ITEM 1. FINANCIAL STATEMENTS
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
1.
|
Summary of Significant Accounting Policies
|
The accompanying unaudited condensed consolidated financial statements of Sientra, Inc. (“Sientra”, the “Company”, “we”, “our”, or “us”) 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, 2019 filed with the SEC on March 16, 2020, or the Annual Report. The results for the three and nine months ended September 30, 2020 are not necessarily indicative of results to be expected for the year ending December 31, 2020, any other interim periods, or any future year or period.
Since the Company’s inception, it has incurred significant net operating losses and the Company anticipates that losses will continue in the near term. Although the Company expects its operating expenses will begin to decrease with the implementation of the organizational efficiency initiative announced on November 7, 2019, and other measures introduced as announced in the Company’s filing on Form 8-K on April 7, 2020, 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 and the convertible note, 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. The continuation of the Company as a going concern is dependent upon many factors including liquidity and the ability to raise capital.
During the nine months ended September 30, 2020, the Company sold 37,000 shares of its common stock under the 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 common stock having an aggregate gross offering price of up to $50.0 million. The sales of common stock resulted in net proceeds after commissions of approximately $0.3 million.
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. Further on May 11, 2020, the Company amended certain credit agreements with Midcap Financial Trust pursuant to which the Company repaid certain amounts of its existing indebtedness. See Note 10 – Debt for further discussion.
As of September 30, 2020, the Company had cash and cash equivalents of $63.5 million. 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.
5
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.
|
Recent Accounting Pronouncements
|
Recently Adopted Accounting Standards
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) - Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. The amendment modifies, removes, and adds certain disclosure requirements on fair value measurements. The ASU is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption 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 condensed 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 condensed consolidated financial statements from the adoption.
6
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.
|
e.
|
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 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 three months ended June 30, 2020 and continued to harm the Company’s revenues during the three months ended September 30, 2020. While some states have lifted certain restrictions on non-emergency procedures during the three months ended September 30, 2020, 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
7
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.
Certain reclassifications have been made to prior year amounts to conform to the current year presentation.
On November 7, 2019, the Company announced an organizational efficiency initiative, or the Plan, designed to reduce spending and simplify operations. Under the Plan, the Company is implementing 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.
Under the Plan, the Company intends to reduce its workforce by terminating approximately 70 employees. The Company expects to incur total charges of approximately $2.5 million in connection with one-time employee termination costs, retention costs and other benefits. In addition, the Company expects to incur estimated charges of approximately $0.5 million related to duplicate operating costs and other associated costs. In total, the Plan is estimated to cost approximately $3.0 million, excluding non-cash charges, with related cash payments expected to be substantially paid out with cash on hand by the end of 2020.
The following table details the amount of the liabilities related to the Plan included in "Accrued and other current liabilities" in the condensed consolidated balance sheet as of September 30, 2020 (amounts in thousands):
|
|
Severance costs
|
|
|
Other associated costs
|
|
|
Duplicate operating costs
|
|
Balance at December 31, 2019
|
|
$
|
894
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Costs charged to expense
|
|
|
1,467
|
|
|
|
208
|
|
|
|
174
|
|
Costs paid or otherwise settled
|
|
|
(1,995
|
)
|
|
|
(208
|
)
|
|
|
(174
|
)
|
Balance at September 30, 2020
|
|
$
|
366
|
|
|
$
|
—
|
|
|
$
|
—
|
|
The following table details the charges by reportable segment, recorded in "Restructuring" under operating expenses in the condensed consolidated statements of operations for the nine months ended September 30, 2020 (amounts in thousands):
|
|
Year Ended
|
|
|
Nine Months Ended
|
|
|
Cumulative Restructuring
|
|
|
|
December 31, 2019
|
|
|
September 30, 2020
|
|
|
Charges
|
|
Breast Products
|
|
$
|
499
|
|
|
$
|
389
|
|
|
$
|
888
|
|
miraDry
|
|
|
584
|
|
|
|
1,460
|
|
|
|
2,044
|
|
Total
|
|
$
|
1,083
|
|
|
$
|
1,849
|
|
|
$
|
2,932
|
|
8
The Company anticipates incurring approximately $0.1 million of additional restructuring costs during the remainder of 2020 attributable to the miraDry segment. As the development of the Plan is completed, the Company will update its costs by reportable segment as needed.
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.
Performance obligations typically include the delivery of promised products, such as breast implants, tissue expanders, BIOCORNEUM, miraDry Systems and bioTips, along with service-type warranties and deliverables under certain marketing programs. Other deliverables may be promised but are ancillary and insignificant in the context of the contract as a whole. For delivery of promised products, control transfers and revenue is recognized upon shipment, unless the contractual arrangement requires transfer of control when products reach their destination, for which revenue is recognized once the product arrives at its destination. Revenue for service warranties are recognized ratably over the term of the agreements, and revenue related to marketing program deliverables are recognized upon delivery of the marketing product or performance of the service.
The liability for unsatisfied performance obligations under the service warranty and deliverables under certain marketing programs as of September 30, 2020 were as follows:
|
|
Nine Months Ended September 30,
|
|
|
|
2020
|
|
Balance as of December 31, 2019
|
|
$
|
2,089
|
|
Additions and adjustments
|
|
|
2,077
|
|
Revenue recognized
|
|
|
(1,389
|
)
|
Balance as of September 30, 2020
|
|
$
|
2,777
|
|
4.
|
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 5. The fair value of debt is based on the amount of future cash flows associated with the instrument discounted using the Company’s estimated market rate. As of September 30, 2020, the carrying value of the long-term debt and convertible note was not materially different from the fair value.
5.
|
Fair Value Measurements
|
Certain assets and liabilities are carried at fair value under GAAP. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.
Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three levels of the fair value hierarchy, of which the first two are considered observable and the last is considered unobservable:
|
•
|
Level 1 — Quoted prices in active markets for identical assets or liabilities.
|
9
|
•
|
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.
|
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 of September 30, 2020, the fair value of the warrants was immaterial as a result of the decline in the Company’s stock price.
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 consist 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 revenue discount rate, which was 20.0%. 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. During the nine months ended September 30, 2020, the total change in the fair value of contingent consideration was $0.1 million and no settlements were recorded.
Convertible note conversion feature
The Company assesses on a quarterly basis the fair value of the conversion feature related to the convertible note due in 2025. The conversion feature was bifurcated and recorded as a derivative liability on the condensed 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. During the three months ended September 30, 2020, the change in the fair value of the derivative liability was a decrease of $10.1 million. During the nine months ended September 30, 2020, the change in the fair value of the derivative liability was an increase of $8.4 million. No settlements were recorded.
10
The following tables present information about the Company’s liabilities that are measured at fair value on a recurring basis as of September 30, 2020 and December 31, 2019 and indicate the level of the fair value hierarchy utilized to determine such fair value (in thousands):
|
|
Fair Value Measurements as of
|
|
|
|
September 30, 2020 Using:
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability for contingent consideration
|
|
$
|
—
|
|
|
|
—
|
|
|
|
6,959
|
|
|
|
6,959
|
|
Liability for convertible note conversion feature
|
|
|
—
|
|
|
|
—
|
|
|
|
24,520
|
|
|
|
24,520
|
|
|
|
$
|
—
|
|
|
|
—
|
|
|
|
31,479
|
|
|
|
31,479
|
|
|
|
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 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 condensed consolidated balance sheet. The liability for the conversion feature related to the convertible note is included in “derivative liability” in the condensed consolidated balance sheet.
The Company recognizes changes in the fair value of the derivative liability in “change in fair value of derivative liability” in the condensed consolidated statement of operations and changes in the contingent consideration are recognized in “general and administrative” expense in the condensed consolidated statement of operations.
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 3 above. The assurance component is primarily related to the lifetime no-charge contralateral replacement implants and up to $5,000 in financial assistance for revision surgeries, for covered rupture events that occur within twenty years of the surgery date. Under the miraDry warranty, the Company provides a standard product warranty for the miraDry System and bioTips, which the Company considers an assurance-type warranty.
The following table provides a rollforward of the accrued warranties (in thousands):
|
|
Nine Months Ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Balance as of January 1
|
|
$
|
1,562
|
|
|
$
|
1,395
|
|
Warranty costs incurred during the period
|
|
|
(501
|
)
|
|
|
(492
|
)
|
Changes in accrual related to warranties issued during the period
|
|
|
717
|
|
|
|
820
|
|
Changes in accrual related to pre-existing warranties
|
|
|
(6
|
)
|
|
|
23
|
|
Balance as of September 30
|
|
$
|
1,772
|
|
|
$
|
1,746
|
|
11
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 September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2020
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Net loss (in thousands)
|
|
$
|
(5,821
|
)
|
|
$
|
(22,433
|
)
|
|
$
|
(68,710
|
)
|
|
$
|
(86,571
|
)
|
Weighted average common shares outstanding, basic and diluted
|
|
|
50,394,858
|
|
|
|
49,401,094
|
|
|
|
50,155,623
|
|
|
|
37,671,215
|
|
Net loss per share attributable to common stockholders
|
|
$
|
(0.12
|
)
|
|
$
|
(0.45
|
)
|
|
$
|
(1.37
|
)
|
|
$
|
(2.30
|
)
|
The Company excluded the following potentially dilutive securities, outstanding as of September 30, 2020 and 2019, from the computation of diluted net loss per share attributable to common stockholders for the three and nine months ended September 30, 2020 and 2019 because they had an anti-dilutive impact due to the net loss attributable to common stockholders incurred for the periods.
|
|
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Stock options to purchase common stock
|
|
|
1,571,375
|
|
|
|
2,036,027
|
|
Warrants for the purchase of common stock
|
|
|
27,264
|
|
|
|
47,710
|
|
Equity contingent consideration
|
|
|
607,442
|
|
|
|
—
|
|
Stock issuable upon conversion of convertible note
|
|
|
19,733,352
|
|
|
|
—
|
|
|
|
|
21,939,433
|
|
|
|
2,083,737
|
|
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 three and nine months ended September 30, 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.
8.
|
Balance Sheet Components
|
Inventories, net consist of the following (in thousands):
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Raw materials
|
|
$
|
6,767
|
|
|
$
|
8,095
|
|
Work in progress
|
|
|
9,356
|
|
|
|
5,543
|
|
Finished goods
|
|
|
28,809
|
|
|
|
23,893
|
|
Finished goods - right of return
|
|
|
3,535
|
|
|
|
2,081
|
|
|
|
$
|
48,467
|
|
|
$
|
39,612
|
|
12
|
b.
|
Property and Equipment
|
Property and equipment, net consist of the following (in thousands):
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Leasehold improvements
|
|
$
|
2,857
|
|
|
$
|
2,841
|
|
Manufacturing equipment and toolings
|
|
|
9,037
|
|
|
|
8,175
|
|
Computer equipment
|
|
|
2,375
|
|
|
|
1,250
|
|
Software
|
|
|
3,056
|
|
|
|
2,602
|
|
Office equipment
|
|
|
167
|
|
|
|
111
|
|
Furniture and fixtures
|
|
|
1,192
|
|
|
|
1,144
|
|
|
|
|
18,684
|
|
|
|
16,123
|
|
Less accumulated depreciation
|
|
|
(5,942
|
)
|
|
|
(3,809
|
)
|
|
|
$
|
12,742
|
|
|
$
|
12,314
|
|
Depreciation expense for the three months ended September 30, 2020 and 2019 was $1.0 million and $0.3 million, respectively. Depreciation expense for the nine months ended September 30, 2020 and 2019 was $1.8 million and $0.9 million, respectively.
|
c.
|
Goodwill and Other Intangible Assets, net
|
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.
The changes in the carrying amount of goodwill during the nine months ended September 30, 2020 and the year ended December 31, 2019 were as follows (in thousands):
|
|
Breast Products
|
|
|
miraDry
|
|
|
Total
|
|
Balances as of December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
23,480
|
|
|
|
7,629
|
|
|
|
31,109
|
|
Accumulated impairment losses
|
|
|
(14,278
|
)
|
|
|
(7,629
|
)
|
|
|
(21,907
|
)
|
Goodwill, net
|
|
$
|
9,202
|
|
|
$
|
—
|
|
|
$
|
9,202
|
|
Balances as of September 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
23,480
|
|
|
|
7,629
|
|
|
|
31,109
|
|
Accumulated impairment losses
|
|
|
(14,278
|
)
|
|
|
(7,629
|
)
|
|
|
(21,907
|
)
|
Goodwill, net
|
|
$
|
9,202
|
|
|
$
|
—
|
|
|
$
|
9,202
|
|
In the first quarter of 2020, the Company noted a decline in actual and forecasted earnings for the miraDry reporting unit due to the impacts and uncertainty surrounding the COVID-19 pandemic. As a result, the Company performed a test of recoverability by comparing the carrying value of the reporting unit to the future undiscounted cash flows the reporting unit is expected to generate. As the future undiscounted cash flows attributable to the asset group were less than the carrying value, the Company performed a quantitative analysis to compare the fair value of the intangible assets in the reporting unit to their carrying amount.
13
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.
After performing the impairment analysis as of March 31, 2020, the Company determined that the carrying values of all of the intangible assets in the miraDry reporting unit exceeded their estimated fair values. Consequently, the Company recorded total non-cash impairment charges of $1.1 million for trade names, $1.4 million for developed technology, and $3.9 million for customer relationships within impairment in the accompanying condensed consolidated statement of operations for the nine months ended September 30, 2020. As of September 30, 2020, the remaining carrying value of the intangible assets are entirely associated with the Breast Products segment.
The components of the Company’s other intangible assets consist of the following (in thousands):
|
|
Average
|
|
|
|
|
|
|
Amortization
|
|
|
September 30, 2020
|
|
|
|
Period
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Intangible
|
|
|
|
(in years)
|
|
|
Amount
|
|
|
Amortization
|
|
|
Assets, net
|
|
Intangibles with definite lives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
|
10
|
|
|
$
|
4,940
|
|
|
$
|
(3,727
|
)
|
|
$
|
1,213
|
|
Trade names - finite life
|
|
|
12
|
|
|
|
800
|
|
|
|
(306
|
)
|
|
|
494
|
|
Non-compete agreement
|
|
|
2
|
|
|
|
80
|
|
|
|
(80
|
)
|
|
|
—
|
|
Regulatory approvals
|
|
|
1
|
|
|
|
670
|
|
|
|
(670
|
)
|
|
|
—
|
|
Acquired FDA non-gel product approval
|
|
|
11
|
|
|
|
1,713
|
|
|
|
(1,713
|
)
|
|
|
—
|
|
Manufacturing know-how
|
|
|
19
|
|
|
|
8,240
|
|
|
|
(678
|
)
|
|
|
7,562
|
|
Total definite-lived intangible assets
|
|
|
|
|
|
$
|
16,443
|
|
|
$
|
(7,174
|
)
|
|
$
|
9,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangibles with indefinite lives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade names - indefinite life
|
|
—
|
|
|
|
450
|
|
|
|
—
|
|
|
|
450
|
|
Total indefinite-lived intangible assets
|
|
|
|
|
|
$
|
450
|
|
|
$
|
—
|
|
|
$
|
450
|
|
14
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
December 31, 2019
|
|
|
|
Period
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Intangible
|
|
|
|
(in years)
|
|
|
Amount
|
|
|
Amortization
|
|
|
Assets, net
|
|
Intangibles with definite lives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
|
11
|
|
|
$
|
9,540
|
|
|
$
|
(3,846
|
)
|
|
$
|
5,694
|
|
Trade names - finite life
|
|
|
14
|
|
|
|
2,000
|
|
|
|
(292
|
)
|
|
|
1,708
|
|
Developed technology
|
|
|
13
|
|
|
|
1,500
|
|
|
|
(84
|
)
|
|
|
1,416
|
|
Non-compete agreement
|
|
|
2
|
|
|
|
80
|
|
|
|
(80
|
)
|
|
|
—
|
|
Regulatory approvals
|
|
|
1
|
|
|
|
670
|
|
|
|
(670
|
)
|
|
|
—
|
|
Acquired FDA non-gel product approval
|
|
|
11
|
|
|
|
1,713
|
|
|
|
(1,713
|
)
|
|
|
—
|
|
Manufacturing know-how
|
|
|
19
|
|
|
|
8,240
|
|
|
|
(118
|
)
|
|
|
8,122
|
|
Total definite-lived intangible assets
|
|
|
|
|
|
$
|
23,743
|
|
|
$
|
(6,803
|
)
|
|
$
|
16,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangibles with indefinite lives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade names - indefinite life
|
|
—
|
|
|
|
450
|
|
|
|
—
|
|
|
|
450
|
|
Total indefinite-lived intangible assets
|
|
|
|
|
|
$
|
450
|
|
|
$
|
—
|
|
|
$
|
450
|
|
Amortization expense for the three months ended September 30, 2020 and 2019 was $0.3 million and $0.5 million, respectively. Amortization expense for the nine months ended September 30, 2020 and 2019 was $1.2 million and $1.7 million, respectively. The following table summarizes the estimated amortization expense relating to the Company's definite-lived intangible assets as of September 30, 2020 (in thousands):
|
|
Amortization
|
|
Period
|
|
Expense
|
|
2020
|
|
$
|
332
|
|
2021
|
|
|
1,221
|
|
2022
|
|
|
1,163
|
|
2023
|
|
|
1,092
|
|
2024
|
|
|
948
|
|
Thereafter
|
|
|
4,513
|
|
|
|
$
|
9,269
|
|
|
d.
|
Accrued and Other Current Liabilities
|
Accrued and other current liabilities consist of the following (in thousands):
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Payroll and related expenses
|
|
$
|
2,574
|
|
|
$
|
6,789
|
|
Accrued severance
|
|
|
980
|
|
|
|
894
|
|
Accrued commissions
|
|
|
5,335
|
|
|
|
4,984
|
|
Accrued manufacturing
|
|
|
835
|
|
|
|
2,616
|
|
Deferred and contingent consideration, current portion
|
|
|
6,931
|
|
|
|
6,830
|
|
Audit, consulting and legal fees
|
|
|
304
|
|
|
|
630
|
|
Accrued sales and marketing expenses
|
|
|
861
|
|
|
|
1,109
|
|
Lease liabilities
|
|
|
1,556
|
|
|
|
1,299
|
|
Other
|
|
|
7,303
|
|
|
|
7,400
|
|
|
|
$
|
26,679
|
|
|
$
|
32,551
|
|
15
The Company leases certain office space, warehouses, distribution facilities and office equipment. 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 and distribution 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 leases of office equipment are accounted for as finance leases as they meet one or more of the five finance lease classification criteria. Lease cost for these finance leases is comprised of amortization of the ROU asset and interest expense which are recognized in operating expenses and other income (expense), net.
Components of lease expense were as follows:
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
Lease Cost
|
|
Classification
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Operating lease cost
|
|
Operating expenses
|
|
$
|
428
|
|
|
$
|
389
|
|
|
$
|
1,270
|
|
|
$
|
1,155
|
|
Operating lease cost
|
|
Inventory
|
|
|
131
|
|
|
|
1,248
|
|
|
|
364
|
|
|
|
3,743
|
|
Total operating lease cost
|
|
|
|
$
|
559
|
|
|
$
|
1,637
|
|
|
$
|
1,634
|
|
|
$
|
4,898
|
|
Finance lease cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of right-of-use assets
|
|
Operating expenses
|
|
|
10
|
|
|
|
10
|
|
|
|
31
|
|
|
|
30
|
|
Amortization of right-of-use assets
|
|
Inventory
|
|
|
12
|
|
|
|
—
|
|
|
|
24
|
|
|
|
—
|
|
Interest on lease liabilities
|
|
Other income (expense), net
|
|
|
3
|
|
|
|
1
|
|
|
|
7
|
|
|
|
3
|
|
Total finance lease cost
|
|
|
|
$
|
25
|
|
|
$
|
11
|
|
|
$
|
62
|
|
|
$
|
33
|
|
Variable lease cost
|
|
Inventory
|
|
|
—
|
|
|
|
3,291
|
|
|
|
—
|
|
|
|
7,886
|
|
Total lease cost
|
|
|
|
$
|
584
|
|
|
$
|
4,939
|
|
|
$
|
1,696
|
|
|
$
|
12,817
|
|
Short-term lease expense for the three and nine months ended September 30, 2020 and 2019 was not material.
16
Supplemental cash flow information related to operating and finance leases for the nine months ended September 30, 2020 was as follows (in thousands):
|
|
Nine Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
|
|
|
|
Operating cash outflows from operating leases
|
|
$
|
1,337
|
|
|
$
|
4,605
|
|
Operating cash outflows from finance leases
|
|
|
61
|
|
|
|
33
|
|
Right-of-use assets obtained in exchange for lease obligations:
|
|
|
|
|
|
|
|
|
Operating leases
|
|
$
|
1,242
|
|
|
$
|
24,779
|
|
Finance leases
|
|
|
157
|
|
|
|
117
|
|
Supplemental balance sheet information, as of September 30, 2020, related to operating and finance leases was as follows (in thousands, except lease term and discount rate):
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Reported as:
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
|
|
|
|
|
|
Operating lease right-of-use assets
|
|
$
|
7,581
|
|
|
$
|
7,494
|
|
Finance lease right-of-use assets
|
|
|
180
|
|
|
|
78
|
|
Total right-of use assets
|
|
$
|
7,761
|
|
|
$
|
7,572
|
|
Accrued and other current liabilities
|
|
|
|
|
|
|
|
|
Operating lease liabilities
|
|
$
|
1,472
|
|
|
$
|
1,259
|
|
Finance lease liabilities
|
|
|
84
|
|
|
|
40
|
|
Warranty reserve and other long-term liabilities
|
|
|
|
|
|
|
|
|
Operating lease liabilities
|
|
|
6,358
|
|
|
|
6,434
|
|
Finance lease liabilities
|
|
|
97
|
|
|
|
35
|
|
Total lease liabilities
|
|
$
|
8,011
|
|
|
$
|
7,768
|
|
Weighted average remaining lease term (years)
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
5
|
|
|
|
5
|
|
Finance leases
|
|
|
2
|
|
|
|
2
|
|
Weighted average discount rate
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
7.73
|
%
|
|
|
7.45
|
%
|
Finance leases
|
|
|
6.18
|
%
|
|
|
4.06
|
%
|
As of September 30, 2020, maturities of the Company’s operating and finance lease liabilities are as follows (in thousands):
Period
|
|
Operating leases
|
|
|
Finance leases
|
|
|
Total
|
|
Remainder of 2020
|
|
$
|
527
|
|
|
$
|
24
|
|
|
$
|
551
|
|
2021
|
|
|
2,095
|
|
|
|
89
|
|
|
|
2,184
|
|
2022
|
|
|
1,920
|
|
|
|
53
|
|
|
|
1,973
|
|
2023
|
|
|
1,968
|
|
|
|
29
|
|
|
|
1,997
|
|
2024
|
|
|
1,507
|
|
|
|
1
|
|
|
|
1,508
|
|
2025 and thereafter
|
|
|
1,534
|
|
|
|
—
|
|
|
|
1,534
|
|
Total lease payments
|
|
$
|
9,551
|
|
|
$
|
196
|
|
|
$
|
9,747
|
|
Less imputed interest
|
|
|
1,721
|
|
|
|
15
|
|
|
|
1,736
|
|
Total operating lease liabilities
|
|
$
|
7,830
|
|
|
$
|
181
|
|
|
$
|
8,011
|
|
17
Term Loan and Revolving Loan
On July 25, 2017, the Company entered into a Term Loan Credit and Security Agreement and a Revolving Loan Credit and Security Agreement with MidCap Financial Trust (“MidCap”), which replaced the Company’s prior Silicon Valley Bank Loan Agreement. Both agreements were amended and restated on July 1, 2019 and further amended on November 7, 2019 (as so amended, the “Restated Term Loan Agreement” and the “Restated Revolving Credit Agreement” and, together, the “Credit Agreements”).
The Restated Term Loan Agreement provides for the following tranches: (i) a $35 million term loan facility drawn at signing, (ii) a $5 million term loan facility drawn at signing, (iii) at any time after September 30, 2020 to December 31, 2020, a $10.0 million term loan facility (subject to the satisfaction of certain conditions, including evidence that the Company’s net revenue for the past 12 months was greater than or equal to $100.0 million), and (iv) until December 31, 2020 and upon the consent of the agent and the lenders following a request from the Company, an additional $15.0 million term loan facility. The loan matures on July 1, 2024 and carries an interest rate of LIBOR plus 7.50%. The Company will make monthly payments of accrued interest from the funding date until July 31, 2021, to be followed by monthly installments of principal and interest through the maturity date. The Company may prepay some or all of the principal prior to its maturity date provided the Company pays MidCap a prepayment fee. The loan provides that the Company shall pay an exit fee equal to 5.0% of the aggregate amount of all term loans funded to the Company.
On May 11, 2020, the Company entered in to the Second Amendment to Amended and Restated Credit and Security Agreement (Term Loan), by and among the Company, certain of the Company’s subsidiaries, the lenders party thereto and MidCap Financial Trust as agent (the “Term Amendment”). The Term Amendment provides for, among other things, the prepayment by the Company of $25.0 million of outstanding principal, $0.1 million of accrued interest, and $1.25 million in prepaid exit fees with the parties agreeing to waive the prepayment fee with respect to these amounts. The Term Amendment increases the tranche 3 commitment amount from $10.0 million to $15.0 million, extends the tranche 3 termination date from December 31, 2020 to June 30, 2021, and amended certain conditions upon which the tranche 3 commitment can be withdrawn, including evidence that the Company’s Net Revenue for the past six months was greater than or equal to $30.0 million. In addition, the Term Amendment amends certain financial requirements including reducing the Company’s minimum unrestricted cash amount from $20.0 million to $5.0 million and amends certain minimum net revenue requirements. Further, the monthly minimum net revenue requirements were revised to be calculated on a trailing three-month basis.
As of September 30, 2020, there was $15.0 million of outstanding principal and $0.8 million of exit fee payable related to the term loans, reduced by unamortized debt issuance costs of $1.1 million included in “Long-term debt” and $0.7 million included in “Current portion of long-term debt” on the condensed consolidated balance sheets.
The Restated Revolving Credit Agreement provides for, among other things, a revolving loan of up to $10.0 million. The amount of loans available to be drawn under the Revolving Credit Agreement is based on a borrowing base equal to 85% of the net collectible value of eligible accounts receivable plus 40% of eligible finished goods inventory, or the Borrowing Base, provided that availability from eligible finished goods inventory does not exceed 20% of the Borrowing Base. The revolving loan carries an interest rate of LIBOR plus 4.50%. The Company may make (subject to the applicable borrowing base at the time) and repay borrowings from time to time until the maturity of the facility on July 1, 2024.
On May 11, 2020, the Company entered in to the Second Amendment to Amended and Restated Credit and Security Agreement (Revolving Loan), by and among the Company, certain of the Company’s subsidiaries, the lenders party thereto and MidCap Financial Trust as agent (the “Revolving Amendment”). The Revolving Amendment includes conforming changes to reflect the changes in the Term Amendment. In addition, the Revolving Amendment reduces the borrowing base by the portion of the eligible inventory previously included in the calculation.
18
As of September 30, 2020, there were no borrowings outstanding under the Revolving Loan. As of September 30, 2020, the unamortized debt issuance costs related to the revolving loan was approximately $0.1 million and was included in “Other assets” on the condensed consolidated balance sheets.
The amortization of debt issuance costs on the term loan and the revolving loan for the three months ended September 30, 2020 and 2019 were $0.2 million and $0.1 million, respectively. The amortization of debt issuance costs on the term loan and revolving loan for the nine months ended September 30, 2020 and 2019 was $0.7 million and $0.2 million, respectively, and was included in interest expense in the condensed consolidated statements of operations.
The Credit Agreements include customary affirmative and restrictive covenants and representations and warranties, including a financial covenant for minimum revenues, a financial covenant for minimum cash requirements, a covenant against the occurrence of a “change in control,” financial reporting obligations, and certain limitations on indebtedness, liens, investments, distributions, collateral, mergers or acquisitions, taxes, and deposit accounts. Upon the occurrence of an event of default, a default interest rate of an additional 5.0% may be applied to any outstanding principal balances, and MidCap may declare all outstanding obligations immediately due and payable and take such other actions as set forth in the Credit Agreements. The Company’s obligations under the Credit Agreements are secured by a security interest in substantially all of the Company’s assets.
Convertible Note
On March 11, 2020, the Company issued $60.0 million of unsecured and subordinated convertible notes with an interest rate of 4.00% (“Note”) to Deerfield Partners, L.P. (“Holder”) in order to fund ongoing operations. The Note matures on March 11, 2025, subject to earlier conversion by the option of the Holder at any time in whole or in part into common shares of the Company, for a period up to five years. Upon conversion by the Holder, the Company shall deliver, shares of the Company’s common stock at a conversion rate of 14,634 per $1,000 principal amount of the Note (which represents an initial conversion rate price of $4.10), or the Base Conversion Rate, in each case subject to customary anti-dilution adjustments. In addition to the typical anti-dilution adjustment, the Note also provides the Holder with additional consideration (“Make-Whole Provision”) beyond the settlement of the conversion obligation, in the event of a major transaction prior to maturity (e.g. a change in control). Upon conversion by the Holder in the event of a major transaction, the Company shall deliver, either cash, shares of the Company’s common stock or a combination of cash and common stock at the Base Conversion rate plus the additional consideration from the Make-Whole Provision. The $60.0 million principal amount of the Note is not payable until the maturity date of March 11, 2025, unless converted to equity earlier. The Company will pay interest in cash on the Note at 4.00% per annum, quarterly from July 1, 2020.
The conversion features in the outstanding convertible debt instrument are accounted for as a free-standing embedded derivative bifurcated from the principal balance of the Note, as (1) the conversion features are not clearly and closely related to the debt instrument and are not considered to be indexed to the Company’s equity, (2) the conversion features standing alone meet the definition of a derivative, and (3) the Note is not remeasured at fair value each reporting period with changes in fair value recorded in the condensed consolidated statement of operations.
The initial embedded derivative liability of $16.1 million was recorded as a non-current liability on the condensed consolidated balance sheet and is remeasured to fair value at each balance sheet date with a resulting non-cash gain or loss related to the change in the fair value being charged to earnings (loss). As of September 30, 2020, the fair value of the derivative liability was $24.5 million. A corresponding debt discount to the initial embedded derivative liability of $16.1 million and issuance costs of $1.5 million were recorded on the issuance date and is netted against the principal amount of the Note. As of September 30, 2020, the unamortized debt discount and issuance costs were $16.3 million. The Company will amortize the debt discount and debt issuance costs to interest expense under the effective interest method over the term of the Note, at a resulting effective interest rate of approximately 12%. For the three and nine months ended September 30, 2020, the amortization of the convertible debt discount and issuance costs were $0.7 million and $1.5 million, respectively, and were included in interest expense in the condensed consolidated statements of operations.
19
CARES Act
On April 20, 2020, the Company was granted a loan of $6.7 million under the Paycheck Protection Program of the CARES Act, or the PPP Loan, from Silicon Valley Bank, or the Lender. The PPP Loan matures on April 20, 2022, or the Maturity Date, and bears interest at a rate of 1.0% per annum. Under the terms of the PPP Loan, the Company will make no payments until the date which forgiveness of the PPP Loan is determined, which can be up to 10 months following the end of the covered period (which is defined as 24 weeks from the date of the loan), or the Deferral Period. Commencing one month after the expiration of the Deferral Period, and continuing on the same day of each month until the Maturity Date, the Company will pay to Lender monthly payments of principal and interest, in an amount required to fully amortize the principal amount outstanding on the PPP Loan on the last day of the Deferral Period by the Maturity Date. As of September 30, 2020, $5.8 million is recorded in “Long-term debt” and $0.8 million is recorded in “Current portion of long-term debt” on the Company’s condensed consolidated balance sheets.
All or a portion of the PPP Loan may be forgiven upon submission of documentation of expenditures in accordance with certain specified requirements. Under the CARES Act, loan forgiveness is available for the sum of documented payroll costs, covered rent payments, covered mortgage interest and covered utilities during the 24-week period beginning on the date of loan approval. Not more than 40% of the forgiven amount may be for non-payroll costs. The amount of the PPP Loan eligible to be forgiven will be reduced if the Company’s full-time headcount declines, or if salaries and wages for employees with salaries of $100,000 or less annually are reduced by more than 25%. The Company will be required to repay any portion of the outstanding principal that is not forgiven, along with accrued interest, in accordance with the amortization schedule described above. The Company has elected to account for the PPP loan in accordance with ASC 470 – Debt, and any forgiveness of the loan will be treated as a gain on extinguishment within the condensed consolidated statement of operations.
Future Principal and Exit Fee Payments of Debt
The future schedule of principal and exit fee payments for all outstanding debt as of September 30, 2020 was as follows (in thousands):
Fiscal Year
|
|
|
|
|
Remainder of 2020
|
|
$
|
—
|
|
2021
|
|
|
5,409
|
|
2022
|
|
|
8,326
|
|
2023
|
|
|
5,000
|
|
2024
|
|
|
3,667
|
|
Thereafter
|
|
|
60,000
|
|
Total
|
|
$
|
82,402
|
|
The Company’s Amended and Restated Certificate of Incorporation authorizes the Company to issue 210,000,000 shares of common and preferred stock, consisting of 200,000,000 shares of common stock with $0.01 par value and 10,000,000 shares of preferred stock with $0.01 par value. As of September 30, 2020 and December 31, 2019, the Company had no preferred stock issued or outstanding.
On January 17, 2013, the Company entered into a Loan and Security Agreement, or the Original Term Loan Agreement, with Oxford Finance, LLC, or Oxford. On June 30, 2014, the Company entered into an Amended and Restated Loan and Security Agreement, or the Amended Term Loan Agreement, with Oxford. In connection with the Original Term Loan Agreement and the Amended Term Loan Agreement, the Company issued to Oxford
20
(i) seven-year warrants in January 2013 to purchase shares of the Company’s common stock with a value equal to 3.0% of the tranche A, B and C term loans amounts, or the Original Warrants, and (ii) seven-year warrants in June 2014 to purchase shares of the Company’s common stock with a value equal to 2.5% of the tranche D term loan amount. The warrants have an exercise price per share of $14.671. The warrants within Tranche A expired on January 17, 2020 and the warrants within Tranche B expired on August 1, 2020. As of September 30, 2020, there were warrants to purchase an aggregate of 27,264 shares of common stock outstanding.
In April 2007, the Company adopted the 2007 Equity Incentive Plan, or the 2007 Plan. The 2007 Plan provides for the granting of stock options to employees, directors and consultants of the Company. Options granted under the 2007 Plan may either be incentive stock options or nonstatutory stock options. Incentive stock options, or ISOs, may be granted only to Company employees. Nonstatutory stock options, or NSOs, may be granted to all eligible recipients. A total of 1,690,448 shares of the Company’s common stock were initially reserved for issuance under the 2007 Plan.
The Company’s board of directors adopted the 2014 Equity Incentive Plan, or 2014 Plan, in July 2014, and the stockholders approved the 2014 Plan in October 2014. The 2014 Plan became effective upon completion of the IPO on November 3, 2014, at which time the Company ceased granting awards under the 2007 Plan. Under the 2014 Plan, the Company may issue ISOs, NSOs, stock appreciation rights, restricted stock awards, restricted stock unit awards and other forms of stock awards, or collectively, stock awards, all of which may be granted to employees, including officers, non-employee directors and consultants of the Company and their affiliates. ISOs may be granted only to employees. A total of 1,027,500 shares of common stock were initially reserved for issuance under the 2014 Plan, subject to certain annual increases. As of September 30, 2020, a total of 2,544,816 shares of the Company’s common stock were available for issuance under the 2014 Plan.
Pursuant to a board-approved Inducement Plan, the Company may issue NSOs and restricted stock unit awards, or collectively, stock awards, all of which may only be granted to new employees of the Company and their affiliates in accordance with NASDAQ Stock Market Rule 5635(c)(4) as an inducement material to such individuals entering into employment with the Company. As of September 30, 2020, inducement grants for 1,412,083 shares of common stock have been awarded, and 923,342 shares of common stock were available for future issuance under the Inducement Plan.
Options under the 2007 Plan and the 2014 Plan may be granted for periods of up to ten years as determined by the Company’s board of directors, provided, however, that (i) the exercise price of an ISO shall not be less than 100% of the estimated fair value of the shares on the date of grant, and (ii) the exercise price of an ISO granted to a more than 10% shareholder shall not be less than 110% of the estimated fair value of the shares on the date of grant. An NSO has no such exercise price limitations. NSOs under the Inducement Plan may be granted for periods of up to ten years as determined by the board of directors, provided, the exercise price will not be less than 100% of the estimated fair value of the shares on the date of grant. Options generally vest with 25% of the grant vesting on the first anniversary and the balance vesting monthly on a straight-lined basis over the requisite service period of three additional years for the award. Additionally, options have been granted to certain key executives that vest upon achievement of performance conditions based on performance targets as defined by the board of directors, which have included net sales targets and defined corporate objectives over the performance period with possible payout ranging from 0% to 100% of the target award. Compensation expense is recognized on a straight-lined basis over the vesting term of one year based upon the probable performance target that will be met. The vesting provisions of individual options may vary but provide for vesting of at least 25% per year.
21
The following summarizes all option activity under the 2007 Plan, 2014 Plan and Inducement Plan:
|
|
|
|
|
|
Weighted
|
|
|
Weighted
average
|
|
|
|
|
|
|
|
average
|
|
|
remaining
|
|
|
|
Option
|
|
|
exercise
|
|
|
contractual
|
|
|
|
Shares
|
|
|
price
|
|
|
term (year)
|
|
Balances at December 31, 2019
|
|
|
1,880,846
|
|
|
$
|
7.42
|
|
|
|
5.48
|
|
Exercised
|
|
|
(6,181
|
)
|
|
|
2.48
|
|
|
|
|
|
Forfeited
|
|
|
(313,347
|
)
|
|
|
7.92
|
|
|
|
|
|
Balances at September 30, 2020
|
|
|
1,561,318
|
|
|
$
|
7.34
|
|
|
|
4.49
|
|
For stock-based awards the Company recognizes compensation expense based on the grant date fair value using the Black-Scholes option valuation model. There was no stock-based compensation expense related to stock options for the three and nine months ended September 30, 2020. Stock-based compensation expense related to stock options was $0.1 million and $0.4 million for the three months ended September 30, 2019 and nine months ended September 30, 2019. As of September 30, 2020, there were also no unrecognized compensation costs related to stock options.
|
d.
|
Restricted Stock Units
|
The Company has issued restricted stock unit awards, or RSUs, under the 2014 Plan and the Inducement Plan. The RSUs issued to employees generally vest on a straight-line basis annually over a 3-year requisite service period. RSUs issued to non-employees generally vest either monthly or annually over the service term.
Activity related to RSUs is set forth below:
|
|
|
|
|
|
Weighted
average
|
|
|
|
Number
|
|
|
grant date
|
|
|
|
of shares
|
|
|
fair value
|
|
Balances at December 31, 2019
|
|
|
2,232,956
|
|
|
$
|
11.99
|
|
Granted
|
|
|
934,965
|
|
|
|
5.63
|
|
Vested
|
|
|
(921,964
|
)
|
|
|
10.45
|
|
Forfeited
|
|
|
(701,907
|
)
|
|
|
9.07
|
|
Balances at September 30, 2020
|
|
|
1,544,050
|
|
|
$
|
10.38
|
|
Stock-based compensation expense for RSUs for the three months ended September 30, 2020 and 2019 was $1.5 million and $2.8 million, respectively. Stock-based compensation expense for RSUs for the nine months ended September 30, 2020 and 2019 was $4.9 million and $8.9 million, respectively. As of September 30, 2020, there was $7.1 million of total unrecognized compensation costs related to non-vested RSU awards. The cost is expected to be recognized over a weighted average period of approximately 1.43 years.
|
e.
|
Employee Stock Purchase Plan
|
The Company’s board of directors adopted the 2014 Employee Stock Purchase Plan, or ESPP, in July 2014, and the stockholders approved the ESPP in October 2014. The ESPP allows eligible employees to purchase shares of the Company’s common stock at a discount through payroll deductions of up to 15% of their eligible compensation, subject to any plan limitations. The ESPP provides for offering periods not to exceed 27 months, and each offering period will include purchase periods, which will be the approximately six-month period commencing with one exercise date and ending with the next exercise date. Employees are able to purchase shares at 85% of the lower of the fair market value of the Company’s common stock on the first trading day of the offering period or on the purchase date. A total of 255,500 shares of common stock were initially reserved for issuance under the ESPP, subject to certain annual increases.
22
During the nine months ended September 30, 2020, employees purchased 203,728 shares of common stock at a weighted average price of $4.11 per share. As of September 30, 2020, the number of shares of common stock available for future issuance was 946,292.
The Company estimated the fair value of employee stock purchase rights using the Black-Scholes model. Stock-based compensation expense related to the ESPP was $0.1 million and $0.2 million for the three months ended September 30, 2020 and 2019, respectively. Stock-based compensation expense related to the ESPP was $0.4 million and $0.5 million for the nine months ended September 30, 2020 and 2019, respectively.
|
f.
|
Significant Modifications
|
During the nine months ended September 30, 2020, there were no material modifications of equity awards. During the nine months ended September 30, 2019, the Company recognized $0.6 million in incremental compensation cost resulting from entering into a consulting agreement with two former employees that resulted in the modification of their existing equity awards.
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. The Company had no tax expense for both the three and nine months ended September 30, 2020 and 2019.
Reportable Segments
The Company has two reportable segments: Breast Products and miraDry. The Breast Products segment focuses on sales of silicone gel breast implants, tissue expanders and scar management products under the brands OPUS, Luxe, Curve, AlloX2, Dermaspan, Softspan and BIOCORNEUM. The miraDry segment, acquired on July 25, 2017, focuses on sales of the miraDry System, consisting of a console and a handheld device which uses consumable single-use bioTips. These segments align with the Company’s principal target markets. miraDry has been included in the condensed consolidated results of operations as of the acquisition date and financial performance of the acquired business is reported in the miraDry segment. The Vesta Acquisition, completed on November 7, 2019, has been included in the condensed consolidated results of operations as of the acquisition date and financial performance of the acquired business is reported in the Breast Products segment.
The Company’s Chief Operating Decision Maker, or CODM, assesses the performance of each segment and allocates resources to those segments based on net sales and operating income (loss). Operating income (loss) by segment includes items that are directly attributable to each segment, including sales and marketing functions, as well as finance, information technology, human resources, legal and related corporate infrastructure costs, along with certain benefit-related expenses. There are no unallocated expenses for the two segments.
The following tables present the net sales, net operating loss and net assets by reportable segment for the periods presented (in thousands):
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Breast Products
|
|
$
|
15,330
|
|
|
$
|
12,626
|
|
|
$
|
37,109
|
|
|
$
|
33,570
|
|
miraDry
|
|
|
3,887
|
|
|
|
9,786
|
|
|
|
11,488
|
|
|
|
26,919
|
|
Total net sales
|
|
$
|
19,217
|
|
|
$
|
22,412
|
|
|
$
|
48,597
|
|
|
$
|
60,489
|
|
23
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Loss from operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Breast Products
|
|
$
|
(9,304
|
)
|
|
$
|
(12,319
|
)
|
|
$
|
(30,683
|
)
|
|
$
|
(38,555
|
)
|
miraDry
|
|
|
(4,654
|
)
|
|
|
(9,141
|
)
|
|
|
(22,595
|
)
|
|
|
(45,722
|
)
|
Total loss from operations
|
|
$
|
(13,958
|
)
|
|
$
|
(21,460
|
)
|
|
$
|
(53,278
|
)
|
|
$
|
(84,277
|
)
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Assets
|
|
|
|
|
|
|
|
|
Breast Products
|
|
$
|
156,538
|
|
|
$
|
169,613
|
|
miraDry
|
|
|
21,266
|
|
|
|
34,791
|
|
Total assets
|
|
$
|
177,804
|
|
|
$
|
204,404
|
|
14.
|
Commitments and Contingencies
|
The Company is subject to claims and assessment from time to time in the ordinary course of business. The Company accrues a liability for such matters when it is probable that future expenditures will be made and such expenditures can be reasonably estimated.
Product Liability Litigation
On October 7, 2019, a lawsuit was filed in the Superior Court of the State of California against the Company and Silimed Industria de Implantes Ltda. (the Company’s former contract manufacturer). The lawsuit alleges that the Company’s textured breast implants caused certain of the plaintiffs to develop a condition known as breast implant associated anaplastic large cell lymphoma (“BIA-ALCL”), and that the Company is liable to the plaintiffs based on claims for strict liability (failure to warn), strict liability (defective manufacture), negligence and loss of consortium. On January 21, 2020, the Company filed a demurrer to the plaintiff’s complaint, which demurrer is still pending before the Court. The Company intends to vigorously defend itself in this lawsuit. Given the nature of this case, the Company is unable to estimate the reasonably possible loss or range of loss, if any, arising from this matter.
On September 23, 2020, a lawsuit was filed in the Eastern District of Tennessee against the Company. The lawsuit alleges that the Company’s textured breast implants caused certain of the plaintiffs to develop a condition known as breast implant associated anaplastic large cell lymphoma (“BIA-ALCL”), and that the Company is liable to the plaintiffs based on claims for negligence, strict liability (manufacturing defects), strict liability (failure to warn), breach of express and implied warranties, and punitive damages. No response has been filed to the complaint at presented. The Company intends to vigorously defend itself in this lawsuit. Given the nature of this case, the Company is unable to estimate the reasonably possible loss or range of loss, if any, arising from this matter.
24