SIENTRA, INC., 10-Q filed on 5/9/2018
Quarterly Report
v3.8.0.1
Document and Entity Information - shares
3 Months Ended
Mar. 31, 2018
May 07, 2018
Document And Entity Information [Abstract]    
Entity Registrant Name Sientra, Inc.  
Entity Central Index Key 0001551693  
Document Type 10-Q  
Document Period End Date Mar. 31, 2018  
Amendment Flag false  
Current Fiscal Year End Date --12-31  
Entity Filer Category Accelerated Filer  
Entity Common Stock, Shares Outstanding   28,183,911
Document Fiscal Year Focus 2018  
Document Fiscal Period Focus Q1  
Trading Symbol SIEN  
v3.8.0.1
Condensed Consolidated Balance Sheets - USD ($)
$ in Thousands
Mar. 31, 2018
Dec. 31, 2017
Current assets:    
Cash and cash equivalents $ 16,059 $ 26,588
Accounts receivable, net of allowances of $1,137 and $4,816 at March 31, 2018 and December 31, 2017, respectively 12,072 6,569
Inventories, net 21,829 20,896
Prepaid expenses and other current assets 2,374 1,512
Total current assets 52,334 55,565
Property and equipment, net 4,934 4,763
Goodwill 12,507 12,507
Other intangible assets, net 18,223 18,803
Other assets 719 575
Total assets 88,717 92,213
Current liabilities:    
Current portion of long-term debt 5,256 24,639
Accounts payable 10,487 5,811
Accrued and other current liabilities 16,535 13,474
Legal settlement payable 1,000 1,000
Customer deposits 5,431 5,423
Refund liability 4,400  
Total current liabilities 43,109 50,347
Long-term debt 22,735  
Deferred and contingent consideration 11,338 12,597
Warranty reserve and other long-term liabilities 1,692 1,646
Total liabilities 78,874 64,590
Commitments and contingencies (Note 12)
Stockholders’ equity:    
Preferred stock, $0.01 par value – Authorized 10,000,000 shares; none issued or outstanding
Common stock, $0.01 par value — Authorized 200,000,000 shares; issued 19,716,369 and 19,474,702 and outstanding 19,643,642 and 19,401,975 shares at March 31, 2018 and December 31, 2017 respectively 197 194
Additional paid-in capital 308,799 307,159
Treasury stock, at cost (72,727 shares at March 31, 2018 and December 31, 2017) (260) (260)
Accumulated deficit (298,893) (279,470)
Total stockholders’ equity 9,843 27,623
Total liabilities and stockholders’ equity $ 88,717 $ 92,213
v3.8.0.1
Condensed Consolidated Balance Sheets (Parenthetical) - USD ($)
$ in Thousands
Mar. 31, 2018
Dec. 31, 2017
Statement Of Financial Position [Abstract]    
Accounts receivable, allowances (in dollars) $ 1,137 $ 4,816
Preferred stock, par value (in dollars per share) $ 0.01 $ 0.01
Preferred stock, shares authorized 10,000,000 10,000,000
Preferred stock, shares issued 0 0
Preferred stock, shares outstanding 0 0
Common stock, par value (in dollars per share) $ 0.01 $ 0.01
Common stock, shares authorized 200,000,000 200,000,000
Common stock, shares issued 19,716,369 19,474,702
Common stock, shares outstanding 19,643,642 19,401,975
Treasury stock, shares 72,727 72,727
v3.8.0.1
Condensed Consolidated Statements of Operations - USD ($)
3 Months Ended
Mar. 31, 2018
Mar. 31, 2017
Income Statement [Abstract]    
Net sales $ 14,676,000 $ 7,489,000
Cost of goods sold 6,097,000 2,322,000
Gross profit 8,579,000 5,167,000
Operating expenses:    
Sales and marketing 15,256,000 6,955,000
Research and development 2,751,000 3,194,000
General and administrative 9,499,000 6,436,000
Total operating expenses 27,506,000 16,585,000
Loss from operations (18,927,000) (11,418,000)
Other income (expense), net:    
Interest income 40,000 22,000
Interest expense (655,000) (9,000)
Other income (expense), net 119,000 8,000
Total other income (expense), net (496,000) 21,000
Loss before income taxes (19,423,000) (11,397,000)
Income tax expense 0 25,000
Net loss $ (19,423,000) $ (11,422,000)
Basic and diluted net loss per share attributable to common stockholders $ (0.99) $ (0.61)
Weighted average outstanding common shares used for net loss per share attributable to common stockholders:    
Basic and diluted 19,613,417 18,772,965
v3.8.0.1
Condensed Consolidated Statements of Cash Flows - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2018
Mar. 31, 2017
Cash flows from operating activities:    
Net loss $ (19,423) $ (11,422)
Adjustments to reconcile net loss to net cash used in operating activities:    
Depreciation and amortization 880 570
Provision for doubtful accounts 233 8
Provision for warranties 183 57
Provision for inventory 199 107
Amortization of acquired inventory step-up 59 201
Change in fair value of warrants (121) (9)
Change in fair value of deferred and contingent consideration 621 64
Change in deferred revenue (99)  
Amortization of debt discount and issuance costs 51  
Non-cash interest expense   8
Stock-based compensation expense 2,548 1,360
Deferred income taxes   25
Changes in assets and liabilities, net of effects from acquisitions:    
Accounts receivable (5,735) 365
Inventories (1,191) 977
Prepaid expenses, other current assets and other assets (1,009) (1,420)
Insurance recovery receivable (10) 9,301
Accounts payable 4,684 (856)
Accrued and other liabilities 948 3,040
Legal settlement payable   (10,900)
Customer deposits 8 335
Refund liability 4,400  
Net cash used in operating activities (12,774) (8,189)
Cash flows from investing activities:    
Purchase of property and equipment (142) (952)
Net cash used in investing activities (142) (952)
Cash flows from financing activities:    
Proceeds from exercise of stock options   752
Proceeds from issuance of common stock under ESPP 391 324
Tax payments related to shares withheld for vested restricted stock units (RSUs) (1,296) (390)
Gross borrowings under the Revolving Loan 9,033  
Repayment of the Revolving Loan (5,735)  
Deferred financing costs (6)  
Net cash provided by financing activities 2,387 686
Net decrease in cash and cash equivalents (10,529) (8,455)
Cash and cash equivalents at:    
Beginning of period 26,588 67,212
End of period 16,059 58,757
Supplemental disclosure of cash flow information:    
Interest paid 586  
Supplemental disclosure of non-cash investing and financing activities:    
Property and equipment in accounts payable and accrued liabilities $ 1,530 214
Fair value of warrants to be issued   $ 88
v3.8.0.1
Formation and Business of the Company
3 Months Ended
Mar. 31, 2018
Organization Consolidation And Presentation Of Financial Statements [Abstract]  
Formation and Business of the Company

1.

Formation and Business of the Company

 

a.

Formation

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

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

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

 

b.

Acquisition of miraDry

 

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

 

 

c.

Regulatory Review of Vesta Manufacturing

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

v3.8.0.1
Summary of Significant Accounting Policies
3 Months Ended
Mar. 31, 2018
Accounting Policies [Abstract]  
Summary of Significant Accounting Policies

2.

Summary of Significant Accounting Policies

 

a.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements in this Quarterly Report on Form 10-Q have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP, and the rules and regulations of the U.S. Securities and Exchange Commission, or SEC.  Accordingly, they do not include certain footnotes and financial presentations normally required under accounting principles generally accepted in the United States of America for complete financial reporting. The interim financial information is unaudited, but reflects all normal adjustments and accruals which are, in the opinion of management, considered necessary to provide a fair presentation for the interim periods presented. The accompanying condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 filed with the SEC on March 13, 2018 and Form 10-K/A filed on April 30, 2018, or the Annual Report. The results for the three months ended March 31, 2018 are not necessarily indicative of results to be expected for the year ending December 31, 2018, any other interim periods, or any future year or period.

 

b.

Liquidity  

Since the Company’s inception, it has incurred significant net operating losses and anticipate that losses will continue in the near term.  The Company expects its operating expenses will continue to grow as they expand operations.  The Company will need to generate significant net sales to achieve profitability. To date, the Company has funded operations primarily with proceeds from the sales of preferred stock, borrowings under term loans, sales of products since 2012, and the proceeds from the sale of common stock in public offerings.

 

The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which implies the Company will continue to realize its assets and discharge its liabilities in the normal course of business.  As of March 31, 2018, the Company had cash and cash equivalents of $16.1 million. Since inception, the Company has incurred recurring losses from operations and cash outflows from operating activities. 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 our common stock having an aggregate gross offering price of up to $50 million. Further, on May 7, 2018, the Company completed a public offering of its common stock, raising approximately $107.7 million in net proceeds after deducting underwriting discounts and commissions and other estimated offering expenses.  

 

The Company believes that its cash and cash equivalents combined with the additional capital raised subsequent to March 31, 2018 discussed above, will be sufficient to fund its operations for at least the next 12 months. To fund ongoing operating and capital needs, the Company may need to raise additional capital in the future through the sale of equity securities and incremental debt financing.  

 

c.

Use of Estimates

The preparation of the condensed consolidated financial statements, in conformity with GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

 

d.

Significant Accounting Policies

Revenue Recognition

The Company recognizes revenue when the Company transfers control of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled to in exchange for those goods or services. See Note 3 - Revenue for further discussion.

There have been no other changes to the accounting policies during the three months ended March 31, 2018, 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 May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). Topic 606 supersedes the revenue recognition requirements in Topic 605 Revenue Recognition (Topic 605) and requires entities to recognize revenue when control of the promised goods or services is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The Company adopted Topic 606 in the first quarter of 2018 to all contracts using the modified retrospective method. The adoption of Topic 606 did not have a material impact on the Company’s historical net losses and, therefore, no adjustment was made to the opening balance of retained earnings. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. The Company does not expect the adoption of Topic 606 to have a material impact to the Company’s net income (loss) on an ongoing basis.

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

 

 

March 31, 2018

 

 

 

 

 

 

 

Balances Without

 

 

 

 

 

 

 

 

 

 

 

Adoption of

 

 

Effect of Change

 

 

 

As Reported

 

 

ASC 606

 

 

Higher/(Lower)

 

Balance Sheet

 

 

 

 

 

 

 

 

 

 

 

 

    Assets

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable, net of allowances

 

$

12,072

 

 

$

7,672

 

 

$

4,400

 

    Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Refund liability

 

$

4,400

 

 

 

 

 

$

4,400

 

Additionally, in accordance with Topic 606, the balance of breast product inventory estimated to be returned as of March 31, 2018 is included in the components of the Company’s inventory as “Finished goods – right of return” in Note 9b - Inventories. Prior to the adoption of Topic 606, the inventory impact of estimated returns for breast products was included in the “Finished goods” inventory balance and was not separately disclosed.

 

The adoption of Topic 606 did not have a material impact on our condensed consolidated income statement.

 

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows – Classifications of Certain Cash Receipts and Cash Payments (Topic 230). The standard update addresses eight specific cash flow issues not currently addressed by GAAP, with the objective of reducing the existing diversity in practice of how these cash receipts and payments are presented and classified in the statement of cash flows. The ASU requires a retrospective approach to adoption. The Company adopted the ASU in the first quarter of 2018. The adoption of this ASU did not have a material impact on the Company’s condensed consolidated financial statements for the first fiscal quarter 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 Company adopted the ASU in the first quarter of 2018 on prospective basis. The adoption of this ASU did not have a material impact on the Company’s condensed consolidated financial statements.

 

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

Recently Issued Accounting Standards

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) which supersedes FASB Accounting Standard Codification Leases (Topic 840). The standard is intended to increase the transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This accounting standard update will be effective for the Company beginning in fiscal year 2019. The Company is currently evaluating the impact that adoption of the standard will have on the financial statements and related disclosures.

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

 

f.Reclassifications

 

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

v3.8.0.1
Revenue
3 Months Ended
Mar. 31, 2018
Revenue From Contract With Customer [Abstract]  
Revenue

3.

Revenue

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. Sales prices are documented in the executed sales contract or purchase order 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. Revenue for extended service agreements are recognized ratably over the term of the agreements.

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

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

 

For Breast Products, with the exception of the Company’s BIOCORNEUM scar management products, the Company allows for the return of products from customers within six months after the original sale, which is accounted for as variable consideration. Appropriate reserves are established for anticipated sales returns based on the expected amount calculated with historical experience, recent gross sales and any notification of pending returns. The estimated sales return is recorded as a reduction of revenue and as a refund 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 $4.4 million and $3.9 million as of March 31, 2018 and December 31, 2017, respectively, recorded as “Refund liability” on the condensed consolidated balance sheet under Topic 606 as of March 31, 2018 and recorded in “Accounts receivable, net of allowances,” at December 31, 2017 on the condensed consolidated balance sheet, as indicated above inRecently Adopted Accounting Standards.”

Sales tax, value-added tax, and other taxes the Company may collect concurrent with revenue-producing activities are excluded from the measurement of the transaction price and thus from revenue.

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, 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.  

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 generally 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 $0.2 million for both the three months ended March 31, 2018 and 2017. 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 condensed consolidated statement of operations as an accounting policy election. Shipping and handling charges are typically billed to customers for sales of the miraDry systems and are recorded as a component of cost of goods sold in the condensed consolidated statement of operations. The associated costs for the three months ended March 31, 2018 was $0.1 million.

v3.8.0.1
Acquisitions
3 Months Ended
Mar. 31, 2018
Business Combinations [Abstract]  
Acquisitions

4.

Acquisitions

 

a.

Acquisition of miraDry

On June 11, 2017, Sientra entered into the Merger Agreement with miraDry, pursuant to which Sientra commenced a tender offer to purchase all of the outstanding shares of miraDry’s common stock for (i) $0.3149 per share, plus (ii) the contractual right to receive one or more contingent payments upon the achievement of certain future sales milestones. The total merger consideration was $18.7 million in upfront cash and the contractual rights represent potential contingent payments of up to $14 million. The transaction, which closed on July 25, 2017, or the Acquisition Date, added the miraDry System, the only FDA cleared device indicated to reduce underarm sweat, odor and hair of all colors, to Sientra’s aesthetics portfolio.  The Company did not record any professional fees related to the acquisition for the three months ended March 31, 2018 and 2017. 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. Contingent consideration of future cash payments of a maximum of $14.0 million represents the contractual right of certain former miraDry shareholders to receive one or more contingent payments upon achievement of certain future sales milestones and includes certain amounts due to investors related to the remaining balances on the January 2017 Bridge Note and accrued royalty obligations, with certain amounts held back for potential litigation-related expenses. The fair value of the contingent consideration at the acquisition date was determined using a Monte-Carlo simulation model. The inputs include the estimated amount and timing of future net sales, and a risk-adjusted discount rate. The inputs are significant inputs not observable in the market, which are referred to as Level 3 inputs and are further discussed in Note 6. The contingent consideration component is subject to the recognition of subsequent changes in fair value through general and administrative expense in the condensed consolidated statement of operations.

 

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

 

 

July 25,

 

 

 

2017

 

Cash

 

$

205

 

Accounts receivable, net

 

 

2,091

 

Inventories, net

 

 

7,064

 

Other current assets

 

 

170

 

Property and equipment, net

 

 

528

 

Goodwill

 

 

7,629

 

Intangible assets

 

 

14,800

 

Restricted cash

 

 

305

 

Other assets

 

 

12

 

Liabilities assumed:

 

 

 

 

Accounts payable

 

 

(908

)

Accrued and other current liabilities

 

 

(2,294

)

Other current liabilities

 

 

(30

)

Net assets acquired

 

$

29,572

 

 

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

 

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

 

 

 

 

 

 

 

Estimated useful

 

Amortization

 

 

Amount

 

 

life

 

method

Developed technology

 

$

3,000

 

 

15 years

 

Accelerated

Customer relationships

 

 

6,300

 

 

14 years

 

Accelerated

Distributor relationships

 

 

500

 

 

9 years

 

Accelerated

Trade name

 

 

5,000

 

 

15 years

 

Accelerated

 

 

$

14,800

 

 

 

 

 

 

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

Unaudited Pro Forma Information

 

The following unaudited pro forma financial information presents combined results of operations for each of the periods presented, 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 condensed 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 will differ from the unaudited pro forma information presented below (in thousands, except per share amounts):

 

 

 

March 31,

 

 

 

 

2017

 

 

 

Pro Forma

 

 

Net sales

 

$

11,303

 

 

Net loss

 

 

(20,659

)

 

Pro forma loss per share attributable to

   ordinary shares - basic and diluted

 

$

(1.11

)

 

 

 

v3.8.0.1
Fair Value of Financial Instruments
3 Months Ended
Mar. 31, 2018
Financial Instruments Owned At Fair Value [Abstract]  
Fair Value of Financial Instruments

5.

Fair Value of Financial Instruments

The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, customer deposits and refund liability are reasonable estimates of their fair value because of the short maturity of these items. The fair value of the common stock warrant liability, deferred and contingent consideration are discussed in Note 2. The fair value of the debt is based on the amount of future cash flows associated with the instrument discounted using the Company’s estimated market rate. As of March 31, 2018, the carrying value of the long-term debt was not materially different from the fair value.

v3.8.0.1
Fair Value Measurements
3 Months Ended
Mar. 31, 2018
Fair Value Disclosures [Abstract]  
Fair Value Measurements

6.

Fair Value Measurements

Certain assets and liabilities are carried at fair value under GAAP. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three levels of the fair value hierarchy, of which the first two are considered observable and the last is considered unobservable:

 

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

 

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

 

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

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

The Company assessed the fair value of the contingent consideration for future royalty payments related to the acquisition of BIOCORNEUM, the contingent consideration for future milestone payments for the acquisition of the tissue expander portfolio 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 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 March 31, 2018 and December 31, 2017 and indicate the level of the fair value hierarchy utilized to determine such fair value (in thousands):

 

 

 

Fair Value Measurements as of

 

 

 

March 31, 2018 Using:

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liability for common stock warrants

 

$

 

 

 

 

 

 

73

 

 

 

73

 

Liability for contingent consideration

 

 

 

 

 

 

 

 

12,940

 

 

 

12,940

 

 

 

$

 

 

 

 

 

 

13,013

 

 

 

13,013

 

 

 

 

Fair Value Measurements as of

 

 

 

December 31, 2017 Using:

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liability for common stock warrants

 

$

 

 

 

 

 

 

194

 

 

 

194

 

Liability for contingent consideration

 

 

 

 

 

 

 

 

12,319

 

 

 

12,319

 

 

 

$

 

 

 

 

 

 

12,513

 

 

 

12,513

 

 

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

 

Warrant Liability

 

 

 

 

Balance, December 31, 2017

 

$

194

 

Change in fair value of warrant liability

 

 

(121

)

Balance, March 31, 2018

 

$

73

 

Contingent Consideration Liability

 

 

 

 

Balance, December 31, 2017

 

$

12,319

 

Change in fair value of contingent consideration

 

 

621

 

Balance, March 31, 2018

 

$

12,940

 

 

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

v3.8.0.1
Product Warranties
3 Months Ended
Mar. 31, 2018
Product Warranties Disclosures [Abstract]  
Product Warranties

7.

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 implant surgeries taking place after May 1, 2018, the breast implant product replacement and limited warranty program provides lifetime no-charge replacement implants for covered rupture events, and no-charge replacement breast implants for other covered events that occur within twenty years of the implant surgery.  For certain covered events, the Company will also reimburse patients for certain out-of-pocket expenses incurred by patients within twenty years of the implant surgery, up to a maximum amount of $5,000.  For implants occurring prior to May 1, 2018, the Company will reimburse patients for certain out-of-pocket costs related to revision surgeries performed within ten years from the date of implantation in a covered event. Under the breast implant lifetime product replacement program, the Company provides no-charge replacement breast implants if a patient experiences a covered event. Under the miraDry warranty, the Company provides a standard product warranty for the miraDry system and bioTips. Additionally, an extended warranty may be purchased to provide additional protection of the miraDry System.

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

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

Beginning balance as of January 1

 

$

1,642

 

 

$

1,378

 

Warranty costs incurred during the period

 

 

(104

)

 

 

 

Changes in accrual related to warranties issued during the period

 

 

50

 

 

 

51

 

Changes in accrual related to pre-existing warranties

 

 

133

 

 

 

6

 

Balance as of March 31

 

$

1,721

 

 

$

1,435

 

 

 

v3.8.0.1
Net Loss Per Share
3 Months Ended
Mar. 31, 2018
Earnings Per Share [Abstract]  
Net Loss Per Share

8.

Net Loss Per Share

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

 

 

 

Three Months Ended March 31,

 

 

 

 

2018

 

 

2017

 

 

Net loss (in thousands)

 

$

(19,423

)

 

$

(11,422

)

 

Weighted average common shares outstanding, basic

   and diluted

 

 

19,613,417

 

 

 

18,772,965

 

 

Net loss per share attributable to common stockholders

 

$

(0.99

)

 

$

(0.61

)

 

 

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

 

 

 

March 31,

 

 

 

 

2018

 

 

2017

 

 

Stock options to purchase common stock

 

 

1,600,826

 

 

 

1,701,131

 

 

Warrants for the purchase of common stock

 

 

47,710

 

 

 

47,710

 

 

 

 

 

1,648,536

 

 

 

1,748,841

 

 

 

v3.8.0.1
Balance Sheet Components
3 Months Ended
Mar. 31, 2018
Balance Sheet Related Disclosures [Abstract]  
Balance Sheet Components

9.

Balance Sheet Components

 

a.

Allowance for Doubtful Accounts

 

The Company has established an allowance for doubtful accounts of $1.1 million and $0.9 million as of March 31, 2018 and December 31, 2017, respectively, recorded net against accounts receivable in the balance sheet.

 

b.

Inventories

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

 

 

March 31,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Raw materials

 

$

1,727

 

 

$

1,642

 

Work in progress

 

 

2,991

 

 

 

3,956

 

Finished goods

 

 

16,021

 

 

 

15,298

 

Finished goods - right of return

 

 

1,090

 

 

 

 

 

 

$

21,829

 

 

$

20,896

 

 

c.

Property and Equipment

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

 

 

March 31,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Leasehold improvements

 

$

402

 

 

$

402

 

Manufacturing equipment and toolings

 

 

4,587

 

 

 

4,260

 

Computer equipment

 

 

392

 

 

 

387

 

Software

 

 

837

 

 

 

797

 

Office equipment

 

 

231

 

 

 

142

 

Furniture and fixtures

 

 

816

 

 

 

816

 

 

 

 

7,265

 

 

 

6,804

 

Less accumulated depreciation

 

 

(2,331

)

 

 

(2,041

)

 

 

$

4,934

 

 

$

4,763

 

 

Depreciation expense for the three months ended March 31, 2018 and 2017 was $0.3 million and $0.1 million, respectively.

 

d.

Goodwill and Other Intangible Assets, net

Goodwill represents the excess of the purchase price over the fair value of net assets of purchased businesses. Goodwill is not amortized, but instead subject to impairment tests on at least an annual basis and whenever circumstances suggest that goodwill may be impaired.  The Company’s annual test for impairment is performed as of October 1 of each fiscal year. The Company makes a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount. If the Company concludes that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, it is not required to perform the impairment assessment for that reporting unit.

The applicable accounting guidance requires the Company to compare the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered impaired. The impairment loss is measured by the excess of the carrying amount of the reporting unit goodwill over the fair value of that goodwill.

The changes in the carrying amount of goodwill during the three months ended March 31, 2018 were as follows (in thousands):

 

 

 

Breast Products

 

 

miraDry

 

 

Total

 

Balances as of December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

$

19,156

 

 

$

7,629

 

 

$

26,785

 

Accumulated impairment losses

 

 

(14,278

)

 

 

 

 

 

(14,278

)

Goodwill, net

 

$

4,878

 

 

$

7,629

 

 

$

12,507

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances as of March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

$

19,156

 

 

$

7,629

 

 

$

26,785

 

Accumulated impairment losses

 

 

(14,278

)

 

 

 

 

 

(14,278

)

Goodwill, net

 

$

4,878

 

 

$

7,629

 

 

$

12,507

 

 

The components of the Company’s other intangible assets consist of the following (in thousands):

 

 

 

Average

 

 

 

 

 

 

Amortization

 

 

March 31, 2018

 

 

 

Period

 

 

Gross Carrying

 

 

Accumulated

 

 

Intangible

 

 

 

(in years)

 

 

Amount

 

 

Amortization

 

 

Assets, net

 

Intangibles with definite lives

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

 

11

 

 

$

11,240

 

 

$

(2,266

)

 

$

8,974

 

Trade names - finite life

 

 

14

 

 

 

5,800

 

 

 

(297

)

 

 

5,503

 

Developed technology

 

 

15

 

 

 

3,000

 

 

 

(156

)

 

 

2,844

 

Distributor relationships

 

 

9

 

 

 

500

 

 

 

(63

)

 

 

437

 

Non-compete agreement

 

 

2

 

 

 

80

 

 

 

(65

)

 

 

15

 

Regulatory approvals

 

 

1

 

 

 

670

 

 

 

(670

)

 

 

-

 

Acquired FDA non-gel product approval

 

 

11

 

 

 

1,713

 

 

 

(1,713

)

 

 

-

 

Total definite-lived intangible assets

 

 

 

 

 

$

23,003

 

 

$

(5,230

)

 

$

17,773

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Intangibles with indefinite lives

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trade names - indefinite life

 

 

 

 

450

 

 

 

 

 

 

450

 

Total indefinite-lived intangible assets

 

 

 

 

 

$

450

 

 

$

 

 

$

450

 

 

 

 

 

 

 

 

December 31, 2017

 

 

 

Average Amortization

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Period

 

 

Gross Carrying

 

 

Accumulated

 

 

Intangible

 

 

 

(in years)

 

 

Amount

 

 

Amortization

 

 

Assets, net

 

Intangibles with definite lives

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

 

11

 

 

$

11,240

 

 

$

(1,859

)

 

$

9,381

 

Trade names - finite life

 

 

14

 

 

 

5,800

 

 

 

(216

)

 

 

5,584

 

Developed technology

 

 

15

 

 

 

3,000

 

 

 

(95

)

 

 

2,905

 

Distributor relationships

 

 

9

 

 

 

500

 

 

 

(40

)

 

 

460

 

Non-compete agreement

 

 

2

 

 

 

80

 

 

 

(57

)

 

 

23

 

Regulatory approvals

 

 

1

 

 

 

670

 

 

 

(670

)

 

 

 

Acquired FDA non-gel product approval

 

 

11

 

 

 

1,713

 

 

 

(1,713

)

 

 

 

Total definite-lived intangible assets

 

 

 

 

 

$

23,003

 

 

$

(4,650

)

 

$

18,353

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Intangibles with indefinite lives

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trade names - indefinite life

 

 

 

 

450

 

 

 

 

 

 

450

 

Total indefinite-lived intangible assets

 

 

 

 

 

$

450

 

 

$

 

 

$

450

 

 

Amortization expense for the three months ended March 31, 2018 and 2017 was $0.6 million and $0.4 million, respectively. The following table summarizes the estimated amortization expense relating to the Company's definite-lived intangible assets as of March 31, 2018 (in thousands):

 

 

 

Amortization

 

Period

 

Expense

 

Remainder of 2018

 

$

1,728

 

2019

 

 

2,321

 

2020

 

 

2,209

 

2021

 

 

1,996

 

2022

 

 

1,762

 

Thereafter

 

 

7,757

 

 

 

$

17,773

 

 

 

e.

Accrued and Other Current Liabilities

Accrued and other current liabilities consist of the following (in thousands):

 

 

March 31,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Payroll and related expenses

 

$

4,670

 

 

$

3,579

 

Accrued commissions

 

 

2,930

 

 

 

3,297

 

Accrued equipment

 

 

1,508

 

 

 

1,091

 

Deferred and contingent consideration, current portion

 

 

2,857

 

 

 

977

 

Audit, consulting and legal fees

 

 

789

 

 

 

920

 

Accrued sales and marketing expenses

 

 

566

 

 

 

794

 

Other

 

 

3,215

 

 

 

2,816

 

 

 

$

16,535

 

 

$

13,474

 

 

v3.8.0.1
Long-Term Debt and Revolving Loan
3 Months Ended
Mar. 31, 2018
Debt Disclosure [Abstract]  
Long-Term Debt and Revolving Loan

10.

Long-Term Debt and Revolving Loan

 

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

 

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

 

Any indebtedness under the Term Loan Credit Agreement bears interest at a floating per annum rate equal to the LIBOR as reported by MidCap with a floor of 1.00%, which as of March 31, 2018 was 2.31%, plus 7.50%. The Term Loans have a scheduled maturity date of December 1, 2021, or the Maturity Date. The Company must make monthly payments of accrued interest under the Term Loans from the funding date of the Term Loans, until December 31, 2018, followed by monthly installments of principal and interest through the Maturity Date. The Company may prepay all of the Term Loans prior to its maturity date provided the Company pays MidCap a prepayment fee. The Company paid an origination fee of 0.50% of the Term Loans total amount of $40.0 million on the closing date. As of March 31, 2018, there was $25.0 million outstanding related to the Term Loans. As of March 31, 2018, the unamortized debt issuance costs on the Term Loans was approximately $0.1 million current portion and approximately $0.2 million long-term portion and are included as a reduction to debt on the condensed consolidated balance sheet.

 

Any indebtedness under the Revolving Credit Agreement bears interest at a floating per annum rate equal to the LIBOR as reported by MidCap with a floor of 1.00%, plus 4.50%. The Company may make and repay borrowings from time to time under the Revolving Credit Agreement until the maturity of the facility on December 1, 2021. The Company is required to pay an annual collateral management fee of 0.50% on the outstanding balance, and an annual unused line fee of 0.50% of the average unused portion. The Company may prepay all of the outstanding balance prior to the maturity date provided the Company pays MidCap a prepayment fee. The Company paid an origination fee of 0.50% of the Revolving Loan amount of $10.0 million on the closing date. As of March 31, 2018, there was $3.3 million borrowings outstanding related to the Revolving Loan. The Company has classified the amounts borrowed under the Revolving Loan as short term because it is the Company's intention to use the line of credit to borrow and pay back funds over short periods of time. As of March 31, 2018, the unamortized debt issuance costs related to the Revolving Loan was approximately $0.1 million and was included in other long-term assets on the condensed consolidated balance sheet.

 

The amortization of debt issuance costs relating to the Term Loans and Revolving Loan for the three months ended March 31, 2018 was $0.1 million, and was included in interest expense in the condensed consolidated statements of operations.

 

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

 

Future Principal Payments of Debt

 

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

 

Fiscal Year

 

 

 

 

2019

 

$

8,333

 

2020

 

 

8,333

 

2021