
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, 2016 |
|
$ |
99 |
|
Fair value of warrants to be issued upon borrowing under the SVB Loan Agreement (Note 9) |
|
|
88 |
|
Warrants extinguished upon termination of SVB Loan Agreement |
|
|
(88 |
) |
Change in fair value through September 30, 2017 |
|
|
151 |
|
Balance, September 30, 2017 |
|
$ |
250 |
|
Deferred Consideration Liability |
|
|
|
|
Balance, December 31, 2016 |
|
$ |
395 |
|
Initial fair value of acquisition-related deferred consideration |
|
|
966 |
|
Change in fair value of deferred consideration |
|
|
(10 |
) |
Balance, September 30, 2017 |
|
$ |
1,351 |
|
Contingent Consideration Liability |
|
|
|
|
Balance, December 31, 2016 |
|
$ |
1,242 |
|
Initial fair value of acquisition-related contingent consideration |
|
|
9,946 |
|
Change in fair value of contingent consideration |
|
|
768 |
|
Balance, September 30, 2017 |
|
$ |
11,956 |
|
|
The following table provides a rollforward of the accrued warranties (in thousands):
|
|
Nine Months Ended September 30, |
|
|||||
|
|
2017 |
|
|
2016 |
|
||
Beginning balance as of January 1 |
|
$ |
1,378 |
|
|
$ |
1,332 |
|
Acquired warranty liability |
|
|
137 |
|
|
|
— |
|
Payments made during the period |
|
|
(11 |
) |
|
|
(19 |
) |
Changes in accrual related to warranties issued during the period |
|
|
125 |
|
|
|
134 |
|
Changes in accrual related to pre-existing warranties |
|
|
8 |
|
|
|
(1 |
) |
Balance as of September 30 |
|
$ |
1,637 |
|
|
$ |
1,446 |
|
|
Inventories, net consist of the following (in thousands):
|
|
September 30, |
|
|
December 31, |
|
||
|
|
2017 |
|
|
2016 |
|
||
Raw materials |
|
$ |
1,784 |
|
|
$ |
— |
|
Work in progress |
|
|
2,865 |
|
|
|
— |
|
Finished goods |
|
|
18,420 |
|
|
|
18,484 |
|
|
|
$ |
23,069 |
|
|
$ |
18,484 |
|
Prepaid expenses and other current assets consist of the following (in thousands):
|
|
September 30, |
|
|
December 31, |
|
||
|
|
2017 |
|
|
2016 |
|
||
Prepaid expenses |
|
$ |
2,046 |
|
|
$ |
1,145 |
|
Other current assets |
|
|
2,028 |
|
|
|
707 |
|
Total |
|
$ |
4,074 |
|
|
$ |
1,852 |
|
Property and equipment, net consist of the following (in thousands):
|
|
September 30, |
|
|
December 31, |
|
||
|
|
2017 |
|
|
2016 |
|
||
Leasehold improvements |
|
$ |
940 |
|
|
$ |
86 |
|
Laboratory equipment and toolings |
|
|
5,049 |
|
|
|
2,264 |
|
Computer equipment |
|
|
594 |
|
|
|
287 |
|
Software |
|
|
1,077 |
|
|
|
669 |
|
Office equipment |
|
|
134 |
|
|
|
129 |
|
Furniture and fixtures |
|
|
885 |
|
|
|
743 |
|
|
|
|
8,679 |
|
|
|
4,178 |
|
Less accumulated depreciation |
|
|
(4,319 |
) |
|
|
(1,192 |
) |
|
|
$ |
4,360 |
|
|
$ |
2,986 |
|
The changes in the carrying amount of goodwill during the nine months ended September 30, 2017 were as follows (in thousands):
Balances as of December 31, 2016 |
|
|
|
|
Goodwill |
|
$ |
19,156 |
|
Accumulated impairment losses |
|
|
(14,278 |
) |
Goodwill, net |
|
$ |
4,878 |
|
|
|
|
|
|
Goodwill acquired (Note 3) |
|
|
7,629 |
|
|
|
|
|
|
Balances as of September 30, 2017 |
|
|
|
|
Goodwill |
|
$ |
26,785 |
|
Accumulated impairment losses |
|
|
(14,278 |
) |
Goodwill, net |
|
$ |
12,507 |
|
The components of the Company’s other intangible assets consist of the following (in thousands):
|
|
|
|
|
|
September 30, 2017 |
|
|||||||||
|
|
Average Amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period |
|
|
Gross Carrying |
|
|
Accumulated |
|
|
Intangible |
|
||||
|
|
(in years) |
|
|
Amount |
|
|
Amortization |
|
|
Assets, net |
|
||||
Intangibles with definite lives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships |
|
|
11 |
|
|
$ |
11,240 |
|
|
$ |
(1,464 |
) |
|
$ |
9,776 |
|
Trade names - finite life |
|
|
14 |
|
|
|
5,800 |
|
|
|
(146 |
) |
|
|
5,654 |
|
Developed technology |
|
|
15 |
|
|
|
3,000 |
|
|
|
(40 |
) |
|
|
2,960 |
|
Distributor relationships |
|
|
9 |
|
|
|
500 |
|
|
|
(17 |
) |
|
|
483 |
|
Regulatory approvals |
|
|
1 |
|
|
|
670 |
|
|
|
(526 |
) |
|
|
144 |
|
Non-compete agreement |
|
|
2 |
|
|
|
80 |
|
|
|
(47 |
) |
|
|
33 |
|
Acquired FDA non-gel product approval |
|
|
11 |
|
|
|
1,713 |
|
|
|
(1,709 |
) |
|
|
4 |
|
Total definite-lived intangible assets |
|
|
|
|
|
$ |
23,003 |
|
|
$ |
(3,949 |
) |
|
$ |
19,054 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangibles with indefinite lives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade names - indefinite life |
|
— |
|
|
|
450 |
|
|
|
— |
|
|
|
450 |
|
|
Total indefinite-lived intangible assets |
|
|
|
|
|
$ |
450 |
|
|
$ |
— |
|
|
$ |
450 |
|
|
|
|
|
|
|
December 31, 2016 |
|
|||||||||
|
|
Average Amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period |
|
|
Gross Carrying |
|
|
Accumulated |
|
|
Intangible |
|
||||
|
|
(in years) |
|
|
Amount |
|
|
Amortization |
|
|
Assets, net |
|
||||
Intangibles with definite lives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships |
|
|
10 |
|
|
$ |
4,940 |
|
|
$ |
(602 |
) |
|
$ |
4,338 |
|
Trade names - finite life |
|
|
12 |
|
|
|
800 |
|
|
|
(56 |
) |
|
|
744 |
|
Regulatory approvals |
|
|
1 |
|
|
|
670 |
|
|
|
(96 |
) |
|
|
574 |
|
Non-compete agreement |
|
|
2 |
|
|
|
80 |
|
|
|
(17 |
) |
|
|
63 |
|
Acquired FDA non-gel product approval |
|
|
11 |
|
|
|
1,713 |
|
|
|
(1,696 |
) |
|
|
17 |
|
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 |
|
The following table summarizes the estimated amortization expense relating to the Company's definite-lived intangible assets as of September 30, 2017 (in thousands):
|
|
Amortization |
|
|
Period |
|
Expense |
|
|
Remainder of 2017 |
|
$ |
705 |
|
2018 |
|
|
2,308 |
|
2019 |
|
|
2,321 |
|
2020 |
|
|
2,197 |
|
2021 |
|
|
1,996 |
|
Thereafter |
|
|
9,527 |
|
|
|
$ |
19,054 |
|
Accrued and other current liabilities consist of the following (in thousands):
|
|
September 30, |
|
|
December 31, |
|
||
|
|
2017 |
|
|
2016 |
|
||
Payroll and related expenses |
|
$ |
4,369 |
|
|
$ |
2,592 |
|
Audit, consulting and legal fees |
|
|
3,060 |
|
|
|
812 |
|
Accrued commissions |
|
|
2,024 |
|
|
|
1,222 |
|
Deferred consideration, current portion |
|
|
966 |
|
|
|
— |
|
Accrued marketing and sales expenses |
|
|
482 |
|
|
|
31 |
|
Warrant liability |
|
|
250 |
|
|
|
99 |
|
Accrued clinical trial and research and development expenses |
|
|
183 |
|
|
|
119 |
|
Other |
|
|
2,335 |
|
|
|
1,632 |
|
|
|
$ |
13,669 |
|
|
$ |
6,507 |
|
|
The future schedule of principal payments for the outstanding Term Loan as of September 30, 2017 was as follows (in thousands):
Fiscal Year |
|
|
|
|
Remainder of 2017 |
|
$ |
— |
|
2018 |
|
|
— |
|
2019 |
|
|
8,333 |
|
2020 |
|
|
8,333 |
|
2021 |
|
|
8,334 |
|
Thereafter |
|
|
— |
|
Total |
|
$ |
25,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average |
|
|
|
|
|
|
|
|
Weighted |
|
|
remaining |
|
||
|
|
|
|
|
|
average |
|
|
contractual |
|
||
|
|
Option Shares |
|
|
exercise price |
|
|
term (year) |
|
|||
Balances at December 31, 2016 |
|
|
2,786,977 |
|
|
$ |
7.27 |
|
|
|
6.28 |
|
Granted |
|
|
180,000 |
|
|
|
9.12 |
|
|
|
|
|
Exercised |
|
|
(475,171 |
) |
|
|
2.79 |
|
|
|
|
|
Forfeited |
|
|
(286,880 |
) |
|
|
12.82 |
|
|
|
|
|
Balances at September 30, 2017 |
|
|
2,204,926 |
|
|
$ |
7.66 |
|
|
|
7.51 |
|
|
|
|
|
|
|
Weighted average |
|
|
|
|
|
|
|
|
grant date |
|
|
|
|
Number of shares |
|
|
fair value |
|
||
Balances at December 31, 2016 |
|
|
430,733 |
|
|
$ |
7.99 |
|
Granted |
|
|
761,345 |
|
|
|
8.61 |
|
Vested |
|
|
(252,285 |
) |
|
|
7.74 |
|
Forfeited |
|
|
(39,416 |
) |
|
|
8.46 |
|
Balances at September 30, 2017 |
|
|
900,377 |
|
|
$ |
8.57 |
|
|
The following tables present the net sales and net operating loss by reportable segment for the periods presented (in thousands):
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
September 30, |
|
|
September 30, |
|
||||||||||
|
|
2017 |
|
|
2016 |
|
|
2017 |
|
|
2016 |
|
||||
Net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Breast Product |
|
$ |
7,655 |
|
|
$ |
6,531 |
|
|
$ |
23,313 |
|
|
$ |
14,246 |
|
miraDry® |
|
|
2,164 |
|
|
|
— |
|
|
|
2,164 |
|
|
|
— |
|
Total net sales |
|
$ |
9,819 |
|
|
$ |
6,531 |
|
|
$ |
25,477 |
|
|
$ |
14,246 |
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||||
|
|
September 30, |
|
|
September 30, |
|
||||||||||||
|
|
2017 |
|
|
2016 |
|
|
2017 |
|
|
|
|
2016 |
|
||||
Loss from operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Breast Product |
|
$ |
(11,253 |
) |
|
$ |
(9,774 |
) |
|
$ |
(42,878 |
) |
|
|
|
$ |
(31,921 |
) |
miraDry® |
|
|
(2,602 |
) |
|
|
— |
|
|
|
(2,602 |
) |
|
|
|
|
— |
|
Total loss from operations |
|
$ |
(13,855 |
) |
|
$ |
(9,774 |
) |
|
$ |
(45,480 |
) |
|
|
|
$ |
(31,921 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|