SIENTRA, INC., 10-Q filed on 11/7/2017
Quarterly Report
Document and Entity Information
9 Months Ended
Sep. 30, 2017
Nov. 3, 2017
Document And Entity Information [Abstract]
 
 
Entity Registrant Name
Sientra, Inc. 
 
Entity Central Index Key
0001551693 
 
Document Type
10-Q 
 
Document Period End Date
Sep. 30, 2017 
 
Amendment Flag
false 
 
Current Fiscal Year End Date
--12-31 
 
Entity Current Reporting Status
Yes 
 
Entity Filer Category
Accelerated Filer 
 
Entity Common Stock, Shares Outstanding
 
19,395,285 
Document Fiscal Year Focus
2017 
 
Document Fiscal Period Focus
Q3 
 
Trading Symbol
SIEN 
 
Condensed Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Sep. 30, 2017
Dec. 31, 2016
Current assets:
 
 
Cash and cash equivalents
$ 37,641 
$ 67,212 
Accounts receivable, net of allowances of $4,657 and $4,329 at September 30, 2017 and December 31, 2016, respectively
4,678 
3,082 
Inventories, net
23,069 
18,484 
Insurance recovery receivable
75 
9,375 
Prepaid expenses and other current assets
4,074 
1,852 
Total current assets
69,537 
100,005 
Property and equipment, net
4,360 
2,986 
Goodwill
12,507 
4,878 
Other intangible assets, net
19,504 
6,186 
Other assets
736 
228 
Total assets
106,644 
114,283 
Current liabilities:
 
 
Accounts payable
3,990 
3,555 
Accrued and other current liabilities
13,669 
6,507 
Legal settlement payable
1,000 
10,900 
Customer deposits
5,572 
6,559 
Total current liabilities
24,231 
27,521 
Long-term debt
24,747 
 
Deferred and contingent consideration
12,341 
1,637 
Warranty reserve and other long-term liabilities
1,718 
1,508 
Total liabilities
63,037 
30,666 
Commitments and contingencies (Note 13)
   
   
Stockholders’ equity:
 
 
Preferred stock, $0.01 par value – Authorized 10,000,000 shares; none issued or outstanding
   
   
Common stock, $0.01 par value — Authorized 200,000,000 shares; issued 19,437,978 and 18,671,409 and outstanding 19,365,251 and 18,598,682 shares at September 30, 2017 and December 31, 2016 respectively
193 
186 
Additional paid-in capital
305,308 
299,133 
Treasury stock, at cost (72,727 shares at September 30, 2017 and December 31, 2016)
(260)
(260)
Accumulated deficit
(261,634)
(215,442)
Total stockholders’ equity
43,607 
83,617 
Total liabilities and stockholders’ equity
$ 106,644 
$ 114,283 
Condensed Consolidated Balance Sheets (Parenthetical) (USD $)
In Thousands, except Share data, unless otherwise specified
Sep. 30, 2017
Dec. 31, 2016
Statement Of Financial Position [Abstract]
 
 
Accounts receivable, allowances (in dollars)
$ 4,657 
$ 4,329 
Preferred stock, par value (in dollars per share)
$ 0.01 
$ 0.01 
Preferred stock, shares authorized
10,000,000 
10,000,000 
Preferred stock, shares issued
Preferred stock, shares outstanding
Common stock, par value (in dollars per share)
$ 0.01 
$ 0.01 
Common stock, shares authorized
200,000,000 
200,000,000 
Common stock, shares issued
19,437,978 
18,671,409 
Common stock, shares outstanding
19,365,251 
18,598,682 
Treasury stock, shares
72,727 
72,727 
Condensed Consolidated Statements of Operations (USD $)
3 Months Ended 9 Months Ended
Sep. 30, 2017
Sep. 30, 2016
Sep. 30, 2017
Sep. 30, 2016
Income Statement [Abstract]
 
 
 
 
Net sales
$ 9,819,000 
$ 6,531,000 
$ 25,477,000 
$ 14,246,000 
Cost of goods sold
3,484,000 
1,814,000 
8,427,000 
4,319,000 
Gross profit
6,335,000 
4,717,000 
17,050,000 
9,927,000 
Operating expenses:
 
 
 
 
Sales and marketing
7,981,000 
5,137,000 
21,100,000 
16,533,000 
Research and development
2,911,000 
2,052,000 
7,677,000 
7,370,000 
General and administrative
9,298,000 
5,684,000 
23,753,000 
16,327,000 
Legal settlement
 
1,618,000 
10,000,000 
1,618,000 
Total operating expenses
20,190,000 
14,491,000 
62,530,000 
41,848,000 
Loss from operations
(13,855,000)
(9,774,000)
(45,480,000)
(31,921,000)
Other income (expense), net:
 
 
 
 
Interest income
54,000 
16,000 
112,000 
47,000 
Interest expense
(409,000)
(105,000)
(603,000)
(118,000)
Other income (expense), net
(155,000)
(52,000)
(151,000)
(54,000)
Total other income (expense), net
(510,000)
(141,000)
(642,000)
(125,000)
Loss before income taxes
(14,365,000)
(9,915,000)
(46,122,000)
(32,046,000)
Income taxes
16,000 
48,000 
70,000 
48,000 
Net loss
$ (14,381,000)
$ (9,963,000)
$ (46,192,000)
$ (32,094,000)
Basic and diluted net loss per share attributable to common stockholders
$ (0.74)
$ (0.55)
$ (2.42)
$ (1.77)
Weighted average outstanding common shares used for net loss per share attributable to common stockholders:
 
 
 
 
Basic and diluted
19,328,244 
18,208,112 
19,079,788 
18,111,593 
Condensed Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
9 Months Ended
Sep. 30, 2017
Sep. 30, 2016
Cash flows from operating activities:
 
 
Net loss
$ (46,192)
$ (32,094)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
Depreciation and amortization
2,037 
734 
Provision for doubtful accounts
84 
384 
Provision for warranties
133 
133 
Provision for inventory
468 
519 
Amortization of acquired inventory step-up
802 
 
Change in fair value of warrants
151 
57 
Change in fair value of deferred and contingent consideration
758 
 
Non-cash portion of debt extinguishment loss
16 
 
Amortization of debt discount and issuance costs
97 
 
Non-cash interest expense
23 
Stock-based compensation expense
4,777 
2,630 
Loss on disposal of property and equipment
12 
124 
Deferred income taxes
70 
48 
Changes in assets and liabilities, net of effects from acquisitions:
 
 
Accounts receivable
411 
1,053 
Inventories
1,208 
1,136 
Insurance recovery receivable
9,300 
(9,282)
Prepaid expenses, other current assets and other assets
(2,083)
(58)
Accounts payable
(478)
(986)
Accrued and other liabilities
3,613 
460 
Legal settlement payable
(9,900)
10,900 
Customer deposits
(987)
(3,288)
Net cash used in operating activities
(35,702)
(27,507)
Cash flows from investing activities:
 
 
Purchase of property and equipment
(1,173)
(916)
Business acquisitions, net of cash acquired
(18,455)
(6,759)
Net cash used in investing activities
(19,628)
(7,675)
Cash flows from financing activities:
 
 
Proceeds from exercise of stock options
1,327 
910 
Proceeds from issuance of common stock under ESPP
647 
753 
Tax payments related to shares withheld for vested restricted stock units (RSUs)
(569)
 
Gross borrowings under the Term Loan
25,000 
 
Gross borrowings under the Revolving Line of Credit
5,000 
 
Payment on the Revolving Line of Credit
(5,000)
 
Deferred financing costs
(646)
 
Net cash provided by financing activities
25,759 
1,663 
Net decrease in cash and cash equivalents
(29,571)
(33,519)
Cash and cash equivalents at:
 
 
Beginning of period
67,212 
112,801 
End of period
37,641 
79,282 
Supplemental disclosure of cash flow information:
 
 
Interest paid
305 
96 
Supplemental disclosure of non-cash investing and financing activities:
 
 
Property and equipment in accounts payable and accrued liabilities
700 
140 
Acquisition of business, deferred and contingent consideration obligations at fair value
10,912 
550 
Forgiveness of SVB Loan commitment fee
$ 750 
 
Formation and Business of the Company
Formation and Business of the Company

1.

Formation and Business of the Company

 

a.

Formation

Sientra, Inc., or the Company, was incorporated in the State of Delaware on August 29, 2003 under the name Juliet Medical, Inc. and subsequently changed its name to Sientra, Inc. in April 2007. The Company acquired substantially all the assets of Silimed, Inc. on April 4, 2007. The purpose of the acquisition was to acquire the rights to the silicone breast implant clinical trials, related product specifications and 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.”

 

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.

 

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.  

Summary of Significant Accounting Policies
Summary of Significant Accounting Policies

2.

Summary of Significant Accounting Policies

 

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.

Acquisitions
Acquisitions

3.

Acquisitions

 

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):

 

 

 

Fair Value

 

Cash consideration at Acquisition Date (other than debt payoff)

 

$

6,193

 

Cash consideration at Acquisition Date (debt payoff)

 

 

12,467

 

Deferred consideration

 

 

966

 

Contingent consideration

 

 

9,946

 

Total purchase consideration

 

$

29,572

 

 

The Company funded the cash consideration, including the debt payoff amount with cash on hand. The cash consideration included the payoff of 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):

 

 

 

July 25,

 

 

 

2017

 

Cash

 

$

205

 

Accounts receivable, net

 

 

2,091

 

Inventories, net

 

 

7,064

 

Other current assets

 

 

170

 

Property and equipment, net

 

 

528

 

Goodwill

 

 

7,629

 

Intangible assets

 

 

14,800

 

Restricted cash

 

 

305

 

Other assets

 

 

12

 

Liabilities assumed:

 

 

 

 

Accounts payable

 

 

(908

)

Accrued and other current liabilities

 

 

(2,294

)

Other current liabilities

 

 

(30

)

Net assets acquired

 

$

29,572

 

 

Goodwill has been allocated to the miraDry® reportable segment. The goodwill recognized is attributable primarily to the assembled workforce and additional market opportunities. Goodwill is not 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):

 

 

 

 

 

 

 

Estimated useful

 

Amortization

 

 

Amount

 

 

life

 

method

Developed technology

 

$

3,000

 

 

15 years

 

Accelerated

Customer relationships

 

 

6,300

 

 

14 years

 

Accelerated

Distributor relationships

 

 

500

 

 

9 years

 

Accelerated

Trade name

 

 

5,000

 

 

15 years

 

Accelerated

 

 

$

14,800

 

 

 

 

 

 

The Company retained an independent third-party appraiser to assist management in its valuation; 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):

 

 

 

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

)

 

 

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):

 

 

 

Fair Value

 

Cash

 

$

6,859

 

Deferred consideration

 

 

434

 

Contingent consideration

 

 

116

 

 

 

$

7,409

 

 

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

 

 

 

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 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.

 

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.   

Fair Value of Financial Instruments
Fair Value of Financial Instruments

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.

Fair Value Measurements
Fair Value Measurements

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:

 

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.

Product Warranties
Product Warranties

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

 

 

 

Net Loss Per Share
Net Loss Per Share

7.

Net Loss Per Share

Basic net loss per share attributable to common stockholders is computed by dividing net loss by the weighted average number of common shares outstanding during each period. Diluted net loss per common share is computed by dividing net loss available to common stockholders by the weighted average number of common shares and dilutive potential common share equivalents then outstanding, to the extent they are dilutive. Potential common shares consist of shares issuable upon the exercise of stock options and warrants (using the treasury stock method). Dilutive net loss per share is the same as basic net loss per share for all periods presented because the effects of potentially dilutive items were anti-dilutive.

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Net loss (in thousands)

 

$

 

(14,381

)

 

$

 

(9,963

)

 

$

(46,192

)

 

$

(32,094

)

Weighted average common shares outstanding, basic

   and diluted

 

 

 

19,328,244

 

 

 

 

18,208,112

 

 

 

19,079,788

 

 

 

18,111,593

 

Net loss per share attributable to common stockholders

 

$

 

(0.74

)

 

$

 

(0.55

)

 

$

(2.42

)

 

$

(1.77

)

 

The Company excluded the following potentially dilutive securities, outstanding as of September 30, 2017 and 2016, from the computation of diluted net loss per share attributable to common stockholders for the three and nine months ended September 30, 2017 and 2016 because they had an anti-dilutive impact due to the net loss attributable to common stockholders incurred for the periods.

 

 

 

September 30,

 

 

 

2017

 

 

2016

 

Stock options to purchase common stock

 

 

1,872,999

 

 

 

1,760,596

 

Warrants for the purchase of common stock

 

 

47,710

 

 

 

47,710

 

 

 

 

1,920,709

 

 

 

1,808,306

 

 

Balance Sheet Components
Balance Sheet Components

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

 

 

Long-Term Debt and Revolving Loan
Long-Term Debt and Revolving Loan

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

 

 

Stockholders' Equity
Stockholders' Equity

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