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, 2020 filed with the SEC on March 11, 2021, or the Annual Report. The results for the three months ended March 31, 2021 are not necessarily indicative of results to be expected for the year ending December 31, 2021, 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. The Company expects its operating expenses will continue to decrease following the completion of the organizational efficiency initiative in 2020 and the sale of the miraDry business 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 – recent developments
On February 5, 2021, the Company entered into a Second Amended and Restated Credit and Security Agreement (Term Loan), by and among the Company, certain of the Company’s wholly-owned subsidiaries (together with Sientra, the “Borrowers”), the lenders party thereto from time to time and MidCap Financial Trust, as administrative agent and collateral agent (“Agent”) (the “Restated Term Loan Agreement”). The Restated Term Loan Agreement amends and restates the Company’s existing Amended and Restated Credit and Security Agreement (Term Loan), dated as of July 1, 2019.
Also on February 5, 2021, the Company entered in to a Third Amendment to Amended and Restated Credit and Security Agreement (Revolving Loan), by and among the Borrowers, the lenders party thereto from time to time, and the Agent (the “Revolving Loan Amendment”). The Revolving Loan Amendment modified the Net Revenue (as defined therein) requirement in a manner consistent with the modification under the Restated Term Loan Agreement. In addition, the Revolving Loan Amendment made other conforming changes to the Restated Term Loan Agreement.
See Note 6 to the condensed consolidated financial statements for a full description of all of the Company’s long-term debt, revolving line of credit, convertible note, and PPP loan.
7
Equity financing – recent developments
On February 8, 2021, the Company completed a follow-on public offering of 5,410,628 shares of common stock at $6.75 per share, as well as 811,594 additional shares of common stock pursuant to the full exercise of the over-allotment option granted to the underwriters. Net proceeds were approximately $39.2 million after deducting underwriting discounts and commissions of approximately $2.5 million and offering expenses of approximately $0.3 million.
As of March 31, 2021, the Company had cash and cash equivalents of $80.4 million. 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 Company believes that its cash and cash equivalents will be sufficient to fund its operations for at least the next 12 months.
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 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 was permitted. The Company adopted the applicable amendments within ASU 2019-12 in the first quarter of 2021 and there was no material impact on its condensed 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.
8
|
|
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 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 since the second quarter of 2020 and continued to harm the Company’s revenues during the three months ended March 31, 2021. 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. It is not possible to accurately predict the length or severity of the COVID-19 pandemic or the timing for a broad and sustained ability to perform non-emergency procedures involving the Company’s products.
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.
Certain reclassifications have been made to prior year amounts to conform to the current year presentation.
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
9
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 liability for unsatisfied performance obligations under the service warranty as of March 31, 2021 were as follows:
|
|
|
Three Months Ended March 31,
|
|
|
|
|
2021
|
|
|
Balance as of December 31, 2020
|
|
$
|
2,618
|
|
|
Additions and adjustments
|
|
|
427
|
|
|
Revenue recognized
|
|
|
(373
|
)
|
|
Balance as of March 31, 2021
|
|
$
|
2,672
|
|
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):
|
|
|
Three Months Ended March 31,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Beginning balance
|
|
$
|
9,192
|
|
|
$
|
8,116
|
|
|
Addition to reserve for sales activity
|
|
|
36,386
|
|
|
|
28,538
|
|
|
Actual returns
|
|
|
(33,700
|
)
|
|
|
(28,074
|
)
|
|
Change in estimate of sales returns
|
|
|
(858
|
)
|
|
|
127
|
|
|
Ending balance
|
|
$
|
11,020
|
|
|
$
|
8,707
|
|
10
|
3.
|
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 4. 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 March 31, 2021, the carrying value of the long-term debt was not materially different from the fair value. As of March 31, 2021, the carrying value and fair value of the convertible note were as follows (in thousands):
|
|
|
March 31, 2021
|
|
|
|
|
Carrying Value
|
|
|
Fair Value
|
|
|
Convertible note
|
|
$
|
45,131
|
|
|
$
|
39,080
|
|
|
4.
|
Balance Sheet Components
|
Inventories, net consist of the following (in thousands):
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Raw materials
|
|
$
|
5,985
|
|
|
$
|
7,138
|
|
|
Work in progress
|
|
|
8,454
|
|
|
|
12,303
|
|
|
Finished goods
|
|
|
32,184
|
|
|
|
25,791
|
|
|
Finished goods - right of return
|
|
|
3,933
|
|
|
|
3,416
|
|
|
|
|
$
|
50,556
|
|
|
$
|
48,648
|
|
|
|
b.
|
Property and Equipment
|
Property and equipment, net consist of the following (in thousands):
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Leasehold improvements
|
|
$
|
2,909
|
|
|
$
|
2,857
|
|
|
Manufacturing equipment and toolings
|
|
|
9,598
|
|
|
|
9,289
|
|
|
Computer equipment
|
|
|
3,013
|
|
|
|
2,776
|
|
|
Software
|
|
|
4,206
|
|
|
|
3,546
|
|
|
Office equipment
|
|
|
167
|
|
|
|
167
|
|
|
Furniture and fixtures
|
|
|
1,243
|
|
|
|
1,193
|
|
|
|
|
|
21,136
|
|
|
|
19,828
|
|
|
Less accumulated depreciation
|
|
|
(7,748
|
)
|
|
|
(6,722
|
)
|
|
|
|
$
|
13,388
|
|
|
$
|
13,106
|
|
Depreciation expense for the three months ended March 31, 2021 and 2020 was $1.1 million and $0.7 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.
11
The changes in the carrying amount of goodwill during the three months ended March 31, 2021 and the year ended December 31, 2020 were as follows (in thousands):
|
|
|
Breast Products
|
|
|
miraDry
|
|
|
Total
|
|
|
Balances as of December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 March 31, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
23,480
|
|
|
|
7,629
|
|
|
|
31,109
|
|
|
Accumulated impairment losses
|
|
|
(14,278
|
)
|
|
|
(7,629
|
)
|
|
|
(21,907
|
)
|
|
Goodwill, net
|
|
$
|
9,202
|
|
|
$
|
—
|
|
|
$
|
9,202
|
|
As of March 31, 2021, the Breast Products reporting unit had a negative carrying value.
The components of the Company’s other intangible assets consist of the following (in thousands):
|
|
|
Average
|
|
|
|
|
|
|
|
Amortization
|
|
|
March 31, 2021
|
|
|
|
|
Period
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Intangible
|
|
|
|
|
(in years)
|
|
|
Amount
|
|
|
Amortization
|
|
|
Assets, net
|
|
|
Intangibles with definite lives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
|
10
|
|
|
$
|
4,940
|
|
|
$
|
(3,948
|
)
|
|
$
|
992
|
|
|
Trade names - finite life
|
|
|
12
|
|
|
|
800
|
|
|
|
(339
|
)
|
|
|
461
|
|
|
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
|
|
|
|
(1,062
|
)
|
|
|
7,178
|
|
|
Total definite-lived intangible assets
|
|
|
|
|
|
$
|
16,443
|
|
|
$
|
(7,812
|
)
|
|
$
|
8,631
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangibles with indefinite lives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade names - indefinite life
|
|
—
|
|
|
|
450
|
|
|
|
—
|
|
|
|
450
|
|
|
Total indefinite-lived intangible assets
|
|
|
|
|
|
$
|
450
|
|
|
$
|
—
|
|
|
$
|
450
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
December 31, 2020
|
|
|
|
|
Period
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Intangible
|
|
|
|
|
(in years)
|
|
|
Amount
|
|
|
Amortization
|
|
|
Assets, net
|
|
|
Intangibles with definite lives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
|
10
|
|
|
$
|
4,940
|
|
|
$
|
(3,856
|
)
|
|
$
|
1,084
|
|
|
Trade names - finite life
|
|
|
12
|
|
|
|
800
|
|
|
|
(322
|
)
|
|
|
478
|
|
|
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
|
|
|
|
(865
|
)
|
|
|
7,375
|
|
|
Total definite-lived intangible assets
|
|
|
|
|
|
$
|
16,443
|
|
|
$
|
(7,506
|
)
|
|
$
|
8,937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangibles with indefinite lives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade names - indefinite life
|
|
—
|
|
|
|
450
|
|
|
|
—
|
|
|
|
450
|
|
|
Total indefinite-lived intangible assets
|
|
|
|
|
|
$
|
450
|
|
|
$
|
—
|
|
|
$
|
450
|
|
12
Amortization expense for the three months ended March 31, 2021 and 2020 was $0.3 million and $0.6 million, respectively. The following table summarizes the estimated amortization expense relating to the Company's definite-lived intangible assets as of March 31, 2021 (in thousands):
|
|
|
Amortization
|
|
|
Period
|
|
Expense
|
|
|
2021
|
|
$
|
916
|
|
|
2022
|
|
|
1,163
|
|
|
2023
|
|
|
1,092
|
|
|
2024
|
|
|
948
|
|
|
2025
|
|
|
805
|
|
|
Thereafter
|
|
|
3,707
|
|
|
|
|
$
|
8,631
|
|
|
|
d.
|
Accrued and Other Current Liabilities
|
Accrued and other current liabilities consist of the following (in thousands):
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Payroll and related expenses
|
|
$
|
3,445
|
|
|
$
|
3,524
|
|
|
Accrued severance
|
|
|
389
|
|
|
|
2,900
|
|
|
Accrued commissions
|
|
|
3,924
|
|
|
|
5,561
|
|
|
Accrued manufacturing
|
|
|
278
|
|
|
|
225
|
|
|
Deferred and contingent consideration, current portion
|
|
|
10,163
|
|
|
|
10,146
|
|
|
Audit, consulting and legal fees
|
|
|
81
|
|
|
|
48
|
|
|
Accrued sales and marketing expenses
|
|
|
519
|
|
|
|
445
|
|
|
Lease liabilities
|
|
|
1,565
|
|
|
|
1,588
|
|
|
Other
|
|
|
6,571
|
|
|
|
7,952
|
|
|
|
|
$
|
26,935
|
|
|
$
|
32,389
|
|
The following table provides a rollforward of the accrued assurance-type warranties (in thousands):
|
|
|
Three Months Ended March 31,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Balance as of January 1
|
|
$
|
2,001
|
|
|
$
|
1,562
|
|
|
Warranty costs incurred during the period
|
|
|
(175
|
)
|
|
|
(185
|
)
|
|
Changes in accrual related to warranties issued during the period
|
|
|
326
|
|
|
|
242
|
|
|
Changes in accrual related to pre-existing warranties
|
|
|
6
|
|
|
|
(6
|
)
|
|
Balance as of March 31
|
|
$
|
2,158
|
|
|
$
|
1,613
|
|
As of March 31, 2021, $2.1 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 March 31, 2020, $1.5 million is included in “Warranty reserve and other long-term liabilities”, and $0.1 million is included in “Accrued and other current liabilities”.
|
|
f.
|
Liabilities measured at fair value
|
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.
13
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.
|
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 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 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 condensed consolidated balance sheets 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.
14
The following tables present information about the Company’s liabilities that are measured at fair value on a recurring basis as of March 31, 2021 and December 31, 2020 and indicate the level of the fair value hierarchy utilized to determine such fair value (in thousands):
|
|
|
Fair Value Measurements as of
|
|
|
|
|
March 31, 2021 Using:
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability for common stock warrants
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Liability for contingent consideration
|
|
|
—
|
|
|
|
—
|
|
|
|
7,044
|
|
|
|
7,044
|
|
|
Liability for derivative
|
|
|
—
|
|
|
|
—
|
|
|
|
69,310
|
|
|
|
69,310
|
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
76,354
|
|
|
$
|
76,354
|
|
|
|
|
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
|
|
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration liability
|
|
|
Derivative liability
|
|
|
Balance, December 31, 2020
|
|
$
|
7,026
|
|
|
$
|
26,570
|
|
|
Change in fair value
|
|
|
18
|
|
|
|
42,740
|
|
|
Balance, March 31, 2021
|
|
$
|
7,044
|
|
|
$
|
69,310
|
|
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 sheets. The liability for the conversion feature related to the convertible note is included in “Derivative liability” in the condensed 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 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.
Components of lease expense were as follows:
|
|
|
|
|
Three Months Ended March 31,
|
|
|
Lease Cost
|
|
Classification
|
|
2021
|
|
|
2020
|
|
|
Operating lease cost
|
|
Operating expenses
|
|
$
|
428
|
|
|
$
|
413
|
|
|
Operating lease cost
|
|
Inventory
|
|
|
100
|
|
|
|
117
|
|
|
Total operating lease cost
|
|
|
|
$
|
528
|
|
|
$
|
530
|
|
|
Finance lease cost
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of right-of-use assets
|
|
Operating expenses
|
|
|
10
|
|
|
|
10
|
|
|
Amortization of right-of-use assets
|
|
Inventory
|
|
|
12
|
|
|
|
4
|
|
|
Interest on lease liabilities
|
|
Other income (expense), net
|
|
|
2
|
|
|
|
2
|
|
|
Total finance lease cost
|
|
|
|
$
|
24
|
|
|
$
|
16
|
|
|
Total lease cost
|
|
|
|
$
|
552
|
|
|
$
|
546
|
|
15
Short-term lease expense for the three months ended March 31, 2021 and 2020 was not material.
Supplemental cash flow information related to operating and finance leases for the three months ended March 31, 2021 was as follows (in thousands):
|
|
|
Three Months Ended March 31,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
|
|
|
|
|
Operating cash outflows from operating leases
|
|
$
|
418
|
|
|
$
|
487
|
|
|
Operating cash outflows from finance leases
|
|
|
24
|
|
|
|
14
|
|
|
Right-of-use assets obtained in exchange for lease obligations:
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
$
|
—
|
|
|
$
|
1,105
|
|
|
Finance leases
|
|
|
—
|
|
|
|
60
|
|
Supplemental balance sheet information related to operating and finance leases was as follows (in thousands, except lease term and discount rate):
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Reported as:
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
|
|
|
|
|
|
|
Operating lease right-of-use assets
|
|
$
|
6,765
|
|
|
$
|
7,176
|
|
|
Finance lease right-of-use assets
|
|
|
137
|
|
|
|
158
|
|
|
Total right-of use assets
|
|
$
|
6,902
|
|
|
$
|
7,334
|
|
|
Accrued and other current liabilities
|
|
|
|
|
|
|
|
|
|
Operating lease liabilities
|
|
$
|
1,486
|
|
|
$
|
1,504
|
|
|
Finance lease liabilities
|
|
|
79
|
|
|
|
84
|
|
|
Warranty reserve and other long-term liabilities
|
|
|
|
|
|
|
|
|
|
Operating lease liabilities
|
|
|
5,578
|
|
|
|
5,946
|
|
|
Finance lease liabilities
|
|
|
65
|
|
|
|
77
|
|
|
Total lease liabilities
|
|
$
|
7,208
|
|
|
$
|
7,611
|
|
|
Weighted average remaining lease term (years)
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
5
|
|
|
|
5
|
|
|
Finance leases
|
|
|
2
|
|
|
|
2
|
|
|
Weighted average discount rate
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
7.78
|
%
|
|
|
7.75
|
%
|
|
Finance leases
|
|
|
6.10
|
%
|
|
|
6.15
|
%
|
As of March 31, 2021, maturities of the Company’s operating and finance lease liabilities are as follows (in thousands):
|
Period
|
|
Operating leases
|
|
|
Finance leases
|
|
|
Total
|
|
|
Remainder of 2021
|
|
$
|
1,570
|
|
|
$
|
67
|
|
|
$
|
1,637
|
|
|
2022
|
|
|
1,920
|
|
|
|
55
|
|
|
|
1,975
|
|
|
2023
|
|
|
1,968
|
|
|
|
30
|
|
|
|
1,998
|
|
|
2024
|
|
|
1,507
|
|
|
|
1
|
|
|
|
1,508
|
|
|
2025
|
|
|
579
|
|
|
|
—
|
|
|
|
579
|
|
|
2026 and thereafter
|
|
|
955
|
|
|
|
—
|
|
|
|
955
|
|
|
Total lease payments
|
|
$
|
8,499
|
|
|
$
|
153
|
|
|
$
|
8,652
|
|
|
Less imputed interest
|
|
|
1,435
|
|
|
|
9
|
|
|
|
1,444
|
|
|
Total lease liabilities
|
|
$
|
7,064
|
|
|
$
|
144
|
|
|
$
|
7,208
|
|
16
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 provided 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 provided 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 into the Second Amendment to the 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 provided 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 increased the tranche 3 commitment amount from $10.0 million to $15.0 million, extended 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 amended certain financial requirements including reducing the Company’s minimum unrestricted cash amount from $20.0 million to $5.0 million and amended certain minimum net revenue requirements. Further, the monthly minimum net revenue requirements were revised to be calculated on a trailing three-month basis.
On February 5, 2021, the Company entered into a Second Amended and Restated Credit and Security Agreement (Term Loan), by and among the Company, certain of the Company’s subsidiaries, the lenders party thereto from time to time and MidCap Financial Trust, as administrative agent and collateral agent (“Agent”) (the “Restated Term Loan Agreement”). The Restated Term Loan Agreement amends and restates the Company’s existing Amended and Restated Credit and Security Agreement, dated as of July 1, 2019. Pursuant to the Restated Term Loan Agreement, tranche 3 commitments were reduced from $15 million to $1 million and were advanced on the effective date of the Restated Term Loan Agreement and the remaining unfunded tranche of $15 million was revised to two $5 million tranche commitments, with tranche 4 availability commencing on July 1, 2021 and tranche 5 availability commencing July 1, 2022. The parties agreed to extend the last day of the interest only period for all tranches from July 31, 2021 in the Existing Term Loan Agreement to December 31, 2022 in the Restated Term Loan Agreement. The Restated Term Loan Agreement contains certain minimum net revenue requirements based on the Company’s 12-month trailing net revenue, as well as certain minimum unrestricted cash requirements that increase upon the funding of the tranche 4 and tranche 5 loans. The exit fee was modified to apply to only to the amount of any tranche 4 and 5 loans advanced. Finally, in connection with the Restated Term Loan Agreement, the Company agreed to pay an amendment fee of $750,000.
As of March 31, 2021, there was $16.0 million of outstanding principal related to the term loans and $1.4 million of unamortized debt issuance costs which are included in “Long-term debt” on the condensed consolidated balance sheets.
17
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 into 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 included conforming changes to reflect the changes in the Term Amendment. In addition, the Revolving Amendment reduced the borrowing base by the portion of the eligible inventory previously included in the calculation.
Also on February 5, 2021, the Company entered into a Third Amendment to the Amended and Restated Credit and Security Agreement (Revolving Loan), by and among the Company, the lenders party thereto from time to time, and the Agent (the “Revolving Loan Amendment”). The Revolving Loan Amendment modified the net revenue requirement in a manner consistent with the modification under the Restated Term Loan Agreement. In addition, the Revolving Loan Amendment made other conforming changes to the Restated Term Loan Agreement.
As of March 31, 2021, there were no borrowings outstanding under the Revolving Loan. As of March 31, 2021, 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 March 31, 2021 and 2020 were $0.2 million and $0.1 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. Beginning on July 1, 2020, the Company pays quarterly interest in cash on the Note at 4.00% per annum.
18
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 March 31, 2021, the fair value of the derivative liability was $69.3 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 March 31, 2021, the unamortized debt discount and issuance costs were $14.9 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 months ended March 31, 2021 and 2020, the amortization of the convertible debt discount and issuance costs were $0.7 million and $0.2 million, respectively, and were included in interest expense in the condensed consolidated statements of operations.
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 March 31, 2021, $5.8 million is recorded in “Current portion of long-term debt” and $0.8 million is recorded in “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.
19
Future Principal Payments of Debt
The future schedule of principal payments for all outstanding debt as of March 31, 2021 was as follows (in thousands):
|
Fiscal Year
|
|
|
|
|
|
Remainder of 2021
|
|
$
|
3,326
|
|
|
2022
|
|
|
3,326
|
|
|
2023
|
|
|
10,105
|
|
|
2024
|
|
|
5,895
|
|
|
2025
|
|
|
60,000
|
|
|
Total
|
|
$
|
82,652
|
|
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 March 31, 2021 and December 31, 2020, 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 (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, the warrants within Tranche B expired on August 1, 2020, and the warrants within Tranche C expired on December 13, 2020. As of March 31, 2021, there were warrants within Tranche D to purchase an aggregate of 17,040 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 March 31, 2021, a total of 1,738,359 shares of the Company’s common stock were available for issuance under the 2014 Plan.
20
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 March 31, 2021, inducement grants for 1,667,910 shares of common stock have been awarded, and 796,304 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.
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, 2020
|
|
|
1,959,501
|
|
|
$
|
4.79
|
|
|
|
5.92
|
|
|
Exercised
|
|
|
(12,727
|
)
|
|
|
3.99
|
|
|
|
|
|
|
Forfeited
|
|
|
(91,327
|
)
|
|
|
9.90
|
|
|
|
|
|
|
Balances at March 31, 2021
|
|
|
1,855,447
|
|
|
$
|
4.54
|
|
|
|
5.87
|
|
For stock-based awards the Company recognizes compensation expense based on the grant date fair value using the Black-Scholes option valuation model. Stock-based compensation expense related to stock options for the three months ended March 31, 2021 was $0.1 million. There was no stock-based compensation expense related to stock options for the three months ended March 31, 2020. As of March 31, 2021, unrecognized compensation costs related to stock options was $1.9 million.
21
|
|
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. In 2020, the Company implemented a sell-to-cover program for employees who elect to sell shares to cover any withholding taxes due upon vesting. For employees who do not elect to sell shares to cover withholding taxes, the Company nets shares upon vesting and pays the withholding taxes directly.
Activity related to RSUs is set forth below:
|
|
|
|
|
|
|
Weighted
average
|
|
|
|
|
Number
|
|
|
grant date
|
|
|
|
|
of shares
|
|
|
fair value
|
|
|
Balances at December 31, 2020
|
|
|
3,093,790
|
|
|
$
|
6.97
|
|
|
Granted
|
|
|
1,199,518
|
|
|
|
7.39
|
|
|
Vested
|
|
|
(554,896
|
)
|
|
|
6.38
|
|
|
Forfeited
|
|
|
(176,337
|
)
|
|
|
4.34
|
|
|
Balances at March 31, 2021
|
|
|
3,562,075
|
|
|
$
|
7.33
|
|
Stock-based compensation expense for RSUs for the three months ended March 31, 2021 and 2020 was $2.9 million and $1.9 million, respectively. As of March 31, 2021, there was $15.6 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 2.23 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.
During the three months ended March 31, 2021, employees purchased 95,919 shares of common stock at a weighted average price of $3.37 per share. As of March 31, 2021, the number of shares of common stock available for future issuance was 1,356,767.
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 for both the three months ended March 31, 2021 and 2020.
|
|
f.
|
Significant Modifications
|
During the three months ended March 31, 2021 and 2020, there were no material modifications of equity awards.
22
Basic net loss per share attributable to common stockholders is computed by dividing net loss by the weighted average number of common shares outstanding during each period. Diluted net loss per common share is computed by dividing net loss available to common stockholders by the weighted average number of common shares and dilutive potential common share equivalents then outstanding, to the extent they are dilutive. Potential common shares consist of shares issuable upon the exercise of stock options and warrants (using the treasury stock method). Dilutive net loss per share is the same as basic net loss per share for all periods presented because the effects of potentially dilutive items were anti-dilutive.
|
|
|
Three Months Ended March 31,
|
|
|
|
|
2021
|
|
2020
|
|
|
Net loss (in thousands)
|
|
$
|
(54,690
|
)
|
|
$
|
(28,612
|
)
|
|
Weighted average common shares outstanding, basic and diluted
|
|
|
54,321,146
|
|
|
|
49,916,412
|
|
|
Net loss per share attributable to common stockholders
|
|
$
|
(1.01
|
)
|
|
$
|
(0.57
|
)
|
The Company excluded the following potentially dilutive securities, outstanding as of March 31, 2021 and 2020, from the computation of diluted net loss per share attributable to common stockholders for the three months ended March 31, 2021 and 2020 because they had an anti-dilutive impact due to the net loss attributable to common stockholders incurred for the periods.
|
|
|
March 31,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Stock options to purchase common stock
|
|
|
2,455,504
|
|
|
|
1,590,903
|
|
|
Warrants for the purchase of common stock
|
|
|
17,040
|
|
|
|
32,375
|
|
|
Equity contingent consideration
|
|
|
607,442
|
|
|
|
607,442
|
|
|
Stock issuable upon conversion of convertible note
|
|
|
16,175,862
|
|
|
|
19,733,352
|
|
|
|
|
|
19,255,848
|
|
|
|
21,964,072
|
|
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 months ended March 31, 2021 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.
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 months ended March 31, 2021 and 2020.
23
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
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
2021
|
|
|
2020
|
|
|
|
Net sales
|
|
|
|
|
|
|
|
|
|
|
Breast Products
|
|
$
|
18,312
|
|
|
$
|
12,471
|
|
|
|
miraDry
|
|
|
4,924
|
|
|
|
4,461
|
|
|
|
Total net sales
|
|
$
|
23,236
|
|
|
$
|
16,932
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
2021
|
|
|
2020
|
|
|
|
Profit (Loss) from operations
|
|
|
|
|
|
|
|
|
|
|
Breast Products
|
|
$
|
(11,550
|
)
|
|
$
|
(12,363
|
)
|
|
|
miraDry
|
|
|
1,730
|
|
|
|
(14,643
|
)
|
|
|
Total loss from operations
|
|
$
|
(9,820
|
)
|
|
$
|
(27,006
|
)
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Breast Products
|
|
$
|
180,691
|
|
|
$
|
151,059
|
|
|
miraDry
|
|
|
17,722
|
|
|
|
17,919
|
|
|
Total assets
|
|
$
|
198,413
|
|
|
$
|
168,978
|
|
|
11.
|
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.
24
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 the Court granted in a tentative ruling dated March 9, 2021 with leave to replead. The Plaintiffs filed an amended complaint on April 6, 2021 and the Company filed a demurrer to that complaint on May 6, 2021. 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. The Company filed a motion to dismiss the complaint on December 7, 2020. Briefing on the motion is complete and oral argument is presently scheduled for July 2021. 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.
Sale of the miraDry Business
On May 11, 2021, the Company and certain of its subsidiaries entered into an Asset Purchase Agreement (the “Purchase Agreement”) with miraDry Acquisition Company, Inc., a Delaware corporation (“Buyer”), and, solely for purposes of Section 8.14 of the Purchase Agreement, 1315 Capital II, LP, pursuant to which Buyer has agreed to acquire certain assets and rights, and assume certain liabilities, comprising the Company’s miraDry business (the “Business”) for a purchase price of $10,000,000 in cash, subject to certain adjustments (the “Asset Purchase”).
The Purchase Agreement includes customary representations and warranties, as well as certain covenants, including, among other things, that: (i) the Company will abide by certain non-solicitation, exclusivity, and non-competition covenants, and (ii) the Company will enter into a transition services agreement to provide certain transition services related to the Business. The Asset Purchase is anticipated to close in the second quarter of 2021. The Company will report the results of the miraDry business as discontinued operations beginning in the second quarter of 2021 and expects to recognize a loss between $2.5 million and $3.5 million in the same period.
25