SIENTRA, INC., 10-K filed on 3/16/2020
Annual Report
v3.20.1
Document and Entity Information - USD ($)
$ in Thousands
12 Months Ended
Dec. 31, 2019
Mar. 04, 2020
Jun. 30, 2019
Cover [Abstract]      
Entity Registrant Name Sientra, Inc.    
Entity Central Index Key 0001551693    
Document Type 10-K    
Document Period End Date Dec. 31, 2019    
Amendment Flag false    
Current Fiscal Year End Date --12-31    
Entity Well-known Seasoned Issuer No    
Entity Voluntary Filers No    
Entity Current Reporting Status Yes    
Entity Interactive Data Current Yes    
Entity Filer Category Accelerated Filer    
Entity Shell Company false    
Entity Small Business true    
Entity Emerging Growth Company false    
Entity Public Float     $ 278,429,000
Entity Common Stock, Shares Outstanding   49,985,057  
Document Fiscal Year Focus 2019    
Document Fiscal Period Focus FY    
Trading Symbol SIEN    
Title of 12(b) Security Common Stock, par value $0.01 per share    
Security Exchange Name NASDAQ    
Entity File Number 001-36709    
Entity Incorporation, State or Country Code DE    
Entity Tax Identification Number 20-5551000    
Entity Address, Address Line One 420 South Fairview Avenue    
Entity Address, Address Line Two Suite 200    
Entity Address, City or Town Santa Barbara    
Entity Address, State or Province CA    
Entity Address, Postal Zip Code 93117    
City Area Code 805    
Local Phone Number 562-3500    
Document Annual Report true    
Document Transition Report false    
Documents Incorporated by Reference

Portions of the registrant’s definitive Proxy Statement relating to its 2020 Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report on Form 10-K where indicated. Such Proxy Statement will be filed with the U.S. Securities and Exchange Commission within 120 days after the end of the fiscal year to which this report relates.

   
v3.20.1
Consolidated Balance Sheets - USD ($)
$ in Thousands
Dec. 31, 2019
Dec. 31, 2018
Current assets:    
Cash and cash equivalents $ 87,608 $ 86,899
Accounts receivable, net of allowances of $3,835 and $2,428 at December 31, 2019 and December 31, 2018, respectively 27,548 22,527
Inventories, net 39,612 24,085
Prepaid expenses and other current assets 2,489 2,612
Total current assets 157,257 136,123
Property and equipment, net 12,314 2,536
Goodwill 9,202 12,507
Other intangible assets, net 17,390 16,495
Other assets 8,241 698
Total assets 204,404 168,359
Current liabilities:    
Current portion of long-term debt 6,508 6,866
Accounts payable 9,352 13,184
Accrued and other current liabilities 32,551 27,697
Legal settlement payable   410
Customer deposits 13,943 9,936
Sales return liability 8,116 6,048
Total current liabilities 70,470 64,141
Long-term debt 38,248 27,883
Deferred and contingent consideration 5,177 6,481
Warranty reserve and other long-term liabilities 8,627 2,976
Total liabilities 122,522 101,481
Commitments and contingencies (Note 13)
Stockholders’ equity:    
Preferred stock, $0.01 par value – Authorized 10,000,000 shares; none issued or outstanding
Common stock, $0.01 par value — Authorized 200,000,000 shares; issued 49,612,907 and 28,701,494 and outstanding 49,540,180 and 28,628,767 shares at December 31, 2019 and December 31, 2018, respectively 495 286
Additional paid-in capital 550,562 428,949
Treasury stock, at cost (72,727 shares at December 31, 2019 and December 31, 2018) (260) (260)
Accumulated deficit (468,915) (362,097)
Total stockholders’ equity 81,882 66,878
Total liabilities and stockholders’ equity $ 204,404 $ 168,359
v3.20.1
Consolidated Balance Sheets (Parenthetical) - USD ($)
$ in Thousands
Dec. 31, 2019
Dec. 31, 2018
Statement Of Financial Position [Abstract]    
Accounts receivable, allowances (in dollars) $ 3,835 $ 2,428
Preferred stock, par value (in dollars per share) $ 0.01 $ 0.01
Preferred stock, shares authorized 10,000,000 10,000,000
Preferred stock, shares issued 0 0
Preferred stock, shares outstanding 0 0
Common stock, par value (in dollars per share) $ 0.01 $ 0.01
Common stock, shares authorized 200,000,000 200,000,000
Common stock, shares issued 49,612,907 28,701,494
Common stock, shares outstanding 49,540,180 28,628,767
Treasury stock, shares 72,727 72,727
v3.20.1
Consolidated Statements of Operations - USD ($)
12 Months Ended
Dec. 31, 2019
Dec. 31, 2018
Dec. 31, 2017
Income Statement [Abstract]      
Net sales $ 83,699,000 $ 68,126,000 $ 36,542,000
Cost of goods sold 33,012,000 26,822,000 14,171,000
Gross profit 50,687,000 41,304,000 22,371,000
Operating expenses:      
Sales and marketing 80,189,000 67,715,000 33,911,000
Research and development 13,537,000 10,945,000 9,813,000
General and administrative 46,771,000 42,418,000 31,537,000
Restructuring 1,083,000    
Legal settlement     10,000,000
Goodwill and other intangible impairment 12,674,000    
Total operating expenses 154,254,000 121,078,000 85,261,000
Loss from operations (103,567,000) (79,774,000) (62,890,000)
Other income (expense), net:      
Interest income 1,406,000 532,000 172,000
Interest expense (4,568,000) (3,428,000) (1,232,000)
Other income (expense), net (55,000) 39,000 (95,000)
Total other income (expense), net (3,217,000) (2,857,000) (1,155,000)
Loss before income taxes (106,784,000) (82,631,000) (64,045,000)
Income tax (benefit) expense 34,000 (4,000) (17,000)
Net loss $ (106,818,000) $ (82,627,000) $ (64,028,000)
Basic and diluted net loss per share attributable to common stockholders $ (2.63) $ (3.25) $ (3.34)
Weighted average outstanding common shares used for net loss per share attributable to common stockholders:      
Basic and diluted 40,654,272 25,402,241 19,159,057
v3.20.1
Consolidated Statements of Stockholders' Equity - USD ($)
$ in Thousands
Total
Common stock
Treasury stock
Additional paid-in capital
Accumulated deficit
Balance, beginning of year at Dec. 31, 2016 $ 83,617 $ 186 $ (260) $ 299,133 $ (215,442)
Balance, beginning of year (in shares) at Dec. 31, 2016   18,671,409 72,727    
Employee stock-based compensation expense 6,766     6,766  
Stock option exercises 1,346 $ 5   1,341  
Stock option exercises (in shares)   480,236      
Employee stock purchase program (ESPP) 647 $ 1   646  
Employee stock purchase program (ESPP) (in shares)   108,081      
Vested restricted stock   $ 3   (3)  
Vested restricted stock (in shares)   293,910      
Shares withheld for tax obligations on vested RSUs (725) $ (1)   (724)  
Shares withheld for tax obligations on vested RSUs, shares   (78,934)      
Net loss (64,028)       (64,028)
Balance, end of year at Dec. 31, 2017 27,623 $ 194 $ (260) 307,159 (279,470)
Balance, end of year (in shares) at Dec. 31, 2017   19,474,702 72,727    
Proceeds from follow-on offering, net of costs 107,551 $ 85   107,466  
Proceeds from follow-on offering, net of costs (in shares)   8,518,519      
Employee stock-based compensation expense 13,824     13,824  
Stock option exercises 1,149 $ 1   1,148  
Stock option exercises (in shares)   147,463      
Employee stock purchase program (ESPP) 993 $ 2   991  
Employee stock purchase program (ESPP) (in shares)   145,616      
Vested restricted stock   $ 5   (5)  
Vested restricted stock (in shares)   523,257      
Shares withheld for tax obligations on vested RSUs (1,635) $ (1)   (1,634)  
Shares withheld for tax obligations on vested RSUs, shares   (108,063)      
Net loss (82,627)       (82,627)
Balance, end of year at Dec. 31, 2018 66,878 $ 286 $ (260) 428,949 (362,097)
Balance, end of year (in shares) at Dec. 31, 2018   28,701,494 72,727    
Proceeds from follow-on offering, net of costs 107,734 $ 200   107,534  
Proceeds from follow-on offering, net of costs (in shares)   20,000,000      
Employee stock-based compensation expense 12,655     12,655  
Stock option exercises 125     125  
Stock option exercises (in shares)   51,451      
Employee stock purchase program (ESPP) 1,216 $ 1   1,215  
Employee stock purchase program (ESPP) (in shares)   175,624      
Vested restricted stock   $ 10   (10)  
Vested restricted stock (in shares)   944,467      
Shares withheld for tax obligations on vested RSUs (3,064) $ (2)   (3,062)  
Shares withheld for tax obligations on vested RSUs, shares   (260,129)      
Equity contingent consideration 3,156     3,156  
Net loss (106,818)       (106,818)
Balance, end of year at Dec. 31, 2019 $ 81,882 $ 495 $ (260) $ 550,562 $ (468,915)
Balance, end of year (in shares) at Dec. 31, 2019   49,612,907 72,727    
v3.20.1
Consolidated Statements of Cash Flows - USD ($)
12 Months Ended
Dec. 31, 2019
Dec. 31, 2018
Dec. 31, 2017
Cash flows from operating activities:      
Net loss $ (106,818,000) $ (82,627,000) $ (64,028,000)
Adjustments to reconcile net loss to net cash used in operating activities:      
Goodwill impairment 7,629,000 0 0
Intangible asset impairment 5,045,000 0 0
Depreciation and amortization 3,524,000 3,321,000 3,034,000
Provision for doubtful accounts 2,298,000 2,043,000 493,000
Provision for warranties 929,000 325,000 294,000
Provision for inventory 2,626,000 955,000 3,125,000
Change in fair value of warrants (75,000) (81,000) 95,000
Change in fair value of deferred consideration 100,000 24,000 (110,000)
Change in fair value of contingent consideration 1,044,000 2,528,000 1,135,000
Change in deferred revenue 1,124,000 627,000  
Non-cash portion of debt extinguishment loss 53,000   17,000
Amortization of debt discount and issuance costs 359,000 174,000 140,000
Stock-based compensation expense 12,478,000 13,824,000 6,766,000
Loss on disposal of property and equipment 119,000 74,000 25,000
Deferred income taxes 18,000 (8,000) (21,000)
Payments of contingent consideration liability in excess of acquisition-date fair value (1,968,000) (320,000)  
Changes in assets and liabilities, net of effect from acquisitions:      
Accounts receivable (7,320,000) (14,094,000) (1,890,000)
Inventories (10,921,000) (4,144,000) 1,526,000
Prepaid expenses, other current assets and other assets (8,513,000) (1,302,000) 713,000
Insurance recovery receivable   39,000 9,336,000
Accounts payable (2,225,000) 8,502,000 1,290,000
Accrued and other liabilities 7,795,000 7,885,000 3,218,000
Legal settlement payable (410,000) (590,000) (9,900,000)
Customer deposits 4,008,000 4,513,000 (1,136,000)
Sales return liability 2,068,000 2,142,000  
Net cash used in operating activities (87,033,000) (56,190,000) (45,878,000)
Cash flows from investing activities:      
Purchase of property and equipment (4,071,000) (855,000) (1,864,000)
Business acquisitions, net of cash and restricted cash acquired (17,943,000)   (18,150,000)
Net cash used in investing activities (22,014,000) (855,000) (20,014,000)
Cash flows from financing activities:      
Net proceeds from issuance of common stock 107,734,000 107,551,000  
Proceeds from exercise of stock options 125,000 1,149,000 1,346,000
Proceeds from issuance of common stock under ESPP 1,216,000 993,000 647,000
Tax payments related to shares withheld for vested restricted stock units (RSUs) (3,064,000) (1,635,000) (725,000)
Gross borrowings under the Term Loan 5,000,000 10,000,000 25,000,000
Gross borrowings under the Revolving Loan 22,296,000 12,109,000 5,000,000
Repayment of the Revolving Loan (15,788,000) (12,109,000) (5,000,000)
Payments of contingent consideration up to acquisition-date fair value (5,766,000) (680,000)  
Deferred financing costs (1,997,000) (22,000) (657,000)
Net cash provided by financing activities 109,756,000 117,356,000 25,611,000
Net increase in cash, cash equivalents and restricted cash 709,000 60,311,000 (40,281,000)
Cash, cash equivalents and restricted cash at:      
Beginning of period 87,242,000 26,931,000 67,212,000
End of period 87,951,000 87,242,000 26,931,000
Reconciliation of cash, cash equivalents, and restricted cash to the consolidated balance sheets      
Cash and cash equivalents 87,608,000 86,899,000 26,588,000
Restricted cash included in other assets $ 343,000 $ 343,000 $ 343,000
Restricted Cash Noncurrent Asset Statement Of Financial Position Extensible List us-gaap:OtherNoncurrentAssetsMember us-gaap:OtherNoncurrentAssetsMember us-gaap:OtherNoncurrentAssetsMember
End of period $ 87,951,000 $ 87,242,000 $ 26,931,000
Supplemental disclosure of cash flow information:      
Interest paid 4,089,000 3,120,000 870,000
Supplemental disclosure of non-cash investing and financing activities:      
Property and equipment in accounts payable and accrued liabilities 745,000 679,000 1,088,000
Acquisition of business, deferred and contingent consideration obligations at fair value $ 9,063,000   10,912,000
Non-cash deferred consideration settlement   1,000,000  
Non-cash settlement of assets held for sale in accounts payable   $ 2,674,000  
Forgiveness of SVB Loan commitment fee     750,000
Deferred financing costs in accrued liabilities     $ 6,000
v3.20.1
Formation and Business of the Company
12 Months Ended
Dec. 31, 2019
Organization Consolidation And Presentation Of Financial Statements [Abstract]  
Formation and Business of the Company

(1) Formation and Business of the Company

(a)

Formation

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

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

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

(b)

Acquisition of miraDry

 

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

 

(c)

Acquisition of certain assets from Vesta Intermediate Funding, Inc.

 

On November 7, 2019, the Company entered into an Asset Purchase Agreement, or the Purchase Agreement, with Vesta Intermediate Funding, Inc., or Vesta, pursuant to which the Company purchased certain assets and obtained a non-exclusive, royalty-free, perpetual, irrevocable, assignable, sublicensable, and worldwide license to certain intellectual property owned by Vesta, or the Vesta Acquisition. The total consideration was $ 19.1 million in cash, $3.2 million and $3.0 million in cash payable on November 7, 2021 and November 7, 2023, respectively, and two contingent share issuances of up to 303,721 shares each, of the Company’s common stock upon the achievement of certain price targets. The transaction, which closed on November 7, 2019, will allow the Company to achieve a greater degree of vertical integration, obtaining direct control of breast implant manufacturing and product development activities and generating production-related cost synergies.

 

(d)

Regulatory Review of Vesta Manufacturing

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

(e)

Follow-on Offerings

 

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

 

On June 7, 2019, the Company completed an underwritten follow-on public offering of 17,391,305 shares of its common stock at $5.75 per share, as well as 2,608,695 additional shares of its common stock pursuant to the full exercise of the over-allotment option granted to the underwriters. Net proceeds to the Company were approximately $107.7 million after deducting underwriting discounts and commissions of $6.9 million and offering expenses of approximately $0.4 million.

(f)

Regulatory Inquiries Regarding Products Manufactured by Silimed

 

There have been regulatory inquiries related to medical devices manufactured by Silimed Indústria de Implantes Ltda. (formerly, Silimed-Silicone e Instrumental Medico-Cirugio e Hospitalar Ltda.), or Silimed, the Company’s former sole source contract manufacturer for its silicone gel breast implants. Following extensive independent, third-party testing and analyses of its devices manufactured by Silimed, which tests indicated no significant safety concerns with the use of Silimed’s products, the Company lifted the temporary hold on the sale of such devices. While the Company continues to sell its remaining inventory of devices manufactured by Silimed, its existing manufacturing contract with Silimed expired on its terms in April 2017 and the Company did not renew the contract.

v3.20.1
Summary of Significant Accounting Policies
12 Months Ended
Dec. 31, 2019
Accounting Policies [Abstract]  
Summary of Significant Accounting Policies

(2) Summary of Significant Accounting Policies

(a)

Basis of Presentation and Use of Estimates

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

(b)

Liquidity

Since the Company’s inception, it has incurred significant net operating losses and the Company anticipates that losses will continue in the near term. Although the Company expects its operating expenses will begin to decrease with the implementation of the organizational efficiency initiative, the Company will need to generate significant net sales to achieve profitability. To date, the Company has funded operations primarily with proceeds from the sales of preferred stock, borrowings under term loans, sales of products since 2012, and the proceeds from the sale of common stock in public offerings.

The accompanying consolidated financial statements have been prepared on a going concern basis, which implies the Company will continue to realize its assets and discharge its liabilities in the normal course of business. At December 31, 2019, the Company had cash and cash equivalents of $87.6 million. Since inception, the Company has incurred recurring losses from operations and cash outflows from operating activities. During the years ended December 31, 2019, 2018 and 2017 the Company incurred net losses of $106.8 million, $82.6 million and $64.0 million, respectively. The Company used $87.0 million of cash in operations for the year ended December 31, 2019, $56.2 million for the year ended December 31, 2018 and $45.9 million for the year ended December 31, 2017. At December 31, 2019 and 2018 the Company had an accumulated deficit of $468.9 million and $362.1 million, respectively. The continuation of the Company as a going concern is dependent upon many factors including liquidity and the ability to raise capital. The Company received FDA approval of their PMA supplement on April 17, 2018 and was then able to access a $10.0 million term loan pursuant to an amendment to the credit agreement with MidCap Financial Trust, or MidCap. In addition, in February 2018, the Company entered into an At-The-Market Equity Offering Sales Agreement with Stifel, Nicolaus & Company, Incorporated, or Stifel, as sales agent pursuant to which the Company may sell, from time to time, through Stifel, shares of its common stock having an aggregate gross offering price of up to $50.0 million. As of December 31, 2019, the Company had not sold any common stock pursuant to the sales agreement. Further, on May 7, 2018 and June 7, 2019, the Company completed public offerings of its common stock, raising approximately $107.6 million and $107.7 million, respectively, in net proceeds after deducting underwriting discounts and commissions and other offering expenses.

 

On March 11, 2020, the Company entered into a Facility Agreement (the “Deerfield Facility Agreement”) by and among the Company, as borrower, certain of the Company’s subsidiaries party thereto as guarantors (collectively with the Company, the “Loan Parties”) and Deerfield Partners, L.P. (“Deerfield”), as agent for itself and the lenders, providing for the sale by the Company to Deerfield of $60.0 million of principal amount of 4.0% unsecured and subordinated convertible notes (the “Convertible Note”) upon the terms and conditions set forth in the Deerfield Facility Agreement (the “Deerfield Financing”). Refer to Note 7 – Debt for further details.

(c)

Cash and Cash Equivalents

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

(d)

Concentration of Credit and Supplier Risks

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

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

(e)

Fair Value of Financial Instruments

The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, customer deposits and sales return liability are reasonable estimates of their fair value because of the short maturity of these items. The fair value of the common stock warrant liability, deferred and contingent consideration are discussed in Note 2(f) below. The fair value of the debt is based on the amount of future cash flows associated with the instrument discounted using the Company’s market rate. At December 31, 2019, the carrying value of the long-term debt was not materially different from the fair value.

(f)

Fair Value Measurements

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

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

 

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

 

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

 

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

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

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

The following tables present information about the Company’s liabilities that are measured at fair value on a recurring basis as of December 31, 2019 and 2018 and indicate the level of the fair value hierarchy utilized to determine such fair value (in thousands):

 

 

 

Fair Value Measurements as of

 

 

 

December 31, 2019 Using:

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liability for common stock warrants

 

$

 

 

 

 

 

 

38

 

 

 

38

 

Liability for contingent consideration

 

 

 

 

 

 

 

 

6,891

 

 

 

6,891

 

 

 

$

 

 

 

 

 

 

6,929

 

 

 

6,929

 

 

 

 

Fair Value Measurements as of

 

 

 

December 31, 2018 Using:

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liability for common stock warrants

 

$

 

 

 

 

 

 

113

 

 

 

113

 

Liability for contingent consideration

 

 

 

 

 

 

 

 

13,847

 

 

 

13,847

 

 

 

$

 

 

 

 

 

 

13,960

 

 

 

13,960

 

 

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

 

Warrant Liability

 

 

 

 

Balance, December 31, 2018

 

$

113

 

Change in fair value of warrant liability

 

 

(75

)

Balance, December 31, 2019

 

$

38

 

Contingent Consideration Liability

 

 

 

 

Balance, December 31, 2018

 

$

13,847

 

Settlements of contingent consideration

 

 

(8,000

)

Change in fair value of contingent consideration

 

 

1,044

 

Balance, December 31, 2019

 

$

6,891

 

 

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

(g)

Property and Equipment

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

(h)

Goodwill and Other Intangible Assets

Goodwill represents the excess of the purchase price over the fair value of net assets of purchased businesses. Goodwill is not amortized, but instead is subject to impairment tests on at least an annual basis and whenever circumstances suggest that goodwill may be impaired. After the acquisition of miraDry, management began evaluating the Company as two reporting units, Breast Products and miraDry. The Company’s annual test for impairment is performed as of October 1 of each fiscal year. The Company makes a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount. If the Company concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying amount from the qualitative assessment, the Company performs a quantitative analysis to compare the fair value of the reporting unit to its carrying amount. The Company recognizes impairment charges for the amount by which the carrying amount exceeds the reporting unit’s fair value.

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

In the second quarter of 2019, the Company noted a decline in actual and forecasted earnings for the miraDry reporting unit in comparison to forecasted earnings determined in prior periods. Based on this evaluation, the Company determined that the carrying value of the miraDry reporting unit more likely than not exceeded its estimated fair value. As a result, the Company performed a quantitative analysis to compare the fair value of the reporting unit to its carrying amount.

After performing the impairment test as of June 30, 2019 the Company determined that the carrying value of its miraDry reporting unit exceeded its estimated fair value using the income approach, as described above, by an amount that indicated a full impairment of the carrying value of goodwill. Consequently, the Company recorded a non-cash goodwill impairment charge of $7.6 million during the second quarter ended June 30, 2019, which is reflected in the accompanying consolidated statement of operations for the year ended December 31, 2019.

For the Breast Products reporting unit, the Company performed a qualitative analysis on the annual impairment testing date of October 1, 2019 and determined the fair value of the reporting unit was more likely than not greater than its carrying value. For the years ended December 31, 2018 and 2017 the Company did not record any goodwill impairment charges.

Further, the Company acquired goodwill through the Vesta acquisition in the fourth quarter of 2019. The Company determined that an impairment analysis would not be necessary as they were assessed and recorded at fair value during the quarter ended December 31, 2019, and thus the goodwill carrying value approximates the fair value as of December 31, 2019. Refer to Note 4(a) for further details.

The Company tests indefinite-lived intangible assets for impairment on at least an annual basis and whenever circumstances suggest the assets may be impaired. The Company’s annual test for impairment is performed as of October 1 of each fiscal year. If indicators of impairment are present, the Company evaluates the carrying value of the intangible assets in relation to estimates of future undiscounted cash flows. If the carrying value of the intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to the difference. The Company also evaluates the remaining useful life of an indefinite-lived intangible asset to determine whether events and circumstances continue to support an indefinite useful life. For the years ended December 31, 2019, 2018, and 2017, the Company did not record any indefinite-lived intangible assets impairment charges.

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

In connection with the circumstances leading to the impairment of goodwill for the miraDry reporting unit, in the second quarter of 2019 the Company performed a test of recoverability of the intangible assets in the miraDry reporting unit by comparing the carrying amount of the asset group to the future undiscounted cash flows the assets are expected to generate. As the future undiscounted cash flows attributable to the asset group were less than the carrying value, the Company performed a quantitative analysis to compare the fair value of the intangible assets in the reporting unit to their carrying amount.

After performing the impairment test as of June 30, 2019, the Company determined that the carrying values of all of the intangible assets in the miraDry reporting unit exceeded their estimated fair values. Consequently, the Company recorded non-cash impairment charges of $0.4 million for customer relationships, $0.3 million for distributor relationships, $3.3 million for tradenames, and $1.0 million for developed technology within goodwill and other intangible impairment during the second quarter ended June 30, 2019, which is reflected in the accompanying consolidated statement of operations for the year ended December 31, 2019. For the years ended December 31, 2018 and 2017, the Company did not record any definite-lived intangible asset impairment charges.

(i)

Impairment of Long‑Lived Assets

The Company’s management routinely considers whether indicators of impairment of long‑lived assets are present. If such indicators are present, management determines whether the sum of the estimated undiscounted cash flows attributable to the assets in question is less than their carrying value. If less, the Company will recognize an impairment loss based on the excess of the carrying amount of the assets over their respective fair values. Fair value is determined by discounted future cash flows, appraisals or other methods. If the assets determined to be impaired are to be held and used, the Company will recognize an impairment charge to the extent the present value of anticipated net cash flows attributable to the asset are less than the asset’s carrying value. The fair value of the asset will then become the asset’s new carrying value. There have been no impairments of tangible long‑lived assets recorded during the years ended December 31, 2019, 2018 and 2017. The Company may record impairment losses in future periods if factors influencing its estimates change.

(j)

Business Combinations

Business combinations are accounted for using the acquisition method of accounting. Under the acquisition method, assets acquired and liabilities assumed are recorded at their respective fair values as of the acquisition date in the financial statements. The excess of the fair value of consideration transferred over the fair value of the net assets acquired is recorded as goodwill. Liability-classified contingent consideration obligations incurred in connection with a business combination are recorded at their fair values on the acquisition date and remeasured at their fair values each subsequent reporting period until the related contingencies are resolved. The resulting changes in fair values are recorded in earnings. Equity-classified contingent consideration obligations incurred in connection with a business combination are recorded at their fair values on the acquisition date and are not subsequently remeasured each reporting period unless the obligation becomes reclassified as a liability. The subsequent settlement of the obligation is accounted for within equity.

(k)

Segment Reporting

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

(l)

Revenue Recognition

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

For Breast Products, with the exception of the Company’s BIOCORNEUM scar management products, the Company allows for the return of products from customers within six months after the original sale, which is accounted for as variable consideration. Reserves are established for anticipated sales returns based on the expected amount calculated with historical experience, recent gross sales and any notification of pending returns. The estimated sales returns are recorded as a reduction of revenue and as a sales return liability in the same period revenue is recognized. Actual sales returns in any future period are inherently uncertain and thus may differ from the estimates. If actual sales returns differ significantly from the estimates, an adjustment to revenue in the current or subsequent period would be recorded. The Company has established an allowance for sales returns of $8.1 million and $6.0 million as of December 31, 2019 and December 31, 2018, respectively, recorded as “sales return liability” on the consolidated balance sheets.

The following table provides a rollforward of the sales return liability (in thousands):

 

 

 

Sales return liability

 

Balance as of December 31, 2018

 

$

6,048

 

Addition to reserve for sales activity

 

 

105,496

 

Actual returns

 

 

(104,148

)

Change in estimate of sales returns

 

 

720

 

Balance as of December 31, 2019

 

$

8,116

 

 

For Breast Products, a portion of the Company’s revenue is generated from the sale of consigned inventory of breast implants maintained at doctor, hospital, and clinic locations. For these products, revenue is recognized at the time the Company is notified by the customer that the product has been implanted, not when the consigned products are delivered to the customer’s location.

For miraDry, in addition to domestic and international direct sales, the Company leverages a distributor network for selling the miraDry System internationally. The Company recognizes revenue when control of the goods or services is transferred to the distributors. Standard terms in both direct sales agreements (domestic and international), and international distributor agreements do not allow for trial periods, right of return, refunds, payment contingent on obtaining financing or other terms that could impact the customer’s payment obligation.

Arrangements with Multiple Performance Obligations

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

The Company introduced its Platinum20 Limited Warranty Program, or Platinum20, in May 2018 on all OPUS breast implants implanted in the United States or Puerto Rico on or after May 1, 2018. Platinum20 provides for financial assistance for revision surgeries and no-charge contralateral replacement implants upon the occurrence of certain qualifying events. The Company considers Platinum20 to have an assurance warranty component and a service warranty component. The assurance component is recorded as a warranty liability at the time of sale (as discussed in Note 2(s)). The Company considers the service warranty component as an additional performance obligation and defers revenue at the time of sale based on the relative estimated selling price, by estimating a standalone selling price using the expected cost plus margin approach for the performance obligation. Inputs into the expected cost plus margin approach include historical incidence rates, estimated replacement costs, estimated financial assistance payouts and an estimated margin. The liability for unsatisfied performance obligations under the service warranty as of December 31, 2019 and December 31, 2018 was $1.2 million and $0.4 million, respectively.

The short-term obligation related to the service warranty was $0.5 million and $0.2 million as of December 31, 2019 and December 31, 2018, respectively, and is included in “accrued and other current liabilities” on the consolidated balance sheet. The long-term obligation related to the service warranty was $0.7 million and $0.3 million as of December 31, 2019 and December 31, 2018, respectively, and is included in “warranty reserve and other long-term liabilities” on the consolidated balance sheet. The performance obligation is satisfied at the time that Platinum20 benefits are provided and are expected to be satisfied over the following 6 to 24 month period for financial assistance and 20 years for product replacement. Revenue recognized for the service warranty performance obligations for the year ended December 31, 2019 was $0.2 million. Revenue recognized for the service warranty performance obligations for the year ended December 31, 2018 was immaterial.

Practical Expedients and Policy Election

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

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

The Company has elected to account for shipping and handling activities performed after a customer obtains control of the products as activities to fulfill the promise to transfer the products to the customer. Shipping and handling activities are largely provided to customers free of charge for the Breast Products segment. The associated costs were $1.9 million, $1.3 million and $0.9 million for the years ended December 31, 2019, 2018, and 2017, respectively. These costs are viewed as part of the Company’s marketing programs and are recorded as a component of sales and marketing expense in the consolidated statement of operations as an accounting policy election. For the miraDry segment, shipping and handling charges are typically billed to customers and recorded as revenue. The shipping and handling costs incurred are recorded as a component of cost of goods sold in the consolidated statement of operations. The associated costs were $0.7 million, $0.4 million, and $35,000 for the years ended December 31, 2019, 2018, and 2017 from the acquisition date July 25, 2017, respectively.

(m)

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable are recorded at the invoiced amount and do not bear interest. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability to collect from some of its customers. The allowances for doubtful accounts are based on the analysis of historical bad debts, customer credit‑worthiness, past transaction history with the customer, and current economic trends. If the financial condition of the Company’s customers were to deteriorate, adversely affecting their ability to make payments, additional allowances may be required. The Company has established an allowance for doubtful accounts of $3.8 million and $2.4 million as of December 31, 2019 and 2018, respectively.

(n)

Inventories and Cost of Goods Sold

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

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

At December 31, 2019 and 2018, approximately $2.7 million and $1.4 million, respectively, of the Company’s Breast Products segment inventory was held on consignment at doctors’ offices, clinics, and hospitals. The value and quantity at any one location is not significant.

(o)

Income Taxes

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

The Company operates in several tax jurisdictions and is subject to taxes in each jurisdiction in which it conducts business. To date, the Company has incurred cumulative net losses and maintains a full valuation allowance on its net deferred tax assets due to the uncertainty surrounding realization of such assets. However, the Company has deferred tax liabilities that cannot be considered sources of income to support the realization of the deferred tax assets, and has provided for tax expense (or benefit) and a corresponding deferred tax liability. Tax expense for the year ended December 31, 2019 was $34,000. Tax benefit for the years ended December 31, 2018 and 2017 was $4,000 and $17,000, respectively.

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

(p)

Research and Development Expenditures

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

(q)

Advertising

Expenses related to advertising are charged to sales and marketing expense as incurred. Advertising costs were $6.1 million, $1.3 million and $1.8 million for the years ended December 31, 2019, 2018 and 2017, respectively.

(r)

Stock‑Based Compensation

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

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

 

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

 

Dividend yield—The Company has never declared or paid any cash dividends and do not presently plan to pay cash dividends in the foreseeable future. Consequently, the Company utilized an expected dividend yield of zero.

 

Expected volatility—In the prior years, the Company utilized median historic price volatilities and implied volatilities of comparable public companies due to a lack of significant trading history for the Company’s own common stock. In the current year, the Company estimated its expected stock volatility based on company-specific historical and implied volatility information of its stock as sufficient historical information has become available.

 

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

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

 

 

 

Year Ended December 31,

Stock Options

 

2019

 

2018

 

2017

Expected term (in years)

 

 

 

4.47

 

to

6.07

 

Expected volatility

 

 

 

45

%

to

56

%

Risk-free interest rate

 

 

 

1.24

%

to

2.45

%

Dividend yield

 

 

 

 

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

 

 

 

Year Ended December 31,

ESPP

 

2019

 

2018

 

2017

Expected term (in years)

 

 

0.50

 

 

to

 

2.00

 

 

 

 

0.50

 

 

to

 

2.00

 

 

 

 

0.50

 

 

to

 

2.10

 

 

Expected volatility

 

69

 

%

to

77

 

%

 

36

 

%

to

42

 

%

 

46

 

%

to

55

 

%

Risk-free interest rate

 

1.87

 

%

to

2.06

 

%

 

1.27

 

%

to

 

3.03

 

%

 

0.08

 

%

to

 

1.30

 

%

Dividend yield

 

 

 

 

(s)

Product Warranties

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

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

 

 

 

Year Ended December 31,

 

 

 

2019

 

 

2018

 

Balance as of January 1

 

$

1,395

 

 

$

1,642

 

Warranty costs incurred during the period

 

 

(762

)

 

 

(572

)

Changes in accrual related to warranties issued during the period

 

 

1,138

 

 

 

891

 

Changes in accrual related to pre-existing warranties

 

 

(209

)

 

 

(566

)

Balance as of December 31

 

$

1,562

 

 

$

1,395

 

 

(t)

Net Loss Per Share

 

 

 

 

December 31,

 

 

 

 

2019

 

 

2018

 

 

2017

 

Net loss (in thousands)

 

 

$

(106,818

)

 

$

(82,627

)

 

$

(64,028

)

Weighted average common shares outstanding, basic and diluted

 

 

 

40,654,272

 

 

 

25,402,241

 

 

 

19,159,057

 

Net loss per share attributable to common stockholders

 

 

$

(2.63

)

 

$

(3.25

)

 

$

(3.34

)

 

The Company excluded the following potentially dilutive securities, outstanding as of December 31, 2019, 2018 and 2017 from the computation of diluted net loss per share attributable to common stockholders for the years ended December 31, 2019, 2018 and 2017 because they had an anti-dilutive impact due to the net loss attributable to common stockholders incurred for the periods.

 

 

 

December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

Stock options to purchase common stock

 

 

417,109

 

 

 

1,625,778

 

 

 

1,867,627

 

Warrants for the purchase of common stock

 

 

47,710

 

 

 

47,710

 

 

 

47,710

 

 

 

 

464,819

 

 

 

1,673,488

 

 

 

1,915,337

 

 

(u)

Recent Accounting Pronouncements

Recently Adopted Accounting Standards

 

In February 2016, the FASB issued Accounting Standards Update, or ASU, 2016-02, Leases (Topic 842). This ASU requires a company to recognize lease assets and liabilities arising from operating leases in the statement of financial position. This ASU does not significantly change the previous lease guidance for how a lessee should recognize the recognition, measurement, and presentation of expenses and cash flows arising from a lease. Additionally, the criteria for classifying a finance lease versus an operating lease are substantially the same as the previous guidance. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and early adoption was permitted. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842) Targeted Improvements, amending certain aspects of the new leasing standard. The amendment allowed an additional optional transition method whereby an entity records a cumulative effect adjustment to opening retained earnings in the year of adoption without restating prior periods. The Company adopted Topic 842 on January 1, 2019 electing the package of practical expedients permitted under the transition guidance, which allowed the Company to carry forward the historical lease classification, the assessment on whether a contract is or contains a lease, and the initial direct costs for any leases that exist prior to adoption of the new standard. The Company has not restated prior periods under the optional transition method. The adoption of ASU 2016-02 on January 1, 2019 resulted in the recognition of right-of-use assets of approximately $22.7 million, lease liabilities of approximately $22.9 million and no cumulative-effect adjustment on retained earnings on its consolidated balance sheets. Refer to Note 6 - Leases for further details.

 

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

 

Recently Issued Accounting Standards

 

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

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

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendment removes certain exceptions for recognizing deferred taxes for investments, performing intraperiod allocation, and calculating income taxes in interim periods. The amendment also adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. The ASU is effective for annual and interim periods in fiscal years beginning after December 15, 2020. Early adoption is permitted. The Company is currently evaluating the impact that adoption of the standard will have on the consolidated financial statements.

 

(v)

Reclassifications

 

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

v3.20.1
Restructuring
12 Months Ended
Dec. 31, 2019
Restructuring And Related Activities [Abstract]  
Restructuring

(3) Restructuring

 

On November 6, 2019, the Board of Directors of the Company approved an organizational efficiency initiative, or the Plan, designed to reduce spending and simplify operations. Under the Plan, the Company will implement numerous initiatives to reduce spending, including closing the Santa Clara offices of miraDry, Inc., outsourcing miraDry product assembly to a third party, and consolidating a number of business support services via a shared services organization at the Company’s Santa Barbara headquarters.

 

Under the Plan, the Company intends to reduce its workforce by terminating approximately 70 employees over a 10-month period. As a result, the Company expects to incur total charges of approximately $4.1 million in connection with one-time employee termination costs, retention costs and other benefits. In addition, the Company expects to incur estimated charges of approximately $1.3 million related to contract termination costs, outsourcing miraDry product assembly, duplicate operating costs, and other associated costs. In total, the Plan is estimated to cost approximately $5.4 million over 10 months, excluding non-cash charges, with related cash payments expected to be substantially paid out with cash on hand by the end of the third quarter of 2020.

 

The following table details the amount of the liabilities related to the Plan included in "Accrued and other current liabilities" in the consolidated balance sheet as of December 31, 2019 (amounts in thousands):

 

 

 

 

Severance

costs

 

Other associated

costs

 

Balance at December 31, 2018

 

$

-

 

$

-

 

Costs charged to expense

 

 

957

 

 

126

 

Costs paid or otherwise settled

 

 

(63

)

 

(126

)

Balance at December 31, 2019

 

$

894

 

$

 

 

During 2019, the Company recorded $1.1 million of severance and other associated costs related to the Plan. The following table details the charges by reportable segment, recorded in "Restructuring" under operating expenses in the consolidated statements of operations for the year ended December 31, 2019 by segment (amounts in thousands):

 

 

 

Year Ended

 

 

 

December 31, 2019

 

Breast Products

 

$

499

 

miraDry

 

 

584

 

Total

 

$

1,083

 

 

 

It is anticipated that the Company will additionally incur approximately $4.1 million of total restructuring costs during 2020, of which $1.1 million would be attributable to the Breast Products segment and $3.0 million would be attributable to the miraDry segment. As the development of the Plan is completed, the Company will update its estimated costs by reportable segment as needed.

v3.20.1
Acquisitions
12 Months Ended
Dec. 31, 2019
Business Combinations [Abstract]  
Acquisitions

(4) Acquisitions

 

 

(a)

Acquisition of certain assets from Vesta Intermediate Funding, Inc.

On November 7, 2019, the Company entered into an Asset Purchase Agreement with Vesta Intermediate Funding, Inc., pursuant to which the Company purchased certain assets and obtained a non-exclusive, royalty-free, perpetual, irrevocable, assignable, sublicensable, and worldwide license to certain intellectual property owned by Vesta. In consideration of the acquisition, the Company paid $14.0 million in cash on the closing date and $5.1 million for additional inventory. The Company will pay an additional $3.2 million and $3.0 million in cash on November 7, 2021 and November 7, 2023, respectively. In addition, in the event the closing price of the Company’s common stock equals or exceeds a certain agreed upon price target, or the First Milestone Price Target, on any date through November 7, 2023, the Company will issue Vesta 303,721 shares of common stock within five business days of such date and in the event the closing price of the Company’s common stock equals or exceeds a second agreed upon price target, or the Second Milestone Price Target, on any date through November 7, 2023, the Company will issue Vesta 303,721 shares of common stock within five business days of such date. The Company will use its commercially reasonable efforts to file and maintain a resale registration statement registering the resale of the milestone shares. The transaction, which closed on November 7, 2019, or the Acquisition Date, will allow the Company to achieve a greater degree of vertical integration, obtaining direct control of breast implant manufacturing and product development activities and generating production-related cost synergies.

The acquired set of activities, which includes all the inputs, processes, and outputs related to the manufacturing of the Company’s gel breast implants, was determined to meet the definition of a business as outlined in ASC 805. In connection with the acquisition, the Company recorded $2.6 million of professional fees for the year ended December 31, 2019, which are included in general and administrative expense. The aggregate preliminary acquisition date fair value of the consideration transferred was approximately $27.0 million, consisting of the following (in thousands):

 

 

 

Fair Value

 

Cash consideration at Acquisition Date

 

$

14,000

 

Deferred consideration

 

 

4,737

 

Equity contingent consideration

 

 

3,156

 

Purchase price for additional inventory purchase

 

 

5,113

 

Total purchase consideration

 

$

27,006

 

 

The Company funded the cash consideration amount with cash on hand. The deferred consideration represents the fair value of the additional cash to be paid on the second and fourth anniversaries following the closing date. The equity contingent consideration represents Vesta’s contractual right to receive potential future consideration in the form of shares of Sientra common stock upon achievement of certain price milestones of the Company’s common stock (the First and Second Milestone Price Targets). The fair value of the equity contingent consideration at the acquisition date was determined using a Monte-Carlo simulation model. The inputs include the Company’s closing stock price as of the valuation date, Company-specific historical equity volatility, and the risk-free rate. Equity contingent consideration was determined to be equity classified and is therefore not subsequently remeasured each reporting period unless the obligation becomes reclassified as a liability, and subsequent settlement of the obligation will be accounted for within equity. The additional inventory purchase represents cash paid for inventory and ordering supplies needed to support the acquired manufacturing process, at cost in accordance with the Transition Services Agreement. As of December 31, 2019, $3.9 million of the additional inventory purchase was funded with cash on hand, and the remaining $1.2 million is included in “Accrued and other current liabilities” on the consolidated balance sheet.

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

 

 

 

November 7,

 

 

 

2019

 

Inventories

 

$

7,138

 

Property and equipment

 

 

7,304

 

Goodwill

 

 

4,324

 

Intangible assets

 

 

8,240

 

Net assets acquired

 

$

27,006

 

 

Goodwill was allocated to the Breast Products reportable segment. The goodwill recognized is attributable primarily to the assembled workforce and additional market opportunities and is deductible for tax purposes.

The intangible assets consist of intellectual property related to manufacturing know-how. The intellectual property has an estimated useful life of 19 years and is amortized using an accelerated method of 95% of the benefit realized.

The Company retained an independent third-party appraiser to assist management in its valuation; however, the purchase price allocation has not been finalized. The fair values of assets acquired may change over the measurement period as additional information is received. The primary areas that are subject to change include the fair value of property and equipment and inventories. The measurement period will end no later than one year from the acquisition date.

In connection with the acquisition, the Company entered into a Termination and Release Agreement with Vesta, effectively terminating the existing manufacturing agreement between the Company and Vesta. The Company evaluated the settlement of the pre-exiting relationship under the provisions of ASC 805 and recognized no gain or loss as a result of the termination.

The results of the acquired business have been included in the consolidated financial statements from November 7, 2019 through December 31, 2019 and have been included in the Breast Products segment. Disclosure of pro forma combined revenue have not been presented because the effect of the acquisition had no impact on the Company’s revenue. Disclosure of pro forma combined earnings have not been presented because it is impracticable to do so due to a variety of limitations, including a lack of readily available historical GAAP financial statements.

 

(b)

Acquisition of miraDry

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

 

 

 

 

Fair Value

 

Cash consideration at Acquisition Date (other than debt payoff)

 

$

6,193

 

Cash consideration at Acquisition Date (debt payoff)

 

 

12,467

 

Deferred consideration

 

 

966

 

Contingent consideration

 

 

9,946

 

Total purchase consideration

 

$

29,572

 

 

The Company funded the cash consideration, including the debt payoff amount with cash on hand. The cash consideration included the payoff of miraDry’s existing term loan, or the Note Purchase Agreement dated January 27, 2017 and bridge loan, or the January 2017 Bridge Loan, including interest. The deferred consideration relates to cash held back to be used for either potential litigation-related expenses or for payments to certain former investors of miraDry, as defined in the Note Purchase Agreement dated January 27, 2017, one year following the Acquisition Date. Upon reaching one year, the deferred consideration was classified as $0.4 million of legal settlement payable in the consolidated balance sheet and $0.6 million had offset legal fees paid that the Company had previously included in “prepaid expenses and other current assets” on the consolidated balance sheet. Contingent consideration of future cash payments of a maximum of $14.0 million in two milestones represents the contractual right of certain former miraDry shareholders to receive one or more contingent payments upon achievement of certain future sales milestones and includes certain amounts due to investors related to the remaining balances on the January 2017 Bridge Note and accrued royalty obligations, with certain amounts held back for potential litigation-related expenses. The fair value of the contingent consideration at the acquisition date was determined using a Monte-Carlo simulation model. The inputs include the estimated amount and timing of future net sales, and a risk-adjusted discount rate. The inputs are significant inputs not observable in the market, which are referred to as Level 3 inputs and are further discussed in Note 2(f). The first milestone was met in the second quarter of 2019 and subsequently paid out in the third quarter of 2019. The remaining contingent consideration component continues to be subject to the recognition of subsequent changes in fair value through general and administrative expense in the consolidated statement of operations.

 

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

 

 

 

July 25,

 

 

 

2017

 

Cash

 

$

205

 

Accounts receivable, net

 

 

2,091

 

Inventories

 

 

7,064

 

Other current assets

 

 

170

 

Property and equipment, net

 

 

528

 

Goodwill

 

 

7,629

 

Intangible assets

 

 

14,800

 

Restricted cash

 

 

305

 

Other assets

 

 

12

 

Liabilities assumed:

 

 

 

 

Accounts payable

 

 

(908

)

Accrued and other current liabilities

 

 

(2,294

)

Other current liabilities

 

 

(30

)

Net assets acquired

 

$

29,572

 

 

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

 

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

 

 

 

 

 

 

 

Estimated useful

 

Amortization

 

 

Amount

 

 

life

 

method

Developed technology

 

$

3,000

 

 

15 years

 

Accelerated

Customer relationships

 

 

6,300

 

 

14 years

 

Accelerated

Distributor relationships

 

 

500

 

 

9 years

 

Accelerated

Trade name

 

 

5,000

 

 

15 years

 

Accelerated

 

 

$

14,800

 

 

 

 

 

 

For a discussion of the impairment of goodwill and partial impairment of intangible assets associated with the miraDry acquisition in 2019, see Note 2(h).

 

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

Unaudited Pro Forma Information

 

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

 

 

 

December 31,

 

 

 

2017

 

 

 

Pro Forma

 

Net sales

 

$

46,747

 

Net loss

 

 

(74,110

)

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

 

$

(3.96

)

 

 

v3.20.1
Balance Sheet Components
12 Months Ended
Dec. 31, 2019
Balance Sheet Related Disclosures [Abstract]  
Balance Sheet Components

(5) Balance Sheet Components

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

 

 

 

December 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Raw materials

 

$

8,095

 

 

$

2,147

 

Work in progress

 

 

5,543

 

 

 

2,110

 

Finished goods

 

 

23,893

 

 

 

18,335

 

Finished goods - right of return

 

 

2,081

 

 

 

1,493

 

 

 

$

39,612

 

 

$

24,085

 

 

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

 

 

 

December 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Leasehold improvements

 

$

2,841

 

 

$

402

 

Manufacturing equipment and toolings

 

 

8,175

 

 

 

1,928

 

Computer equipment

 

 

1,250

 

 

 

682

 

Software

 

 

2,602

 

 

 

1,039

 

Office equipment

 

 

111

 

 

 

156

 

Furniture and fixtures

 

 

1,144

 

 

 

826

 

 

 

 

16,123

 

 

 

5,033

 

Less accumulated depreciation

 

 

(3,809

)

 

 

(2,497

)

 

 

$

12,314

 

 

$

2,536

 

 

Depreciation expense for the years ended December 31, 2019, 2018 and 2017 was $1.2 million, $1.1 million and $0.9 million, respectively.

 

Under the terms of the Asset Purchase Agreement with Vesta entered into on November 7, 2019, the Company acquired $7.3 million of fixed assets, including leasehold improvements of $2.4 million, manufacturing equipment of $4.4 million, and capitalized software of $0.5 million. Refer further to Note 4(a).  

Accrued and other current liabilities consist of the following:

 

 

 

December 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Payroll and related expenses

 

$

6,789

 

 

$

6,466

 

Accrued severance

 

 

894

 

 

 

 

Accrued commissions

 

 

4,984

 

 

 

5,321

 

Accrued equipment

 

 

400

 

 

 

18

 

Accrued inventory

 

 

2,216

 

 

 

 

Deferred and contingent consideration, current portion

 

 

6,830

 

 

 

7,645

 

Audit, consulting and legal fees

 

 

630

 

 

 

703

 

Accrued sales and marketing expenses

 

 

1,109

 

 

 

1,374

 

Operating lease liabilities

 

 

1,259

 

 

 

 

Finance lease liabilities

 

 

40

 

 

 

 

Other

 

 

7,400

 

 

 

6,170

 

 

 

$

32,551

 

 

$

27,697

 

v3.20.1
Leases
12 Months Ended
Dec. 31, 2019
Leases [Abstract]  
Leases

(6) Leases

 

The Company leases certain office space, warehouses, distribution facilities, manufacturing facilities and office equipment. The Company also has embedded leases of manufacturing facilities and equipment associated with the Company’s manufacturing contracts. The Company determines if an arrangement contains a lease at inception by evaluating whether the arrangement conveys the right to use an identified asset and whether the Company obtains substantially all of the economic benefits from and has the ability to direct the use of the asset.

 

Operating and finance lease right-of-use, or ROU, assets and lease liabilities are recognized based on the present value of the future lease payments over the lease term at the commencement date. The Company determines its incremental borrowing rate based on the information available at the commencement date in determining the lease liabilities as the Company’s leases generally do not provide an implicit rate. The ROU assets also include any initial direct costs incurred and any lease payments made at or before the lease commencement date, less lease incentives received. Lease terms may include options to extend or terminate when the Company is reasonably certain that the option will be exercised. During the fourth quarter of 2019, the Company included a four-year renewal option in the lease term for one operating lease as it was concluded that it was reasonably certain that the Company will exercise the option. The Company elected to apply the short-term lease measurement and recognition exemption in which ROU assets and lease liabilities are not recognized for short-term leases. The Company’s lease agreements generally do not contain material residual value guarantees or material restrictive covenants.

 

The Company’s leases of office space, warehouses, distribution facilities and manufacturing facilities are treated as operating leases and often contain lease and non-lease components. The Company has elected to account for these lease and non-lease components separately. Non-lease components for these assets are primarily comprised of common-area maintenance, utilities, and real estate taxes that are passed on from the lessor in proportion to the space leased by the Company, and are recognized in operating expenses in the period in which the obligation for those payments was incurred. Lease cost for these operating leases is recognized on a straight-line basis over the lease term in operating expenses.

 

The Company’s embedded leases of manufacturing facilities and equipment are treated as operating leases and often contain lease and non-lease components. The Company has elected to account for these lease and non-lease components as a single lease component. There may be variability in future lease payments as the amount of the non-lease components is based on the costs of manufacturing and is dependent on the amount and types of units produced. The Company reduces the operating lease liability when the inventory is purchased.

 

The Company’s leases of office equipment are accounted for as finance leases as they meet one or more of the five finance lease classification criteria. Lease cost for these finance leases is comprised of amortization of the ROU asset and interest expense which are recognized in operating expenses and other income (expense), net.

 

Components of lease expense were as follows: