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|
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. |
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 September 23, 2015, the Medicines and Healthcare Products Regulatory Agency, or MHRA, an executive agency of the United Kingdom, or U.K., announced the suspension of sales and implanting in the U.K. of all medical devices manufactured by Silimed following the suspension of the CE and ISO 13485 certifications of these products issued by TÜV SÜD, Silimed’s notified body under European Union, or EU, regulation. The suspension followed TÜV SÜD’s inspection at Silimed’s manufacturing facilities in Brazil, relating to the alleged presence of surface particles on Silimed breast products.
On October 2, 2015, the Brazilian regulatory agency ANVISA and the Department of the Secretary of State of the State of Rio de Janeiro announced the suspension of the manufacturing and shipment of all medical devices made by Silimed, including products manufactured for Sientra, while they reviewed the technical compliance related to current good manufacturing practices, or cGMP, of Silimed’s manufacturing facilities.
On October 9, 2015, the Company voluntarily placed a hold on the sale of all Sientra devices manufactured by Silimed and recommended that plastic surgeons discontinue implanting the devices until further notice.
On January 27, 2016, after completing an analysis and risk assessment, ANVISA announced its authorization of Silimed to resume the commercialization and use of its previously manufactured products. ANVISA concluded there was no evidence that the presence of surface particles on silicone implants represented risks which are additional to those inherent in the product.
On March 1, 2016, after the completion of extensive independent, third-party testing and analyses of its devices manufactured by Silimed, the Company lifted the temporary hold on the sale of such devices and informed its Plastic Surgeons of the Company’s controlled market re-entry plan designed to optimize the Company’s inventory supply. The results of the Company’s testing 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 MHRA and ANVISA that no reports of adverse events and no risks to patient health had been identified in connection with implanting Silimed-manufactured products.
On July 11, 2016, after completing an inspection of Silimed’s facility, ANVISA announced the reinstatement of Silimed’s GMP certificate, valid for two years, and their ability to manufacture commercial products. The Silimed facility that was approved for manufacturing is a different facility from where Sientra breast implants were previously manufactured, which was damaged by a fire on October 22, 2015. The suspension of Silimed’s CE and ISO 13485 certifications by TÜV SÜD remains in place. The Company’s existing manufacturing contract with Silimed expired on its terms in April 2017 and the Company did not renew the contract.
For more information on the status of the Company’s relationship with Silimed, see Note 12 – Commitments and Contingencies.
|
2. |
Summary of Significant Accounting Policies |
|
a. |
Basis of Presentation |
The accompanying unaudited condensed 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 financial statements should be read in conjunction with the Company’s audited 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 six months ended June 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 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 Intermediate Funding, Inc., or Vesta, a Lubrizol Lifesciences company, 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 breast implants. The continuation of the Company as a going concern is dependent upon many factors including resolution of any outstanding disputes with Silimed (see Note 12—Commitments and Contingencies), the availability of alternative manufacturing sources, and continued sale of the Company’s products. Since inception, the Company has incurred net losses. As of June 30, 2017, the Company had cash and cash equivalents of $55.5 million. Furthermore, through the Loan and Security Agreement, Silicon Valley bank made available to the Company a revolving line of credit of up to $15.0 million, or the Revolving Line, and a $5.0 million term loan, or the Term Loan. The Company believes that it has the ability to continue as a going concern for at least 12 months from the date the Company’s financial statements are issued. These financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
On July 25, 2017, the Company acquired Miramar Labs, Inc. and also entered into certain credit agreements with Midcap Financial Trust (see Subsequent Events – Acquisition of Miramar Labs and Credit Agreements with MidCap Financial Trust for more information).
|
c. |
Use of Estimates |
The preparation of the condensed 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 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 six months ended June 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 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 current 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 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 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 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 standard will be effective for the Company beginning in fiscal year 2020. Early adoption is permitted for interim and annual goodwill impairment tests performed after January 1, 2017. The Company 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 financial statements. The Company will reassess any impact at year end
Recently Issued Accounting Standards
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. The standard was issued to provide a single framework that replaces existing industry and transaction specific GAAP with a five step analysis of transactions to determine when and how revenue is recognized. The accounting standard update will replace most existing revenue recognition guidance in GAAP when it becomes effective. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, to defer the effective date of ASU 2014-09 by one year. Therefore, ASU 2014-09 will become effective for the Company beginning in fiscal year 2018. Early adoption would be permitted for the Company beginning in fiscal year 2017. The standard permits the use of either the retrospective or cumulative transition method. In December 2016, the FASB issued ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers. ASU 2016-20 is intended to clarify and suggest improvements to the application of current standards under Topic 606 and other Topics amended by ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The effective date of ASU 2016-20 is the same as the effective date for ASU 2014-09. In preparation for our adoption of the new standard in our fiscal year ending December 31, 2018, we are reviewing contracts and other forms of agreements with our customers and are evaluating the provisions contained therein in light of the five-step model specified by the new guidance. That five-step model includes: (1) determination of whether a contract—an agreement between two or more parties that creates legally enforceable rights and obligations—exists; (2) identification of the performance obligations in the contract; (3) determination of the transaction price; (4) allocation of the transaction price to the performance obligations in the contract; and (5) recognition of revenue when (or as) the performance obligation is satisfied. We are also evaluating the impact of the new standard on certain common practices currently employed by us and by other medical device companies, such as allowance for sales returns, rebates, warranty and other pricing programs. We have not yet determined the impact of the new standard on our financial statements or whether we will adopt on a prospective or retrospective basis in the first quarter of our fiscal year ending December 31, 2018.
In 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. We have not yet determined the impact of the new standard on our financial statements.
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3. |
Acquisitions |
|
a. |
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 $0.0 and $0.2 million of professional fees for the three and six months ended June 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 six months ended June 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 classified as other long-term liability and are subject to the recognition of subsequent changes in fair value through general and administrative expense in the statement of operations.
The Company allocated the total consideration transferred to the tangible and identifiable intangible assets acquired based on their respective fair values on the acquisition date, with the remaining unallocated amount recorded as goodwill. The goodwill arising from the transaction is primarily attributable to expected operational synergies, and all of goodwill will be deductible for income tax purposes. The condensed financial statements for the three and six months ended June 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 (in years) |
|
|
method |
||
Customer relationships |
|
$ |
3,200 |
|
|
|
10 |
|
|
Accelerated |
Trade name |
|
|
800 |
|
|
|
12 |
|
|
Straight-line |
|
|
$ |
4,000 |
|
|
|
|
|
|
|
The Company retained an independent third-party appraiser to assist management in its valuation and the purchase price has been finalized. Pro forma results of operations have not been presented because the effect of the acquisition was not material to the Company's results of operations.
|
b. |
Acquisition of Tissue Expander Portfolio from Specialty Surgical Products, Inc. |
On November 2, 2016, the Company entered into an asset purchase agreement with Specialty Surgical Products, Inc., or SSP, to acquire certain assets, consisting of the Dermaspan™, Softspan™, and AlloX2® tissue expanders, from SSP. The acquisition adds a complete portfolio of premium, differentiated tissue expanders and aligns with the Company’s business development plans for growth in the breast reconstruction market. The Company did not record any professional fees for the three and six months ended June 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 classified as other long-term liabilities and are subject to the recognition of subsequent changes in fair value through general and administrative expense in the statement of operations.
The Company allocated the total consideration transferred to the tangible and identifiable intangible assets acquired and liabilities assumed based on their respective fair values on the acquisition date, with the remaining unallocated amount recorded as goodwill. The goodwill arising from the transaction is primarily attributable to expected operational synergies, and all of goodwill will be deductible for income tax purposes. The financial statements for the three and six months ended June 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; however, the purchase price allocation has not been finalized. The primary areas of the preliminary purchase price allocation that are not yet finalized relate to the fair values of certain tangible assets and liabilities acquired, the valuation of intangible assets acquired, and residual goodwill. The Company expects to continue to obtain information to assist in determining the fair value of the net assets acquired at the acquisition date during the measurement period. The preliminary allocation of the purchase price is based on the best estimates of management and is subject to revision based on the final valuations and estimates of useful lives.
Pro forma results of operations have not been presented because the effect of the acquisition was not material to the Company's results of operations.
|
c. |
Acquisition Miramar Labs |
On July 25, 2017, the Company acquired Miramar Labs, Inc. (see Note 13 – Subsequent Events – Acquisition of Miramar Labs).
|
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. As of June 30, 2017, the Company had no outstanding long-term debt.
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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 the acquisition of the tissue expander portfolio from SSP using the Monte-Carlo simulation model. Significant assumptions used in the measurement include future net sales for a defined term and the risk-adjusted discount rate associated with the business. As the inputs are not observable, the overall, fair value measurement of the deferred consideration and contingent consideration is classified as Level 3.
The following tables present information about the Company’s liabilities that are measured at fair value on a recurring basis as of June 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 |
|
|||||||||||||
|
|
June 30, 2017 Using: |
|
|||||||||||||
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability for common stock warrants |
|
$ |
— |
|
|
|
— |
|
|
|
182 |
|
|
|
182 |
|
Liability for deferred consideration |
|
|
— |
|
|
|
— |
|
|
|
381 |
|
|
|
381 |
|
Liability for contingent consideration |
|
|
— |
|
|
|
— |
|
|
|
1,705 |
|
|
|
1,705 |
|
|
|
$ |
— |
|
|
|
— |
|
|
|
2,268 |
|
|
|
2,268 |
|
|
|
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 is included in “accrued and other current liabilities” and the liability for the deferred consideration and contingent consideration is included in “warranty reserve and other long-term liabilities” in the balance sheet. The following table provides a rollforward of the aggregate fair values of the Company’s common stock warrants, deferred and contingent consideration for which fair value is determined by Level 3 inputs (in thousands):
Warrant Liability |
|
|
|
|
Balance, December 31, 2016 |
|
$ |
99 |
|
Fair value of warrants to be issued upon borrowing under the Silicon Valley Bank term loan (Note 9) |
|
|
88 |
|
Change in fair value through June 30, 2017 |
|
|
(5 |
) |
Balance, June 30, 2017 |
|
$ |
182 |
|
Deferred Consideration Liability |
|
|
|
|
Balance, December 31, 2016 |
|
$ |
395 |
|
Change in fair value of deferred consideration |
|
|
(14 |
) |
Balance, June 30, 2017 |
|
$ |
381 |
|
Contingent Consideration Liability |
|
|
|
|
Balance, December 31, 2016 |
|
$ |
1,242 |
|
Change in fair value of contingent consideration |
|
|
463 |
|
Balance, June 30, 2017 |
|
$ |
1,705 |
|
The Company recognizes changes in the fair value of the warrants in “other income (expense), net” in the statement of operations and changes in deferred consideration and contingent consideration are recognized in “general and administrative” expense in the statement of operations.
|
6. |
Product Warranties |
The Company offers a limited warranty and a lifetime product replacement program for the Company’s silicone gel breast implants. Under the limited warranty, the Company will reimburse patients for certain out-of-pocket costs related to revision surgeries performed within ten years from the date of implantation in a covered event. Under the lifetime product replacement program, the Company provides no-charge replacement breast implants if a patient experiences a covered event. The programs are available to all patients implanted with the Company’s silicone breast implants after April 1, 2012 and are subject to the terms, conditions, claim procedures, limitations and exclusions. Timely completion of a device tracking and warranty enrollment form by the patient’s Plastic Surgeon is required to activate the programs and for the patient to be able to receive benefits under either program.
The following table provides a rollforward of the accrued warranties (in thousands):
|
|
Six Months Ended June 30, |
|
|||||
|
|
2017 |
|
|
2016 |
|
||
Beginning balance as of January 1 |
|
$ |
1,378 |
|
|
$ |
1,332 |
|
Payments made during the period |
|
|
— |
|
|
|
(9 |
) |
Changes in accrual related to warranties issued during the period |
|
|
110 |
|
|
|
76 |
|
Changes in accrual related to pre-existing warranties |
|
|
9 |
|
|
|
(2 |
) |
Balance as of June 30 |
|
$ |
1,497 |
|
|
$ |
1,397 |
|
|
8. |
Balance Sheet Components |
|
a. |
Allowance for Sales Returns and Doubtful Accounts |
The Company has established an allowance for sales returns of $4.1 million and $3.9 million as of June 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 $0.4 million and $0.4 million as of June 30, 2017 and December 31, 2016, respectively, recorded net against accounts receivable in the balance sheet.
|
b. |
Property and Equipment |
Property and equipment, net consist of the following (in thousands):
|
|
June 30, |
|
|
December 31, |
|
||
|
|
2017 |
|
|
2016 |
|
||
Leasehold improvements |
|
$ |
96 |
|
|
$ |
86 |
|
Laboratory equipment and toolings |
|
|
3,273 |
|
|
|
2,264 |
|
Computer equipment |
|
|
308 |
|
|
|
287 |
|
Software |
|
|
719 |
|
|
|
669 |
|
Office equipment |
|
|
130 |
|
|
|
129 |
|
Furniture and fixtures |
|
|
757 |
|
|
|
743 |
|
|
|
|
5,283 |
|
|
|
4,178 |
|
Less accumulated depreciation |
|
|
(1,495 |
) |
|
|
(1,192 |
) |
|
|
$ |
3,788 |
|
|
$ |
2,986 |
|
Depreciation expense for the three months ended June 30, 2017 and 2016 was $0.2 million and $0.1 million, respectively. Depreciation expense for the six months ended June 30, 2017 and 2016 was $0.3 million and $0.1 million, respectively.
|
c. |
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 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 six months ended June 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 |
|
Balances as of June 30, 2017 |
|
|
|
|
Goodwill |
|
$ |
19,156 |
|
Accumulated impairment losses |
|
|
(14,278 |
) |
Goodwill, net |
|
$ |
4,878 |
|
The components of the Company’s other intangible assets consist of the following (in thousands):
|
|
|
|
|
|
June 30, 2017 |
|
|||||||||
|
|
Average Amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period |
|
|
Gross Carrying |
|
|
Accumulated |
|
|
Intangible |
|
||||
|
|
(in years) |
|
|
Amount |
|
|
Amortization |
|
|
Assets, net |
|
||||
Intangibles with definite lives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired FDA non-gel product approval |
|
|
11 |
|
|
$ |
1,713 |
|
|
$ |
(1,704 |
) |
|
$ |
9 |
|
Customer relationships |
|
|
9.5 |
|
|
|
4,940 |
|
|
|
(1,108 |
) |
|
|
3,832 |
|
Trade names - finite life |
|
|
12 |
|
|
|
800 |
|
|
|
(89 |
) |
|
|
711 |
|
Regulatory approvals |
|
|
1.17 |
|
|
|
670 |
|
|
|
(383 |
) |
|
|
287 |
|
Non-compete agreement |
|
|
2.0 |
|
|
|
80 |
|
|
|
(37 |
) |
|
|
43 |
|
Total definite-lived intangible assets |
|
|
|
|
|
$ |
8,203 |
|
|
$ |
(3,321 |
) |
|
$ |
4,882 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired FDA non-gel product approval |
|
|
11 |
|
|
$ |
1,713 |
|
|
$ |
(1,696 |
) |
|
$ |
17 |
|
Customer relationships |
|
|
9.5 |
|
|
|
4,940 |
|
|
|
(602 |
) |
|
|
4,338 |
|
Trade names - finite life |
|
|
12 |
|
|
|
800 |
|
|
|
(56 |
) |
|
|
744 |
|
Regulatory approvals |
|
|
1.17 |
|
|
|
670 |
|
|
|
(96 |
) |
|
|
574 |
|
Non-compete agreement |
|
|
2.0 |
|
|
|
80 |
|
|
|
(17 |
) |
|
|
63 |
|
Total definite-lived intangible assets |
|
|
|
|
|
$ |
8,203 |
|
|
$ |
(2,467 |
) |
|
$ |
5,736 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangibles with indefinite lives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade names - indefinite life |
|
— |
|
|
|
450 |
|
|
|
— |
|
|
|
450 |
|
|
Total indefinite-lived intangible assets |
|
|
|
|
|
$ |
450 |
|
|
$ |
— |
|
|
$ |
450 |
|
Amortization expense for the three months ended June 30, 2017 and 2016 was $0.4 million and $0.2 million, respectively. Amortization expense for the six months ended June 30, 2017 and 2016 was $0.9 and $0.3 respectively. The following table summarizes the estimated amortization expense relating to the Company's intangible assets as of June 30, 2017 (in thousands):
|
|
Amortization |
|
|
Period |
|
Expense |
|
|
Remainder of 2017 |
|
$ |
854 |
|
2018 |
|
|
1,090 |
|
2019 |
|
|
794 |
|
2020 |
|
|
582 |
|
2021 |
|
|
435 |
|
Thereafter |
|
|
1,127 |
|
|
|
$ |
4,882 |
|
|
d. |
Accrued and Other Current Liabilities |
Accrued and other current liabilities consist of the following (in thousands):
|
|
June 30, |
|
|
December 31, |
|
||
|
|
2017 |
|
|
2016 |
|
||
Accrued clinical trial and research and development expenses |
|
$ |
119 |
|
|
$ |
119 |
|
Audit, consulting and legal fees |
|
|
3,373 |
|
|
|
803 |
|
Payroll and related expenses |
|
|
3,177 |
|
|
|
2,592 |
|
Accrued commission |
|
|
1,774 |
|
|
|
1,222 |
|
Warrant liability |
|
|
182 |
|
|
|
99 |
|
Other |
|
|
1,729 |
|
|
|
1,672 |
|
|
|
$ |
10,354 |
|
|
$ |
6,507 |
|
|
9. |
Long-Term Debt and Revolving Line of Credit |
In March 2017, the Company entered into a Loan and Security Agreement, or the Loan Agreement, with Silicon Valley Bank, or SVB. Under the terms of the Loan Agreement, SVB made available to the Company a revolving line of credit of up to $15.0 million, or the Revolving Line, and a $5.0 million term loan, or the Term Loan. As of June 30, 2017, the Company had not borrowed any amounts under the Term Loan. In April 2017, the Company borrowed $5.0 million under the Revolving Line. The Company intends to use the proceeds from the Loan Agreement for working capital and other general corporate purposes.
Any indebtedness under the Term Loan and the Revolving Line bear interest at a floating per annum rate equal to the prime rate as reported in The Wall Street Journal, which as of the closing date was 3.75%, plus 1.00%. The Term Loan has a scheduled maturity date of March 1, 2020. The Company must make monthly payments of accrued interest under the Term Loan from the funding date of the Term Loan, or the Funding Date, until April 1, 2018, followed by monthly installments of principal and interest through the Term Loan maturity date. The interest-only period may be extended until April 1, 2019 if the Company has obtained FDA certification of the manufacturing facility operated by Vesta by March 31, 2018. The Company may prepay all, but not less than all, of the Term Loan prior to its maturity date provided the Company pays SVB a prepayment charge based on a percentage of the then-outstanding principal balance which shall be equal to 2% if the prepayment occurs prior to the second anniversary of the Funding Date, and 1% if the prepayment occurs thereafter. Upon making the final payment of the Term Loan, whether upon prepayment, acceleration or at maturity, the Company is required to pay a 12.5% fee on the original principal amount of the Term Loan.
The amount of loans available to be drawn under the Revolving Line is based on a borrowing base equal to 80% of the Company’s eligible accounts; provided that if the Company maintains an adjusted quick ratio (as defined in the Loan Agreement) of 1.5:1.0 for three continuous consecutive months, they may access the full Revolving Line. The Company may make (subject to the applicable borrowing base at the time) and repay borrowings from time to time under the Revolving Line until the maturity of the facility on March 13, 2022.
The Loan Agreement includes customary affirmative and restrictive covenants and representations and warranties, including a financial covenant to maintain the adjusted quick ratio (as defined in the Loan Agreement) of 1.15:1.0 while borrowings are outstanding and until the Company has obtained FDA certification of the manufacturing facility operated by Vesta, a covenant against the occurrence of a “change in control,” financial reporting obligations, and certain limitations on indebtedness, liens, investments, distributions (including dividends), collateral, mergers or acquisitions, taxes, corporate changes, and deposit accounts. The Loan Agreement also includes customary events of default, including payment defaults, breaches of covenants following any applicable cure period, the occurrence of any “material adverse change” as set forth in the Loan Agreement, penalties or judgements in an amount of at least $1.0 million rendered against the Company by any governmental agency and certain events relating to bankruptcy or insolvency. 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 SVB may declare all outstanding obligations immediately due and payable and take such other actions as set forth in the Loan Agreement. The Company’s obligations under the Loan Agreement are secured by a security interest in substantially all of The Company’s assets, other than intellectual property.
In connection with the entry into the Term Loan, the Company will issue a warrant to SVB, or the Warrant, exercisable for such number of shares of the Company’s common stock as equal to $87,500 divided by a price per share equal to the average closing price of the Company’s common stock on the NASDAQ Capital Market for the five trading days prior to the Funding Date. The Warrant may be exercised on a cashless basis, and is immediately exercisable from the Funding Date through the earlier of (i) the five year anniversary of the Funding Date, or (ii) the consummation of certain acquisition transactions involving the Company as set forth in the Warrant.
At the closing of the Loan Agreement, SVB earned a commitment fee of $937,500 of which $187,500 was payable on the closing date and the remainder of which is due and payable by the Company in increments of $187,500 on each anniversary thereof.
On July 27, 2017, the Company entered into certain credit agreements with Midcap Financial Trust pursuant to which the Company repaid its existing indebtedness under its Loan Agreement and the outstanding commitment fee was cancelled as well as the obligation to issue a warrant to SVB (see Note 13 – Subsequent Events – Credit Agreements with MidCap Financial Trust).
|
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 June 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 June 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 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 June 30, 2017, a total of 462,417 shares of the Company’s common stock were reserved 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 June 30, 2017, inducement grants for 330,000 shares of common stock have been awarded, and 34,000 shares of common stock were reserved for future issuance under the Inducement Plan.
Options under the 2007 Plan and the 2014 Plan may be granted for periods of up to ten years as determined by the Company’s board of directors, provided, however, that (i) the exercise price of an ISO shall not be less than 100% of the estimated fair value of the shares on the date of grant, and (ii) the exercise price of an ISO granted to a more than 10% shareholder shall not be less than 110% of the estimated fair value of the shares on the date of grant. An NSO has no such exercise price limitations. NSOs under the Inducement Plan may be granted for periods of up to ten years as determined by the board of directors, provided, the exercise price will be not less than 100% of the estimated fair value of the shares on the date of grant. Options generally vest with 25% of the grant vesting on the first anniversary and the balance vesting monthly on a straight-lined basis over the requisite service period of three additional years for the award. Additionally, options have been granted to certain key executives that vest upon achievement of performance conditions based on performance targets as defined by the board of directors, which have included net sales targets and defined corporate objectives over the performance period with possible payout ranging from 0% to 100% of the target award. Compensation expense is recognized on a straight-lined basis over the vesting term of one year based upon the probable performance target that will be met. The vesting provisions of individual options may vary but provide for vesting of at least 25% per year.
The following summarizes all option activity under the 2007 Plan, 2014 Plan and Inducement Plan:
|
|
|
|
|
|
|
|
|
|
Weighted average |
|
|
|
|
|
|
|
|
Weighted |
|
|
remaining |
|
||
|
|
|
|
|
|
average |
|
|
contractual |
|
||
|
|
Option Shares |
|
|
exercise price |
|
|
term (year) |
|
|||
Balances at December 31, 2016 |
|
|
2,786,977 |
|
|
$ |
7.27 |
|
|
|
6.28 |
|
Granted |
|
|
90,000 |
|
|
|
8.50 |
|
|
|
|
|
Exercised |
|
|
(417,172 |
) |
|
|
2.63 |
|
|
|
|
|
Forfeited |
|
|
(253,921 |
) |
|
|
12.25 |
|
|
|
|
|
Balances at June 30, 2017 |
|
|
2,205,884 |
|
|
$ |
7.63 |
|
|
|
7.59 |
|
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 $0.5 million for the three months ended June 30, 2017 and 2016, respectively. Stock-based compensation expense was $1.2 million and $0.8 million for the six months ended June 30, 2017 and 2016, respectively. As of June 30, 2017, there was $3.6 million of unrecognized compensation costs related to stock options. The expense is recorded within the operating expense components in the statement of operations based on the recipients receiving the awards. These costs are expected to be recognized over a weighted average period of 2.33 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 |
|
|
700,246 |
|
|
|
8.43 |
|
Vested |
|
|
(251,160 |
) |
|
|
7.76 |
|
Restricted stock units withheld for tax |
|
|
68,968 |
|
|
|
8.28 |
|
Forfeited |
|
|
(22,000 |
) |
|
|
8.49 |
|
Balances at June 30, 2017 |
|
|
926,787 |
|
|
$ |
8.40 |
|
Stock-based compensation expense for RSUs for the three months ended June 30, 2017 and 2016 was $1.2 million and $0.4 million, respectively. Stock-based compensation expense for RSUs for the six months ended June 30, 2017 and 2016 was $1.8 million and $0.6 million, respectively. As of June 30, 2017, there was $6.2 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 2.00 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 June 30, 2017, the number of shares of common stock reserved for issuance under the ESPP was 770,549. During the six months ended June 30, 2017, employees purchased 54,559 shares of common stock at a weighted average price of $5.93 per share. As of June 30, 2017, the number of shares of common stock available for future issuance was 549,073.
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 and $0.1 million for the three months ended June 30, 2017 and 2016, respectively. Stock-based compensation expense related to the ESPP was $0.2 million and $0.2 million for the six months ended June 30, 2017 and 2016, respectively.
|
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 $0.0 million and $0.1 million for the three and six months ended June 30, 2017. There was no tax expense for the three and six months ended June 30, 2016.
|
12. |
Commitments and Contingencies |
|
a. |
Operating Leases |
The Company’s lease for its general office facility in Santa Barbara, California expires in February 2020. The Company also leases additional industrial space for warehouse, research and development and additional general office use. Rent expense was $0.1 million and $0.1 million for the three months ended June 30, 2017 and 2016, respectively. Rent expense was $0.3 million and $0.3 million for the six months ended June 30, 2017 and 2016. 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. The lawsuit names the Company and certain of its officers as defendants, or the Sientra Defendants, and alleges violations of Sections 10(b) and 20(a) of the Exchange Act in connection with allegedly false and misleading statements concerning the Company’s business, operations, and prospects. The plaintiff seeks damages and an award of reasonable costs and expenses, including attorneys’ fees. On November 24, 2015, three stockholders (or groups of stockholders) filed motions to appoint lead plaintiff(s) and to approve their selection on lead counsel. On December 10, 2015, the court entered an order appointing lead plaintiffs and approving their selection of lead counsel. On February 19, 2016, lead plaintiffs filed their consolidated amended complaint, which added claims under Sections 11, 12(a)(2) and 15 of the Securities Act and named as defendants the underwriters associated with the Company’s follow-on public offering that closed on September 23, 2015, or the Underwriter Defendants. On March 21, 2016, the Sientra Defendants and the Underwriter Defendants each filed a motion to dismiss, or the Motions to Dismiss, the consolidated amended complaints. On April 20, 2016, lead plaintiffs filed their opposition to the Motions to Dismiss, and the Sientra Defendants and Underwriter Defendants filed separate replies on May 5, 2016. On June 9, 2016, the court granted in part and denied in part the Motions to Dismiss. On July 14, 2016, the Sientra Defendants moved the court to reconsider its June 9, 2016 order and grant the Motions to Dismiss in full. On August 4, 2016, lead plaintiffs filed an opposition to the motion for reconsideration. On August 12, 2016, the court denied the motion for reconsideration, and the Sientra Defendants and the Underwriter Defendants each filed an answer to the consolidated amended complaint.
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. The lawsuits name 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. The lawsuits allege violations of Sections 11, 12(a)(2), and 15 of the Securities Act in connection with allegedly false and misleading statements in the Company’s offering documents associated with the follow-on offering concerning its business, operations, and prospects. The plaintiffs seek damages and an award of reasonable costs and expenses, including attorneys’ fees. On December 4, 2015, defendants removed all three lawsuits to the United States District Court for the Northern District of California. On December 15 and December 16, 2015, plaintiffs filed motions to remand the lawsuits back to San Mateo Superior Court, or the Motions to Remand. On January 19, 2016, defendants filed their opposition to the Motions to Remand, and plaintiffs filed their reply in support of the Motions to Remand on January 26, 2016.
On May 20, 2016, the United States District Court for the Northern District of California granted plaintiffs’ Motions to Remand, and the San Mateo Superior Court received the remanded cases on May 27, 2016. On July 19, 2016, the San Mateo Superior Court consolidated the three lawsuits. On August 2, 2016, plaintiffs filed their consolidated complaint. On August 5, 2016, defendants filed a motion to stay all proceedings in favor of the class action filed in the United States District Court for the Central District of California.
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. On September 13, 2016 and September 20, 2016, respectively, the parties filed notices of settlement in both courts. On September 22, 2016, the United States District Court for the Central District of California stayed that action pending the court’s approval of a settlement. On September 23, 2016, the San Mateo Superior Court stayed that action as well pending the court’s approval of a settlement.
On December 20, 2016, the plaintiffs in the federal court action filed a motion for preliminary approval of the class action settlement. On January 23, 2017, the United States District Court for the Central District of California preliminarily approved the settlement. A final approval hearing in that court is scheduled for May 22, 2017. On January 5, 2017, the plaintiffs in the state court action also filed a motion for preliminary approval of the class action settlement. On February 7, 2017, the San Mateo Superior Court preliminarily approved the settlement. On April 24, 2017, the plaintiffs in the federal court action and the state court action each filed their motion for final approval of the class action settlement, approval of the proposed plan of allocation, and an award of attorneys’ fees and expenses. 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 year ended December 31, 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 balance sheets.
Silimed Litigation
On November 6, 2016, Silimed filed a lawsuit in the United States District Court for the Southern District of New York, the Silimed Litigation, naming Sientra as the defendant and alleging breach of contract of the Silimed Agreement, unfair competition and misappropriation of trade secrets against us. In its complaint, Silimed alleges that the Company’s theft, misuse, and improper disclosure of Silimed’s confidential, proprietary, and trade secret manufacturing information was done in order for the Company to develop its own manufacturing capability that it intends to use to manufacture our PMA-approved products. Silimed is seeking a declaration that the Company is in material breach of the Silimed Agreement, a preliminary and permanent injunction to prevent the Company’s allegedly wrongful use and disclosure of Silimed’s confidential and proprietary information, as well as unquantified compensatory and punitive damages. On November 15, 2016, Sientra filed its answer and counterclaims for declaratory judgment in which it denied that Silimed is entitled to any relief including, among other reasons, because of Silimed’s material breach of the Silimed Agreement and Silimed’s unclean hands, and further seeks declaratory relief that Sientra is the owner of certain assets it acquired from Silimed, Inc. in 2007, that Sientra owns, or is exclusively licensed, to any improvements created since April 2007, that Silimed lacks any confidential information or proprietary rights under the Silimed Agreement, and that Silimed lacks any relevant trade secret rights. On December 9, 2016, Silimed filed a motion to strike the Company’s counterclaims. Briefing on that motion was completed on December 30, 2016, and the parties are waiting for a decision from the court. On February 1, 2017, Sientra filed a motion to stay Silimed’s breach of contract claim in light of a demand for arbitration filed by Sientra against Silimed on January 20, 2017 concerning Silimed’s material breaches of the Silimed Agreement, and to further dismiss, or alternatively stay, the unfair competition and misappropriation of trade secrets claims. Briefing on that motion was completed on February 22, 2017, and the parties are waiting for a decision from the court. On February 3, 2017, the court held an initial pre-trial conference and entered a pre-trial scheduling order which set a final pre-trial conference date of August 3, 2018.
On January 20, 2017, Sientra filed an arbitration demand in the International Center for Dispute Resolution, or ICDR, in New York, the Silimed Arbitration, naming Silimed as the defendant and alleging material breach of the Silimed Agreement, gross negligence and tortious interference by Silimed, as well as seeking certain declaratory relief. Among other things, Sientra alleges that Silimed’s supply failure constitutes a material breach of the Silimed Agreement, and that such breach was caused by Silimed’s grossly negligent or other willful conduct related to its regulatory suspensions and the fire at its manufacturing facility. Silimed filed its answer to Sientra’s arbitration demand and counterclaim on March 8, 2017. Sientra filed its answer to Silimed’s counterclaims on April 10, 2017. The parties nominated their party arbitrators on March 13, 2017 and their appointment was confirmed by the ICDR by April 5. 2017. The party appointed arbitrators nominated a president of the tribunal on May 8, 2017 whose appointment was confirmed by the ICDR. On May 30, 2017 a Preparatory Conference was held with the arbitration tribunal on June 26, 2017. A court-ordered settlement conference was held between the parties on June 27, 2017.
The lawsuit between Sientra and Silimed was settled pursuant to a settlement agreement, or the Settlement Agreement, dated July 27, 2017. Pursuant to the Settlement Agreement, in exchange for a mutual release of claims and covenants not to sue or pursue certain litigation, Sientra will pay Silimed a lump sum of $9.0 million within 30-days of execution of the Settlement Agreement, and $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 Note 13 -- Subsequent Events--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.
|
13.Subsequent Events
|
a. |
Acquisition of Miramar Labs |
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 $20 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, the only FDA cleared device to reduce underarm sweat, odor and permanently reduce hair of all colors to Sientra’s aesthetics portfolio.
|
b. |
Credit Agreements with Midcap Financial Trust |
On July 25, 2017, Sientra borrowed $25.0 million aggregate principal amount of term loans, or the Closing Term Loans, pursuant to a Credit and Security Agreement (Term Loan), or the Term Loan Credit Agreement, with MidCap Financial Trust, or Midcap, and the other lenders party thereto. Sientra used the proceeds of the Closing Term Loans (i) to repay in full Sientra’s existing indebtedness under its Loan Agreement with SVB, which totaled approximately $5.0 million, (ii) to pay fees and expenses in connection with the foregoing and (iii) for general corporate purposes. The Credit Agreement provides for (i) the Closing Date Term Loans, (ii) until March 31, 2018, an additional $10.0 million term loan facility subject to the satisfaction of certain conditions, including FDA certification of the manufacturing facility operated by Vesta and (iii) an additional $5.0 million term loan facility subject to the satisfaction of certain conditions, including evidence that Sientra’s Net Revenue (as defined in the Term Loan Credit Agreement) for the past 12 months was greater than or equal to $75.0 million, or collectively, the Term Loans.
On July 25, 2017, Sientra also entered in to a Credit and Security Agreement (Revolving Loan), or the Revolving Credit Agreement and, together with the Term Loan Credit Agreement, the Credit Agreements, with MidCap and the other lenders party thereto. The amount of loans available to be drawn under the Revolving Credit Agreement is based on a borrowing base equal to 85% of eligible accounts, subject to certain adjustments. Sientra may make (subject to the applicable borrowing base at the time) and repay borrowings from time to time under the Revolving Credit Agreement until the maturity of the facility on December 1, 2021.
The obligations under each Credit Agreement are guaranteed by Sientra and each of Sientra’s existing and subsequently acquired or formed direct and indirect subsidiaries. The obligations under the Credit Agreement are secured, subject to customary permitted liens and other agreed upon exceptions, by a perfected security interest in (i) all tangible and intangible assets of Sientra and the guarantors, except for certain customary excluded property, and (ii) all of the capital stock owned by Sientra and guarantors thereunder.
The interest rate applicable to the Term Loans is LIBOR plus 7.50%, and the interest rate applicable to loans incurred under the Revolving Credit Agreement is LIBOR plus 4.50%, in both cases subject to a LIBOR floor of 1.0%.
Each Credit Agreement requires that the Borrowers (i) maintain Net Revenue (as defined in each Credit Agreement) in amounts set forth in each Credit Agreement and (ii) at all times, maintain cash and cash equivalents of at least $10.0 million. The Credit Agreements also contain customary representations and warranties and customary affirmative and negative covenants, including, among other things, restrictions on indebtedness, liens, investments, mergers, dispositions, prepayment of other indebtedness and dividends and other distributions.
|
c. |
Silimed Settlement |
On June 27, 2017, Silimed and Sientra participated in a court-ordered settlement conference pursuant to which they reached a definitive settlement of the Silimed Litigation and Silimed Arbitration subject to execution of a formal settlement agreement (the “Settlement Agreement”). The parties executed the Settlement Agreement on July 27, 2017. Pursuant to the Settlement Agreement. Sientra and Silimed have granted mutual releases to each other with respect to certain specified conduct, and have granted each other covenants not to sue with respect to certain specified conduct. The Company has also agreed to pay Silimed a lump sum of $9.0 million within 30-days of execution of the Settlement Agreement, and $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. The Settlement Agreement was a compromise and settlement of disputed claims between the parties and not an admission of liability which was expressly denied.
|
|
a. |
Basis of Presentation |
The accompanying unaudited condensed 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 financial statements should be read in conjunction with the Company’s audited 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 six months ended June 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 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 Intermediate Funding, Inc., or Vesta, a Lubrizol Lifesciences company, 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 breast implants. The continuation of the Company as a going concern is dependent upon many factors including resolution of any outstanding disputes with Silimed (see Note 12—Commitments and Contingencies), the availability of alternative manufacturing sources, and continued sale of the Company’s products. Since inception, the Company has incurred net losses. As of June 30, 2017, the Company had cash and cash equivalents of $55.5 million. Furthermore, through the Loan and Security Agreement, Silicon Valley bank made available to the Company a revolving line of credit of up to $15.0 million, or the Revolving Line, and a $5.0 million term loan, or the Term Loan. The Company believes that it has the ability to continue as a going concern for at least 12 months from the date the Company’s financial statements are issued. These financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
On July 25, 2017, the Company acquired Miramar Labs, Inc. and also entered into certain credit agreements with Midcap Financial Trust (see Subsequent Events – Acquisition of Miramar Labs and Credit Agreements with MidCap Financial Trust for more information).
|
c. |
Use of Estimates |
The preparation of the condensed 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 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 six months ended June 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 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 current 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 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 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 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 standard will be effective for the Company beginning in fiscal year 2020. Early adoption is permitted for interim and annual goodwill impairment tests performed after January 1, 2017. The Company 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 financial statements. The Company will reassess any impact at year end
Recently Issued Accounting Standards
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. The standard was issued to provide a single framework that replaces existing industry and transaction specific GAAP with a five step analysis of transactions to determine when and how revenue is recognized. The accounting standard update will replace most existing revenue recognition guidance in GAAP when it becomes effective. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, to defer the effective date of ASU 2014-09 by one year. Therefore, ASU 2014-09 will become effective for the Company beginning in fiscal year 2018. Early adoption would be permitted for the Company beginning in fiscal year 2017. The standard permits the use of either the retrospective or cumulative transition method. In December 2016, the FASB issued ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers. ASU 2016-20 is intended to clarify and suggest improvements to the application of current standards under Topic 606 and other Topics amended by ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The effective date of ASU 2016-20 is the same as the effective date for ASU 2014-09. In preparation for our adoption of the new standard in our fiscal year ending December 31, 2018, we are reviewing contracts and other forms of agreements with our customers and are evaluating the provisions contained therein in light of the five-step model specified by the new guidance. That five-step model includes: (1) determination of whether a contract—an agreement between two or more parties that creates legally enforceable rights and obligations—exists; (2) identification of the performance obligations in the contract; (3) determination of the transaction price; (4) allocation of the transaction price to the performance obligations in the contract; and (5) recognition of revenue when (or as) the performance obligation is satisfied. We are also evaluating the impact of the new standard on certain common practices currently employed by us and by other medical device companies, such as allowance for sales returns, rebates, warranty and other pricing programs. We have not yet determined the impact of the new standard on our financial statements or whether we will adopt on a prospective or retrospective basis in the first quarter of our fiscal year ending December 31, 2018.
In 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. We have not yet determined the impact of the new standard on our financial statements.
|
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 (in years) |
|
|
method |
||
Customer relationships |
|
$ |
3,200 |
|
|
|
10 |
|
|
Accelerated |
Trade name |
|
|
800 |
|
|
|
12 |
|
|
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 June 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 |
|
|||||||||||||
|
|
June 30, 2017 Using: |
|
|||||||||||||
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability for common stock warrants |
|
$ |
— |
|
|
|
— |
|
|
|
182 |
|
|
|
182 |
|
Liability for deferred consideration |
|
|
— |
|
|
|
— |
|
|
|
381 |
|
|
|
381 |
|
Liability for contingent consideration |
|
|
— |
|
|
|
— |
|
|
|
1,705 |
|
|
|
1,705 |
|
|
|
$ |
— |
|
|
|
— |
|
|
|
2,268 |
|
|
|
2,268 |
|
|
|
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 Silicon Valley Bank term loan (Note 9) |
|
|
88 |
|
Change in fair value through June 30, 2017 |
|
|
(5 |
) |
Balance, June 30, 2017 |
|
$ |
182 |
|
Deferred Consideration Liability |
|
|
|
|
Balance, December 31, 2016 |
|
$ |
395 |
|
Change in fair value of deferred consideration |
|
|
(14 |
) |
Balance, June 30, 2017 |
|
$ |
381 |
|
Contingent Consideration Liability |
|
|
|
|
Balance, December 31, 2016 |
|
$ |
1,242 |
|
Change in fair value of contingent consideration |
|
|
463 |
|
Balance, June 30, 2017 |
|
$ |
1,705 |
|
|
The following table provides a rollforward of the accrued warranties (in thousands):
|
|
Six Months Ended June 30, |
|
|||||
|
|
2017 |
|
|
2016 |
|
||
Beginning balance as of January 1 |
|
$ |
1,378 |
|
|
$ |
1,332 |
|
Payments made during the period |
|
|
— |
|
|
|
(9 |
) |
Changes in accrual related to warranties issued during the period |
|
|
110 |
|
|
|
76 |
|
Changes in accrual related to pre-existing warranties |
|
|
9 |
|
|
|
(2 |
) |
Balance as of June 30 |
|
$ |
1,497 |
|
|
$ |
1,397 |
|
|
Property and equipment, net consist of the following (in thousands):
|
|
June 30, |
|
|
December 31, |
|
||
|
|
2017 |
|
|
2016 |
|
||
Leasehold improvements |
|
$ |
96 |
|
|
$ |
86 |
|
Laboratory equipment and toolings |
|
|
3,273 |
|
|
|
2,264 |
|
Computer equipment |
|
|
308 |
|
|
|
287 |
|
Software |
|
|
719 |
|
|
|
669 |
|
Office equipment |
|
|
130 |
|
|
|
129 |
|
Furniture and fixtures |
|
|
757 |
|
|
|
743 |
|
|
|
|
5,283 |
|
|
|
4,178 |
|
Less accumulated depreciation |
|
|
(1,495 |
) |
|
|
(1,192 |
) |
|
|
$ |
3,788 |
|
|
$ |
2,986 |
|
The changes in the carrying amount of goodwill during the six months ended June 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 |
|
Balances as of June 30, 2017 |
|
|
|
|
Goodwill |
|
$ |
19,156 |
|
Accumulated impairment losses |
|
|
(14,278 |
) |
Goodwill, net |
|
$ |
4,878 |
|
The components of the Company’s other intangible assets consist of the following (in thousands):
|
|
|
|
|
|
June 30, 2017 |
|
|||||||||
|
|
Average Amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period |
|
|
Gross Carrying |
|
|
Accumulated |
|
|
Intangible |
|
||||
|
|
(in years) |
|
|
Amount |
|
|
Amortization |
|
|
Assets, net |
|
||||
Intangibles with definite lives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired FDA non-gel product approval |
|
|
11 |
|
|
$ |
1,713 |
|
|
$ |
(1,704 |
) |
|
$ |
9 |
|
Customer relationships |
|
|
9.5 |
|
|
|
4,940 |
|
|
|
(1,108 |
) |
|
|
3,832 |
|
Trade names - finite life |
|
|
12 |
|
|
|
800 |
|
|
|
(89 |
) |
|
|
711 |
|
Regulatory approvals |
|
|
1.17 |
|
|
|
670 |
|
|
|
(383 |
) |
|
|
287 |
|
Non-compete agreement |
|
|
2.0 |
|
|
|
80 |
|
|
|
(37 |
) |
|
|
43 |
|
Total definite-lived intangible assets |
|
|
|
|
|
$ |
8,203 |
|
|
$ |
(3,321 |
) |
|
$ |
4,882 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired FDA non-gel product approval |
|
|
11 |
|
|
$ |
1,713 |
|
|
$ |
(1,696 |
) |
|
$ |
17 |
|
Customer relationships |
|
|
9.5 |
|
|
|
4,940 |
|
|
|
(602 |
) |
|
|
4,338 |
|
Trade names - finite life |
|
|
12 |
|
|
|
800 |
|
|
|
(56 |
) |
|
|
744 |
|
Regulatory approvals |
|
|
1.17 |
|
|
|
670 |
|
|
|
(96 |
) |
|
|
574 |
|
Non-compete agreement |
|
|
2.0 |
|
|
|
80 |
|
|
|
(17 |
) |
|
|
63 |
|
Total definite-lived intangible assets |
|
|
|
|
|
$ |
8,203 |
|
|
$ |
(2,467 |
) |
|
$ |
5,736 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangibles with indefinite lives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade names - indefinite life |
|
— |
|
|
|
450 |
|
|
|
— |
|
|
|
450 |
|
|
Total indefinite-lived intangible assets |
|
|
|
|
|
$ |
450 |
|
|
$ |
— |
|
|
$ |
450 |
|
The following table summarizes the estimated amortization expense relating to the Company's intangible assets as of June 30, 2017 (in thousands):
|
|
Amortization |
|
|
Period |
|
Expense |
|
|
Remainder of 2017 |
|
$ |
854 |
|
2018 |
|
|
1,090 |
|
2019 |
|
|
794 |
|
2020 |
|
|
582 |
|
2021 |
|
|
435 |
|
Thereafter |
|
|
1,127 |
|
|
|
$ |
4,882 |
|
Accrued and other current liabilities consist of the following (in thousands):
|
|
June 30, |
|
|
December 31, |
|
||
|
|
2017 |
|
|
2016 |
|
||
Accrued clinical trial and research and development expenses |
|
$ |
119 |
|
|
$ |
119 |
|
Audit, consulting and legal fees |
|
|
3,373 |
|
|
|
803 |
|
Payroll and related expenses |
|
|
3,177 |
|
|
|
2,592 |
|
Accrued commission |
|
|
1,774 |
|
|
|
1,222 |
|
Warrant liability |
|
|
182 |
|
|
|
99 |
|
Other |
|
|
1,729 |
|
|
|
1,672 |
|
|
|
$ |
10,354 |
|
|
$ |
6,507 |
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
90,000 |
|
|
|
8.50 |
|
|
|
|
|
Exercised |
|
|
(417,172 |
) |
|
|
2.63 |
|
|
|
|
|
Forfeited |
|
|
(253,921 |
) |
|
|
12.25 |
|
|
|
|
|
Balances at June 30, 2017 |
|
|
2,205,884 |
|
|
$ |
7.63 |
|
|
|
7.59 |
|
|
|
|
|
|
|
Weighted average |
|
|
|
|
|
|
|
|
grant date |
|
|
|
|
Number of shares |
|
|
fair value |
|
||
Balances at December 31, 2016 |
|
|
430,733 |
|
|
$ |
7.99 |
|
Granted |
|
|
700,246 |
|
|
|
8.43 |
|
Vested |
|
|
(251,160 |
) |
|
|
7.76 |
|
Restricted stock units withheld for tax |
|
|
68,968 |
|
|
|
8.28 |
|
Forfeited |
|
|
(22,000 |
) |
|
|
8.49 |
|
Balances at June 30, 2017 |
|
|
926,787 |
|
|
$ |
8.40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|