SIENTRA, INC., 10-K filed on 3/11/2021
Annual Report
v3.20.4
Document and Entity Information - USD ($)
$ in Thousands
12 Months Ended
Dec. 31, 2020
Mar. 05, 2021
Jun. 30, 2020
Cover [Abstract]      
Entity Registrant Name SIENTRA, INC.    
Entity Central Index Key 0001551693    
Document Type 10-K    
Document Period End Date Dec. 31, 2020    
Amendment Flag false    
Current Fiscal Year End Date --12-31    
Entity Well-known Seasoned Issuer No    
Entity Voluntary Filers No    
Entity Current Reporting Status Yes    
Entity Interactive Data Current Yes    
Entity Filer Category Non-accelerated Filer    
Entity Shell Company false    
ICFR Auditor Attestation Flag false    
Entity Small Business true    
Entity Emerging Growth Company false    
Entity Public Float     $ 188,807,000
Entity Common Stock, Shares Outstanding   57,273,356  
Document Fiscal Year Focus 2020    
Document Fiscal Period Focus FY    
Trading Symbol SIEN    
Title of 12(b) Security Common Stock, par value $0.01 per share    
Security Exchange Name NASDAQ    
Entity File Number 001-36709    
Entity Incorporation, State or Country Code DE    
Entity Tax Identification Number 20-5551000    
Entity Address, Address Line One 420 South Fairview Avenue    
Entity Address, Address Line Two Suite 200    
Entity Address, City or Town Santa Barbara    
Entity Address, State or Province CA    
Entity Address, Postal Zip Code 93117    
City Area Code 805    
Local Phone Number 562-3500    
Document Annual Report true    
Document Transition Report false    
Documents Incorporated by Reference

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

   
v3.20.4
Consolidated Balance Sheets - USD ($)
$ in Thousands
Dec. 31, 2020
Dec. 31, 2019
Current assets:    
Cash and cash equivalents $ 54,967 $ 87,608
Accounts receivable, net of allowances of $4,464 and $3,835 at December 31, 2020 and December 31, 2019, respectively 23,503 27,548
Inventories, net 48,648 39,612
Prepaid expenses and other current assets 2,154 2,489
Total current assets 129,272 157,257
Property and equipment, net 13,106 12,314
Goodwill 9,202 9,202
Other intangible assets, net 9,387 17,390
Other assets 8,011 8,241
Total assets 168,978 204,404
Current liabilities:    
Current portion of long-term debt 4,670 6,508
Accounts payable 6,504 9,352
Accrued and other current liabilities 32,389 32,551
Customer deposits 17,905 13,943
Sales return liability 9,192 8,116
Total current liabilities 70,660 70,470
Long-term debt 60,500 38,248
Derivative liability 26,570  
Deferred and contingent consideration 2,350 5,177
Warranty reserve and other long-term liabilities 9,455 8,627
Total liabilities 169,535 122,522
Commitments and contingencies (Note 12)
Stockholders’ equity (deficit):    
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 50,712,151 and 49,612,907 and outstanding 50,639,424 and 49,540,180 shares at December 31, 2020 and December 31, 2019, respectively 506 495
Additional paid-in capital 558,059 550,562
Treasury stock, at cost (72,727 shares at December 31, 2020 and December 31, 2019) (260) (260)
Accumulated deficit (558,862) (468,915)
Total stockholders’ equity (deficit) (557) 81,882
Total liabilities and stockholders’ equity (deficit) $ 168,978 $ 204,404
v3.20.4
Consolidated Balance Sheets (Parenthetical) - USD ($)
$ in Thousands
Dec. 31, 2020
Dec. 31, 2019
Statement Of Financial Position [Abstract]    
Accounts receivable, allowances (in dollars) $ 4,464 $ 3,835
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 50,712,151 49,612,907
Common stock, shares outstanding 50,639,424 49,540,180
Treasury stock, shares 72,727 72,727
v3.20.4
Consolidated Statements of Operations - USD ($)
$ in Thousands
12 Months Ended
Dec. 31, 2020
Dec. 31, 2019
Dec. 31, 2018
Income Statement [Abstract]      
Net sales $ 71,241 $ 83,699 $ 68,126
Cost of goods sold 32,302 33,012 26,822
Gross profit 38,939 50,687 41,304
Operating expenses:      
Sales and marketing 52,553 80,189 67,715
Research and development 10,311 13,537 10,945
General and administrative 38,191 46,771 42,418
Restructuring 1,762 1,083  
Impairment 6,432 12,674  
Total operating expenses 109,249 154,254 121,078
Loss from operations (70,310) (103,567) (79,774)
Other income (expense), net:      
Interest income 206 1,406 532
Interest expense (9,451) (4,568) (3,428)
Change in fair value of derivative liability (10,470)    
Other income (expense), net 111 (55) 39
Total other income (expense), net (19,604) (3,217) (2,857)
Loss before income taxes (89,914) (106,784) (82,631)
Income tax 33 34 (4)
Net loss $ (89,947) $ (106,818) $ (82,627)
Basic and diluted net loss per share attributable to common stockholders $ (1.79) $ (2.63) $ (3.25)
Weighted average outstanding common shares used for net loss per share attributable to common stockholders:      
Basic and diluted 50,233,175 40,654,272 25,402,241
v3.20.4
Consolidated Statements of Stockholders' Equity (Deficit) - USD ($)
$ in Thousands
Total
Common stock
Treasury stock
Additional paid-in capital
Accumulated deficit
Balance, beginning of year at Dec. 31, 2017 $ 27,623 $ 194 $ (260) $ 307,159 $ (279,470)
Balance, beginning of year (in shares) at Dec. 31, 2017   19,474,702 72,727    
Proceeds from follow-on offering, net of costs 107,551 $ 85   107,466  
Proceeds from follow-on offering, net of costs (in shares)   8,518,519      
Employee stock-based compensation expense 13,824     13,824  
Stock option exercises 1,149 $ 1   1,148  
Stock option exercises (in shares)   147,463      
Employee stock purchase program (ESPP) 993 $ 2   991  
Employee stock purchase program (ESPP) (in shares)   145,616      
Vested restricted stock   $ 5   (5)  
Vested restricted stock (in shares)   523,257      
Shares withheld for tax obligations on vested RSUs (1,635) $ (1)   (1,634)  
Shares withheld for tax obligations on vested RSUs, shares   (108,063)      
Net loss (82,627)       (82,627)
Balance, end of year at Dec. 31, 2018 66,878 $ 286 $ (260) 428,949 (362,097)
Balance, end of year (in shares) at Dec. 31, 2018   28,701,494 72,727    
Proceeds from follow-on offering, net of costs 107,734 $ 200   107,534  
Proceeds from follow-on offering, net of costs (in shares)   20,000,000      
Employee stock-based compensation expense 12,655     12,655  
Stock option exercises 125     125  
Stock option exercises (in shares)   51,451      
Employee stock purchase program (ESPP) 1,216 $ 1   1,215  
Employee stock purchase program (ESPP) (in shares)   175,624      
Vested restricted stock   $ 10   (10)  
Vested restricted stock (in shares)   944,467      
Shares withheld for tax obligations on vested RSUs (3,064) $ (2)   (3,062)  
Shares withheld for tax obligations on vested RSUs, shares   (260,129)      
Equity contingent consideration 3,156     3,156  
Net loss (106,818)       (106,818)
Balance, end of year at Dec. 31, 2019 81,882 $ 495 $ (260) 550,562 (468,915)
Balance, end of year (in shares) at Dec. 31, 2019   49,612,907 72,727    
Proceeds from follow-on offering, net of costs 263     263  
Proceeds from follow-on offering, net of costs (in shares)   37,000      
Employee stock-based compensation expense 8,171     8,171  
Stock option exercises 29     29  
Stock option exercises (in shares)   9,817      
Employee stock purchase program (ESPP) 836 $ 2   834  
Employee stock purchase program (ESPP) (in shares)   203,728      
Vested restricted stock   $ 12   (12)  
Vested restricted stock (in shares)   1,150,707      
Shares withheld for tax obligations on vested RSUs (1,791) $ (3)   (1,788)  
Shares withheld for tax obligations on vested RSUs, shares   (302,008)      
Net loss (89,947)       (89,947)
Balance, end of year at Dec. 31, 2020 $ (557) $ 506 $ (260) $ 558,059 $ (558,862)
Balance, end of year (in shares) at Dec. 31, 2020   50,712,151 72,727    
v3.20.4
Consolidated Statements of Cash Flows - USD ($)
$ in Thousands
12 Months Ended
Dec. 31, 2020
Dec. 31, 2019
Dec. 31, 2018
Cash flows from operating activities:      
Net loss $ (89,947) $ (106,818) $ (82,627)
Adjustments to reconcile net loss to net cash used in operating activities      
Impairment 6,432 12,674  
Depreciation and amortization 4,094 3,524 3,321
Provision for doubtful accounts 4,423 2,298 2,043
Provision for warranties 1,271 929 325
Provision for inventory 3,601 2,626 955
Fair value adjustments to derivative liability 10,470    
Fair value adjustments of other liabilities held at fair value 96 969 2,447
Amortization of debt discount and issuance costs 4,347 359 174
Stock-based compensation expense 8,344 12,478 13,824
Payments of contingent consideration liability in excess of acquisition-date fair value   (1,968) (320)
Other non-cash adjustments 375 290 90
Changes in operating assets and liabilities:      
Accounts receivable (378) (7,320) (14,094)
Inventories (12,808) (10,921) (4,144)
Prepaid expenses, other current assets and other assets 935 (8,513) (1,263)
Accounts payable, accrueds, and other liabilities (6,420) 6,694 17,014
Customer deposits 3,961 4,008 4,513
Sales return liability 1,077 2,068 2,142
Legal settlement payable   (410) (590)
Net cash used in operating activities (60,127) (87,033) (56,190)
Cash flows from investing activities:      
Purchase of property and equipment (4,037) (4,071) (855)
Business acquisitions, net of cash and restricted cash acquired   (17,943)  
Net cash used in investing activities (4,037) (22,014) (855)
Cash flows from financing activities:      
Proceeds from option exercises and employee stock purchase plan 865 1,341 2,142
Net proceeds from issuance of common stock 263 107,734 107,551
Payments related to tax witholding on vested restricted stock units (RSUs) (1,791) (3,064) (1,635)
Gross borrowings under the Term Loan   5,000 10,000
Repayments under the Term Loan (25,000)    
Repayment of the Revolving Loan (6,508) (15,788) (12,109)
Net proceeds from issuance of the Convertible Note 60,000    
Payments of contingent consideration up to acquisition-date fair value   (5,766) (680)
Deferred financing costs (2,958) (1,997) (22)
Net cash provided by financing activities 31,523 109,756 117,356
Net increase (decrease) in cash, cash equivalents and restricted cash (32,641) 709 60,311
Cash, cash equivalents and restricted cash at:      
Beginning of period 87,951 87,242 26,931
End of period 55,310 87,951 87,242
Reconciliation of cash, cash equivalents, and restricted cash to the consolidated balance sheets      
Cash and cash equivalents 54,967 87,608 86,899
Restricted cash included in other assets 343 $ 343 $ 343
Restricted Cash Noncurrent Asset Statement Of Financial Position Extensible List   us-gaap:OtherNoncurrentAssetsMember us-gaap:OtherNoncurrentAssetsMember
End of period 55,310 $ 87,951 $ 87,242
Supplemental disclosure of cash flow information:      
Interest paid 4,198 4,089 3,120
Supplemental disclosure of non-cash investing and financing activities:      
Property and equipment in accounts payable and accrued liabilities 413 745 679
Acquisition of business, deferred and contingent consideration obligations at fair value   9,063  
Non-cash deferred consideration settlement     1,000
Non-cash settlement of assets held for sale in accounts payable     2,674
Revolving Loan      
Cash flows from financing activities:      
Gross borrowings   $ 22,296 $ 12,109
Paycheck Protection Program      
Cash flows from financing activities:      
Gross borrowings $ 6,652    
v3.20.4
Summary of Significant Accounting Policies
12 Months Ended
Dec. 31, 2020
Accounting Policies [Abstract]  
Summary of Significant Accounting Policies

(1) Summary of Significant Accounting Policies

(a)

Basis of Presentation and Use of Estimates

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

(b)

Liquidity

Since the Company’s inception, it has incurred significant net operating losses and the Company anticipates that losses will continue in the near term. The Company expects its operating expenses will continue to decrease with the change in the miraDry business strategy, but 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 and the convertible note, sales of products since 2012, and the proceeds from the sale of common stock in public offerings. 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.

Debt financing

On July 25, 2017, the Company entered into the Existing Credit Agreements with Midcap. On July 1, 2019, the Company entered into certain credit agreements with Midcap Financial Trust pursuant to which the Company repaid their existing indebtedness under the Existing Credit Agreements and the outstanding commitment fee was cancelled. Further, on May 11, 2020 and February 5, 2021, the Company amended certain credit agreements with Midcap Financial Trust.

 

On March 11, 2020, the Company entered into a facility agreement with Deerfield Partners, L.P., issuing $60.0 million in principal amount of 4.0% unsecured and subordinated convertible notes upon the terms and conditions set forth in the facility agreement.

 

In April 2020, the Company was granted a loan of $6.7 million under the Paycheck Protection Program of the CARES Act, or the PPP Loan, all or a portion of which may be forgiven dependent on the use of proceeds. The PPP Loan matures on April 20, 2022 and bears interest at a rate of 1.0% per annum. All or a portion of the PPP Loan may be forgiven upon submission of documentation of expenditures in accordance with certain specified requirements. The Company sought and obtained the PPP Loan due to the immediate and continued impact of the COVID-19 pandemic on revenues and prospects. The PPP Loan has allowed the Company to satisfy payroll obligations without a material reduction in pay for employees or a material headcount reduction, other than the reductions in the previously announced organizational efficiency initiative.

See Note 7 to the consolidated financial statements for a full description of our long-term debt, revolving line of credit, convertible note, and PPP loan.

Equity financing

In February 2018, the Company entered into an At-The-Market Equity Offering Sales Agreement with Stifel, Nicolaus & Company, Incorporated, or Stifel, as sales agent pursuant to which the Company may sell, from time to time, through Stifel, shares of its common stock having an aggregate gross offering price of up to $50.0 million. As of December 31, 2020, the Company has sold 37,000 shares of its common stock pursuant to the sales agreement.

 

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

 

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

 

At December 31, 2020, the Company had cash and cash equivalents of $55.0 million. The accompanying consolidated financial statements have been prepared on a going concern basis, which implies the Company will continue to realize its assets and discharge its liabilities in the normal course of business. The Company believes that its cash and cash equivalents will be sufficient to fund its operations for at least the next 12 months.

(c)

Cash and Cash Equivalents

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

(d)

Concentration of Credit and Supplier Risks

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

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

(e)

Fair Value of Financial Instruments

The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, customer deposits and sales return liability are reasonable estimates of their fair value because of the short maturity of these items. The fair value of the common stock warrant liability, contingent consideration, and the convertible feature related to the convertible note are discussed in Note 1(f) below. The fair value of the debt is based on the amount of future cash flows associated with the instrument discounted using the Company’s market rate. As of December 31, 2020, the carrying value of the long-term debt was not materially different from the fair value. As of December 31, 2020, the carrying value and fair value of the convertible note were as follows (in thousands):

 

 

 

December 31, 2020

 

 

 

Carrying Value

 

 

Fair Value

 

Convertible note

 

$

44,436

 

 

$

37,580

 

The convertible note is carried on the consolidated balance sheets at amortized cost. The fair value is estimated using a discounted cash flow analysis with a yield derived from a calibrated binomial lattice model as of the convertible note issuance date and adjusted for market movements thereafter. The market for trading of the convertible note is not considered to be an active market and therefore the estimate of fair value is based on Level 2 inputs.

(f)

Fair Value Measurements

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

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

 

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

 

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

 

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

(g)

Property and Equipment

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

(h)    Leases

 

The Company leases certain office space, warehouses, distribution facilities, manufacturing facilities and office equipment. The Company also has embedded leases of manufacturing facilities and equipment associated with the

Company’s manufacturing contracts. The Company determines if an arrangement contains a lease at inception by evaluating whether the arrangement conveys the right to use an identified asset and whether the Company obtains substantially all of the economic benefits from and has the ability to direct the use of the asset.

 

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

 

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

 

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

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

(i)

Goodwill and Other Intangible Assets

Goodwill

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

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

In the second quarter of 2019, the Company recorded a full impairment of goodwill in the miraDry reporting unit after performing a quantitative analysis. Refer to Note 5(a) for further details.  

Indefinite-lived intangible assets

The Company tests indefinite-lived intangible assets for impairment on at least an annual basis and whenever circumstances suggest the assets may be impaired. The Company’s annual test for impairment is performed as of October 1 of each fiscal year. If indicators of impairment are present, the Company evaluates the carrying value of the intangible assets in relation to estimates of future undiscounted cash flows. If the carrying value of the intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to the difference. The Company also evaluates the remaining useful life of an indefinite-lived intangible asset to determine whether events and circumstances continue to support an indefinite useful life. For the years ended December 31, 2020, 2019, and 2018, the Company did not record any indefinite-lived intangible assets impairment charges.

Finite-lived intangible assets

The intangible assets are amortized to the consolidated statement of operations based on estimated cash flows generated from the intangible asset over its estimated life. Each fiscal year the Company evaluates the estimated remaining useful lives of purchased intangible assets and whether events or changes in circumstance warrant a revision to the remaining periods of amortization. Judgments about the recoverability of purchased finite‑lived intangible assets are made whenever events or changes in circumstance indicate that impairment may exist. Recoverability of finite‑lived intangible assets is measured by comparison of the carrying amount of the asset group to the future undiscounted cash flows the asset group is expected to generate. If the sum of the future undiscounted cash flows is less than the carrying value, the Company will evaluate whether the fair value of each asset in the asset group exceeds its respective carrying value. If the fair value of any asset in the asset group is determined to be less than its carrying value, then the Company will recognize an impairment loss based on the excess of the carrying amount over the asset’s respective fair value.

The Company’s fair value analysis of intangible assets utilizes methods under various income approaches. The Company values its customer relationships using an excess earnings method, which assumes the value of the asset is the discounted future cash flows derived from existing customers and requires the use of customer attrition rates and discount rates to determine the estimated fair value. The future revenues and free cash flow from existing customers are determined based upon actual results giving effect to management’s expected changes in operating results in future years. The attrition rate is based on average historical levels of customer attrition and the discount rate is based upon market participant assumptions using a defined peer group. Tradenames and developed technology are valued using a relief from royalty method, which assumes the value of the asset is the discounted cash flows of the amount that would be paid by a hypothetical market participant had they not owned the asset and instead licensed the asset from another company. This method requires the use of royalty rates which are determined based on comparable third-party license agreements involving similar assets and discount rates similar to the above to determine the estimated fair value.

In the second quarter of 2019, the Company recorded a partial impairment of intangible assets in the miraDry reporting unit after performing a quantitative analysis and subsequently recorded a full impairment in the first quarter of 2020. Refer to Note 5(b) for further details.  

(j)

Impairment of Tangible Long‑Lived Assets

The Company’s management routinely considers whether indicators of impairment of long‑lived assets are present. If such indicators are present, management determines whether the sum of the estimated undiscounted cash flows attributable to the asset group in question is less than their carrying value. If less, the Company will recognize an impairment loss based on the excess of the carrying amount of the assets over their respective fair values. Fair value is determined by discounted future cash flows, appraisals or other methods. If the assets determined to be impaired are to be held and used, the Company will recognize an impairment charge to the extent the present value of anticipated net cash flows attributable to the asset are less than the asset’s carrying value. The fair value of the asset will then become the asset’s new carrying value.

(k)

Business Combinations

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

(l)

Segment Reporting

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

(m)

Revenue Recognition

The Company generates revenue primarily through the sale and delivery of promised goods or services to customers. Sales prices are documented in the executed sales contract, purchase order or order acknowledgement prior to the transfer of control to the customer. Typical payment terms are 30 days for Breast Products and direct sales of consumable miraDry products and tend to be longer for capital sales of miraDry Systems and sales to miraDry distributors, but do not extend beyond one year.

Revenue contracts may include multiple products or services, each of which is considered a separate performance obligation. Performance obligations typically include the delivery of promised products, such as breast implants, tissue expanders, BIOCORNEUM, miraDry Systems and bioTips, along with service-type warranties. Other deliverables are sometimes promised but are ancillary and insignificant in the context of the contract as a whole. Revenue is allocated to each performance obligation based on its relative standalone selling price. The Company determines standalone selling prices based on observable prices for all performance obligations with the exception of the service-type warranty under the Platinum20 Limited Warranty Program, or Platinum20.

The Company introduced Platinum20 in May 2018 on all OPUS breast implants implanted in the United States or Puerto Rico on or after May 1, 2018. Platinum20 provides for financial assistance for revision surgeries and no-charge contralateral replacement implants upon the occurrence of certain qualifying events. The Company considers Platinum20 to have an assurance warranty component and a service warranty component. The assurance component is recorded as a warranty liability at the time of sale (as discussed in Note 1(t)). The Company considers the service warranty component as an additional performance obligation and defers revenue at the time of sale using the expected cost plus margin approach for the performance obligation. Inputs into the expected cost plus margin approach include historical incidence rates, estimated replacement costs, estimated financial assistance payouts and an estimated margin.

The liability for unsatisfied performance obligations under the service warranty as of December 31, 2020 were as follows (in thousands):

 

 

Year Ended December 31,

 

 

 

2020

 

Balance as of December 31, 2019

 

$

1,596

 

Additions and adjustments

 

 

2,137

 

Revenue recognized

 

 

(1,115

)

Balance as of December 31, 2020

 

$

2,618

 

Revenue for service warranties are recognized ratably over the term of the agreements. Specifically for Platinum20, the performance obligation is satisfied at the time that the benefits are provided and are expected to be satisfied over the following 3 to 24 month period for financial assistance and 20 years for product replacement.

 

For delivery of promised products, control transfers and revenue is recognized upon shipment, unless the contractual arrangement requires transfer of control when products reach their destination, for which revenue is recognized once the product arrives at its destination. For Breast Products, a portion of the Company’s revenue is generated from the sale of consigned inventory of breast implants maintained at doctor, hospital, and clinic locations. For these products, revenue is recognized at the time the Company is notified by the customer that the product has been implanted, not when the consigned products are delivered to the customer’s location.

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

Sales Return Liability

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. A sales return liability is established based on estimated returns using relevant historical experience taking into consideration recent gross sales and notifications of pending returns, as adjusted for changes in recent industry events and trends. The estimated sales returns are recorded as a reduction of revenue and as a sales return liability in the same period revenue is recognized. Actual sales returns in any future period are inherently uncertain and thus may differ from the estimates. If actual sales returns differ significantly from the estimates, an adjustment to revenue in the current or subsequent period would be recorded. The following table provides a rollforward of the sales return liability (in thousands):

 

 

 

Year Ended December 31,

 

 

 

2020

 

 

2019

 

Beginning balance

 

$

8,116

 

 

$

6,048

 

Addition to reserve for sales activity

 

 

118,508

 

 

 

105,496

 

Actual returns

 

 

(117,407

)

 

 

(104,148

)

Change in estimate of sales returns

 

 

(25

)

 

 

720

 

Ending balance

 

$

9,192

 

 

$

8,116

 

Practical Expedients and Policy Election

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

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

The Company has elected to account for shipping and handling activities performed after a customer obtains control of the products as activities to fulfill the promise to transfer the products to the customer. For the Breast Products

segment, shipping and handling activities are largely provided to customers free of charge. The associated costs were $2.9 million, $1.9 million and $1.3 million for the years ended December 31, 2020, 2019, and 2018, respectively. These costs are viewed as part of the Company’s marketing programs and are recorded as a component of sales and marketing expense in the consolidated statement of operations as an accounting policy election. For the miraDry segment, shipping and handling charges are typically billed to customers and recorded as revenue. The shipping and handling costs incurred are recorded as a component of cost of goods sold in the consolidated statement of operations. The associated costs were $0.3 million, $0.7 million, and $0.4 million for the years ended December 31, 2020, 2019, and 2018, respectively.

(n)

Accounts Receivable and Allowance for Doubtful Accounts

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

(o)

Inventories and Cost of Goods Sold

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

(p)

Income Taxes

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

The Company operates in several tax jurisdictions and is subject to taxes in each jurisdiction in which it conducts business. To date, the Company has incurred cumulative net losses and maintains a full valuation allowance on its net deferred tax assets due to the uncertainty surrounding realization of such assets. However, the Company has deferred tax liabilities that cannot be considered sources of income to support the realization of the deferred tax assets, and has provided for tax expense (or benefit) and a corresponding deferred tax liability.

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

(q)

Research and Development Expenditures

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

(r)

Advertising

Expenses related to advertising are charged to sales and marketing expense as incurred. Advertising costs were $3.6 million, $6.1 million and $1.3 million for the years ended December 31, 2020, 2019 and 2018, respectively.

(s)

Stock‑Based Compensation

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

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

 

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

 

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

 

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

 

Expected term—The expected term represents the period that our stock‑based awards are expected to be outstanding. The Company utilizes the simplified method to estimate the expected term.

 

(t)

Product Warranties

The Company offers a product replacement and limited warranty program for the Company’s silicone gel breast implants, and a product warranty for the Company’s miraDry Systems and consumable bioTips. For silicone gel breast implant surgeries occurring prior to May 1, 2018, the Company provides lifetime replacement implants and

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

 

(u)

Net Loss Per Share

 

 

 

December 31,

 

 

 

2020

 

 

2019

 

 

2018

 

Net loss (in thousands)

 

$

(89,947

)

 

$

(106,818

)

 

$

(82,627

)

Weighted average common shares outstanding, basic and diluted

 

 

50,233,175

 

 

 

40,654,272

 

 

 

25,402,241

 

Net loss per share attributable to common stockholders

 

$

(1.79

)

 

$

(2.63

)

 

$

(3.25

)

 

The Company excluded the following potentially dilutive securities, outstanding as of December 31, 2020, 2019 and 2018 from the computation of diluted net loss per share attributable to common stockholders for the years ended December 31, 2020, 2019 and 2018 because they had an anti-dilutive impact due to the net loss attributable to common stockholders incurred for the periods.

 

 

 

December 31,

 

 

 

2020

 

 

2019

 

 

2018

 

Stock options to purchase common stock

 

 

2,559,558

 

 

 

1,967,367

 

 

 

1,625,778

 

Warrants for the purchase of common stock

 

 

17,040

 

 

 

47,710

 

 

 

47,710

 

Equity contingent consideration

 

 

607,442

 

 

 

 

 

 

 

Stock issuable upon conversion of convertible note

 

 

19,733,352

 

 

 

 

 

 

 

 

 

 

22,917,392

 

 

 

2,015,077

 

 

 

1,673,488

 

 

The Company uses the if-converted method for calculating any potential dilutive effects of the convertible note. The Company did not adjust the net loss for the year ended December 31, 2020 to eliminate any interest expense or gain/loss for the derivative liability related to the note in the computation of diluted loss per share, as the effects would be anti-dilutive.

 

(v)

Recent Accounting Pronouncements

Recently Adopted Accounting Standards

 

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

 

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) - Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. The amendment modifies, removes, and adds certain disclosure requirements on fair value measurements. The ASU is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption was permitted. The Company adopted the applicable amendments within ASU 2018-13 prospectively in the first quarter of 2020 and there was no material impact on its consolidated financial statements from the adoption.

 

In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40) - Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract. The amendment aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendment. The ASU is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2019. Early adoption was permitted. The Company adopted ASU 2018-15 prospectively in the first quarter of 2020 and there was no material impact on its consolidated financial statements from the adoption.

 

Recently Issued Accounting Standards

In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The amendment eliminates certain accounting models and simplifies the accounting for convertible instruments and enhances disclosures for convertible instruments and earnings per share. The amendments are effective for public entities excluding smaller reporting companies for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2023 including interim periods within those fiscal years and early adoption is permitted. The Company is currently evaluating the impact that adoption of the standard will have on the consolidated financial statements.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848)-Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendment provides optional expedients and exceptions for contract modifications that replace a reference rate affected by reference rate reform. The amendments are effective for all entities as of March 12, 2020 through December 31, 2022, and entities may elect to apply by Topic as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. The Company is currently evaluating the impact the election of the optional expedient will have on the consolidated financial statements.

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

 

 

(w)     Risks and Uncertainties

 

The rapid, global spread of COVID-19 has resulted in significant economic uncertainty, significant declines in business and consumer confidence and global demand in the non-essential healthcare industry (among others), a global economic slowdown, and could lead to a global recession. The Company is subject to risks and uncertainties as a result of the COVID-19 pandemic. The full extent to which the COVID-19 pandemic will directly or indirectly impact the Company’s business, results of operations and financial condition, including sales, expenses, reserves and allowances, manufacturing, and employee-related amounts, will depend on future developments that are highly uncertain. The Company continues to monitor and assess new information related to the COVID-19 pandemic, the actions taken to contain or treat COVID-19, as well as the economic impact on local, regional, national and international customers and markets.

 

As an aesthetics company, surgical procedures involving the Company’s breast and miraDry products are susceptible to local and national government restrictions, such as social distancing, “shelter in place” orders and business closures, due to the economic and logistical impacts these measures have on consumer demand as well as the practitioners’ ability to administer such procedures. The inability or limited ability to perform such non-emergency procedures significantly harmed the Company’s revenues during the second quarter of 2020 and continued to harm the Company’s revenues during the third and fourth quarter of 2020. While some states have lifted certain restrictions on non-emergency procedures, the Company will likely continue to experience future harm to its revenues while existing or new restrictions remain in place.

 

Further, the spread of COVID-19 has caused the Company to modify workforce practices, and the Company may take further actions determined to be in the best interests of the Company’s employees or as required by governments. In addition, capital markets and economies worldwide have also been negatively impacted by the COVID-19 pandemic, and it is possible that this can lead to a local and/or global economic recession, which may result in further harm to the aesthetics market. Such economic disruption could adversely affect the Company’s business. The continued spread of COVID-19, or another infectious disease, could also result in delays or disruptions in the Company’s supply chain or adversely affect the Company’s manufacturing facilities and personnel. Further, trade and/or national security protection policies may be adjusted as a result of the COVID-19 pandemic, such as actions by governments that limit, restrict or prevent the movement of certain goods into a country and/or region, and current U.S./China trade relations may be further exacerbated by the pandemic.

 

The estimates used for, but not limited to, determining the collectability of accounts receivable, fair value of long-lived assets and goodwill, and sales returns liability required could be impacted by the pandemic. While the full impact of COVID-19 is unknown at this time, the Company has made appropriate estimates based on the facts and circumstances available as of the reporting date. These estimates may change as new events occur and additional information is obtained.

 

(x)

Reclassifications

 

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

v3.20.4
Restructuring
12 Months Ended
Dec. 31, 2020
Restructuring And Related Activities [Abstract]  
Restructuring

(2) Restructuring

 

On November 6, 2019, the Board of Directors of the Company approved an organizational efficiency initiative (the “Plan”) designed to reduce spending and simplify operations. Under the Plan, the Company implemented numerous initiatives to reduce spending, including closing the Santa Clara offices of miraDry, Inc. and consolidating a number of business support services via a shared services organization at the Company’s Santa Barbara headquarters. As of December 31, 2020, the Company has completed its restructuring plan, incurred cumulative restructuring charges to date, and does not anticipate incurring restructuring charges in connection with this Plan in future periods.

 

Under the Plan, the Company reduced its workforce by terminating approximately 60 employees. As a result, the Company incurred total charges of $2.3 million in connection with one-time employee termination costs, retention costs and other benefits. In addition, the Company incurred $0.5 million related to duplicate operating costs and other associated costs. In total, the Plan incurred charges of $2.8 million, excluding non-cash charges.

 

The following table details the activity of liabilities related to the Plan included in "Accrued and other current liabilities" in the consolidated balance sheet as of December 31, 2020 (amounts in thousands):

 

 

 

Severance costs

 

 

Other associated costs

 

 

Duplicate operating costs

 

Balance at December 31, 2019

 

$

894

 

 

$

 

 

$

 

Costs charged to expense

 

 

1,380

 

 

 

208

 

 

 

174

 

Costs paid or otherwise settled

 

 

(2,274

)

 

 

(208

)

 

 

(174

)

Balance at December 31, 2020

 

$

 

 

$

 

 

$

 

 

The following table details the charges by reportable segment, recorded in "Restructuring" under operating expenses in the consolidated statements of operations for the year ended December 31, 2020 by segment (amounts in thousands):

 

 

 

Year Ended

 

 

Year Ended

 

 

Cumulative Restructuring

 

 

 

December 31, 2019

 

 

December 31, 2020

 

 

Charges

 

Breast Products

 

$

499

 

 

$

390

 

 

$

889

 

miraDry

 

 

584

 

 

 

1,372

 

 

 

1,956

 

Total

 

$

1,083

 

 

$

1,762

 

 

$

2,845

 

 

 

 

 

v3.20.4
Acquisitions
12 Months Ended
Dec. 31, 2020
Business Combinations [Abstract]  
Acquisitions

(3) Acquisitions

 

Acquisition of certain assets from Vesta Intermediate Funding, Inc.

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

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

 

 

 

Fair Value

 

Cash consideration at Acquisition Date

 

$

14,000

 

Deferred consideration

 

 

4,737

 

Equity contingent consideration

 

 

3,156

 

Purchase price for additional inventory purchase

 

 

5,113

 

Total purchase consideration

 

$

27,006

 

 

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

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

 

 

November 7,

 

 

 

2019

 

Inventories

 

$

7,138

 

Property and equipment

 

 

7,304

 

Goodwill

 

 

4,324

 

Intangible assets

 

 

8,240

 

Net assets acquired

 

$

27,006

 

 

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

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

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

Prior to its acquisition, the Company had engaged Vesta for the manufacture and supply of the Company’s breast implants. In connection with the acquisition, the Company entered into a Termination and Release Agreement with Vesta, effectively terminating the existing manufacturing agreement between the Company and Vesta. The Company evaluated the settlement of the pre-existing relationship under the provisions of ASC 805 and recognized no gain or loss as a result of the termination.

The results of the acquired business have been included in the consolidated financial statements from November 7, 2019 through December 31, 2020 and have been included in the Breast Products segment. Disclosure of pro forma combined revenue have not been presented because the effect of the acquisition had no impact on the Company’s revenue. Disclosure of pro forma combined earnings have not been presented because it is impracticable to do so due to a variety of limitations, including a lack of readily available historical GAAP financial statements.

v3.20.4
Balance Sheet Components
12 Months Ended
Dec. 31, 2020
Balance Sheet Related Disclosures [Abstract]  
Balance Sheet Components

(4) Balance Sheet Components

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

 

 

 

December 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Raw materials

 

$

7,138

 

 

$

8,095

 

Work in progress

 

 

12,303

 

 

 

5,543

 

Finished goods

 

 

25,791

 

 

 

23,893

 

Finished goods - right of return

 

 

3,416

 

 

 

2,081

 

 

 

$

48,648

 

 

$

39,612

 

At December 31, 2020 and 2019, approximately $5.7 million and $2.7 million, respectively, of the Company’s Breast Products segment inventory was held on consignment at doctors’ offices, clinics, and hospitals. The value and quantity at any one location is not significant.

 

 

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

 

 

 

December 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Leasehold improvements

 

$

2,857

 

 

$

2,841

 

Manufacturing equipment and toolings

 

 

9,289

 

 

 

8,175

 

Computer equipment

 

 

2,776

 

 

 

1,250

 

Software

 

 

3,546

 

 

 

2,602

 

Office equipment

 

 

167

 

 

 

111

 

Furniture and fixtures

 

 

1,193

 

 

 

1,144

 

 

 

 

19,828

 

 

 

16,123

 

Less accumulated depreciation

 

 

(6,722

)

 

 

(3,809

)

 

 

$

13,106

 

 

$

12,314

 

 

Depreciation expense for the years ended December 31, 2020, 2019 and 2018 was $2.5 million, $1.2 million and $1.1 million, respectively. There have been no impairments recorded during the years ended December 31, 2020, 2019 and 2018.

 

Under the terms of the Asset Purchase Agreement with Vesta entered into on November 7, 2019, the Company acquired $7.3 million of fixed assets, including leasehold improvements of $2.4 million, manufacturing equipment of $4.4 million, and capitalized software of $0.5 million. Refer further to Note 3.  

Accrued and other current liabilities consist of the following:

 

 

 

December 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Payroll and related expenses

 

$

3,524

 

 

$

6,789

 

Accrued severance

 

 

2,900

 

 

 

894

 

Accrued commissions

 

 

5,561

 

 

 

4,984

 

Accrued manufacturing

 

 

225

 

 

 

2,616

 

Deferred and contingent consideration, current portion

 

 

10,146

 

 

 

6,830

 

Audit, consulting and legal fees

 

 

48

 

 

 

630

 

Accrued sales and marketing expenses

 

 

445

 

 

 

1,109

 

Lease liabilities

 

 

1,588

 

 

 

1,299

 

Other

 

 

7,952

 

 

 

7,400

 

 

 

$

32,389

 

 

$

32,551

 

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

 

 

 

Year Ended December 31,

 

 

 

2020

 

 

2019

 

Balance as of January 1

 

$

1,562

 

 

$

1,395

 

Warranty costs incurred during the period

 

 

(832

)

 

 

(762

)

Changes in accrual related to warranties issued during the period

 

 

1,200

 

 

 

1,138

 

Changes in accrual related to pre-existing warranties

 

 

71

 

 

 

(209

)

Balance as of December 31

 

$

2,001

 

 

$

1,562

 

As of December 31, 2020, $1.9 million is included in “Warranty reserve and other long-term liabilities”, and $0.1 million is included in “Accrued and other current liabilities”. As of  December 31, 2019, $1.4 million is included in “Warranty reserve and other long-term liabilities”, and $0.2 million is included in “Accrued and other current liabilities”.

Liabilities measured at fair value

Common stock warrants

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

Contingent consideration

The Company assessed the fair value of the contingent consideration for future royalty payments related to the acquisition of BIOCORNEUM and the contingent consideration for the future milestone payments related to the acquisition of miraDry using a Monte-Carlo simulation model. The contingent consideration related to the acquisition of BIOCORNEUM consists of royalty obligations based on future net sales for a defined term, beginning in 2024. The significant assumption utilized in the fair value measurement was the discount rate, which was 21.0%. The contingent consideration for future milestone payments related to the acquisition of miraDry is based on the timing of achievement of target net sales, which is estimated based on an internal management forecast. The significant assumption utilized in the fair value measurement was the miraDry company discount rate, which was 11.2%. As these inputs are not observable, the overall fair value measurement of the contingent consideration is classified as Level 3.

Derivative liability

The Company assesses on a quarterly basis the fair value of the derivative liability associated with the conversion feature in the convertible note due in 2025. The conversion feature was bifurcated and recorded as a derivative liability on the consolidated balance sheet with a corresponding discount at the date of issuance that is netted against the principal amount of the note. The Company utilizes a binomial lattice method to determine the fair value of the conversion feature, which utilizes inputs including the common stock price, volatility of common stock, the risk-free interest rate and the probability of conversion to common shares at the Base Conversion Rate in the event of a major transaction (e.g. a change in control). As the probability of conversion is a significant unobservable input, the overall fair value measurement of the conversion feature is classified as Level 3.

The following tables present information about the Company’s liabilities that are measured at fair value on a recurring basis as of December 31, 2020 and 2019 and indicate the level of the fair value hierarchy utilized to determine such fair value (in thousands):

 

 

 

Fair Value Measurements as of

 

 

 

December 31, 2020 Using:

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liability for common stock warrants

 

$

 

 

$

 

 

$

 

 

$

 

Liability for contingent consideration

 

 

 

 

 

 

 

 

7,026

 

 

 

7,026

 

Liability for derivative

 

 

 

 

 

 

 

 

26,570

 

 

 

26,570

 

 

 

$

 

 

$

 

 

$

33,596

 

 

$

33,596

 

 

 

 

 

Fair Value Measurements as of

 

 

 

December 31, 2019 Using:

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liability for common stock warrants

 

$

 

 

$

 

 

$

38

 

 

$

38

 

Liability for contingent consideration

 

 

 

 

 

 

 

 

6,891

 

 

 

6,891

 

 

 

$

 

 

$

 

 

$

6,929

 

 

$

6,929

 

 

The following table provides a rollforward of the aggregate fair values of the Company’s liabilities for which fair value is determined by Level 3 inputs (in thousands):

 

 

 

Warrant liability

 

 

Contingent consideration liability

 

 

Derivative liability

 

Balance, December 31, 2019

 

$

38

 

 

$

6,891

 

 

$

 

Additions

 

 

 

 

 

 

 

 

16,100

 

Change in fair value

 

 

(38

)

 

 

135

 

 

 

10,470

 

Balance, December 31, 2020

 

$

 

 

$

7,026

 

 

$

26,570

 

 

The liability for the current portion of contingent consideration is included in “accrued and other current liabilities” and the long-term portion is included in “deferred and contingent consideration” in the consolidated balance sheets. The liability for the conversion feature related to the convertible note is included in “derivative liability” in the consolidated balance sheets.

 

The Company recognizes changes in the fair value of the derivative liability in “change in fair value of derivative liability” in the consolidated statement of operations and changes in the contingent consideration are recognized in “general and administrative” expense in the consolidated statement of operations.

 

v3.20.4
Goodwill and Other Intangible Assets, net
12 Months Ended
Dec. 31, 2020
Goodwill And Intangible Assets Disclosure [Abstract]  
Goodwill and Other Intangible Assets, net

(5) Goodwill and Other Intangible Assets, net

(a)

Goodwill

The Company has determined that it has two reporting units, Breast Products and miraDry, and evaluates goodwill for impairment at least annually on October 1st and whenever circumstances suggest that goodwill may be impaired.

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

After performing the impairment test as of June 30, 2019 the Company determined that the carrying value of its miraDry reporting unit exceeded its estimated fair value using the income approach by an amount that indicated a full impairment of the carrying value of goodwill. Consequently, the Company recorded a non-cash goodwill impairment charge of $7.6 million during the second quarter ended June 30, 2019, which is reflected in the consolidated statement of operations for the year ended December 31, 2019. For the year ended December 31, 2018, the Company did not record any goodwill impairment charges.

In the current year, the Company performed a qualitative analysis for the goodwill in the Breast Products reporting unit on the annual impairment testing date of October 1, 2020. The Company determined the fair value of the reporting unit was more likely than not greater than its carrying value and did not record any goodwill impairment charges.

As of December 31, 2020, the Breast Products reporting unit had a negative carrying value. As of December 31, 2019 the miraDry reporting unit had a negative carrying value. The changes in the carrying amount of goodwill during the years ended December 31, 2020 and 2019 were as follows (in thousands):

 

 

 

Breast

Products

 

 

miraDry

 

 

Total

 

Balances as of December 31, 2018

 

$

19,156

 

 

$

7,629

 

 

$

26,785

 

Accumulated impairment losses

 

 

(14,278

)

 

 

(7,629

)

 

 

(21,907

)

Goodwill acquired (Note 3)

 

 

4,324

 

 

 

 

 

 

4,324

 

Balances as of December 31, 2019

 

$

9,202

 

 

$

 

 

$

9,202

 

Goodwill acquired

 

 

 

 

 

 

 

 

 

Balances as of December 31, 2020

 

$

9,202