SIENTRA, INC., 10-Q filed on 8/7/2018
Quarterly Report
v3.10.0.1
Document and Entity Information - shares
6 Months Ended
Jun. 30, 2018
Aug. 02, 2018
Document And Entity Information [Abstract]    
Entity Registrant Name Sientra, Inc.  
Entity Central Index Key 0001551693  
Document Type 10-Q  
Document Period End Date Jun. 30, 2018  
Amendment Flag false  
Current Fiscal Year End Date --12-31  
Entity Filer Category Accelerated Filer  
Entity Common Stock, Shares Outstanding   28,427,655
Document Fiscal Year Focus 2018  
Document Fiscal Period Focus Q2  
Trading Symbol SIEN  
v3.10.0.1
Condensed Consolidated Balance Sheets - USD ($)
$ in Thousands
Jun. 30, 2018
Dec. 31, 2017
Current assets:    
Cash and cash equivalents $ 112,619 $ 26,588
Accounts receivable, net of allowances of $1,393 and $4,816 at June 30, 2018 and December 31, 2017, respectively 16,330 6,569
Inventories, net 22,487 20,896
Prepaid expenses and other current assets 6,516 1,512
Total current assets 157,952 55,565
Property and equipment, net 2,247 4,763
Goodwill 12,507 12,507
Other intangible assets, net 17,646 18,803
Other assets 708 575
Total assets 191,060 92,213
Current liabilities:    
Current portion of long-term debt 6,663 24,639
Accounts payable 11,637 5,811
Accrued and other current liabilities 22,337 13,474
Legal settlement payable   1,000
Customer deposits 6,025 5,423
Sales return liability 4,882  
Total current liabilities 51,544 50,347
Long-term debt 28,032  
Deferred and contingent consideration 6,070 12,597
Warranty reserve and other long-term liabilities 2,500 1,646
Total liabilities 88,146 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 28,390,271 and 19,474,702 and outstanding 28,317,544 and 19,401,975 shares at June 30, 2018 and December 31, 2017 respectively 284 194
Additional paid-in capital 419,811 307,159
Treasury stock, at cost (72,727 shares at June 30, 2018 and December 31, 2017) (260) (260)
Accumulated deficit (316,921) (279,470)
Total stockholders’ equity 102,914 27,623
Total liabilities and stockholders’ equity $ 191,060 $ 92,213
v3.10.0.1
Condensed Consolidated Balance Sheets (Parenthetical) - USD ($)
$ in Thousands
Jun. 30, 2018
Dec. 31, 2017
Statement Of Financial Position [Abstract]    
Accounts receivable, allowances (in dollars) $ 1,393 $ 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 28,390,271 19,474,702
Common stock, shares outstanding 28,317,544 19,401,975
Treasury stock, shares 72,727 72,727
v3.10.0.1
Condensed Consolidated Statements of Operations - USD ($)
3 Months Ended 6 Months Ended
Jun. 30, 2018
Jun. 30, 2017
Jun. 30, 2018
Jun. 30, 2017
Income Statement [Abstract]        
Net sales $ 17,554,000 $ 8,169,000 $ 32,229,000 $ 15,658,000
Cost of goods sold 6,660,000 2,621,000 12,756,000 4,942,000
Gross profit 10,894,000 5,548,000 19,473,000 10,716,000
Operating expenses:        
Sales and marketing 15,477,000 6,163,000 30,733,000 13,119,000
Research and development 2,301,000 1,573,000 5,052,000 4,766,000
General and administrative 10,014,000 8,022,000 19,514,000 14,458,000
Legal settlement   10,000,000   10,000,000
Total operating expenses 27,792,000 25,758,000 55,299,000 42,343,000
Loss from operations (16,898,000) (20,210,000) (35,826,000) (31,627,000)
Other income (expense), net:        
Interest income 40,000 37,000 80,000 59,000
Interest expense (867,000) (185,000) (1,521,000) (194,000)
Other income (expense), net (303,000) (4,000) (184,000) 4,000
Total other income (expense), net (1,130,000) (152,000) (1,625,000) (131,000)
Loss before income taxes (18,028,000) (20,362,000) (37,451,000) (31,758,000)
Income tax expense 0 29,000 0 54,000
Net loss $ (18,028,000) $ (20,391,000) $ (37,451,000) $ (31,812,000)
Basic and diluted net loss per share attributable to common stockholders $ (0.73) $ (1.07) $ (1.69) $ (1.68)
Weighted average outstanding common shares used for net loss per share attributable to common stockholders:        
Basic and diluted 24,761,117 19,132,052 22,202,565 18,953,500
v3.10.0.1
Condensed Consolidated Statements of Cash Flows - USD ($)
$ in Thousands
6 Months Ended
Jun. 30, 2018
Jun. 30, 2017
Cash flows from operating activities:    
Net loss $ (37,451) $ (31,812)
Adjustments to reconcile net loss to net cash used in operating activities:    
Depreciation and amortization 1,700 1,159
Provision for doubtful accounts 489 27
Provision for warranties 572 119
Provision for inventory 709 (50)
Amortization of acquired inventory step-up 106 417
Change in fair value of warrants 164 83
Change in fair value of deferred consideration 18 (14)
Change in fair value of contingent consideration 1,708 463
Change in deferred revenue (161)  
Amortization of debt discount and issuance costs 85 144
Stock-based compensation expense 5,686 3,182
Loss on disposal of property and equipment   12
Deferred income taxes   54
Changes in assets and liabilities, net of effects from acquisitions:    
Accounts receivable (6,343) 47
Inventories (2,405) 1,716
Prepaid expenses, other current assets and other assets (2,518) (2,395)
Insurance recovery receivable 33 9,277
Accounts payable 4,230 (1,264)
Accrued and other liabilities 1,643 4,648
Legal settlement payable (1,000) (900)
Customer deposits 602 (697)
Sales return liability 976  
Net cash used in operating activities (31,157) (15,784)
Cash flows from investing activities:    
Purchase of property and equipment (160) (1,580)
Net cash used in investing activities (160) (1,580)
Cash flows from financing activities:    
Proceeds from exercise of stock options 410 1,096
Proceeds from issuance of common stock under ESPP 391 324
Tax payments related to shares withheld for vested restricted stock units (RSUs) (1,297) (569)
Net proceeds from issuance of common stock 107,850  
Gross borrowings under the Term Loan 10,000  
Gross borrowings under the Revolving Loan 12,109 5,000
Repayment of the Revolving Loan (12,109)  
Deferred financing costs (6) (204)
Net cash provided by financing activities 117,348 5,647
Net increase (decrease) in cash and cash equivalents 86,031 (11,717)
Cash and cash equivalents at:    
Beginning of period 26,588 67,212
End of period 112,619 55,495
Supplemental disclosure of cash flow information:    
Interest paid 1,347 50
Supplemental disclosure of non-cash investing and financing activities:    
Property and equipment in accounts payable and accrued liabilities 1,741 $ 461
Deferred follow-on offering costs in accounts payable and accrued liabilities $ 299  
v3.10.0.1
Formation and Business of the Company
6 Months Ended
Jun. 30, 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 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.

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 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 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 submissions.  In addition to approving the manufacturing site-change supplement, the FDA has approved our three (3) process enhancement submissions on January 10, 2018, January 19, 2018 and April 17, 2018.

 

d.

Follow-On Offering

 

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.

 

v3.10.0.1
Summary of Significant Accounting Policies
6 Months Ended
Jun. 30, 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 and six months ended June 30, 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 the Company anticipates 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 June 30, 2018, the Company had cash and cash equivalents of $112.6 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. As of June 30, 2018, we have not sold any common stock pursuant to the sales agreement. Further, on May 7, 2018, the Company completed a public offering of its common stock, raising approximately $107.6 million in net proceeds after deducting underwriting discounts and commissions and other offering expenses.  

 

The Company believes that its cash and cash equivalents 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 and six months ended June 30, 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.

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

 

 

 

As Reported

 

 

Total

 

 

Adjusted

 

 

 

December 31, 2017

 

 

Adjustment

 

 

January 1, 2018

 

Balance Sheet

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable, net of allowances

 

$

6,569

 

 

 

3,906

 

 

 

10,475

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Sales return liability

 

$

 

 

 

3,906

 

 

 

3,906

 

 

 

 

As Reported

 

 

Total

 

 

Amounts Under

 

 

 

June 30, 2018

 

 

Adjustment

 

 

Previous Standards

 

Balance Sheet

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable, net of allowances

 

$

16,330

 

 

 

(4,882

)

 

 

11,448

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Sales return liability

 

$

4,882

 

 

 

(4,882

)

 

 

 

 

Additionally, in accordance with Topic 606, the balance of breast product inventory estimated to be returned as of June 30, 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 statement of operations.

 

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.

 

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 2018-02, 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 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.

In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation (Topic 718), to simplify the accounting for non-employee share-based payment transactions by expanding the scope of ASC Topic 718 to include share-based payment transactions for acquiring goods and services from non-employees. Under the new standard, most of the guidance on stock compensation payments to non-employees would be aligned with the requirements for share-based payments granted to employees. The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those years, with early adoption permitted. The Company is currently evaluating the impact that adoption of the standard will have on the financial statements and related disclosures.

 

f.Reclassifications

 

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

v3.10.0.1
Revenue
6 Months Ended
Jun. 30, 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 $4.9 million and $3.9 million as of June 30, 2018 and December 31, 2017, respectively, recorded as “sales return liability” on the condensed consolidated balance sheet under Topic 606 as of June 30, 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 $0.6 million and $0.5 million for the six months ended June 30, 2018 and 2017. The associated costs were $0.3 million and $0.2 million for the three months ended June 30, 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. 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 condensed consolidated statement of operations. The associated costs were $0.1 million and $0.2 million for the three and six months ended June 30, 2018, respectively.

v3.10.0.1
Acquisitions
6 Months Ended
Jun. 30, 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 and six months ended June 30, 2018. The Company recorded $0.4 million in professional fees related to the acquisition for the three and six months ended June 30, 2017. The aggregate acquisition date fair value of the consideration transferred was 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 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 methods 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):

 

 

Three Months Ended

 

 

Six Months Ended

 

 

June 30,

 

 

June 30,

 

 

2017

 

 

2017

 

 

Pro Forma

 

 

Pro Forma

 

Net sales

$

13,709

 

 

$

25,012

 

Net loss

 

(23,935

)

 

 

(44,566

)

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

$

(1.25

)

 

$

(2.35

)

 

v3.10.0.1
Fair Value of Financial Instruments
6 Months Ended
Jun. 30, 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 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 and contingent consideration are discussed in Note 6. 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 June 30, 2018, the carrying value of the long-term debt was not materially different from the fair value.

v3.10.0.1
Fair Value Measurements
6 Months Ended
Jun. 30, 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 contingent consideration is classified as Level 3.

The following tables present information about the Company’s liabilities that are measured at fair value on a recurring basis as of June 30, 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

 

 

 

June 30, 2018 Using:

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liability for common stock warrants

 

$

 

 

 

 

 

 

358

 

 

 

358

 

Liability for contingent consideration

 

 

 

 

 

 

 

 

14,027

 

 

 

14,027

 

 

 

$

 

 

 

 

 

 

14,385

 

 

 

14,385

 

 

 

 

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

 

 

164

 

Balance, June 30, 2018

 

$

358

 

Contingent Consideration Liability

 

 

 

 

Balance, December 31, 2017

 

$

12,319

 

Change in fair value of contingent consideration

 

 

1,708

 

Balance, June 30, 2018

 

$

14,027

 

 

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.

v3.10.0.1
Product Warranties
6 Months Ended
Jun. 30, 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):

 

 

 

Six Months Ended June 30,

 

 

 

2018

 

 

2017

 

Beginning balance as of January 1

 

$

1,642

 

 

$

1,378

 

Warranty costs incurred during the period

 

 

(231

)

 

 

 

Changes in accrual related to warranties issued during the period

 

 

568

 

 

 

110

 

Changes in accrual related to pre-existing warranties

 

 

4

 

 

 

9

 

Balance as of June 30

 

$

1,983

 

 

$

1,497

 

 

 

v3.10.0.1
Net Loss Per Share
6 Months Ended
Jun. 30, 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 June 30,

 

 

Six Months Ended June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net loss (in thousands)

 

$

 

(18,028

)

 

$

 

(20,391

)

 

$

(37,451

)

 

$

(31,812

)

Weighted average common shares outstanding, basic

   and diluted

 

 

 

24,761,117

 

 

 

 

19,132,052

 

 

 

22,202,565

 

 

 

18,953,500

 

Net loss per share attributable to common stockholders

 

$

 

(0.73

)

 

$

 

(1.07

)

 

$

(1.69

)

 

$

(1.68

)

 

The Company excluded the following potentially dilutive securities, outstanding as of June 30, 2018 and 2017, from the computation of diluted net loss per share attributable to common stockholders for the three and six months ended June 30, 2018 and 2017 because they had an anti-dilutive impact due to the net loss attributable to common stockholders incurred for the periods.

 

 

 

June 30,

 

 

 

2018

 

 

2017

 

Stock options to purchase common stock

 

 

2,011,503

 

 

 

1,663,890

 

Warrants for the purchase of common stock

 

 

47,710

 

 

 

47,710

 

 

 

 

2,059,213

 

 

 

1,711,600

 

 

v3.10.0.1
Balance Sheet Components
6 Months Ended
Jun. 30, 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 $1.4 million and $0.9 million as of June 30, 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):

 

 

 

June 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Raw materials

 

$

1,807

 

 

$

1,642

 

Work in progress

 

 

2,015

 

 

 

3,956

 

Finished goods

 

 

17,456

 

 

 

15,298

 

Finished goods - right of return

 

 

1,209

 

 

 

 

 

 

$

22,487

 

 

$

20,896

 

 

 

c.

Prepaid Expenses and Other Current Assets

 

Prepaid expenses and other current assets consist of the following (in thousands):

 

 

 

June 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Prepaid expenses

 

$

2,245

 

 

$

1,040

 

Assets held for sale

 

 

2,674

 

 

 

 

Other current assets

 

 

1,597

 

 

 

472

 

Total

 

$

6,516

 

 

$

1,512

 

 

Under the terms of the manufacturing agreement with Vesta, upon the commencement of Contract Year One (as defined in the agreement) which occurred following FDA-approval of all submissions related to the site-change PMA supplement for the Vesta manufacturing facility Vesta is obligated to purchase the manufacturing equipment and tooling that Sientra had originally purchased for the manufacture of Sientra’s breast implant inventory at Vesta’s manufacturing facility. The Company expects Vesta to purchase the equipment in the third quarter of 2018. The net book value of $2.7 million is in “assets held for sale” in “prepaid expenses and other current assets” at June 30, 2018 and “property and equipment, net” at December 31, 2017 for the Breast Products segment.

 

 

d.

Property and Equipment

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

 

 

 

June 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Leasehold improvements

 

$

402

 

 

$

402

 

Manufacturing equipment and toolings

 

 

1,586

 

 

 

4,260

 

Computer equipment

 

 

411

 

 

 

387

 

Software

 

 

901

 

 

 

797

 

Office equipment

 

 

156

 

 

 

142

 

Furniture and fixtures

 

 

816

 

 

 

816

 

 

 

 

4,272

 

 

 

6,804

 

Less accumulated depreciation

 

 

(2,025

)

 

 

(2,041

)

 

 

$

2,247

 

 

$

4,763

 

 

Depreciation expense for the three months ended June 30, 2018 and 2017 was $0.3 million and $0.2 million, respectively. Depreciation expense for the six months ended June 30, 2018 and 2017 was $0.6 million and $0.3 million, respectively.

 

e.

Goodwill and Other Intangible Assets, net

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

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

The changes in the carrying amount of goodwill during the six months ended June 30, 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 June 30, 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

 

 

June 30, 2018

 

 

 

Period

 

 

Gross Carrying

 

 

Accumulated

 

 

Intangible

 

 

 

(in years)

 

 

Amount

 

 

Amortization

 

 

Assets, net

 

Intangibles with definite lives

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

 

11

 

 

$

11,240

 

 

$

(2,672

)

 

$

8,568

 

Trade names - finite life

 

 

14

 

 

 

5,800

 

 

 

(378

)

 

 

5,422

 

Developed technology

 

 

15

 

 

 

3,000

 

 

 

(217

)

 

 

2,783

 

Distributor relationships

 

 

9

 

 

 

500

 

 

 

(85

)

 

 

415

 

Non-compete agreement

 

 

2

 

 

 

80

 

 

 

(72

)

 

 

8

 

Regulatory approvals

 

 

1

 

 

 

670

 

 

 

(670

)

 

 

 

Acquired FDA non-gel product approval

 

 

11

 

 

 

1,713

 

 

 

(1,713

)

 

 

 

Total definite-lived intangible assets

 

 

 

 

 

$

23,003

 

 

$

(5,807

)

 

$

17,196

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Intangibles with indefinite lives

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trade names - indefinite life

 

 

 

 

450

 

 

 

 

 

 

450

 

Total indefinite-lived intangible assets

 

 

 

 

 

$

450

 

 

$

 

 

$

450

 

 

 

 

Average

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization

 

 

December 31, 2017

 

 

 

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