a
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2017
OR
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☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 001-36709
SIENTRA, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware | ||
Incorporation or Organization) |
| 20-5551000 (I.R.S. Employer Identification No.) |
420 South Fairview Avenue, Suite 200 Santa Barbara, California (Address of Principal Executive Offices) |
| 93117 (Zip Code) |
(805) 562-3500
(Registrant’s Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ☐ |
| Accelerated filer ☒ |
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|
|
Non-accelerated filer ☐ |
| Smaller reporting company ☐ |
(Do not check if a smaller reporting company) |
| Emerging growth company ☒ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of NovemberAugust 4, 2016,2017, the number of outstanding shares of the registrant’s common stock, par value $0.01 per share, was 18,594,257.19,306,854.
SIENTRA, INC.
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBERJUNE 30, 20162017
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| 1 | |
Condensed Balance Sheets as of |
| 1 |
| 2 | |
| 3 | |
| 4 | |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
| 23 |
Item 3. Quantitative and Qualitative Disclosures About Market Risk |
| 33 |
| 33 | |
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| 36 | |
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
| 66 |
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| 67 | |
| 67 | |
| 69 |
PART I — FINANCIALFINANCIAL INFORMATION
SIENTRA, INC.
(In thousands, except per share and share amounts)
(Unaudited)
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| September 30, |
| December 31, |
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| June 30, |
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| December 31, |
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| 2016 |
| 2015 |
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| 2017 |
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| 2016 |
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Assets |
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Current assets: |
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Cash and cash equivalents |
| $ | 79,282 |
| $ | 112,801 |
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| $ | 55,495 |
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| $ | 67,212 |
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Accounts receivable, net of allowances of $3,890 and $1,116 at September 30, 2016 and December 31, 2015, respectively |
|
| 2,812 |
|
| 4,249 |
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Accounts receivable, net of allowances of $4,532 and $4,329 at June 30, 2017 and December 31, 2016, respectively |
|
| 3,007 |
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| 3,082 |
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Inventories, net |
|
| 19,048 |
|
| 20,602 |
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|
| 16,401 |
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| 18,484 |
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Insurance recovery receivable |
|
| 9,282 |
|
| — |
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|
| 97 |
|
|
| 9,375 |
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Prepaid expenses and other current assets |
|
| 1,429 |
|
| 1,473 |
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|
| 3,401 |
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|
| 1,852 |
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Total current assets |
|
| 111,853 |
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| 139,125 |
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| 78,401 |
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|
| 100,005 |
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Property and equipment, net |
|
| 2,076 |
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| 1,404 |
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|
| 3,788 |
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| 2,986 |
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Goodwill |
|
| 3,273 |
|
| — |
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| 4,878 |
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| 4,878 |
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Other intangible assets, net |
|
| 3,586 |
|
| 53 |
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| 5,332 |
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| 6,186 |
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Other assets |
|
| 231 |
|
| 223 |
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| 1,226 |
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|
| 228 |
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Total assets |
| $ | 121,019 |
| $ | 140,805 |
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| $ | 93,625 |
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| $ | 114,283 |
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Liabilities and Stockholders’ Equity |
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Current liabilities: |
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Current portion of long-term debt |
| $ | 5,000 |
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| $ | — |
| |||||||
Accounts payable |
| $ | 3,201 |
| $ | 4,069 |
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|
| 2,256 |
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| 3,555 |
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Accrued and other current liabilities |
|
| 7,507 |
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| 6,959 |
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|
| 10,354 |
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| 6,507 |
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Legal settlement payable |
|
| 10,900 |
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| — |
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|
| 10,000 |
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|
| 10,900 |
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Customer deposits |
|
| 6,200 |
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| 9,488 |
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|
| 5,862 |
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|
| 6,559 |
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Total current liabilities |
|
| 27,808 |
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| 20,516 |
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| 33,472 |
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|
| 27,521 |
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Warranty reserve and other long-term liabilities |
|
| 2,141 |
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| 1,418 |
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| 4,315 |
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| 3,145 |
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Total liabilities |
|
| 29,949 |
|
| 21,934 |
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| 37,787 |
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| 30,666 |
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Commitments and contingencies (Note 11) |
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Commitments and contingencies (Note 12) |
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Stockholders’ equity: |
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Preferred stock, $0.01 par value – Authorized 10,000,000 shares; none issued or outstanding |
|
| — |
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| — |
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| — |
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| — |
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Common stock, $0.01 par value — Authorized 200,000,000 shares; issued 18,666,984 and 18,066,143 and outstanding 18,594,257 and 17,993,416 shares at September 30, 2016 and December 31, 2015 respectively |
|
| 186 |
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| 180 |
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Common stock, $0.01 par value — Authorized 200,000,000 shares; issued 19,325,332 and 18,671,409 and outstanding 19,252,605 and 18,598,682 shares at June 30, 2017 and December 31, 2016 respectively |
|
| 193 |
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| 186 |
| |||||||
Additional paid-in capital |
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| 298,514 |
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| 294,227 |
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| 303,159 |
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| 299,133 |
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Treasury stock, at cost (72,727 shares at September 30, 2016 and December 31, 2015) |
|
| (260) |
|
| (260) |
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Treasury stock, at cost (72,727 shares at June 30, 2017 and December 31, 2016) |
|
| (260 | ) |
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| (260 | ) | |||||||
Accumulated deficit |
|
| (207,370) |
|
| (175,276) |
|
|
| (247,254 | ) |
|
| (215,442 | ) |
Total stockholders’ equity |
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| 91,070 |
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| 118,871 |
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| 55,838 |
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| 83,617 |
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Total liabilities and stockholders’ equity |
| $ | 121,019 |
| $ | 140,805 |
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| $ | 93,625 |
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| $ | 114,283 |
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See accompanying notes to condensed financial statements.
1
SIENTRA, INC.
Condensed Statements of Operations
(In thousands, except per share and share amounts)
(Unaudited)
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| Three Months Ended |
| Nine Months Ended |
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| Three Months Ended |
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| Six Months Ended |
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| September 30, |
| September 30, |
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| June 30, |
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| June 30, |
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| 2016 |
| 2015 |
| 2016 |
| 2015 |
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| 2017 |
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| 2016 |
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| 2017 |
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| 2016 |
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Net sales |
| $ | 6,531 |
| $ | 9,929 |
| $ | 14,246 |
| $ | 36,569 |
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| $ |
| 8,169 |
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| $ |
| 6,244 |
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| $ |
| 15,658 |
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| $ |
| 7,715 |
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Cost of goods sold |
|
| 1,814 |
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| 2,933 |
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| 4,319 |
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| 10,107 |
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| 2,621 |
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| 1,745 |
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| 4,942 |
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| 2,506 |
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Gross profit |
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| 4,717 |
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| 6,996 |
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| 9,927 |
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| 26,462 |
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| 5,548 |
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| 4,499 |
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| 10,716 |
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| 5,209 |
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Operating expenses: |
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Sales and marketing |
|
| 5,137 |
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| 6,282 |
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| 16,533 |
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| 20,087 |
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| 6,163 |
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| 6,287 |
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| 13,119 |
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| 11,396 |
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Research and development |
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| 2,052 |
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| 2,143 |
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| 7,370 |
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| 4,896 |
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| 1,573 |
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| 3,062 |
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| 4,766 |
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| 5,317 |
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General and administrative |
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| 7,302 |
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| 4,140 |
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| 17,945 |
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| 11,804 |
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| 8,022 |
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|
| 5,357 |
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|
| 14,458 |
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|
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| 10,642 |
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Legal settlement |
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| 10,000 |
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| — |
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| 10,000 |
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|
| — |
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Total operating expenses |
|
| 14,491 |
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| 12,565 |
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| 41,848 |
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| 36,787 |
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| 25,758 |
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| 14,706 |
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| 42,343 |
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| 27,355 |
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Loss from operations |
|
| (9,774) |
|
| (5,569) |
|
| (31,921) |
|
| (10,325) |
|
|
|
| (20,210 | ) |
|
|
| (10,207 | ) |
|
|
| (31,627 | ) |
|
|
| (22,146 | ) |
Other income (expense), net: |
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Interest income |
|
| 16 |
|
| 12 |
|
| 47 |
|
| 19 |
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|
|
| 37 |
|
|
|
| 16 |
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|
|
| 59 |
|
|
|
| 31 |
|
Interest expense |
|
| (105) |
|
| (1,608) |
|
| (118) |
|
| (2,947) |
|
|
|
| (185 | ) |
|
|
| (12 | ) |
|
|
| (194 | ) |
|
|
| (13 | ) |
Other (expense) income, net |
|
| (52) |
|
| 561 |
|
| (54) |
|
| 273 |
| ||||||||||||||||||||
Other income (expense), net |
|
|
| (4 | ) |
|
|
| 10 |
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|
|
| 4 |
|
|
|
| (2 | ) | |||||||||||||
Total other income (expense), net |
|
| (141) |
|
| (1,035) |
|
| (125) |
|
| (2,655) |
|
|
|
| (152 | ) |
|
|
| 14 |
|
|
|
| (131 | ) |
|
|
| 16 |
|
Loss before income taxes |
|
| (9,915) |
|
| (6,604) |
|
| (32,046) |
|
| (12,980) |
|
|
|
| (20,362 | ) |
|
|
| (10,193 | ) |
|
|
| (31,758 | ) |
|
|
| (22,130 | ) |
Income taxes |
|
| 48 |
|
| — |
|
| 48 |
|
| — |
|
|
|
| 29 |
|
|
|
| — |
|
|
|
| 54 |
|
|
|
| — |
|
Net loss |
| $ | (9,963) |
| $ | (6,604) |
| $ | (32,094) |
| $ | (12,980) |
|
| $ |
| (20,391 | ) |
| $ |
| (10,193 | ) |
| $ |
| (31,812 | ) |
| $ |
| (22,130 | ) |
|
|
|
|
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|
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Basic and diluted net loss per share attributable to common stockholders |
| $ | (0.55) |
| $ | (0.43) |
| $ | (1.77) |
| $ | (0.86) |
|
| $ |
| (1.07 | ) |
| $ |
| (0.56 | ) |
| $ |
| (1.68 | ) |
| $ |
| (1.23 | ) |
Weighted average outstanding common shares used for net loss per share attributable to common stockholders: |
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Basic and diluted |
|
| 18,208,112 |
|
| 15,207,870 |
|
| 18,111,593 |
|
| 15,022,022 |
|
|
|
| 19,132,052 |
|
|
|
| 18,075,010 |
|
|
|
| 18,953,500 |
|
|
|
| 18,062,803 |
|
See accompanying notes to condensed financial statements.
2
SIENTRA, INC.
Condensed Statements of Cash Flows
(In thousands)
(Unaudited)
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| Six Months Ended |
| |||||
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| September 30, |
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| June 30, |
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| 2016 |
| 2015 |
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| 2017 |
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| 2016 |
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Cash flows from operating activities: |
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Net loss |
| $ | (32,094) |
| $ | (12,980) |
|
| $ | (31,812 | ) |
| $ | (22,130 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: |
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|
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|
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|
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|
|
|
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Depreciation and amortization |
|
| 734 |
|
| 232 |
|
|
| 1,159 |
|
|
| 425 |
|
Provision for doubtful accounts |
|
| 384 |
|
| 40 |
|
|
| 27 |
|
|
| 331 |
|
Provision for warranties |
|
| 133 |
|
| 445 |
|
|
| 119 |
|
|
| 74 |
|
Provision for inventory |
|
| 519 |
|
| 355 |
|
|
| 367 |
|
|
| 391 |
|
Change in fair value of warrants |
|
| 57 |
|
| (274) |
|
|
| 83 |
|
|
| 6 |
|
Change in fair value of deferred and contingent consideration |
|
| 449 |
|
|
| — |
| |||||||
Non-cash interest expense |
|
| 23 |
|
| 1,387 |
|
|
| 144 |
|
|
| 12 |
|
Stock-based compensation expense |
|
| 2,630 |
|
| 1,759 |
|
|
| 3,182 |
|
|
| 1,664 |
|
Loss on disposal of property and equipment |
|
| 124 |
|
| — |
|
|
| 12 |
|
|
| 122 |
|
Deferred income taxes |
|
| 48 |
|
| — |
|
|
| 54 |
|
|
| — |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
| 1,053 |
|
| 1,511 |
|
|
| 47 |
|
|
| 1,514 |
|
Prepaid expenses, other current assets and other assets |
|
| (58) |
|
| 20 |
|
|
| (2,395 | ) |
|
| (574 | ) |
Inventories |
|
| 1,136 |
|
| (851) |
|
|
| 1,716 |
|
|
| 1,406 |
|
Insurance recovery receivable |
|
| (9,282) |
|
| — |
|
|
| 9,277 |
|
|
| — |
|
Accounts payable |
|
| (986) |
|
| 295 |
|
|
| (1,264 | ) |
|
| (635 | ) |
Accrued and other liabilities |
|
| 460 |
|
| 1,082 |
|
|
| 4,648 |
|
|
| 428 |
|
Legal settlement payable |
|
| 10,900 |
|
| — |
|
|
| (900 | ) |
|
| — |
|
Customer deposits |
|
| (3,288) |
|
| (1,048) |
|
|
| (697 | ) |
|
| (2,530 | ) |
Net cash used in operating activities |
|
| (27,507) |
|
| (8,027) |
|
|
| (15,784 | ) |
|
| (19,496 | ) |
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment |
|
| (916) |
|
| (844) |
|
|
| (1,580 | ) |
|
| (874 | ) |
Business acquisition |
|
| (6,759) |
|
| — |
| ||||||||
Business acquisitions |
|
| — |
|
|
| (6,759 | ) | |||||||
Net cash used in investing activities |
|
| (7,675) |
|
| (844) |
|
|
| (1,580 | ) |
|
| (7,633 | ) |
Cash flows from financing activities: |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options |
|
| 910 |
|
| 113 |
|
|
| 1,096 |
|
|
| 57 |
|
Proceeds from issuance of common stock, net of underwriters discount |
|
| — |
|
| 62,040 |
| ||||||||
Proceeds from issuance of common stock under ESPP |
|
| 753 |
|
| 564 |
|
|
| 324 |
|
|
| 430 |
|
Deferred equity issuance costs, IPO |
|
| — |
|
| (72) |
| ||||||||
Deferred equity issuance costs, follow-on offering |
|
| — |
|
| (77) |
| ||||||||
Repayment of long-term debt |
|
| — |
|
| (1,487) |
| ||||||||
Tax payments related to shares withheld for vested restricted stock units (RSUs) |
|
| (569 | ) |
|
| — |
| |||||||
Gross borrowings under the Revolving Line of Credit |
|
| 5,000 |
|
|
| — |
| |||||||
Deferred financing costs |
|
| (204 | ) |
|
| — |
| |||||||
Net cash provided by financing activities |
|
| 1,663 |
|
| 61,081 |
|
|
| 5,647 |
|
|
| 487 |
|
Net (decrease) increase in cash and cash equivalents |
|
| (33,519) |
|
| 52,210 |
| ||||||||
Net decrease in cash and cash equivalents |
|
| (11,717 | ) |
|
| (26,642 | ) | |||||||
Cash and cash equivalents at: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period |
|
| 112,801 |
|
| 96,729 |
|
|
| 67,212 |
|
|
| 112,801 |
|
End of period |
| $ | 79,282 |
| $ | 148,939 |
|
| $ | 55,495 |
|
| $ | 86,159 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid |
| $ | 96 |
| $ | 1,570 |
|
| $ | 50 |
|
| $ | — |
|
Supplemental disclosure of non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued equity issuance costs |
| $ | — |
| $ | 566 |
| ||||||||
Property and equipment in accounts payable |
|
| 140 |
|
| 36 |
| ||||||||
Property and equipment in accounts payable and accrued liabilities |
|
| 461 |
|
|
| — |
| |||||||
Acquisition of business, deferred and contingent consideration obligations at fair value |
|
| 550 |
|
| — |
|
|
| — |
|
|
| 550 |
|
See accompanying notes to condensed financial statements.
3
SIENTRA, INC.
Notes to the Condensed Financial Statements
(Unaudited)
1.Formation and Business of the Company
a.Formation
1. | Formation and Business of the Company |
a. | Formation |
Sientra, Inc., or the Company, was incorporated in the State of Delaware on August 29, 2003 under the name Juliet Medical, Inc. and subsequently changed its name to Sientra, Inc. in April 2007. The Company acquired substantially all the assets of Silimed, Inc. on April 4, 2007. The purpose of the acquisition was to acquire the rights to the silicone breast implant clinical trials, related product specifications and premarket approval, or PMA, assets. Following this acquisition, the Company focused on completing the clinical trials to gain Food and Drug Administration, or FDA, approval to offer its silicone gel breast implants in the United States.
In March 2012, Sientra announced it had received approval from the FDA for its portfolio of silicone gel breast implants, and in the second quarter of 2012 the Company began commercialization efforts to sell its products in the United States. The Company, based in Santa Barbara, California, is a medical aesthetics company that focuses on serving board-certified plastic surgeons and offers a portfolio of silicone shaped and round breast implants, scar management, tissue expanders, and body contouring products.
In November 2014, the Company completed an initial public offering, or IPO, and its common stock is listed on the Nasdaq Stock Exchange under the symbol “SIEN.”
b. | Regulatory Inquiries Regarding Products Manufactured by Silimed |
b. Follow-On Offering
On September 23, 2015, the Company closed a follow-on public offering, whereby it sold 3,000,000 shares of its common stock, at a price to the public of $22.00 per share. The Company received net proceeds from the follow-on offering of approximately $61.4 million after deducting underwriting discounts and commissions of $4.0 million and offering expenses of approximately $0.6 million.
c. Regulatory Inquiries Regarding Products Manufactured by Silimed
There have been recent regulatory inquiries related to medical devices manufactured by Silimed IndustriaIndústria de Implantes Ltda. (formerly, Silimed-Silicone e Instrumental Medico-Cirugio e Hospitalar Ltda.), or Silimed, the Company’s former sole source contract manufacturer for its silicone gel breast implants and certain other products.implants.
On September 23, 2015, the Medicines and Healthcare Products Regulatory Agency, or MHRA, an executive agency of the United Kingdom, or U.K., issued a press release announcingannounced the suspension of sales and implanting in the U.K. of all medical devices manufactured by Silimed following the suspension of the CE certificateand ISO 13485 certifications of these products issued by TUV SUD,TÜV SÜD, Silimed’s notified body under European Union, or EU, regulation. The suspension of Silimed’s CE certificate by TUV SUD followed TUV SUD’sTÜV SÜD’s inspection at Silimed’s manufacturing facilities in Brazil, relating to the alleged presence of surface particles on Silimed breast products. Breast implants have stringent standards for manufacturing and robust quality systems, but there is no specific or defined standard for surface particles on breast implants. MHRA noted that no risks to patient health have been identified in connection with implanting Silimed products, and, accordingly, there is no need to adopt any procedure or action for those patients who have received them.
On October 2, 2015, the Brazilian regulatory agency ANVISA and the Department of the Secretary of State of the State of Rio de Janeiro announced that as a precautionary measure, they temporarily suspendedthe suspension of the manufacturing and shipment of all medical devices made by Silimed, including products manufactured for Sientra, while they continue to reviewreviewed the technical compliance related to Good Manufacturing Practices,current good manufacturing practices, or GMP,cGMP, of Silimed’s manufacturing facility. ANVISA reiterated that no risks to patient health have been identified in connection with implanting Silimed products, and, accordingly, there is no need to adopt any procedure or action for those patients who have received them. Furthermore,
4
ANVISA also indicated that, based on its contact to date with foreign regulatory authorities, there have been no reports of adverse events related to this issue.facilities.
On October 9, 2015, the Company voluntarily placed a hold on the sale of all Sientra devices manufactured by Silimed and recommended that plastic surgeons discontinue implanting the devices until further notice. The Company had ongoing discussions with the FDA regarding European and Brazilian regulatory inquiries into Silimed products, and the Company conducted its own review of the matter with the assistance of independent experts in quality management systems, GMP and data-based risk assessment. The FDA also reiterated that no reports of adverse events and no risks to patient health had been identified in connection with implanting Silimed products.
On January 27, 2016, after completing an analysis and risk assessment, ANVISA announced its authorization of Silimed to resume the commercialization and use of its previously manufactured products. ANVISA concluded there was no evidence to prove that the presence of surface particles on the silicone implants represented risks which are additional to the onesthose inherent in the product. However, Silimed would continue to be suspended from manufacturing and commercializing new batches of implants until an inspection was performed to reassess the fulfillment of its GMP compliance.
On March 1, 2016, after the completion of extensive independent, third-party testing and analyses of its devices manufactured by Silimed, the Company lifted the temporary hold on the sale of such devices. The Company also sent a letter to plastic surgeons informing themdevices and informed its Plastic Surgeons of the Company’s controlled market re-entry plansplan designed to optimize the Company’s inventory supply. The results of the Company’s testing indicateindicated no anticipated significant safety concerns with the use of its products, including its breast implants, consistent with their approval status since 2012. Additionally, the FDA reiterated prior statements of MHRA and ANVISA that no reports of adverse events and no risks to patient health had been identified in connection with implanting Silimed-manufactured products.
On July 11, 2016, after completing an inspection of Silimed’s facility, ANVISA announced the reinstatement of Silimed’s GMP certificate, valid for two years, and their ability to manufacture commercial products. The Brazilian GMP certificate is effective as of July 8, 2016 and is valid for two years. The Silimed facility that has beenwas approved for manufacturing is an alternatea different facility tofrom where Sientra productsbreast implants were previously manufactured, which was damaged by a fire on October 22, 2015, and it remains unclear as to whether the alternate facility is fully equipped to manufacture Sientra’s silicone gel breast implants. Moreover, even if the alternate facility was equipped to manufacture Sientra’s silicone gel breast implants, such products cannot be sold in the U.S. until a PMA supplement for that facility is submitted, Silimed’s operations have been fully validated to U.S. FDA standards and they have successfully passed an FDA inspection, the timing of which remains uncertain. Additionally, the2015. The suspension of Silimed’s CE certificateand ISO 13485 certifications by TUV SUDTÜV SÜD remains in place and continues to limit Silimed’s ability to sell to countries requiring a CE mark.place. The Company’s existing manufacturing contract with Silimed expiresexpired on its terms in April 2017.2017 and the Company did not renew the contract.
For more information on the status of the Company’s relationship with Silimed, see Note 12—Subsequent Events—Silimed Litigation. 12 – Commitments and Contingencies.
2.
| Summary of Significant Accounting Policies |
| a. | Basis of Presentation |
The accompanying unaudited condensed financial statements in this Quarterly Report on Form 10-Q have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP, and the rules and regulations of the U.S. Securities and Exchange Commission, or SEC. Accordingly, they do not include certain footnotes and financial presentations normally required under accounting principles generally accepted in the United States of America for complete financial reporting. The interim financial information is unaudited, but reflects all normal adjustments and accruals which are, in the opinion of management, considered necessary to provide a fair presentation for the interim periods presented. The accompanying condensed financial statements should be read in conjunction with the Company’s audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 20152016 filed with the SEC on March 10, 2016,14, 2017, or the Annual Report. The results for the three and ninesix months ended SeptemberJune 30, 20162017 are not necessarily indicative of results to be expected for the year ending December 31, 2016,2017, any other interim periods, or any future year or period.
5
b.Going Concern
| b. | Going Concern |
The accompanying financial statements have been prepared on a going concern basis, which implies the Company will continue to realize its assets and discharge its liabilities in the normal course of business. As of September 30, 2016,The Company’s manufacturing contract with Silimed, isexpired on its terms on April 1, 2017, and the Company’s sole source manufacturer of silicone gel breast implants and certain other products, but hasCompany did not been able to resume manufacturing products for the Company.renew that contract. Accordingly, the Company continues to evaluate the availability of alternative manufacturing sources, including with Vesta Intermediate Funding, Inc., or Vesta, a Lubrizol Lifesciences company, which is establishing manufacturing capacity for the Company and is working with which the Company to finalizeexecuted a definitive manufacturing agreement for the long-term supply arrangement forof the Company’s PMA-approved breast implants. The continuation of the Company as a going concern is dependent upon many factors including Silimed’s ability to resume the manufacturing of the Company’s medical devices, resolution of any outstanding disputes with Silimed (see Note 12—Subsequent Events – Silimed Litigation)Commitments and Contingencies), the availability of alternative manufacturing sources, including the entry into a long-term supply arrangement with Vesta or other manufacturers, and continued sale of the Company’s products. Since inception, the Company has incurred net losses. At SeptemberAs of June 30, 2016,2017, the Company had cash and cash equivalents of $79.3$55.5 million. The Company’s abilityFurthermore, through the Loan and Security Agreement, Silicon Valley bank made available to continuethe Company a revolving line of credit of up to meet its obligations$15.0 million, or the Revolving Line, and to achieve its business objectives is dependent upon, amongst other things, generating sufficient revenues.a $5.0 million term loan, or the Term Loan. The Company believes that it has the ability to continue as a going concern for at least 12 months.months from the date the Company’s financial statements are issued. These financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
c.UseOn July 25, 2017, the Company acquired Miramar Labs, Inc. and also entered into certain credit agreements with Midcap Financial Trust (see Subsequent Events – Acquisition of EstimatesMiramar Labs and Credit Agreements with MidCap Financial Trust for more information).
The preparation of the condensed 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 financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
d.Significant Accounting Policies
| d. | Significant Accounting Policies |
There have been no significant changes to the accounting policies during the three and ninesix months ended SeptemberJune 30, 2016,2017, as compared to the significant accounting policies described in the “Notes to Financial Statements” in the Annual Report.
e.Recent Accounting Pronouncements
| e. | Recent Accounting Pronouncements |
Recently Adopted Accounting Standards
In NovemberJuly 2015, the Financial Accounting Standards Board, or FASB issued accounting standard update, or ASU, 2015-17, 2015-11, Balance Sheet ClassificationInventory - Simplifying the Measurement of Deferred TaxesInventory, which. The standard simplifies the presentationsubsequent measurement of deferred income taxes.inventory by requiring inventory to be measured at the lower of cost and net realizable value, thereby simplifying the current guidance under which an entity must measure inventory at the lower of cost or market. The standard requiresaccounting standards update will not apply to inventories that deferred tax assets and liabilities be classified as noncurrent onare measured by using either the balance sheet rather than being separated into current and noncurrent. ASU 2015-17 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. Early adoption is permitted andlast-in, first-out method or the standard may be applied either retrospectively or on a prospective basis to all deferred tax assets and liabilities. retail inventory method. The Company early adopted ASU 2015-17 during2015-11 in the thirdfirst quarter of 20162017 on a prospective basis. The adoption of this ASU did not have a significantmaterial impact on the Company’s financial statements.
In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718). The standard identifies areas for simplification involving several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the statement of cash flows. The Company adopted ASU 2016-09 in the first quarter of 2017 on a prospective basis. The Company has made an accounting policy election to account for forfeitures when they occur. The adoption of this ASU did not have a material impact on the Company’s financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment. The standard update eliminates Step 2 from the goodwill impairment test. The guidance requires an entity to perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. In addition, the guidance eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment. The standard will be effective for the Company beginning in fiscal year 2020. Early adoption is permitted for interim and annual goodwill impairment tests performed after January 1, 2017. The Company adopted ASU 2017-04 in the first quarter of 2017 on a prospective basis. The adoption of this ASU did not have a material impact on the Company’s financial statements. The Company will reassess any impact at year end
Recently Issued Accounting Standards
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers.Customers. The standard was issued to provide a single framework that replaces existing industry and transaction specific GAAP with a five step analysis of transactions to determine when and how revenue is recognized. The accounting standard update will replace most existing revenue recognition guidance in GAAP when it becomes effective. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, to defer the effective date of ASU 2014-09 by one year. Therefore, ASU 2014-09 will become effective for the Company beginning in fiscal year 2018.
6
Early adoption would be permitted for the Company beginning in fiscal year 2017. The standard permits the use of either the retrospective or cumulative transition method. The Company is currently evaluating the accounting, transition and disclosure requirements of the standard and cannot currently estimate the financial statement impact of adoption.
In FebruaryDecember 2016, the FASB issued ASU 2016-02,2016-20, Leases (Topic 842)Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers.
which supersedes FASB Accounting Standard Codification Leases (Topic 840). The standardASU 2016-20 is intended to increaseclarify and suggest improvements to the transparencyapplication of current standards under Topic 606 and comparability among organizationsother Topics amended by recognizing lease assets and lease liabilities onASU 2014-09, Revenue from Contracts with Customers (Topic 606). The effective date of ASU 2016-20 is the balance sheet and disclosing key information about leasing arrangements. This accountingsame as the effective date for ASU 2014-09. In preparation for our adoption of the new standard update will be effective for the Company beginning in our fiscal year 2019. The Companyending December 31, 2018, we are reviewing contracts and other forms of agreements with our customers and are evaluating the provisions contained therein in light of the five-step model specified by the new guidance. That five-step model includes: (1) determination of whether a contract—an agreement between two or more parties that creates legally enforceable rights and obligations—exists; (2) identification of the performance obligations in the contract; (3) determination of the transaction price; (4) allocation of the transaction price to the performance obligations in the contract; and (5) recognition of revenue when (or as) the performance obligation is currentlysatisfied. We are also evaluating the impact that adoption of the new standard on certain common practices currently employed by us and by other medical device companies, such as allowance for sales returns, rebates, warranty and other pricing programs. We have not yet determined the impact of the new standard on our financial statements or whether we will haveadopt on a prospective or retrospective basis in the financial statements and related disclosures.first quarter of our fiscal year ending December 31, 2018.
In March 2016,January 2017, the FASB issued ASU 2016-09, 2017-01, Business Combinations (Topic 805) - Clarifying the DefinitionCompensation – Stock Compensation (Topic 718). The standard identifies areas for simplification involving several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the statement of cash flows. This accounting standard update will be effective for the Company beginning in fiscal year 2017. The Company is currently evaluating the impact that adoption of the standard will have on the financial statements and related disclosures.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows – Classifications of Certain Cash Receipts and Cash Payments (Topic 230)a Business. The standard update addresses eightadds guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses by providing a more specific cash flow issues not currently addressed by GAAP, with the objectivedefinition of reducing the existing diversity in practice of how these cash receipts and payments are presented and classified in the statement of cash flows. Thisa business. The updated accounting standard update will be effective for the Company beginning in fiscal year 2018. The Company is currently evaluatingwill evaluate the impact thatof this ASU on future acquisitions.
In May 2017, the FASB issued ASU 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting. The standard provides clarification on when modification accounting should be used for changes to the terms or conditions of a share-based payment award to which an entity would be required to apply modification accounting under ASC 718. The ASU is effective for the Company beginning in fiscal year 2018. The Company does not expect the adoption of the standardthis guidance will have a material impact on theits consolidated financial statements and related disclosures.
In July 2017, the FASB issued ASU 2017-11, f.Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815). The standard is broken in to two parts. Part I addresses the complexity of accounting for certain financial instruments with down round features. Part II addresses the difficulty of navigating Topic 480 because of the existence of extensive pending content in the ReclassificationsFASB Accounting Standards Codification
Certain reclassifications. The ASU is effective for the Company beginning in fiscal year 2019. We have been made to prior year amounts to conform tonot yet determined the current year presentation.
3.Acquisitionimpact of bioCorneum®the new standard on our financial statements.
3. | Acquisitions |
| a. | Acquisition of BIOCORNEUM® |
On March 9, 2016, the Company entered into an assets purchase agreement with Enaltus LLC, or Enaltus, to acquire exclusive U.S. rights to bioCorneum®BIOCORNEUM®, an advanced silicone scar treatment marketed exclusively to physicians. The acquisition of bioCorneum®BIOCORNEUM® aligns with the Company’s business development objectives and adds a complementary product that serves the needs of its customers. In connection with the acquisition, the Company recorded $2,000$0.0 and $0.2 million of professional fees for the three and ninesix months ended SeptemberJune 30, 2016, respectively, which are included in general and administrative expense. The company did not record any professional fees related to the acquisition for the three and six months ended June 30, 2017. The aggregate preliminary acquisition date fair value of the consideration transferred was estimated at $7.4 million, which consisted of the following (in thousands):
| |||
|
| ||
| |||
| |||
|
|
| Fair Value |
| |
Cash |
| $ | 6,859 |
|
Deferred consideration |
|
| 434 |
|
Contingent consideration |
|
| 116 |
|
|
| $ | 7,409 |
|
The deferred consideration and contingent consideration consist of future royalty payments to be paid on a quarterly basis to Enaltus on future bioCorneum®BIOCORNEUM® sales for the 4.5 years beginning January 1, 2024. The Company has determined the fair value of the deferred consideration and contingent consideration at the acquisition date using a Monte Carlo simulation model. The fair value of the deferred consideration is based on the future minimum royalty payments using the risk-free U.S. Treasury yield curve discount rate. The minimum estimated future payments due under the deferred consideration are $0.5 million. The fair value of the contingent consideration is based on projected future bioCorneum®BIOCORNEUM® sales and a risk adjusted discount rate. The terms of the agreement do not provide for a limitation on the maximum potential future payments. The inputs are significant inputs not observable in the market, which are referred to as Level 3 inputs and are
7
further discussed in Note 5. The deferred consideration and contingent consideration components are classified as an other long-term liability and are subject to the recognition of subsequent changes in fair value through general and administrative expense in the resultsstatement of operations.
The Company allocated the total consideration transferred to the tangible and identifiable intangible assets acquired based on their respective fair values on the acquisition date, with the remaining unallocated amount recorded as goodwill. The goodwill arising from the transaction is primarily attributable to expected operational synergies, and all of goodwill will be deductible for income tax purposes. The condensed financial statements for the three and ninesix months ended SeptemberJune 30, 2017 and 2016 include the results of operations of bioCorneum®BIOCORNEUM® from the date of acquisition.
The following table summarizes the allocation of the fair value of the consideration transferred by major class for the business combination completed on March 9, 2016 (in thousands):
| |||
| |||
|
| ||
| |||
| |||
| |||
|
|
| March 9, |
| |
|
| 2016 |
| |
Inventory |
| $ | 100 |
|
Prepaid expenses |
|
| 36 |
|
Goodwill |
|
| 3,273 |
|
Intangible assets |
|
| 4,000 |
|
|
| $ | 7,409 |
|
A summary of the intangible assets acquired, estimated useful lives and amortization method is as follows (in thousands):
|
|
|
|
|
|
|
| ||||||||||
|
|
|
|
| Estimated useful |
| Amortization |
|
|
|
|
| Estimated useful |
|
| Amortization | |
|
| Amount |
| life (in years) |
| method |
| Amount |
|
| life (in years) |
|
| method | |||
Customer relationships |
| $ | 3,200 |
| 10 |
| Accelerated |
| $ | 3,200 |
|
|
| 10 |
|
| Accelerated |
Trade name |
|
| 800 |
| 12 |
| Straight-line |
|
| 800 |
|
|
| 12 |
|
| Straight-line |
|
| $ | 4,000 |
|
|
|
|
| $ | 4,000 |
|
|
|
|
|
|
|
The Company retained an independent third-party appraiser to assist management in its valuation and the purchase price has been finalized. Pro forma results of operations have not been presented because the effect of the acquisition was not material to the Company's results of operations.
On November 2, 2016, the Company entered into an asset purchase agreement with Specialty Surgical Products, Inc., or SSP, to acquire certain assets, consisting of the Dermaspan™, Softspan™, and AlloX2® tissue expanders, from SSP. The acquisition adds a complete portfolio of premium, differentiated tissue expanders and aligns with the Company’s business development plans for growth in the breast reconstruction market. The Company did not record any professional fees for the three and six months ended June 30, 2017 and 2016 in connection with the acquisition. The aggregate preliminary acquisition date fair value of the consideration transferred was estimated at $6.0 million, which consisted of the following (in thousands):
|
| Fair Value |
| |
Cash |
| $ | 4,950 |
|
Contingent consideration |
|
| 1,050 |
|
|
| $ | 6,000 |
|
The contingent consideration consists of future cash payments of a maximum of $2.0 million to be paid to SSP based upon the achievement of certain milestones of future net sales. The Company has determined the fair value of the contingent consideration at the acquisition date using a Monte-Carlo simulation model. The inputs include the estimated amount and timing of future net sales, and a risk-adjusted discount rate. The inputs are significant inputs not observable in the market, which are referred to as Level 3 inputs and are further discussed in Note 5. The contingent consideration components are classified as other long-term liabilities and are subject to the recognition of subsequent changes in fair value through general and administrative expense in the statement of operations.
The Company allocated the total consideration transferred to the tangible and identifiable intangible assets acquired and liabilities assumed based on their respective fair values on the acquisition date, with the remaining unallocated amount recorded as goodwill. The goodwill arising from the transaction is primarily attributable to expected operational synergies, and all of goodwill will be deductible for income tax purposes. The financial statements for the three and six months ended June 30, 2017 include the results of operations of the Dermaspan™, Softspan™, and AlloX2® tissue expanders.
The following table summarizes the allocation of the fair value of the consideration transferred by major class for the business combination completed on November 2, 2016 (in thousands):
|
| November 2, |
| |
|
| 2016 |
| |
Accounts receivable, net |
| $ | 196 |
|
Inventory |
|
| 1,555 |
|
Equipment |
|
| 34 |
|
Goodwill |
|
| 1,605 |
|
Intangible assets |
|
| 2,860 |
|
Liabilities assumed |
|
| (250 | ) |
|
| $ | 6,000 |
|
A summary of the intangible assets acquired, estimated useful lives and amortization method is as follows (in thousands):
|
|
|
|
|
| Estimated useful |
| Amortization |
|
| Amount |
|
| life |
| method | |
Customer relationships |
| $ | 1,740 |
|
| 9 years |
| Accelerated |
Regulatory approvals |
|
| 670 |
|
| 14 months |
| Straight-line |
Trade names |
|
| 450 |
|
| indefinite-lived |
|
|
|
| $ | 2,860 |
|
|
|
|
|
The Company retained an independent third-party appraiser to assist management in its valuation; however, the purchase price allocation has not been finalized. This could result in adjustmentsThe primary areas of the preliminary purchase price allocation that are not yet finalized relate to the carryingfair values of certain tangible assets and liabilities acquired, the valuation of intangible assets acquired, and residual goodwill. The Company expects to continue to obtain information to assist in determining the fair value of the net assets acquired and liabilities assumed,at the useful lives of intangible assets and residual amount allocated to goodwill.acquisition date during the measurement period. The preliminary allocation of the purchase price is based on the best estimates of management and is subject to revision based on the final valuations and estimates of useful lives.
Pro forma results of operations have not been presented because the effect of the acquisition was not material to the Company's condensed results of operations.
c. | Acquisition Miramar Labs |
4.Fair ValueOn July 25, 2017, the Company acquired Miramar Labs, Inc. (see Note 13 – Subsequent Events – Acquisition of Financial InstrumentsMiramar Labs).
4. | Fair Value of Financial Instruments |
The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, and customer deposits are reasonable estimates of their fair value because of the short maturity of these items. TheSee Note 5 for discussion of the fair value of the common stock warrant liability, deferred consideration and contingent consideration is discussed in Note 5.consideration. As of SeptemberJune 30, 2016,2017, the Company had no outstanding long-term debt.
5. | Fair Value Measurements |
8
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.
Level 2 — Observable inputs (other than Level 1 quoted prices) such as quoted prices in active markets for similar assets or liabilities, quoted prices in markets that are not active for identical or similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data. |
|
|
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to determining the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques.
|
|
|
|
The Company’s common stock warrant liabilities are carried at fair value determined according to the fair value hierarchy described above. The Company has utilized an option pricing valuation model to determine the fair value of its outstanding common stock warrant liabilities. The inputs to the model include fair value of the common stock related to the warrant, exercise price of the warrant, expected term, expected volatility, risk-free interest rate and dividend yield. The warrants are valued using the fair value of common stock as of the measurement date. The Company historically has been a private company and lacks company-specific historical and implied volatility information of its stock. Therefore, it estimates its expected stock volatility based on the historical volatility of publicly traded peer companies for a term equal to the remaining contractual term of the warrants. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve for time periods approximately equal to the remaining contractual term of the warrants. The Company has estimated a 0% dividend yield based on the expected dividend yield and the fact that the Company has never paid or declared dividends. As several significant inputs are not observable, the overall fair value measurement of the warrants is classified as Level 3.
The Company assessed the fair value of the deferred consideration and contingent consideration for future royalty payments related to the acquisition of bioCorneum®BIOCORNEUM® and the contingent consideration for future milestone payments for the acquisition of the tissue expander portfolio from SSP using the Monte CarloMonte-Carlo simulation model. Significant assumptions used in the measurement include future net sales for a defined term and the risk adjustedrisk-adjusted discount rate associated with the business. As the inputs are not observable, the overall, fair value measurement of the deferred consideration and contingent consideration is classified as Level 3.
9
The following tables present information about the Company’s liabilities that are measured at fair value on a recurring basis as of SeptemberJune 30, 20162017 and December 31, 20152016 and indicate the level of the fair value hierarchy utilized to determine such fair value (in thousands):
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|
|
|
| ||||||||||||||||
|
| Fair Value Measurements as of |
|
| Fair Value Measurements as of |
| |||||||||||||||||||||||
|
| September 30, 2016 Using: |
|
| June 30, 2017 Using: |
| |||||||||||||||||||||||
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| Total |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| Total |
| |||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability for common stock warrants |
| $ | — |
|
| — |
|
| 117 |
|
| 117 |
|
| $ | — |
|
|
| — |
|
|
| 182 |
|
|
| 182 |
|
Liability for deferred consideration |
|
| — |
|
| — |
|
| 439 |
|
| 439 |
|
|
| — |
|
|
| — |
|
|
| 381 |
|
|
| 381 |
|
Liability for contingent consideration |
|
| — |
|
| — |
|
| 131 |
|
| 131 |
|
|
| — |
|
|
| — |
|
|
| 1,705 |
|
|
| 1,705 |
|
|
| $ | — |
|
| — |
|
| 687 |
|
| 687 |
|
| $ | — |
|
|
| — |
|
|
| 2,268 |
|
|
| 2,268 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
|
| Fair Value Measurements as of |
|
| Fair Value Measurements as of |
| |||||||||||||||||||||||
|
| December 31, 2015 Using: |
|
| December 31, 2016 Using: |
| |||||||||||||||||||||||
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| Total |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| Total |
| |||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability for common stock warrants |
| $ | — |
|
| — |
|
| 60 |
|
| 60 |
|
| $ | — |
|
|
| — |
|
|
| 99 |
|
|
| 99 |
|
Liability for deferred consideration |
|
| — |
|
|
| — |
|
|
| 395 |
|
|
| 395 |
| |||||||||||||
Liability for contingent consideration |
|
| — |
|
|
| — |
|
|
| 1,242 |
|
|
| 1,242 |
| |||||||||||||
|
| $ | — |
|
| — |
|
| 60 |
|
| 60 |
|
| $ | — |
|
|
| — |
|
|
| 1,736 |
|
|
| 1,736 |
|
The liability for common stock warrants is included in “accrued and other current liabilities” and the liability for the deferred consideration and contingent consideration is included in the “warranty reserve and other long-term liabilities” in the balance sheet. The following table provides a rollforward of the aggregate fair values of the Company’s common stock warrants, deferred and contingent consideration for which fair value is determined by Level 3 inputs (in thousands):
| |||
|
| ||
| |||
|
| ||
| |||
|
|
| |
| |||
| |||
|
| ||
| |||
|
|
| |
| |||
| |||
|
|
Warrant Liability |
|
|
|
|
Balance, December 31, 2016 |
| $ | 99 |
|
Fair value of warrants to be issued upon borrowing under the Silicon Valley Bank term loan (Note 9) |
|
| 88 |
|
Change in fair value through June 30, 2017 |
|
| (5 | ) |
Balance, June 30, 2017 |
| $ | 182 |
|
Deferred Consideration Liability |
|
|
|
|
Balance, December 31, 2016 |
| $ | 395 |
|
Change in fair value of deferred consideration |
|
| (14 | ) |
Balance, June 30, 2017 |
| $ | 381 |
|
Contingent Consideration Liability |
|
|
|
|
Balance, December 31, 2016 |
| $ | 1,242 |
|
Change in fair value of contingent consideration |
|
| 463 |
|
Balance, June 30, 2017 |
| $ | 1,705 |
|
The Company recognizes changes in the fair value of the warrants deferred consideration and contingent consideration in “other income (expense), net” in the statement of operations and changes in deferred consideration and contingent consideration are recognized in “general and administrative” expense in the statement of operations.
The Company offers a limited warranty and a lifetime product replacement program for the Company’s silicone gel breast implants. Under the limited warranty, the Company will reimburse patients for certain out-of-pocket costs related to revision surgeries performed within ten years from the date of implantation in a covered event. Under the lifetime product replacement program, the Company provides no-charge replacement breast implants if a patient experiences a covered event. The programs are available to all patients implanted with the Company’s silicone breast implants after April 1, 2012 and are subject to the terms, conditions, claim procedures, limitations and exclusions. Timely completion of a device
10
tracking and warranty enrollment form by the patient’s Plastic Surgeon is required to activate the programs and for the patient to be able to receive benefits under either program.
The following table provides a rollforward of the accrued warranties (in thousands):
|
|
|
|
|
|
|
|
| Six Months Ended June 30, |
| |||||
|
|
| Nine Months Ended September 30, |
|
| 2017 |
|
| 2016 |
| |||||
|
|
| 2016 |
|
| 2015 |
| ||||||||
Beginning balance as of December 31 |
| $ | 1,332 |
| $ | 961 |
| ||||||||
Beginning balance as of January 1 |
| $ | 1,378 |
|
| $ | 1,332 |
| |||||||
Payments made during the period |
|
| (19) |
|
| (15) |
|
|
| — |
|
|
| (9 | ) |
Changes in accrual related to warranties issued during the period |
|
| 134 |
|
| 438 |
|
|
| 110 |
|
|
| 76 |
|
Changes in accrual related to pre-existing warranties |
|
| (1) |
|
| 7 |
|
|
| 9 |
|
|
| (2 | ) |
Balance as of September 30 |
| $ | 1,446 |
| $ | 1,391 |
| ||||||||
Balance as of June 30 |
| $ | 1,497 |
|
| $ | 1,397 |
|
7. | Net Loss Per Share |
Basic net loss per share attributable to common stockholders is computed by dividing net loss by the weighted average number of common shares outstanding during each period. Diluted net loss per common share is computed by dividing net loss available to common stockholders by the weighted average number of common shares and dilutive potential common share equivalents then outstanding, to the extent they are dilutive. Potential common shares consist of shares issuable upon the exercise of stock options and warrants (using the treasury stock method). Dilutive net loss per share is the same as basic net loss per share for all periods presented because the effects of potentially dilutive items were anti-dilutive.
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, |
|
| Three Months Ended June 30, |
|
| Six Months Ended June 30, |
| ||||||||||||||||||||
|
| 2016 |
| 2015 |
| 2016 |
| 2015 |
|
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| ||||||||||
Net loss (in thousands) |
| $ | (9,963) |
| $ | (6,604) |
| $ | (32,094) |
| $ | (12,980) |
|
| $ |
| (20,391 | ) |
| $ |
| (10,193 | ) |
| $ | (31,812 | ) |
| $ | (22,130 | ) |
Weighted average common shares outstanding, basic and diluted |
|
| 18,208,112 |
|
| 15,207,870 |
|
| 18,111,593 |
|
| 15,022,022 |
|
|
|
| 19,132,052 |
|
|
|
| 18,075,010 |
|
|
| 18,953,500 |
|
|
| 18,062,803 |
|
Net loss per share attributable to common stockholders |
| $ | (0.55) |
| $ | (0.43) |
| $ | (1.77) |
| $ | (0.86) |
|
| $ |
| (1.07 | ) |
| $ |
| (0.56 | ) |
| $ | (1.68 | ) |
| $ | (1.23 | ) |
The Company excluded the following potentially dilutive securities, outstanding as of SeptemberJune 30, 20162017 and 2015,2016, from the computation of diluted net loss per share attributable to common stockholders for the three and ninesix months ended SeptemberJune 30, 20162017 and 20152016 because they had an anti-dilutive impact due to the net loss attributable to common stockholders incurred for the periods.
|
|
|
|
|
|
| |||||||||
|
| September 30, |
|
| June 30, |
| |||||||||
|
| 2016 |
| 2015 |
|
| 2017 |
|
| 2016 |
| ||||
Stock options to purchase common stock |
| 1,760,596 |
|
| 1,354,989 |
|
|
| 1,663,890 |
|
|
| 2,190,866 |
| |
Warrants for the purchase of common stock |
|
| 47,710 |
|
| 47,710 |
|
|
| 47,710 |
|
|
| 47,710 |
|
|
|
| 1,808,306 |
|
| 1,402,699 |
|
|
| 1,711,600 |
|
|
| 2,238,576 |
|
8.
| Balance Sheet Components |
| a. | Allowance for Sales Returns and Doubtful Accounts |
The Company has established an allowance for sales returns of $3.5$4.1 million and $0.7$3.9 million as of SeptemberJune 30, 20162017 and December 31, 2015,2016, respectively, recorded net against accounts receivable in the balance sheet.
The Company has established an allowance for doubtful accounts of $0.4 million and $0.5$0.4 million as of SeptemberJune 30, 20162017 and December 31, 2015,2016, respectively, recorded net against accounts receivable in the balance sheet.
11
b.Property and Equipment
| b. | Property and Equipment |
Property and equipment, net consist of the following (in thousands):
|
|
|
|
|
|
|
| ||||||||
|
| September 30, |
| December 31, |
|
| June 30, |
|
| December 31, |
| ||||
|
| 2016 |
| 2015 |
|
| 2017 |
|
| 2016 |
| ||||
Leasehold improvements |
| $ | 86 |
| $ | 86 |
|
| $ | 96 |
|
| $ | 86 |
|
Laboratory equipment and toolings |
|
| 1,343 |
|
| 366 |
|
|
| 3,273 |
|
|
| 2,264 |
|
Computer equipment |
|
| 283 |
|
| 277 |
|
|
| 308 |
|
|
| 287 |
|
Software |
|
| 569 |
|
| 655 |
|
|
| 719 |
|
|
| 669 |
|
Office equipment |
|
| 129 |
|
| 137 |
|
|
| 130 |
|
|
| 129 |
|
Furniture and fixtures |
|
| 725 |
|
| 724 |
|
|
| 757 |
|
|
| 743 |
|
|
|
| 3,135 |
|
| 2,245 |
|
|
| 5,283 |
|
|
| 4,178 |
|
Less accumulated depreciation |
|
| (1,059) |
|
| (841) |
|
|
| (1,495 | ) |
|
| (1,192 | ) |
|
| $ | 2,076 |
| $ | 1,404 |
|
| $ | 3,788 |
|
| $ | 2,986 |
|
Depreciation expense for the three months ended SeptemberJune 30, 2017 and 2016 and 2015 was $0.1$0.2 million and $0.1 million, respectively. Depreciation expense for the ninesix months ended SeptemberJune 30, 2017 and 2016 and 2015 was $0.2$0.3 million and $0.2$0.1 million, respectively.
c.Goodwill and Other Intangible Assets, net
| c. | Goodwill and Other Intangible Assets, net |
Goodwill represents the excess of the purchase price over the fair value of net assets of purchased businesses. Goodwill is not amortized, but instead subject to impairment tests on at least an annual basis and whenever circumstances suggest that goodwill may be impaired. The Company’s annual test for impairment is performed as of October 1 of each fiscal year. The Company makes a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the two-step goodwill impairment test.amount. If the Company concludes that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, it is not required to perform the two-step impairment testassessment for that reporting unit.
UnderThe Guidance requires the first step of the test, the Company is required to compare the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered impaired and the second step of the test is not performed. If the results of the first step of the impairment test indicate that the fair value of a reporting unit does not exceed its carrying amount, then the second step of the test is required. The second step of the test compares the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill.impaired. The impairment loss is measured by the excess of the carrying amount of the reporting unit goodwill over the implied fair value of that goodwill.
The changes in the carrying amount of goodwill during the ninesix months ended SeptemberJune 30, 20162017 were as follows (in thousands):
| ||||
|
| |||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
|
Balances as of December 31, 2016 |
|
|
|
|
Goodwill |
| $ | 19,156 |
|
Accumulated impairment losses |
|
| (14,278 | ) |
Goodwill, net |
| $ | 4,878 |
|
Balances as of June 30, 2017 |
|
|
|
|
Goodwill |
| $ | 19,156 |
|
Accumulated impairment losses |
|
| (14,278 | ) |
Goodwill, net |
| $ | 4,878 |
|
12
The components of the Company’s other intangible assets consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
| June 30, 2017 |
| |||||||||
|
| September 30, |
| December 31, |
|
| Average Amortization |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
|
| 2016 |
| 2015 |
|
| Period |
|
| Gross Carrying |
|
| Accumulated |
|
| Intangible |
| ||||||
|
| (in years) |
|
| Amount |
|
| Amortization |
|
| Assets, net |
| |||||||||||
Intangibles with definite lives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Acquired FDA non-gel product approval |
| $ | 1,713 |
| $ | 1,713 |
|
|
| 11 |
|
| $ | 1,713 |
|
| $ | (1,704 | ) |
| $ | 9 |
|
Customer relationships |
|
| 3,200 |
|
| — |
|
|
| 9.5 |
|
|
| 4,940 |
|
|
| (1,108 | ) |
|
| 3,832 |
|
Trade name |
|
| 800 |
|
| — |
| ||||||||||||||||
Trade names - finite life |
|
| 12 |
|
|
| 800 |
|
|
| (89 | ) |
|
| 711 |
| |||||||
Regulatory approvals |
|
| 1.17 |
|
|
| 670 |
|
|
| (383 | ) |
|
| 287 |
| |||||||
Non-compete agreement |
|
| 30 |
|
| — |
|
|
| 2.0 |
|
|
| 80 |
|
|
| (37 | ) |
|
| 43 |
|
Less accumulated amortization |
|
| (2,157) |
|
| (1,660) |
| ||||||||||||||||
Total definite-lived intangible assets |
|
|
|
|
| $ | 8,203 |
|
| $ | (3,321 | ) |
| $ | 4,882 |
| |||||||
|
| $ | 3,586 |
| $ | 53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangibles with indefinite lives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Trade names - indefinite life |
| — |
|
|
| 450 |
|
|
| — |
|
|
| 450 |
| ||||||||
Total indefinite-lived intangible assets |
|
|
|
|
| $ | 450 |
|
| $ | — |
|
| $ | 450 |
|
|
|
|
|
|
| December 31, 2016 |
| |||||||||
|
| Average Amortization |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| Period |
|
| Gross Carrying |
|
| Accumulated |
|
| Intangible |
| ||||
|
| (in years) |
|
| Amount |
|
| Amortization |
|
| Assets, net |
| ||||
Intangibles with definite lives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired FDA non-gel product approval |
|
| 11 |
|
| $ | 1,713 |
|
| $ | (1,696 | ) |
| $ | 17 |
|
Customer relationships |
|
| 9.5 |
|
|
| 4,940 |
|
|
| (602 | ) |
|
| 4,338 |
|
Trade names - finite life |
|
| 12 |
|
|
| 800 |
|
|
| (56 | ) |
|
| 744 |
|
Regulatory approvals |
|
| 1.17 |
|
|
| 670 |
|
|
| (96 | ) |
|
| 574 |
|
Non-compete agreement |
|
| 2.0 |
|
|
| 80 |
|
|
| (17 | ) |
|
| 63 |
|
Total definite-lived intangible assets |
|
|
|
|
| $ | 8,203 |
|
| $ | (2,467 | ) |
| $ | 5,736 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangibles with indefinite lives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade names - indefinite life |
| — |
|
|
| 450 |
|
|
| — |
|
|
| 450 |
| |
Total indefinite-lived intangible assets |
|
|
|
|
| $ | 450 |
|
| $ | — |
|
| $ | 450 |
|
Amortization expense for the three months ended SeptemberJune 30, 2017 and 2016 and 2015 was $0.2$0.4 million and $15,000,$0.2 million, respectively. Amortization expense for the ninesix months ended SeptemberJune 30, 2017 and 2016 was $0.9 and 2015 was $0.5 million and $46,000,$0.3 respectively. The following table summarizes the estimated amortization expense relating to the Company's intangible assets as of SeptemberJune 30, 20162017 (in thousands)thousands):
|
|
| |||||
|
| Amortization |
| Amortization |
| ||
Period |
| Expense |
| Expense |
| ||
Remainder of 2016 |
| $ | 210 | ||||
2017 |
| 813 | |||||
Remainder of 2017 |
| $ | 854 |
| |||
2018 |
| 612 |
|
| 1,090 |
| |
2019 |
| 464 |
|
| 794 |
| |
2020 |
|
| 353 |
|
| 582 |
|
2021 |
|
| 435 |
| |||
Thereafter |
|
| 1,127 |
| |||
|
| $ | 2,452 |
| $ | 4,882 |
|
d.Accrued and Other Current Liabilities
Accrued and other current liabilities consist of the following (in thousands):
|
|
|
|
|
|
|
| ||||||||
|
| September 30, |
| December 31, |
|
| June 30, |
|
| December 31, |
| ||||
|
| 2016 |
| 2015 |
|
| 2017 |
|
| 2016 |
| ||||
Accrued clinical trial and research and development expenses |
| $ | 96 |
| $ | 215 |
|
| $ | 119 |
|
| $ | 119 |
|
Audit, consulting and legal fees |
|
| 2,876 |
|
| 1,208 |
|
|
| 3,373 |
|
|
| 803 |
|
Payroll and related expenses |
|
| 1,831 |
|
| 2,494 |
|
|
| 3,177 |
|
|
| 2,592 |
|
Accrued commission |
|
| 1,925 |
|
| 1,960 |
|
|
| 1,774 |
|
|
| 1,222 |
|
Warrant liability |
|
| 117 |
|
| 60 |
|
|
| 182 |
|
|
| 99 |
|
Other |
|
| 662 |
|
| 1,022 |
|
|
| 1,729 |
|
|
| 1,672 |
|
|
| $ | 7,507 |
| $ | 6,959 |
|
| $ | 10,354 |
|
| $ | 6,507 |
|
9. | Long-Term Debt and Revolving Line of Credit |
In March 2017, the Company entered into a Loan and Security Agreement, or the Loan Agreement, with Silicon Valley Bank, or SVB. Under the terms of the Loan Agreement, SVB made available to the Company a revolving line of credit of up to $15.0 million, or the Revolving Line, and a $5.0 million term loan, or the Term Loan. As of June 30, 2017, the Company had not borrowed any amounts under the Term Loan. In April 2017, the Company borrowed $5.0 million under the Revolving Line. The Company intends to use the proceeds from the Loan Agreement for working capital and other general corporate purposes.
9.Stockholders’ EquityAny indebtedness under the Term Loan and the Revolving Line bear interest at a floating per annum rate equal to the prime rate as reported in The Wall Street Journal, which as of the closing date was 3.75%, plus 1.00%. The Term Loan has a scheduled maturity date of March 1, 2020. The Company must make monthly payments of accrued interest under the Term Loan from the funding date of the Term Loan, or the Funding Date, until April 1, 2018, followed by monthly installments of principal and interest through the Term Loan maturity date. The interest-only period may be extended until April 1, 2019 if the Company has obtained FDA certification of the manufacturing facility operated by Vesta by March 31, 2018. The Company may prepay all, but not less than all, of the Term Loan prior to its maturity date provided the Company pays SVB a prepayment charge based on a percentage of the then-outstanding principal balance which shall be equal to 2% if the prepayment occurs prior to the second anniversary of the Funding Date, and 1% if the prepayment occurs thereafter. Upon making the final payment of the Term Loan, whether upon prepayment, acceleration or at maturity, the Company is required to pay a 12.5% fee on the original principal amount of the Term Loan.
The amount of loans available to be drawn under the Revolving Line is based on a borrowing base equal to 80% of the Company’s eligible accounts; provided that if the Company maintains an adjusted quick ratio (as defined in the Loan Agreement) of 1.5:1.0 for three continuous consecutive months, they may access the full Revolving Line. The Company may make (subject to the applicable borrowing base at the time) and repay borrowings from time to time under the Revolving Line until the maturity of the facility on March 13, 2022.
a.Authorized StockThe Loan Agreement includes customary affirmative and restrictive covenants and representations and warranties, including a financial covenant to maintain the adjusted quick ratio (as defined in the Loan Agreement) of 1.15:1.0 while borrowings are outstanding and until the Company has obtained FDA certification of the manufacturing facility operated by Vesta, a covenant against the occurrence of a “change in control,” financial reporting obligations, and certain limitations on indebtedness, liens, investments, distributions (including dividends), collateral, mergers or acquisitions, taxes, corporate changes, and deposit accounts. The Loan Agreement also includes customary events of default, including payment defaults, breaches of covenants following any applicable cure period, the occurrence of any “material adverse change” as set forth in the Loan Agreement, penalties or judgements in an amount of at least $1.0 million rendered against the Company by any governmental agency and certain events relating to bankruptcy or insolvency. 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 SVB may declare all outstanding obligations immediately due and payable and take such other actions as set forth in the Loan
Agreement. The Company’s obligations under the Loan Agreement are secured by a security interest in substantially all of The Company’s assets, other than intellectual property.
In connection with the entry into the Term Loan, the Company will issue a warrant to SVB, or the Warrant, exercisable for such number of shares of the Company’s common stock as equal to $87,500 divided by a price per share equal to the average closing price of the Company’s common stock on the NASDAQ Capital Market for the five trading days prior to the Funding Date. The Warrant may be exercised on a cashless basis, and is immediately exercisable from the Funding Date through the earlier of (i) the five year anniversary of the Funding Date, or (ii) the consummation of certain acquisition transactions involving the Company as set forth in the Warrant.
At the closing of the Loan Agreement, SVB earned a commitment fee of $937,500 of which $187,500 was payable on the closing date and the remainder of which is due and payable by the Company in increments of $187,500 on each anniversary thereof.
On July 27, 2017, the Company entered into certain credit agreements with Midcap Financial Trust pursuant to which the Company repaid its existing indebtedness under its Loan Agreement and the outstanding commitment fee was cancelled as well as the obligation to issue a warrant to SVB (see Note 13 – Subsequent Events – Credit Agreements with MidCap Financial Trust).
10. | Stockholders’ Equity |
a. | Authorized Stock |
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 SeptemberJune 30, 20162017 and December 31, 2015,2016, the Company had no preferred stock issued or outstanding.
| b. | Common Stock Warrants |
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b.Common Stock Warrants
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 thean 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 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. As of SeptemberJune 30, 2016,2017, there were warrants to purchase an aggregate of 47,710 shares of common stock outstanding.
c.Stock Option Plans
| c. | Stock Option Plans |
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 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 SeptemberJune 30, 2016,2017, a total of 2,045,495462,417 shares of the Company’s common stock were reserved 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 SeptemberJune 30, 2016,2017, inducement grants for 30,000330,000 shares of common stock have been awarded, and 150,00034,000 shares of common stock were reserved 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 be not 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 whichthat 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.
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The following summarizes all option activity under the 2007 Plan, 2014 Plan and Inducement Plan:
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| Weighted average |
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| Weighted average |
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| Weighted |
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| remaining |
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| Weighted |
| remaining |
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| average |
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| contractual |
| |||
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| average |
| contractual |
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| Option Shares |
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| exercise price |
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| term (year) |
| ||||
|
| Option Shares |
| exercise price |
| term (year) |
| |||||||||||||
Balances at December 31, 2015 |
| 2,785,672 |
| $ | 6.66 |
| 6.60 |
| ||||||||||||
Balances at December 31, 2016 |
|
| 2,786,977 |
|
| $ | 7.27 |
|
|
| 6.28 |
| ||||||||
Granted |
| 271,753 |
|
| 6.14 |
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|
|
|
| 90,000 |
|
|
| 8.50 |
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|
|
|
|
Exercised |
| (474,799) |
|
| 1.92 |
|
|
|
|
| (417,172 | ) |
|
| 2.63 |
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|
|
|
|
Forfeited |
| (49,205) |
|
| 15.32 |
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|
|
|
| (253,921 | ) |
|
| 12.25 |
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|
|
|
Balances at September 30, 2016 |
| 2,533,421 |
| $ | 7.33 |
| 7.02 |
| ||||||||||||
Balances at June 30, 2017 |
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| 2,205,884 |
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| $ | 7.63 |
|
|
| 7.59 |
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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 was $0.4$0.5 million and $0.6$0.5 million for the three months ended SeptemberJune 30, 20162017 and 2015,2016, respectively. Stock-based compensation expense was $1.2 million and $1.4$0.8 million for the ninesix months ended SeptemberJune 30, 20162017 and 2015,2016, respectively. As of SeptemberJune 30, 2016,2017, there was $3.5$3.6 million of unrecognized compensation costs related to stock options. The expense is recorded within the operating expense components in the statement of operations based on the recipients receiving the awards. These costs are expected to be recognized over a weighted average period of 2.572.33 years.
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 generally vest on a straight-line basis, either quarterly over a 4-year requisite service period or annually over a 3-year requisite service period.
Activity related to RSUs is set forth below:
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| Weighted average |
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| Weighted average |
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| grant date |
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| grant date |
| Number of shares |
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| fair value |
| |||
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| Number of shares |
| fair value | |||||||||
Balances at December 31, 2015 |
| 17,993 |
| $ | 3.88 | ||||||||
Balances at December 31, 2016 |
|
| 430,733 |
|
| $ | 7.99 |
| |||||
Granted |
| 557,240 |
|
| 8.21 |
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| 700,246 |
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|
| 8.43 |
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Vested |
| (3,375) |
|
| 3.88 |
|
| (251,160 | ) |
|
| 7.76 |
|
Balances at September 30, 2016 |
| 571,858 |
| $ | 8.09 | ||||||||
Restricted stock units withheld for tax |
|
| 68,968 |
|
|
| 8.28 |
| |||||
Forfeited |
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| (22,000 | ) |
|
| 8.49 |
| |||||
Balances at June 30, 2017 |
|
| 926,787 |
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| $ | 8.40 |
|
Stock-based compensation expense for RSUs for the three months ended SeptemberJune 30, 2017 and 2016 and 2015 was $0.5$1.2 million and $0,$0.4 million, respectively. Stock-based compensation expense for RSUs for the ninesix months ended SeptemberJune 30, 2017 and 2016 and 2015 was $1.1$1.8 million and $0,$0.6 million, respectively. As of SeptemberJune 30, 2016,2017, there was $3.5$6.2 million of total unrecognized compensation costcosts related to non-vested RSU awards. The cost is expected to be recognized over a weighted average period of 2.112.00 years.
e.Employee Stock Purchase Plan
| 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, except that the first offering period commenced on the first trading day following the effective date of the Company’s registration statement.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 exercise date. A total of 255,500 shares of common stock were initially reserved for issuance under the ESPP, subject to certain annual increases.
As of SeptemberJune 30, 2016,2017, the number of shares of common stock reserved for issuance under the ESPP was 584,563.770,549. During the ninesix months ended SeptemberJune 30, 2016,2017, employees purchased 122,66754,559 shares of common stock at a weighted
15
average price of $6.14$5.93 per share. As of SeptemberJune 30, 2016,2017, the number of shares of common stock available for future issuance was 417,646.549,073.
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 $0.1 million for the three months ended SeptemberJune 30, 20162017 and 2015,2016, respectively. Stock-based compensation expense related to the ESPP was $0.3$0.2 million and $0.3$0.2 million for the ninesix months ended SeptemberJune 30, 2017 and 2016, and 2015, respectively.
11. | Income Taxes |
The Company operates in several tax jurisdictions and is subject to taxes in each jurisdiction in which it conducts business. To date, the Company has incurred cumulative net losses and maintains a full valuation allowance on its net deferred tax assets due to the uncertainty surrounding realization of such assets. However, the Company has deferred tax liabilities associated with indefinite livedindefinite-lived intangible assets that cannot be considered sources of income to support the realization of the deferred tax assets, and has provided for tax expense and a corresponding deferred tax liability associated with these indefinite livedindefinite-lived intangible assets. Tax expense was $48,000$0.0 million and $0 $0.1 million
for the three and ninesix months ended SeptemberJune 30, 20162017. There was no tax expense for the three and 2015, respectively.six months ended June 30, 2016.
11.Commitments and Contingencies
a.Operating Leases
12. | Commitments and Contingencies |
| a. | Operating Leases |
The Company’s lease for its general office facility in Santa Barbara, California expires in February 2020. The Company also leases additional industrial space for warehouse, research and development and additional general office use. Rent expense was $0.1 million and $0.1 million for the three months ended SeptemberJune 30, 20162017 and 2015,2016, respectively. Rent expense was $0.4$0.3 million and $0.4$0.3 million for the ninesix months ended SeptemberJune 30, 20162017 and 2015, respectively.2016. The Company recognizes rent expense on a straight-line basis over the lease term.
b.Contingencies
| b. | 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.
Class Action Shareholder Litigation
On September 25, 2015, a lawsuit styled as a class action of the Company’s stockholders was filed in the United States District Court for the Central District of California. The lawsuit names the Company and certain of its officers as defendants, or the Sientra Defendants, and alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, or the Exchange Act in connection with allegedly false and misleading statements concerning the Company’s business, operations, and prospects. The plaintiff seeks damages and an award of reasonable costs and expenses, including attorneys’ fees. On November 24, 2015, three stockholders (or groups of stockholders) filed motions to appoint lead plaintiff(s) and to approve their selection on lead counsel. On December 10, 2015, the court entered an order appointing lead plaintiffs and approving their selection of lead counsel. On February 19, 2016, lead plaintiffs filed their consolidated amended complaint, which added a claimclaims under SectionSections 11, 12(a)(2) and 15 of the Securities Act and named as defendants the underwriters associated with the Company’s follow-on public offering that closed on September 23, 2015, or the Underwriter Defendants. On March 21, 2016, the Sientra Defendants and the Underwriter Defendants each filed a motion to dismiss, or the Motions to Dismiss, the consolidated amended complaints. On April 20, 2016, lead plaintiffs filed their opposition to the Motions to Dismiss, and the Sientra Defendants and Underwriter Defendants filed separate replies on May 5, 2016. On June 9, 2016, the court granted in part and denied in part the Motions to Dismiss. On July 14, 2016, the Sientra Defendants moved the court to reconsider its June 9, 2016 order and grant the Motions to Dismiss in full. On August 4, 2016, lead plaintiffs filed an opposition to the motion for reconsideration. On August 12, 2016, the court denied the motion for reconsideration, and the Sientra Defendants and the Underwriter Defendants each filed an answer to the consolidated amended complaint.
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On October 28, November 5, and November 19, 2015, three lawsuits styled as class actions of the Company’s stockholders were filed in the Superior Court of California for the County of San Mateo. The lawsuits name the Company, certain of its officers and directors, and the underwriters associated with the Company’s follow-on public offering that closed on September 23, 2015 as defendants. The lawsuits allege violations of Sections 11, 12(a)(2), and 15 of the Securities Act in connection with allegedly false and misleading statements in the Company’s offering documents associated with the follow-on offering concerning its business, operations, and prospects. The plaintiffs seek damages and an award of reasonable costs and expenses, including attorneys’ fees. On December 4, 2015, defendants removed all three lawsuits to the United States District Court for the Northern District of California. On December 15 and December 16, 2015, plaintiffs filed motions to remand the lawsuits back to San Mateo Superior Court, or the Motions to Remand. On January 19, 2016, defendants filed their opposition to the Motions to Remand, and plaintiffs filed their reply in support of the Motions to Remand on January 26, 2016.
On May 20, 2016, the United States District Court for the Northern District of California granted plaintiffs’ Motions to Remand, and the San Mateo Superior Court received the remanded cases on May 27, 2016. On July 19, 2016, the
San Mateo Superior Court consolidated the three lawsuits. On August 2, 2016, plaintiffs filed their consolidated complaint. On August 5, 2016, defendants filed a motion to stay all proceedings in favor of the class action filed in the United States District Court for the Central District of California.
On September 13, 2016, the parties to the actions pending in the San Mateo Superior Court and the United States District Court for the Central District of California signed a memorandum of understanding that sets forth the material deal points of a settlement that covers both actions and includes class-wide relief. On September 13, 2016 and September 20, 2016, respectively, the parties filed notices of settlement in both courts. On September 22, 2016, the United States District Court for the Central District of California stayed that action pending the court’s approval of a settlement. On September 23, 2016, the San Mateo Superior Court stayed that action as well pending the court’s approval of a settlement.
On December 20, 2016, the plaintiffs in the federal court action filed a motion for preliminary approval of the class action settlement. On January 23, 2017, the United States District Court for the Central District of California preliminarily approved the settlement. A final approval hearing in that court is scheduled for May 22, 2017. On January 5, 2017, the plaintiffs in the state court action also filed a motion for preliminary approval of the class action settlement. On February 7, 2017, the San Mateo Superior Court preliminarily approved the settlement. On April 24, 2017, the plaintiffs in the federal court action and the state court action each filed their motion for final approval of the class action settlement, approval of the proposed plan of allocation, and an award of attorneys’ fees and expenses. Following a final fairness hearing in the federal court, on May 23, 2017, the federal court extended an order granting final approval of the settlement and dismissing the federal court action with prejudice. Following a final fairness hearing in the state court, on May 31, 2017, the state court entered an order granting final approval of the settlement and dismissing the state court action with prejudice.
As a result of these developments, the Company has determined a probable loss hashad been incurred and has recognized a net charge to earnings of approximately $1.6 million for the year ended December 31, 2016 within general and administrative expense which iswas comprised of the loss contingency of approximately $10.9 million, net of expected insurance proceeds of approximately $9.4 million. In the first quarter of 2017, the Company received $9.3 million. The Company has classified the loss contingency as “legal settlement payable” and the expectedmillion in insurance proceeds and paid the $10.9 million loss contingency. The remaining insurance proceeds receivable is classified as “insurance recovery receivable” on the accompanying condensed balance sheets.While
Silimed Litigation
On November 6, 2016, Silimed filed a lawsuit in the United States District Court for the Southern District of New York, the Silimed Litigation, naming Sientra as the defendant and alleging breach of contract of the Silimed Agreement, unfair competition and misappropriation of trade secrets against us. In its complaint, Silimed alleges that the Company’s theft, misuse, and improper disclosure of Silimed’s confidential, proprietary, and trade secret manufacturing information was done in order for the Company to develop its own manufacturing capability that it intends to use to manufacture our PMA-approved products. Silimed is possibleseeking a declaration that the Company may incuris in material breach of the Silimed Agreement, a loss greater thanpreliminary and permanent injunction to prevent the amounts recognizedCompany’s allegedly wrongful use and disclosure of Silimed’s confidential and proprietary information, as well as unquantified compensatory and punitive damages. On November 15, 2016, Sientra filed its answer and counterclaims for declaratory judgment in which it denied that Silimed is entitled to any relief including, among other reasons, because of Silimed’s material breach of the Silimed Agreement and Silimed’s unclean hands, and further seeks declaratory relief that Sientra is the owner of certain assets it acquired from Silimed, Inc. in 2007, that Sientra owns, or is exclusively licensed, to any improvements created since April 2007, that Silimed lacks any confidential information or proprietary rights under the Silimed Agreement, and that Silimed lacks any relevant trade secret rights. On December 9, 2016, Silimed filed a motion to strike the Company’s counterclaims. Briefing on that motion was completed on December 30, 2016, and the parties are waiting for a decision from the court. On February 1, 2017, Sientra filed a motion to stay Silimed’s breach of contract claim in light of a demand for arbitration filed by Sientra against Silimed on January 20, 2017 concerning Silimed’s material breaches of the Silimed Agreement, and to further dismiss, or alternatively stay, the unfair competition and misappropriation of trade secrets claims. Briefing on that motion was completed on February 22, 2017, and the parties are waiting for a decision from the court. On February 3, 2017, the court held an initial pre-trial conference and entered a pre-trial scheduling order which set a final pre-trial conference date of August 3, 2018.
On January 20, 2017, Sientra filed an arbitration demand in the accompanying interim financial statements,International Center for Dispute Resolution, or ICDR, in New York, the Silimed Arbitration, naming Silimed as the defendant and alleging material breach of the Silimed Agreement, gross negligence and tortious interference by Silimed, as well as seeking certain declaratory relief. Among other things, Sientra alleges that Silimed’s supply failure constitutes a material breach of the Silimed Agreement, and that such breach was caused by Silimed’s grossly negligent or other willful conduct related to its regulatory suspensions and the fire at its manufacturing facility. Silimed filed its answer to Sientra’s arbitration demand and counterclaim on March 8, 2017. Sientra filed its answer to Silimed’s counterclaims on April 10, 2017. The parties nominated their party arbitrators on March 13, 2017 and their appointment was confirmed by the ICDR by April 5. 2017. The party appointed arbitrators nominated a president of the tribunal on May 8, 2017 whose appointment was confirmed by the ICDR. On May 30, 2017 a Preparatory Conference was held with the arbitration tribunal on June 26, 2017. A court-ordered settlement conference was held between the parties on June 27, 2017.
The lawsuit between Sientra and Silimed was settled pursuant to a settlement agreement, or the Settlement Agreement, dated July 27, 2017. Pursuant to the Settlement Agreement, in exchange for a mutual release of claims and covenants not to sue or pursue certain litigation, Sientra will pay Silimed a lump sum of $9.0 million within 30-days of execution of the Settlement Agreement, and $1.0 million on or by July 1, 2018. In addition, should the Company is unableenter into international markets using certain breast implant specifications, the Company has agreed to determinemake royalty payments of $12.50 on each of its net sales of such products, up to a rangemaximum royalty of possible losses greater than the amount recognized.$5.0 million. (see Note 13 -- Subsequent Events--Silimed Litigation)
It is possible that additional suits will be filed, or allegations made by stockholders, with respect to these same or other matters and also naming the Company and/or its officers and directors as defendants. The Company believes it has meritorious defenses and intends to defend these lawsuits vigorously.
12.13.Subsequent Events
a. | Acquisition of |
On November 2, 2016, pursuant toJune 11, 2017, Sientra entered into an Asset Purchase Agreement and Plan of Merger, or Purchasethe Merger Agreement, by and among the Company and Specialty Surgical Products,with Miramar Labs, Inc., or SSP, the Company acquired certain assets, consistingMiramar, pursuant to which Sientra commenced a tender offer to purchase all of the Dermaspan™, Softspan™, Allox® and Allox2® tissue expanders, from SSPoutstanding shares of Miramar’s common stock for (i) $0.3149 per share, plus (ii) the purchase pricecontractual right to receive one or more contingent payments upon the achievement of $5.0certain future sales milestones. The total merger consideration was $20 million in upfront cash along withand the contractual rights represent potential contingent cash payments of up to an additional $2.0 million if certain future revenue targets are met.$14 million. The assets acquired consisttransaction, which closed on July 25, 2017, added the miraDry system, the only FDA cleared device to reduce underarm sweat, odor and permanently reduce hair of accounts receivable, inventory, consigned inventory, tooling, intellectual property and regulatory approvals, specified contracts and the associated assumed liabilities. The acquisition of these products aligns with the Company’s business development objectives and adds complementary products that serve the needs of its customers.
The Company expectsall colors to account for the transaction as a business combination and is in the process of determining the allocation of the purchase price to acquired assets and assumed liabilities. A determination of the acquisition-date fair values of the assets acquired and the liabilities assumed is pending the completion of an independent appraisal and other evaluations and therefore further disclosures have not been made.
17
Pro forma results of operations have not been presented because the effect of the business combination was not material to the Company's condensed results of operations.
Sientra’s aesthetics portfolio.
b. | Credit Agreements with Midcap Financial Trust |
On July 25, 2017, Sientra borrowed $25.0 million aggregate principal amount of term loans, or the Closing Term Loans, pursuant to a Credit and Security Agreement (Term Loan), or the Term Loan Credit Agreement, with MidCap Financial Trust, or Midcap, and the other lenders party thereto. Sientra used the proceeds of the Closing Term Loans (i) to repay in full Sientra’s existing indebtedness under its Loan Agreement with SVB, which totaled approximately $5.0 million, (ii) to pay fees and expenses in connection with the foregoing and (iii) for general corporate purposes. The Credit Agreement provides for (i) the Closing Date Term Loans, (ii) until March 31, 2018, an additional $10.0 million term loan facility subject to the satisfaction of certain conditions, including FDA certification of the manufacturing facility operated by Vesta and (iii) an additional $5.0 million term loan facility subject to the satisfaction of certain conditions, including evidence that Sientra’s Net Revenue (as defined in the Term Loan Credit Agreement) for the past 12 months was greater than or equal to $75.0 million, or collectively, the Term Loans.
On July 25, 2017, Sientra also entered in to a Credit and Security Agreement (Revolving Loan), or the Revolving Credit Agreement and, together with the Term Loan Credit Agreement, the Credit Agreements, with MidCap and the other lenders party thereto. The amount of loans available to be drawn under the Revolving Credit Agreement is based on a borrowing base equal to 85% of eligible accounts, subject to certain adjustments. Sientra may make
(subject to the applicable borrowing base at the time) and repay borrowings from time to time under the Revolving Credit Agreement until the maturity of the facility on December 1, 2021.
The obligations under each Credit Agreement are guaranteed by Sientra and each of Sientra’s existing and subsequently acquired or formed direct and indirect subsidiaries. The obligations under the Credit Agreement are secured, subject to customary permitted liens and other agreed upon exceptions, by a perfected security interest in (i) all tangible and intangible assets of Sientra and the guarantors, except for certain customary excluded property, and (ii) all of the capital stock owned by Sientra and guarantors thereunder.
The interest rate applicable to the Term Loans is LIBOR plus 7.50%, and the interest rate applicable to loans incurred under the Revolving Credit Agreement is LIBOR plus 4.50%, in both cases subject to a LIBOR floor of 1.0%.
Each Credit Agreement requires that the Borrowers (i) maintain Net Revenue (as defined in each Credit Agreement) in amounts set forth in each Credit Agreement and (ii) at all times, maintain cash and cash equivalents of at least $10.0 million. The Credit Agreements also contain customary representations and warranties and customary affirmative and negative covenants, including, among other things, restrictions on indebtedness, liens, investments, mergers, dispositions, prepayment of other indebtedness and dividends and other distributions.
| Silimed Settlement |
On October 26, 2016, Matthew Pigeon resigned from his position as Chief Financial Officer, Senior Vice PresidentJune 27, 2017, Silimed and Treasurer of the Company. The Company entered intoSientra participated in a Separation Agreement, or the Separation Agreement, with Mr. Pigeon on November 7, 2016,court-ordered settlement conference pursuant to which Mr. Pigeon is entitled to receive: (i) twelve (12) months of his base salary as in effect on the separation date paid in equal installments plusthey reached a payment of $78,750 for the remaining 2016 bonus earned by Mr. Pigeon in connection with the completiondefinitive settlement of the fiscal year priorSilimed Litigation and Silimed Arbitration subject to execution of a formal settlement agreement (the “Settlement Agreement”). The parties executed the Settlement Agreement on July 27, 2017. Pursuant to the separation date, consistingSettlement Agreement. Sientra and Silimed have granted mutual releases to each other with respect to certain specified conduct, and have granted each other covenants not to sue with respect to certain specified conduct. The Company has also agreed to pay Silimed a lump sum of (a) $52,500 payable upon separation$9.0 million within 30-days of execution of the Settlement Agreement, and (b) $26,250$1.0 million on or by July 1, 2018. In addition, should the Company enter into international markets using certain breast implant specifications, the Company has agreed to be paidmake royalty payments of $12.50 on January 30, 2017, and (ii)each of its net sales of such products, up to twelve (12) monthsa maximum royalty of company-paid health insurance premiums to continue his coverage.$5.0 million. The benefits provided for inSettlement Agreement was a compromise and settlement of disputed claims between the Separation Agreement are consistent with the benefits that Mr. Pigeon would have been entitled to receive under his Amendedparties and Restated Employment Agreement had Mr. Pigeon been terminated without cause. not an admission of liability which was expressly denied.
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On October 26, 2016, the Company appointed Patrick F. Williams as its Chief Financial Officer, Senior Vice President and Treasurer. In connection with the appointment, the Company entered into an Employment Agreement, or the Employment Agreement, with Mr. Williams on October 26, 2016, pursuant to which: (i) Mr. William’s annual base salary will be three hundred fifty thousand dollars, (ii) Mr. Williams shall be eligible to earn an annual discretionary performance-based bonus of up to 50% of his base salary, and (iii) for the partial 2016 calendar year, Mr. Williams shall also be eligible for a discretionary performance-based bonus paid on a pro-rata basis to the extent that it is determined by the compensation committee of the board of directors. Additionally, on October 26, 2016, the compensation committee granted to Mr. Williams a nonqualified stock option under the Inducement Plan to purchase 300,000 shares of the Company’s common stock at a per share exercise price equal to the closing price of the Company’s common stock on the grant date. The stock options shall vest as follows: (i) 200,000 option shares shall vest and be exercisable as to 50,000 option shares on the one-year anniversary of the grant date, and as to 150,000 option shares, in thirty-six equal consecutive monthly installments commencing on the thirteenth month anniversary of the grant date, and (ii) 100,000 option shares shall vest and be exercisable in accordance with performance criteria established by the compensation committee. Mr. Williams is also entitled to participate in all employee benefit programs for which he is eligible.
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On October 26, 2016, the board of directors approved an increase to the share reserve under the Inducement Plan from 180,000 shares to 400,000 shares in order to cover in part the 300,000 share inducement grant awarded to Mr. Williams in connection with his appointment as the Company’s new Chief Financial Officer, Senior Vice President and Treasurer. As of October 26, 2016, 70,000 shares remain available for future awards under the Inducement Plan.
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On November 6, 2016, Silimed filed a lawsuit in the U.S. District Court for the Southern District of New York naming the Company as the defendant and alleging breach of contract of the Amended and Restated Exclusivity Agreement executed by the Company and Silimed in April 2007, or the 2007 Agreement, unfair competition, unjust enrichment, and misappropriation of trade secrets against the Company. In its complaint, Silimed alleges that the Company’s theft, misuse, and improper disclosure of Silimed’s confidential, proprietary, and trade secret manufacturing information was done in order for the Company to develop its own manufacturing capability that the Company intends to use to manufacture its PMA-approved products. Silimed is seeking a declaration that the Company is in material breach of the 2007 Agreement, a preliminary and permanent injunction to prevent the Company’s allegedly wrongful use and disclosure of Silimed’s confidential and proprietary information, as well as unquantified compensatory and punitive damages.
The Company believes Silimed’s claims are legally and factually unsupported and intends to defend this lawsuit vigorously.
18
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed financial statements and related notes included in this Quarterly Report on Form 10-Q and the audited financial statements and notes thereto as of and for the year ended December 31, 20152016 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K for the year ended December 31, 2015,2016, filed with the Securities and Exchange Commission on March 10, 2016,14, 2017, or the Annual Report. Unless the context requires otherwise, references in this Quarterly Report on Form 10-Q to “Sientra,” “the Company,” “we,” “us” and “our” refer to Sientra, Inc.
Forward-Looking Statements
The information in this discussion contains forward-looking statements and information within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act, which are subject to the “safe harbor” created by those sections. These forward-looking statements include, but are not limited to, statements concerning our strategy, future operations, future financial position, future revenues, projected costs, prospects and plans and objectives of management. The words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “may,” “plans,” “projects,” “will,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements that we make. These forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially from those in the forward-looking statements, including, without limitation, the risks set forth in Part II, Item 1A, “Risk Factors” in this Quarterly Report on Form 10-Q and in our other filings with the SEC. The forward-looking statements are applicable only as of the date on which they are made, and we do not assume any obligation to update any forward-looking statements.
Overview
We are a medical aesthetics company committed to making a difference in patients’ lives by enhancing their body image, growing their self‑esteem and restoring their confidence. We were founded to provide greater choices to board‑certified plastic surgeons and patients in need of medical aesthetics products. We have developed a broad portfolio of products with technologically differentiated characteristics, supported by independent laboratory testing and strong clinical trial outcomes. We sell our breast implants and breast tissue expanders, or Breast Products, exclusively to board‑certified and board‑admissible plastic surgeons and tailor our customer service offerings to their specific needs, which we believe helps secure their loyalty and confidence. We have recently expanded our product portfolio through two acquisitions. We began selling bioCorneum®BIOCORNEUM®, an advanced silicone scar treatment or Scar Management Products, directly to physicians after we acquired bioCorneum®BIOCORNEUM® from Enaltus onin March 9, 2016. Additionally, we began selling the AlloX2®, and Dermaspan™ lines of breast tissue expanders, as well as the Softspan™ line of general tissue expanders, after we acquired these product lines from SSP in November 2016.
Our primary products are silicone gel breast implants for use in breast augmentation and breast reconstruction procedures, which we offer in over 195approximately 400 variations of shapes, sizes, fill volumes and textures. Our breast implants are primarily used in elective procedures whichthat are generally performed on a cash‑pay basis. Many of our proprietary breast implants incorporate one or more differentiated technologies that differentiate us from our competitors, including a proprietary high‑strength, cohesiveHigh‑Strength Cohesive silicone gel and proprietary texturing branded TRUE Texture®.shell texturing. Our breast implants offer a desired balance between strength, shape retention and softness due to the high‑strength, cohesivesilicone shell and High‑Strength Cohesive silicone gel used in our manufacturing process. TRUE Texture® providesimplants. The texturing on theSientra’s implant shell that is designed to reduce the incidence of malposition, rotation and capsular contracture. We also offer breast tissue expanders and a range of other aesthetic and specialty products. We do not have any patents or patent applications, but rely on trade secrets, proprietary know‑how and regulatory barriers to protect our products and technologies.
Our breast implants were approved by the U.S. Food and Drug Administration, or FDA in 2012, based on data we collected from our ongoing, long‑term clinical trial or the Study, of our breast implants in 1,788 women across 36 investigational sites in the United States, which included 3,506 implants (approximately 53% of which were smooth and 47% of which were textured). Our clinical trial is the largest prospective, long‑term safety and effectiveness pivotal study of breast implants in the United
States and includes the largest magnetic resonance imaging, or MRI, cohort with 571 patients. The
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MRI cohort is a subset of study patients that underwent regular MRI screenings in addition to the other aspects of the clinical trial protocol prior to FDA approval. Post-approval, all patients in the Studylong-term clinical trial are subject to serial MRI screenings as part of the clinical protocol. The clinical data we collected over a nine‑year follow‑up period demonstrated rupture rates, capsular contracture rates and reoperation rates that were comparable to or better than those of our competitors, at similar time points. In addition to our pivotal study, our clinical data is supported by our Continued Access Study of 2,497 women in the United States. We have also commissioned a number of bench studies run by independent laboratories that we believe further demonstrate the advantages of our breast implants over those of our competitors.
We sell our Breast Products exclusively to board‑certified and board‑admissible plastic surgeons, as determined by the American Board of Plastic Surgery, who we refer to as Plastic Surgeons. These surgeons have completed the extensive multi‑year plastic surgery residency training required by the American Board of Plastic Surgery. While aesthetic procedures are performed by a wide range of medical professionals, including dermatologists, otolaryngologists, obstetricians, gynecologists, dentists and other specialists, the majority of aesthetic surgical procedures are performed by Plastic Surgeons. Plastic Surgeons are thought leaders in the medical aesthetics industry. According to the American Board of Plastic Surgery, there are approximately 6,500 board‑certified plastic surgeons in the United States. We seek to provide Plastic Surgeons with differentiated services, including enhanced customer service offerings, a ten‑year limited warranty that we believe is the best in the industry based on: providing patients with the largest cash reimbursement for certain out‑of‑pocket costs related to revision surgeries in a covered event; a lifetime no‑charge implant replacement program for covered ruptures; and our industry‑first CapCon Care Program, or C3 Program, through which we offer no‑charge replacement implants to breast augmentation patients who experience capsular contracture within the first five years after implantation with our smooth or textured breast implants.
Between October 9, 2015 and March 1, 2016, we voluntarily suspended the sale of all Sientra devices manufactured by our sole manufacturer and supplier, Silimed due to the suspension of Silimed’s CE certificateand ISO 13485 certifications by TUV SUD,TÜV SÜD, Silimed’s notified body under EU regulations,regulations. This was followed by Brazilian regulatory inquiries of Silimed and a temporary suspension by the Brazilian regulatory agency ANVISA and the Department of the Secretary of State of Rio de Janeiro of the manufacturing and shipment of all medical devices made by Silimed, and recommendedtheir recommendation that plastic surgeons discontinue implanting the devices until further notice. See Note 1c1(b) to our Condensed Financial Statements for more information on the history of these developments with Silimed.
After ongoing discussions with the FDA and our own review of the matter with the assistance of independent experts in quality management systems, Good Manufacturing Practices, or GMP,cGMP, and data-based risk assessment, on March 1, 2016, we lifted the temporary hold on sales and sales. We also sent a letter toinformed our Plastic Surgeons informingapprising them of our market re-entry plans. We have limited inventory of our Breast Products manufactured by Silimed due to (i) the fire on October 22, 2015 at the manufacturing building where Silimed primarily manufactured our breast implants, and (ii) Silimed’s inability to manufacture products (only recently reinstated by ANVISA on July 11, 2016) for commercial sale in the U.S. at their alternate facility, which will require Sientra to submit a PMA supplement for the alternate facility and require the manufacturing operations to receive a validation of U.S. FDA standards and a successful FDA inspection, the timing of which is uncertain. Accordingly, we developed and communicated to our Plastic Surgeons a controlled market re-entry plan designed to optimize our inventory supply.supply, which continues to be limited.
There are several uncertainties regarding theThe events involving Silimed that maywill likely continue to have a material unfavorable adversely impact our business, in particular due to the limitations on our net sales of Breast Products manufactured by Silimed, including the impact onexisting inventory levels, and inventory adjustments, and the uncertainty of our customers’ responsiveness to our controlled market re-entry plans after we had imposed our voluntary hold on the sale and implanting of all Sientra devices manufactured by Silimed between October 9, 2015 and March 1, 2016.plan. See “Risk Factors — Risks Relating to Our Business and Our Industry” for further detail.
Our existing manufacturing contract with Silimed expiresIn response to these events and anticipated impacts on its terms on April 1, 2017. We cannot provide assurance that Silimed will be able to qualify its alternate facility and manufacture and ship new products to us. Moreover, on November 6, 2016, Silimed filed a lawsuit against us alleging, among other things, a material breach of the existing manufacturing contract. Accordingly,our business, we have increasingly focused our efforts on identifyingsecuring and qualifying an alternate manufacturing supplier.
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On August 9, 2016, we announced our collaboration with Vesta Intermediate Funding, Inc., or Vesta, pursuant to which we are working with Vesta towards establishing a dedicated contract manufacturing facility for our Breast Products.breast implants. On March 14, 2017, we announced that we had executed a definitive manufacturing agreement with Vesta isfor the manufacture and supply of our breast implants. In addition, on March 14, 2017, we announced that we had submitted a Lubrizol LifeSciences Company and leading medical device contract manufacturerPMA supplement to the FDA for the manufacturing of silicone products and other medical devices headquartered in Wisconsin.
our PMA-approved breast implants by Vesta.
We sell our products in the United States through a direct sales organization, consistingwhich as of June 30, 2017, consisted of 45 employees, including 3837 sales representatives and 78 sales managers, as of September 30, 2016.managers.
Recent Developments
The following isOn June 11, 2017, we entered into a summaryMerger Agreement with Miramar pursuant to which we commenced a tender offer to purchase all of significant developments affectingthe outstanding shares of Miramar’s common stock. Pursuant to the transaction, which closed on July 25, 2017 we added the miraDry system, the only FDA cleared device to reduce underarm sweat, odor and hair of all colors to our business that have occurred since the filing of our Quarterly Report on Form 10-Q for the period ended June 30, 2016. For additional developments see the Annual Report and our Quarterly Reports on Form 10-Q for the period ended March 31, 2016 and June 30, 2016.
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Components of Operating Results
Net Sales
We recognize revenue, net of sales discounts and estimated returns, as the customer has a standard six-month window to return purchased Breast Productspurchas.ed Breast Products. We commenced sales of our Breast Breast Products in the United States in the second quarter of 2012 and our Breast Products have historically accounted for substantially all of our net sales. However, salesSales of our Breast Products accounted for 77%83% and 97%79% of our net sales for the three months ended SeptemberJune 30, 20162017 and 2015,2016, respectively and 78%80% and 98%79% of our net sales for the ninesix months ended September 30,2017 and 2016, and 2015, respectively. The percentage decrease inOur net sales of Breast Products for the 2016 periodssix months ended June 30, 2017 reflects the combined effect of the temporary
21
hold on sales and implanting of Breast Products until March 1, 2016, our controlled re-entry to market designed to optimize our supply of Breast Products inventory and the commercial introduction of our Scar Management Productsscar management products as well as the increase of sales of our scar management products as a result of the acquisition of bioCorneum®BIOCORNEUM® on March 9, 2016. Sales of Scar Management Productsscar management products are included in the results of operations from the date of acquisition and accounted for 20%15% and 18% of our net sales for the three months ended SeptemberJune 30, 2017 and 2016, respectively. Sales of scar management products accounted for 17% and 19%18% of our net sales for the ninesix months ended SeptemberJune 30, 2016.
2017 and 2016, respectively.
We expect that, in the future, assuming a favorable outcome of the aforementioned recent events with Silimed or the successful establishment and transition of our manufacturing process to Vesta, that our net sales will fluctuate on a quarterly basis due to a variety of factors, including seasonality of breast augmentation procedures. We believe that breast implant sales are subject to seasonal fluctuation due to breast augmentation patients’ planning their surgery leading up to the summer season and in the period around the winter holiday season.
Cost of Goods Sold and Gross Margin
Cost of goods sold consists primarily of costs of finished products purchased from our third‑party manufacturers, reserve for product warranties, inventory fair market value adjustment, royalty costs, and warehouse and other related costs.
Our Breast Products and certain other products are currently manufactured in Brazil by Silimed. UnderWith respect to our contract with Silimed,breast implants, each particular style of implant has a fixed unit cost.cost under the contract with our third-party manufacturers. Our bioCorneum® Scar Management Productsrecently acquired breast tissue expanders are manufactured in the U.S. by Formulated Solutions, LLC, orUnited States under an exclusive contract with SiMatrix, a subsidiary of Vesta. Under our contract with SiMatrix, each particular product has a fixed unit cost. Our BIOCORNEUM® scar management products are manufactured in the United States under an exclusive contract with Formulated Solutions. Under our contract with Formulated Solutions, each particular product has a fixed unit cost.
In addition to product costs, weWe provide a commercial warranty on our silicone gel-filledgel breast implants. The warranty covers device ruptures in certain circumstances. Estimatedcircumstances and estimated warranty costs are recorded at the time of sale. In addition, the inventory fair market value associated with a non-cash purchase accounting adjustment and our royalty costs related to the acquisition of the tissue expander portfolio from SSP are recorded at the time of sale. Our warehouse and other related costs include labor, rent, product shipments from our third-party manufacturermanufacturers, and other related costs.
We expect our overall gross margin, which is calculated as net sales less cost of goods sold for a given period divided by net sales, to fluctuate in future periods primarily as a result of quantity of units sold, manufacturing price increases, the changing mix of products sold with different gross margins, overhead costs and targeted pricing programs.
Our sales and marketing expenses primarily consist of salaries, bonuses, benefits, incentive compensation, stock-based compensation and travel for our sales, marketing and customer support personnel. Our sales and marketing expenses also include expenses for trade shows, our no‑charge customer shipping program and no-charge product evaluation units, as well as educational, promotional and marketing activities, including direct and online marketing. We expect our sales and marketing expenses to fluctuate in future periods as a result of headcount and timing of our marketing programs. However, we generally expect these costs will increase in absolute dollars.
Research and Development Expenses
Our research and development, or R&D, expenses primarily consist of clinical expenses, product development costs, regulatory expenses, consulting services, outside research activities, quality control and other costs associated with the development of our products and compliance with Good ClinicalManufacturing Practices or cGCP,(“cGMP”), requirements. R&D expenses also include related personnel and consultant compensation and stock‑based compensation expense. We expense R&D costs as they are incurred.
We expect our R&D expenses to vary as different development projects are initiated, including improvements to our existing products, expansions of our existing product lines, new product acquisitions and our FDA‑required PMA post‑approval studies of our breast implants. However, we generally expect these costs will increase in absolute terms over time as we continue to expand our product portfolio and add related personnel.
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General and Administrative Expenses
Our general and administrative, or G&A, expenses primarily consist of salaries, bonuses, benefits, incentive compensation and stock-based compensation for our executive, financial, legal, business development and administrative functions. Other G&A expenses include outside legal counsel and litigation expenses, independent auditors and other outside consultants, corporate insurance, employee benefits, facilities and information technologies expenses. In 2015, G&A expenses also include the federal excise tax on the sale of our medical devices in the United States.
We expect future G&A expenses to increase as we continue to build our finance, legal, information technology, human resources and other general administration resources to continue to advance the commercialization of our products. In addition, we expect to continue to incur G&A expenses in connection with operating as a public company, which may increase further when we are no longer able to rely on the “emerging growth company” exemption we are afforded under the Jumpstart Our Business Startups Act, or the JOBS Act.
Other Income (Expense), net
Other income (expense), net primarily consists of interest income, andinterest expense, changes in the fair value of common stock warrants.
warrants and amortization of issuance costs associated with the Loan Agreement.
Income Taxes
Income tax expense consists of an estimate for income taxes based on the projected income tax expense for the period ending December 31, 2016.ended June 30, 2017. We operate in several tax jurisdictions and are subject to taxes in each jurisdiction in which we conduct business. To date, we have incurred cumulative net losses and maintain a full valuation allowance on our net deferred tax assets due to the uncertainty surrounding realization of such assets. However, as a result of the BIOCORNEUM® and tissue expander portfolio acquisitions, we have deferred tax liabilities associated with indefinite livedindefinite-lived intangible assets that cannot be considered sources of income to support the realization of the deferred tax assets, and have provided for tax expense and a corresponding deferred tax liability associated with these indefinite livedindefinite-lived intangible assets.
Critical Accounting Policies and Significant Judgments and Estimates
The preparation of our unaudited condensed financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the revenues and expenses incurred during the reported periods. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We discussed accounting policies and assumptions that involve a higher degree of judgment and complexity in Note 2 of the “Notes to Financial Statements” in our audited financial statements included in the Annual Report. There have been no material changes to our critical accounting policies and estimates from those disclosed in the Annual Report.
Recent Accounting Pronouncements
Please refer to Note 2 - Summary of Significant Accounting Policies in the notes to the unaudited condensed financial statements included in this Form 10-Q for information on recent accounting pronouncements and the expected impact on our financial statements.
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Results of Operations
Comparison of the Three Months Ended SeptemberJune 30, 20162017 and 2015
2016
The following table sets forth our results of operations for the three months ended SeptemberJune 30, 20162017 and 2015:2016:
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| Three Months Ended |
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| Three Months Ended |
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| June 30, |
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| September 30, |
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| 2017 |
|
| 2016 |
| |||||
|
|
| 2016 |
|
| 2015 |
|
| (unaudited, in thousands) |
| |||||
|
|
| (unaudited, in thousands) |
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|
|
|
|
|
| |||
Statement of operations data |
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Net sales |
| $ | 6,531 |
| $ | 9,929 |
|
| $ | 8,169 |
|
| $ | 6,244 |
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Cost of goods sold |
|
| 1,814 |
|
| 2,933 |
|
|
| 2,621 |
|
|
| 1,745 |
|
Gross profit |
|
| 4,717 |
|
| 6,996 |
|
|
| 5,548 |
|
|
| 4,499 |
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Operating Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
| 5,137 |
|
| 6,282 |
|
|
| 6,163 |
|
|
| 6,287 |
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Research and development |
|
| 2,052 |
|
| 2,143 |
|
|
| 1,573 |
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|
| 3,062 |
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General and administrative |
|
| 7,302 |
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| 4,140 |
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|
| 8,022 |
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|
| 5,357 |
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Legal Settlement |
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| 10,000 |
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| — |
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Total operating expenses |
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| 14,491 |
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| 12,565 |
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| 25,758 |
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| 14,706 |
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Loss from operations |
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| (9,774) |
|
| (5,569) |
|
|
| (20,210 | ) |
|
| (10,207 | ) |
Other income (expense), net |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
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| 16 |
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| 12 |
|
|
| 37 |
|
|
| 16 |
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Interest expense |
|
| (105) |
|
| (1,608) |
|
|
| (185 | ) |
|
| (12 | ) |
Other (expense) income, net |
|
| (52) |
|
| 561 |
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Other income (expense), net |
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| (4 | ) |
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| 10 |
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Total other income (expense), net |
|
| (141) |
|
| (1,035) |
|
|
| (152 | ) |
|
| 14 |
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Loss before income taxes |
|
| (9,915) |
|
| (6,604) |
|
|
| (20,362 | ) |
|
| (10,193 | ) |
Income taxes |
|
| 48 |
|
| — |
|
|
| 29 |
|
|
| — |
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Net loss |
| $ | (9,963) |
| $ | (6,604) |
|
| $ | (20,391 | ) |
| $ | (10,193 | ) |
Net sales decreased $3.4increased $2.0 million, or 34.2%30.8%, to $6.5$8.2 million for the three months ended SeptemberJune 30, 2016,2017 as compared to $9.9$6.2 million for the three months ended SeptemberJune 30, 2015.2016. Net sales of our Breast Products decreased $4.6increased $1.9 million to $5.0$6.8 million for the three months ended SeptemberJune 30, 2016,2017, as compared to $9.6$4.9 million for the three months ended SeptemberJune 30, 2015,2016, primarily due to the additional sales of the tissue expander portfolio as a result of the acquisition of SSP in November 2016. Net sales of our scar management products slightly increased $0.1 million to $1.2 million for the three months ended June 30, 2017 as compared to $1.1 million for the three months ended June 30, 2016.
As of June 30, 2017, our sales organization included 37 sales representatives as compared to 38 sales representatives as of June 30, 2016.
Cost of Goods Sold and Gross Margin
Cost of goods sold increased $0.9 million, or 50.2%, to $2.6 million for the three months ended June 30, 2017, as compared to $1.7 million for the three months ended June 30, 2016. This increase was primarily due to an increase in sales volume driven by sales of our tissue expander portfolio we acquired from SSP in November 2016.
The gross margins for the three months ended June 30, 2017 and 2016 were 67.9% and 72.1%, respectively. The decrease was primarily due to the increase in amortization related to the fair value of inventory recorded from our acquisition of the SSP tissue expander portfolio in the fourth quarter of 2016.
Sales and Marketing Expenses
Sales and marketing expenses slightly decreased $0.1 million, or 2.0%, to $6.2 million for the three months ended June 30, 2017, as compared to $6.3 million for the three months ended June 30, 2016. The slight change in balance is primarily due to the decrease in employee related costs as a result of lower headcount.
Research and Development Expenses
Research and development expenses decreased $1.5 million, or 48.6%, to $1.6 million for the three months ended June 30, 2017, as compared to $3.1 million for the three months ended June 30, 2016. The decrease was primarily due to a $1.9 million decrease in consulting expenses related to product development activities, offset by a $0.5 million increase in employee related costs.
General and Administrative Expenses
G&A expenses increased $2.6 million, or 49.7%, to $8.0 million for the three months ended June 30, 2017, as compared to $5.4 million for the three months ended June 30, 2016. The increase consisted primarily of a $1.2 million increase in employee related costs as a result of additional headcount, a $0.7 million increase in outside legal counsel and consulting expenses, and $0.6 million increase in amortization and change in fair market value of costs related to the BIOCORNEUM® and SSP tissue expander portfolio acquisitions.
Legal Settlement Expenses
The Company had a legal settlement expense of $10 million for the three months ended June 30, 2017, as compared to $0 for the three months ended June 30, 2016. The increase is due to the settlement of the Silimed Litigation and Silimed Arbitration (see Item 5 -- Silimed Settlement).
Other Income (Expense), net
Other income (expense), net for the three months ended June 30, 2017 was primarily associated with expenses related to warrants and amortization of issuance costs associated with the Loan Agreement. Other income (expense), net for the three months ended June 30, 2016 was primarily associated with expense recognized for the change in fair value of warrants.
Income tax expense for the three months ended June 30, 2017 was associated with a deferred tax liability associated with indefinite-lived intangible assets from the BIOCORNEUM® acquisition and the tissue expander portfolio acquisition from SSP that cannot offset deferred tax assets. Income tax expense for the three months ended June 30, 2017 and 2016 was $0.0 and $0.0, respectively.
Comparison of the Six Months Ended June 30, 2017 and 2016
The following table sets forth our results of operations for the six months ended June 30, 2017 and 2016:
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| Six Months Ended |
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| June 30, |
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| 2017 |
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| 2016 |
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| (unaudited, in thousands) |
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Statement of operations data |
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Net sales |
| $ | 15,658 |
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| $ | 7,715 |
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Cost of goods sold |
|
| 4,942 |
|
|
| 2,506 |
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Gross profit |
|
| 10,716 |
|
|
| 5,209 |
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Operating Expenses |
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|
|
Sales and marketing |
|
| 13,119 |
|
|
| 11,396 |
|
Research and development |
|
| 4,766 |
|
|
| 5,317 |
|
General and administrative |
|
| 14,458 |
|
|
| 10,642 |
|
Legal Settlement |
|
| 10,000 |
|
|
| — |
|
Total operating expenses |
|
| 42,343 |
|
|
| 27,355 |
|
Loss from operations |
|
| (31,627 | ) |
|
| (22,146 | ) |
Other income (expense), net |
|
|
|
|
|
|
|
|
Interest income |
|
| 59 |
|
|
| 31 |
|
Interest expense |
|
| (194 | ) |
|
| (13 | ) |
Other income (expense), net |
|
| 4 |
|
|
| (2 | ) |
Total other income (expense), net |
|
| (131 | ) |
|
| 16 |
|
Loss before income taxes |
|
| (31,758 | ) |
|
| (22,130 | ) |
Income taxes |
|
| 54 |
|
|
| — |
|
Net loss |
| $ | (31,812 | ) |
| $ | (22,130 | ) |
Net Sales
Net sales increased $8.0 million, or 103%, to $15.7 million for the six months ended June 30, 2017 as compared to $7.7 million for the six months ended June 30, 2016. Net sales of our Breast Products increased $6.5 million to $12.6 million for the six months ended June 30, 2017, as compared to $6.1 million for the six months ended June 30, 2016, as a result of our controlled re-entry to market designed to optimize our supply of Breast Product inventory. The decrease ininventory after the voluntary hold on the sale and implanting of all Sientra devices manufactured by Silimed between October 9, 2015 and March 1, 2016. Net sales of Breast Product net sales was offset by $1.3 million of Scar Management Product net salesProducts for the threesix months ended SeptemberJune 30, 2017 also included sales of the tissue expander portfolio we acquired from SSP in November 2016.
Net sales of our scar management products increased $1.2 million to $2.6 million for the six months ended June 30, 2017 as compared to $1.4 million for the six months ended June 30, 2016 as a result of integrating scar management products into our product mix after our acquisition of BIOCORNEUM® on March 9, 2016.
As of SeptemberJune 30, 2016,2017, our sales organization included 3837 sales representatives as compared to 4538 sales representatives as of SeptemberJune 30, 2015. 2016.
Cost of Goods Sold and Gross Margin
Cost of goods sold decreased $1.1increased $2.4 million, or 38.2%97%, to $1.8$4.9 million for the threesix months ended SeptemberJune 30, 2016,2017, as compared to $2.9$2.5 million for the threesix months ended SeptemberJune 30, 2015.2016. This decreaseincrease was primarily due to a decreasean increase in sales volume driven by our controlled re-entry of Breast Products into the marketplace.
The gross margins formarketplace after the three months ended September 30, 2016 and 2015 were 72.2% and 70.5%, respectively. This increase was primarily due to a decrease in inventory write-offs of 1.1 percentage points and a decrease in warranty costs of 0.6 percentage points. The decrease in inventory write-offs resulted from the timing and recognition of products anticipated to expire prior to being sold. The decrease in warranty costs resulted from improved rupture rates as indicated by our ongoing clinical studies.
24
Sales and Marketing Expenses
Sales and marketing decreased $1.1 million, or 18.2%, to $5.1 million for the three months ended September 30, 2016, as compared to $6.3 million for the three months ended September 30, 2015. This decrease consisted primarily of a $0.7 million decrease in employee related costs as a result of a decrease in headcount, and a $0.3 million decrease in marketing costs due to lower no‑charge customer shipping costs and less direct marketing activities.
Research and Development Expenses
There was no material change in the amount of R&D expenses for the three months ended September 30, 2016 and 2015. R&D expenses were consistent in both periods.
General and Administrative Expenses
G&A expenses increased $3.2 million, or 76.4%, to $7.3 million for the three months ended September 30, 2016, as compared to $4.1 million for the three months ended September 30, 2015. This increase consisted primary of a $1.5 million increase in outside legal counsel and litigation expenses, a $1.6 million probable loss incurred related to the proposed settlement of the class action securities litigation, and a $0.2 million increase in stock compensation expense.
Other Income (Expense), net
Other income (expense), net for the three months ended September 30, 2016 was primarily associated with interest income on cash held in a money market account, interest paid on inventory payable and expense recognized for the change in fair value of warrants. Other income (expense), net for the three months ended September 30, 2015 was primarily associated with interest income on cash held in a money market account, interest expense on our Oxford term loans, which were repaid in full in the fourth quarter of 2015 and income recognized for the change in fair value of warrants.
Income Tax Expense
Income tax expense for the three months ended September 30, 2016 was associated with a deferred tax liability associated with indefinite lived intangibles from the bioCorneum® acquisition that cannot offset our deferred tax assets. There was no income tax expense for the three months ended September 30, 2015.
25
Comparison of the Nine Months Ended September 30, 2016 and 2015
The following table sets forth our results of operations for the nine months ended September 30, 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
| Nine Months Ended |
| |||
|
|
| September 30, |
| |||
|
|
| 2016 |
|
| 2015 |
|
|
|
| (unaudited, in thousands) |
| |||
Statement of operations data |
|
|
|
|
|
|
|
Net sales |
| $ | 14,246 |
| $ | 36,569 |
|
Cost of goods sold |
|
| 4,319 |
|
| 10,107 |
|
Gross profit |
|
| 9,927 |
|
| 26,462 |
|
Operating Expenses |
|
|
|
|
|
|
|
Sales and marketing |
|
| 16,533 |
|
| 20,087 |
|
Research and development |
|
| 7,370 |
|
| 4,896 |
|
General and administrative |
|
| 17,945 |
|
| 11,804 |
|
Total operating expenses |
|
| 41,848 |
|
| 36,787 |
|
Loss from operations |
|
| (31,921) |
|
| (10,325) |
|
Other income (expense), net |
|
|
|
|
|
|
|
Interest income |
|
| 47 |
|
| 19 |
|
Interest expense |
|
| (118) |
|
| (2,947) |
|
Other (expense) income, net |
|
| (54) |
|
| 273 |
|
Total other income (expense), net |
|
| (125) |
|
| (2,655) |
|
Loss before income taxes |
|
| (32,046) |
|
| (12,980) |
|
Income taxes |
|
| 48 |
|
| — |
|
Net loss |
| $ | (32,094) |
| $ | (12,980) |
|
Net Sales
Net sales decreased $22.3 million, or 61.0%, to $14.2 million for the nine months ended September 30, 2016, as compared to $36.6 million for the nine months ended September 30, 2015. Net sales of our Breast Products decreased $24.6 million to $11.1 million for the nine months ended September 30, 2016, as compared to $35.7 million for the nine months ended September 30, 2015, as a result of both our voluntary hold on the sale and implanting of all Sientra devices manufactured by Silimed between October 9, 2015 and March 1, 2016, andalong with an increase in sales volume of our controlled re-entry to market designed to optimize our supply of Breast Products inventory. The decrease in Breast Product net sales were offset by $2.7 million of Scar Management Product net sales for the nine months ended September 30, 2016, followingscar management products after the acquisition of bioCorneum®BIOCORNEUM® on March 9, 2016.
Cost of Goods Sold and Gross Margin
Cost of goods sold decreased $5.8 million, or 57.3%, to $4.3 million for the nine months ended September 30, 2016, as compared to $10.1 million for the nine months ended September 30, 2015. This decrease was due to a decrease in sales volume driven by both our voluntary hold on sales from October 9, 2015 to March 1, 2016 and sales of our controlled re-entry into the marketplace.
tissue expander portfolio we acquired from SSP in November 2016.
The gross margins for the ninesix months ended SeptemberJune 30, 2017 and 2016 were 68.4% and 2015 were 69.7% and 72.4%67.5%, respectively. The decrease for the nine months ended September 30, 2016 was primarily due to increased inventory write-offs of 2.8 percentage points and increased fixed overhead costs of 0.8 percentage points, partially offset by increased sales of our Scar Management Products, which generally have higher gross margins. The increase in inventory write-offs resulted from the timing and recognition of products anticipated to expire prior to being sold. The increase in fixed overhead costs was a result of our voluntary hold on the sale and implanting of all Sientra devices manufactured by Silimed between October 9, 2015 and March 1, 2016.
26
Sales and Marketing Expenses
Sales and marketing decreased $3.6 million, or 17.7%, to $16.5 million for the nine months ended September 30, 2016, as compared to $20.1 million for the nine months ended September 30, 2015. This decrease consisted primarily of a $2.1 million decrease in marketing costs due to lower no‑charge customer shipping costs and less direct marketing activities as well as a $1.3 million decrease in employee-related costs as a result of a decrease in headcount.
Research and Development Expenses
R&D expenses increased $2.5 million, or 50.5%, to $7.4 million for the nine months ended September 30, 2016, as compared to $4.9 million for the nine months ended September 30, 2015. This increase was primarily due to a $2.3decrease in reserves for inventory obsolescence recorded for product that we estimate to expire prior to being sold and decreased fixed overhead as a percentage of net sales, offset by the increase in amortization related to the fair value of inventory recorded from our acquisition of the SSP tissue expander portfolio in the fourth quarter of 2016.
Sales and Marketing Expenses
Sales and marketing expenses increased $1.7 million, or 15.1%, to $13.1 million for the six months ended June 30, 2017, as compared to $11.4 million for the six months ended June 30, 2016. The increase consisted primarily of a $1.2 million increase in direct marketing activities and travel expenses related to sales training and tradeshows and a $0.5 million increase in employee related costs as a result of an increase in variable expenses and stock based compensation.
Research and Development Expenses
Research and development expenses decreased $0.5 million, or 10.4%, to $4.8 million for the six months ended June 30, 2017, as compared to $5.3 million for the six months ended June 30, 2016. The decrease was primarily due to the $1.6 million decrease in consulting expenses related to the timing of product development activities, offset by a $1.1 million increase in employee costs and consulting fees.
as a result of additional headcount.
General and Administrative Expenses
G&A expenses increased $6.1$3.9 million, or 52.0%35.9%, to $17.9$14.5 million for the ninesix months ended SeptemberJune 30, 2016,2017, as compared to $11.8$10.6 million for the ninesix months ended SeptemberJune 30, 2015. This2016. The increase consisted primaryprimarily of a $4.0$1.9 million increase in employee related costs, $0.7 million increase in outside legal counsel and litigationconsulting expenses, a $1.6 million probable loss incurred related to the proposed settlement of the class action securities litigation, a $0.7 million increase in stock compensation expense and a $0.5$0.8 million increase in amortization expenseand change in fair market value of contingent consideration related to acquisitions.
Legal Settlement Expenses
The Company had a legal settlement expense of $10 million for the bioCorneum® acquisition, offset by a $0.6 million decrease in medical device excise tax costssix months ended June 30, 2017, as a resultcompared to $0 for the six months ended June 30, 2016. The increase is due to the settlement of the suspension of the tax during calendar years 2016Silimed Litigation and 2017.
Silimed Arbitration (see Item 5 -- Settlement Agreement with Silimed).
Other Income (Expense), net
Other income (expense), net for the ninesix months ended SeptemberJune 30, 2017 was primarily associated with expenses related to the warrants and amortization of issuance costs associated with the Loan Agreement. Other income (expense), net for the six months ended June 30, 2016 was primarily associated with interest income on cash held in a money market account, interest paid on inventory payable and expense recognized for the change in fair value of warrants. Other income (expense), net for the nine months ended September 30, 2015 was primarily associated with interest income on cash held in a money market account, interest expense on our Oxford term loans, which were repaid in full in the fourth quarter of 2015 and income recognized for the change in fair value of warrants.
Income Tax Expense
Income tax expense for the ninesix months ended SeptemberJune 30, 20162017 was associated with a deferred tax liability associated with indefinite lived intangiblesindefinite-lived intangible assets from the bioCorneum®BIOCORNEUM® acquisition and the tissue expander portfolio acquisition from SSP that cannot offset the deferred tax asset. There was no incomeassets. Income tax expense for the ninesix months ended SeptemberJune 30, 2015.2017 and 2016 were $0.1 and $0.0, respectively.
Liquidity and Capital Resources
Since our inception, we have incurred significant net operating losses and anticipate that our losses will continue in the near term. We expect our operating expenses will continue to grow as we expand our operations. We will need to generate significant net sales to achieve profitability. To date, we have funded our operations primarily with proceeds from the sales of preferred stock, borrowings under our term loans, sales of our products since 2012, and the proceeds from the sale of our common stock in public offerings. As of SeptemberJune 30, 2016, we had no long-term debt.
2017, the Company borrowed $5.0 million under the Revolving Line.
In November 2014, we completed our IPO of common stock in which we sold 5,750,000 shares at a price of $15.00 per share,, raising approximately $77.0 million in net proceeds after deducting underwriting discounts and commissions of approximately $6.0 million and offering expenses of approximately $3.2 million.
On September 23, 2015, we completed a follow-on public offering of common stock in which we sold 3,000,000 shares at a price of $22.00 per share,, raising approximately $61.4 million in net proceeds after deducting underwriting discounts and commissions of approximately $4.0 million and offering expenses of approximately $0.6 million.
27
the Loan Agreement, SVB made available to us a $15.0 million Revolving Line and a $5.0 million Term Loan. The Revolving Line expires in March 2020. The terms and conditions of our Loan Agreement are described in Note 9 of our unaudited condensed financial statements included in this report. As of SeptemberJune 30, 2016,2017, we had $79.3$5.0 million outstanding under the Revolving Line.
As of June 30, 2017, we had $55.5 million in cash and cash equivalents. Our historical cash outflows have primarily been associated with research and development activities, especially related to obtaining FDA approval for our breast implant portfolio and complying with the FDA’s post-approval requirements, the Mentor litigation, activities relating to commercialization and increases in working capital, including the purchase of inventory as well as the expansion of our sales force and marketing programs. In addition, we have used cash to fund recentthe acquisitions including $5.0 million forof BIOCORNEUM® and the acquisition of assetstissue expander portfolio from Specialty Surgical Products, Inc., which closed on November 2, 2016.SSP. We believe that our available cash on hand, along with the availability under the Loan Agreement, will be sufficient to satisfy our liquidity requirements for at least the next 12 months. months from the date our financial statements are issued.
However, we expect that the recent events involving Silimed, including our voluntary hold on the sale and implanting of all Sientra devices manufactured by Silimed between October 9, 2015 and March 1, 2016, our uncertainty regarding the amount of additional expenses we may incur in connection with regulatory inquiries, expenses we may continue to incur in connection with establishing new manufacturing capacity with Vesta or any other third-party manufacturer for our breast implants, and our uncertainty regarding the amount of additional expenses we may incur in connection with regulatory inquiries, as well as expenses we may incur defendingdefending against litigation claims, including the Silimed litigation, Litigation, may have a material effect on our future cash outflows and our liquidity. As a result, we may be required to make or increase our borrowings under the Loan Agreement, as well as seek additional funds in the future from public or private offerings of our capital stock, borrowings under additional term loans or from other sources.
On July 25, 2017, we entered the Credit Agreements with Midcap pursuant to which we used proceeds there from to repay our existing indebtedness under its Loan Agreement with SVB (see Item 5 – Credit Agreements with Midcap Financial Trust), and on June 27, 2017, the Company entered into a Settlement Agreement with Silimed (see Item 5 – Settlement Agreement with Silimed)
The following table shows a summary of our cash flows (used in) provided by operating, investing and financing activities for the periods indicated:
|
|
|
|
|
|
| ||||||||
|
| Nine Months Ended September 30, |
|
| Six Months Ended June 30, |
| ||||||||
|
| 2016 |
|
| 2015 |
|
| 2017 |
|
| 2016 |
| ||
|
| (unaudited, in thousands) |
|
| (unaudited, in thousands) |
| ||||||||
Net cash (used in) provided by: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities | $ | (27,507) |
| $ | (8,027) |
|
| $ | (15,784 | ) |
| $ | (19,496 | ) |
Investing activities |
| (7,675) |
|
| (844) |
|
|
| (1,580 | ) |
|
| (7,633 | ) |
Financing activities |
| 1,663 |
|
| 61,081 |
|
|
| 5,647 |
|
|
| 487 |
|
Net change in cash and cash equivalents | $ | (33,519) |
| $ | 52,210 |
|
| $ | (11,717 | ) |
| $ | (26,642 | ) |
Cash used in operating activities
Net cash used in operating activities was $27.5$15.8 million during the ninesix months ended SeptemberJune 30, 2016,2017 as compared to $8.0$19.5 million during the ninesix months ended SeptemberJune 30, 2015.2016. The increasedecrease in cash used in operating activities between the ninesix months ended SeptemberJune 30, 20162017 and 20152016 was primarily associated with thean increase in net loss of $19.1 million andoffset by a decrease in customer deposits.
insurance recovery receivable and accrued liabilities due to the timing of payments as compared to the six months ended June 30, 2016.
Cash used in investing activities
Net cash used in investing activities was $7.7$1.6 million during the ninesix months ended SeptemberJune 30, 2016,2017 as compared to $0.8$7.6 million during the ninesix months ended SeptemberJune 30, 2015.2016. The increasedecrease in cash used in investing activities between the ninesix months ended SeptemberJune 30, 20162017 and 20152016 was primarily due to the $6.8 million cash outflow for the acquisition of bioCorneum®BIOCORNEUM®.
Cash provided by financing activities
Net cash provided by financing activities was $1.7$5.6 million during the ninesix months ended SeptemberJune 30, 2016,2017 as compared to $61.1$0.5 million during the ninesix months ended SeptemberJune 30, 2015.2016. The decreaseincrease in cash provided by financing activities was primarily the result of $62.0 million in cash$5M proceeds from borrowings under the follow-on offeringRevolving Line and an increase in 2015.
proceeds from exercise of employee stock options, offset by tax payments related to shares withheld for vested RSUs for the six months ended June 30, 2017.
Our liquidity position and capital requirements are subject to a number of factors. For example, our cash inflow and outflow may be impacted by the following:
| the timing to qualify Vesta with the FDA and the timing and availability of any alternative manufacturing sources, |
28
net sales generated by our Breast Products, scar management products, and any other future products that we may develop and commercialize;
Table of Contentscosts associated with expanding our sales force and marketing programs;
cost associated with developing and commercializing our proposed products or technologies;
|
|
expenses we incur in connection with potential litigation or governmental investigations;
cost of obtaining and maintaining regulatory clearance or approval for our current or future products;
|
|
|
|
|
|
|
|
|
|
anticipated or unanticipated capital expenditures; and
|
|
unanticipated G&A expenses.
Our primary short-term capital needs, which are subject to change, include expenditures related to:
support of our sales and marketing efforts related to our current and future products;
|
|
|
|
|
|
new product acquisition and development efforts;
|
|
facilities expansion needs;
|
|
investment in inventory required to meet customer demands; and
expenses we incur in connection with defending against litigation.
Although we believe the foregoing items reflect our most likely uses of cash in the short-term, we cannot predict with certainty all of our particular short-term cash uses or the timing or amount of cash used. If cash generated from operations is insufficient to satisfy our working capital and capital expenditure requirements, we may be required to sell additional equity or debt securities or obtain credit facilities. Additional capital, if needed, may not be available on satisfactory terms, if at all. Furthermore, any additional equity financing may be dilutive to stockholders, and debt financing, if available, may include restrictive covenants. For a discussion of other factors that may impact our future liquidity and capital funding requirements, see “Risk Factors — Risks Related to Our Financial Results.”
Contractual Obligations and Commitments
As of SeptemberJune 30, 2016,2017, there have been no material changes to our contractual obligations and commitments outside the ordinary course of business from those disclosed under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Contractual Obligations” in the Annual Report.
Off-Balance Sheet Arrangements
During the periods presented we did not have, nor do we currently have, any off-balance sheet arrangements as defined under SEC rules.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of SeptemberJune 30, 2016,2017, we had $79.3$55.5 million in cash and cash equivalents. We generally hold our cash in checking accounts and interest-bearing money market accounts. Our exposure to market risk related to interest rate sensitivity is affected by changes in the general level of U.S. interest rates. Due to the short-term maturities of our cash equivalents and the low risk profile of our investments, an immediate 100 basis point change in interest rates would not have a material effect on the fair market value of our cash equivalents.
29
Table We have established guidelines regarding approved investments and maturities of Contentsinvestments, which are designed to maintain safety and liquidity.
ITEM 4: CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with U.S. GAAP. We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our periodic and current reports that we file with the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and
communicated to our management, including our chief executive officer and principalchief financial officer, as appropriate, to allow timely decisions regarding required disclosure. Our independent registered public accounting firm will first be required to attest to the effectiveness of our internal control over financial reporting for our Annual Report on Form 10-K for the first year we are no longer an “emerging growth company” under the JOBS Act.
As we disclosed in our Annual Report, we identified a material weakness in our internal control over financial reporting related to the Company not maintaining sufficiently trained resources with knowledge of internal control over financial reporting as it relates to accounting for significant unusual transactions, including coordination with external service providers. As a result, we did not have in place effective management review controls over business combinations, specifically key assumptions, financial data and calculations used to measure the fair value of acquired assets and liabilities, including contingent consideration prepared by its external service provider.
As described in our Annual Report, we are taking steps to remediate this material weakness in internal control over financial reporting; however, additional time will be required to assess and ensure remediation of September 30, 2016, we carried out an evaluation, underthese processes and procedures. Our goal is to remediate the supervision and withidentified material weakness by the participationend of 2017.
Because of the material weakness in our management, includinginternal control over financial reporting as previously disclosed, our chief executive officer and principalchief financial officer concluded that, as of June 30, 2017, the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on this evaluation,Act, were not effective. Our management, including our chief executive officer and chief financial officer, has concluded that, notwithstanding the material weakness in our disclosure controlsinternal control over financial reporting, the condensed consolidated financial statements in this Quarterly Report on Form 10-Q fairly present, in all material respects, our financial position, results of operations and procedures were effectivecash flows for the periods presented in conformity with U.S. GAAP.
Changes in Internal Control over Financial Reporting
We are taking actions to achieve their stated purposeremediate the material weakness relating to our internal control over financial reporting, as of September 30, 2016.
An evaluationdescribed above. Except as otherwise described herein, there was also performed under the supervision and with the participation of our management, including our chief executive officer and our principal financial officer, of anyno change in our internal control over financial reporting that occurred during our last fiscal quarter and that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. That evaluation did not identify any change in our internal control over financial reporting that occurred during our latest fiscal quarterthe period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
From time to time, we are involved in legal proceedings and regulatory proceedings arising out of our operations. We establish reserves for specific liabilities in connection with legal actions that we deem to be probable and estimable. The ability to predict the ultimate outcome of such matters involves judgments, estimates, and inherent uncertainties. The actual outcome of such matters could differ materially from management’s estimates.
Class Action Shareholder Litigation
On September 25, 2015, a lawsuit styled as a class action of the Company’s stockholders was filed in the United States District Court for the Central District of California. The lawsuit names the Company and certain of our officers as defendants, or the Sientra Defendants, and alleges violations of Sections 10(b) and 20(a)��of the Exchange Act of 1934, as amended, or the Exchange Act in connection with allegedly false and misleading statements concerning the Company’s business, operations, and prospects. The plaintiff seeks damages and an award of reasonable costs and expenses, including attorneys’ fees. On November 24, 2015, three stockholders (or groups of stockholders) filed motions to appoint lead plaintiff(s) and to approve their selection onof lead counsel. On December 10, 2015, the court entered an order appointing lead plaintiffs and approving their selection of lead counsel. On February 19, 2016, lead plaintiffs filed their consolidated amended complaint, which added a claimclaims under SectionSections 11, 12(a)(2), and 15 of the Securities Act and named as defendants the underwriters associated with the Company’s follow-on public offering that closed on September 23, 2015, or the Underwriter Defendants. On March 21, 2016, the Sientra Defendants and the Underwriter Defendants each filed a motion to dismiss, or the Motions to Dismiss, the consolidated amended
complaints. On April 20, 2016, lead plaintiffs filed their opposition to the Motions to Dismiss, and the Sientra Defendants and Underwriter Defendants filed separate replies on May 5, 2016. On June 9, 2016, the court granted in part and denied in part the Motions to Dismiss. On July 14, 2016, the Sientra Defendants moved the court to reconsider its June 9, 2016 order and grant the Motions to Dismiss in full. On August 4, 2016, lead plaintiffs filed an opposition to the motion for reconsideration. On August 12, 2016, the court denied the motion for reconsideration, and the Sientra Defendants and the Underwriter Defendants each filed an answer to the consolidated amended complaint.
On October 28, November 5, and November 19, 2015, three lawsuits styled as class actions of the Company’s stockholders were filed in the Superior Court of California for the County of San Mateo. The lawsuits name the Company, certain of our officers and directors, and the underwriters associated with our follow-on public offering that closed on September 23, 2015 as defendants. The lawsuits allege violations of Sections 11, 12(a)(2), and 15 of the Securities Act in connection with
30
allegedly false and misleading statements in our offering documents associated with the follow-on offering concerning our business, operations, and prospects. The plaintiffs seek damages and an award of reasonable costs and expenses, including attorneys’ fees. On December 4, 2015, defendants removed all three lawsuits to the United States District Court for the Northern District of California. On December 15 and December 16, 2015, plaintiffs filed motions to remand the lawsuits back to San Mateo Superior Court, or Motions to Remand. On January 19, 2016, defendants filed their opposition to the Motions to Remand, and plaintiffs filed their reply in support of the Motions to Remand on January 26, 2016.
On May 20, 2016, the United States District Court for the Northern District of California granted plaintiffs’ Motions to Remand, and the San Mateo Superior Court received the remanded cases on May 27, 2016. On July 19, 2016, the San Mateo Superior Court consolidated the three lawsuits. On August 2, 2016, plaintiffs filed their consolidated complaint. On August 5, 2016, defendants filed a motion to stay all proceedings in favor of the class action filed in the United States District Court for the Central District of California.
On September 13, 2016, the parties to the actions pending in the San Mateo Superior Court and the United States District Court for the Central District of California signed a memorandum of understanding that sets forth the material deal points of a settlement that covers both actions and includes class-wide relief. On September 13, 2016, and September 20, 2016, respectively, the parties filed notices of settlement in both courts. On September 22, 2016, the United States District Court for the Central District of California stayed that action pending the court’s approval of a settlement. On September 23, 2016, the San Mateo Superior Court stayed that action as well as pending the court’s approval of a settlement.
On December 20, 2016, the plaintiffs in the federal court action filed a motion for preliminary approval of the class action settlement. On January 23, 2017, the United States District Court for the Central District of California preliminarily approved the settlement. On January 5, 2017, the plaintiffs in the state court action also filed a motion for preliminary approval of the class action settlement. On February 7, 2017, the San Mateo Superior Court preliminarily approved the settlement. On April 24, 2017, the plaintiffs in the federal court action and the state court action each filed their motion for final approval of the class action settlement, approval of the proposed plan of allocation, and an award of attorneys’ fees and expenses. Following a final fairness hearing in the federal court, on May 23, 2017, the federal court extended an order granting final approval of the settlement and dismissing the federal court action with prejudice. Following a final fairness hearing in the state court, on May 31, 2017, the state court entered an order granting final approval of the settlement and dismissing the state court action with prejudice.
As a result of these developments, we have determined that a probable loss hashad been incurred and havewe recognized a net charge to earnings of approximately $1.6 million for the year ended December 31, 2016 within general and administrative expense which iswas comprised of the loss contingency of approximately $10.9 million, net of expected insurance proceeds of approximately $9.4 million. In the first quarter of 2017, we received $9.3 million. We have classified the loss contingency as “legal settlement payable” and the expectedmillion in insurance proceeds and paid the $10.9 million loss contingency. The remaining insurance proceeds receivable is classified as “insurance recovery receivable” on the accompanying condensed balance sheets.
While it is possible that we may incur a loss greater than the amounts recognized in the accompanying interim financial statements, we are unable to determine a range of possible losses greater than the amount recognized.
Silimed Litigation
On November 6, 2016, Silimed filed a lawsuit in the U.S.United States District Court for the Southern District of New York naming Sientra as the defendant and alleging breach of contract of the Amended and Restated Exclusivity Agreement executed by Sientra and Silimed in April 2007, or the 2007 Agreement, unfair competition unjust enrichment, and misappropriation of trade secrets against us. In its complaint, Silimed alleges that our theft, misuse, and improper disclosure of Silimed’s confidential, proprietary, and trade secret manufacturing information was done in order for us to develop our own manufacturing capability that we intend to use to manufacture our PMA-approved products. Silimed is seeking a declaration that we are in material breach of the 2007Silimed Agreement, a preliminary and permanent injunction to prevent our allegedly wrongful use and disclosure of Silimed’s confidential and proprietary information, as well as unquantified compensatory and punitive damages. We believeOn November 15, 2016, Sientra filed its answer and counterclaims for declaratory judgment in which it denied that Silimed is entitled to any relief including, among other reasons, because of Silimed’s material breach of the Silimed Agreement and Silimed’s unclean hands, and further seeks declaratory relief that Sientra is the owner of certain assets it acquired from Silimed, Inc. in 2007, that Sientra owns, or is exclusively licensed, to any improvements created since April 2007, that Silimed lacks any confidential information or proprietary rights under the Silimed Agreement, and that Silimed lacks any relevant trade secret rights. On December 9, 2016, Silimed filed a motion to strike the Company’s counterclaims. Briefing on that motion was completed on December 30, 2016, and the parties are waiting for a decision from the court. On February 1, 2017, Sientra filed a motion to stay Silimed’s breach of contract claim in light of a demand for arbitration filed by Sientra against Silimed on January 20, 2017 concerning Silimed’s material breaches of the Silimed Agreement, and to further dismiss, or alternatively stay, the unfair competition and misappropriation of trade secrets claims. Briefing on that motion was completed on February 22, 2017, and the parties are waiting for a decision from the court. On February 3, 2017, the court held an initial pre-trial conference and entered a pre-trial scheduling order which set a final pre-trial conference date of August 3, 2018.
On January 20, 2017, Sientra filed an arbitration demand in the International Center for Dispute Resolution, or ICDR, in New York, the Silimed Arbitration, naming Silimed as the defendant and alleging material breach of the Silimed Agreement, gross negligence and tortious interference by Silimed, as well as seeking certain declaratory relief. Among other things, Sientra alleges that Silimed’s claims are legallysupply failure constitutes a material breach of the Silimed Agreement, and factually unsupportedthat such breach was caused by Silimed’s grossly negligent or other willful conduct related to its regulatory suspensions and intendthe fire at its manufacturing facility. Silimed filed its answer to defend this lawsuit vigorously. Sientra’s arbitration demand and counterclaim on March 8, 2017. Sientra filed its answer to Silimed’s counterclaims on April 10, 2017. The parties nominated their party arbitrators on March 13, 2017 and their appointment was confirmed by the ICDR by April 5. 2017. The party appointed arbitrators nominated a president of the tribunal on May 8, 2017 whose appointment was confirmed by the ICDR on May 30, 2017. A preparatory Conference was held with the arbitration tribunal on June 26, 2017. A court-ordered settlement conference was held between the parties on June 27, 2017.
It is possible that additional suits will be filed, or allegations made by stockholders,On June 27, 2017, the Company entered into a Settlement Agreement with respect to these same or other matters and also naming us and/or our officers and directors as defendants. We believe we have meritorious defenses and intend to defend these lawsuits vigorously. Silimed (see Item 5 -- Settlement Agreement with Silimed).
You should carefully consider the following risk factors, as well as the other information in this report, before deciding whether to purchase, hold or sell shares of our common stock. The occurrence of any of the following risks could harm our business, financial condition, results of operations and/or growth prospects or cause our actual results to differ materially from those contained in forward-looking statements we have made in this report and those we may make from time to time. You should consider all of the risk factors described when evaluating our business. We have marked with an asterisk (*) those risk factors that reflect changes from the risk factors included in Item 1A of the Annual Report.
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Risks Relating to Our Business and Our Industry
We may not be able to procure and qualify a new manufacturer for our silicone gel breast implants and other products previously manufactured by Silimed.*
Our existing manufacturing contract with Silimed our sole source, third-party manufacturer located in Brazil, expiresexpired on its terms on April 1, 2017, and we cannot provide assurancedid not renew it. Moreover, our existing inventory of breast implants that were previously manufactured by Silimed will be able to resume manufacturing and shipping new products to us.
is limited.
Although we continue to collaborate with Vesta towards establishing a dedicated contract manufacturing facility for Sientra’s breast implant products, we have not yet entered into a definitive manufacturing agreement with Vesta, norVesta has Vestanot yet been qualified as a manufacturer to source our implants. Indeed, we must submitWe recently submitted a PMA Supplementsupplement to the FDA before Vesta can commencefor the manufacturing of our products, andPMA-approved implants by Vesta, but the timing of when we submit such PMA Supplement, or when wemay obtain FDA approval, if any, could be subject to delays, some of which are beyond our control. Moreover, we need to negotiate the terms of a definitive manufacturing agreement with Vesta, or any other alternate manufacturer, and they would haveneed to be qualified with the FDA, which is an expensive and time-consuming process. A decision to not execute a manufacturing agreement with Vesta, or anyAny delays or our inability to qualify Vesta or negotiate a manufacturing agreement and qualify another alternate manufacturer could result in a supply interruption, which would materially adversely affect our business, financial condition and results of operations.
We are in litigation with Silimed, our sole source supplier of our silicone gel breast implants and certain other products.*
On November 6, 2016, Silimed filed a lawsuit in the U.S. District Court for the Southern District of New York naming Sientra as the defendant and alleging breach of contract of the Amended and Restated Exclusivity Agreement executed by Sientra and Silimed in April 2007, or the 2007 Agreement, unfair competition, unjust enrichment, and misappropriation of trade secrets against us. In its complaint, Silimed alleges that our theft, misuse, and improper disclosure of Silimed’s confidential, proprietary, and trade secret manufacturing information was done in order for us to develop our own manufacturing capability that we intend to use to manufacture our PMA-approved products. Silimed is seeking a declaration that we are in material breach of the 2007 Agreement, a preliminary and permanent injunction to prevent our allegedly wrongful use and disclosure of Silimed’s confidential and proprietary information, as well as unquantified compensatory and punitive damages.
We believe Silimed’s claims are legally and factually unsupported and intend to defend this lawsuit vigorously. However, we cannot provide assurance that we will be successful in our defense. If Silimed were to succeed in establishing that any protectable Silimed IP rights are in fact unlawfully compromised by our new manufacturing relationship with Vesta in a manner that warrants injunctive relief, we could be subject to an injunction which may delay or otherwise hinder our ability to procure and qualify an alternate manufacturing supplier of our silicone gel breast implants and certain other products, and we could be required to pay Silimed damages, which risks could have a material adverse effect on our business, results of operations and financial condition depending on the scope of any injunctive relief and the size of any damage award. Silimed also seeks declaratory and injunctive relief as to alleged IP rights that it does not claim to be directly associated with Sientra’s relationship with Vesta. Adverse effects, if any, on our business results of operations and financial condition with respect to such claims are difficult to assess. In any event, we expect to incur increased costs associated with defending this lawsuit and the diversion of our management’s attention from the existing business, which could also adversely affect our results of operations and financial condition.
There have been several foreign regulatory inquiries which have affected our ability to rely on Silimed, our sole source, third-party manufacturer and supplier of our silicone gel breast implants and certain other products.*
Historically, we have relied on Silimed to manufacture and supply our silicone gel breast implants and certain other products. Our existing contract with Silimed expires on its terms in April 2017 and several recent events have occurred which have affected our ability to rely on Silimed as our source for these products in the short and long term.
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On September 23, 2015, the Medicines and Healthcare Products Regulatory Agency, or the MHRA, an executive agency of the U.K., issued a press release announcing the suspension of sales and implanting in U.K. of all medical devices manufactured by Silimed following the suspension of the CE certificate of these products issued by TUV SUD, Silimed’s notified body under EU regulation. The suspension of Silimed’s CE certificate by TUV SUD followed TUV SUD’s inspection at Silimed’s manufacturing facilities in Brazil, relating to particles on Silimed breast products.
On October 2, 2015, the Brazilian regulatory agency ANVISA and the Department of the Secretary of State of the State of Rio de Janeiro announced that while they would continue to review the technical compliance related to GMP of Silimed’s manufacturing facility, as a precautionary measure, they temporarily suspended the manufacturing and shipment of all medical devices made by Silimed, including products manufactured for Sientra.
On January 27, 2016, after completing an analysis and risk assessment, ANVISA announced their authorization of Silimed to resume the commercialization and use of its previously manufactured products. ANVISA concluded there was no evidence that the presence of surface particles on the silicone implants represented risks which are additional to the ones inherent in the product. However, Silimed would continue to be suspended from manufacturing and commercializing new batches of implants until an inspection is performed to reassess the fulfillment of its GMP compliance. On July 11, 2016, after completing an inspection of Silimed’s facility, ANVISA announced the reinstatement of Silimed’s GMP certificate and their ability to manufacture commercial products. The Brazilian GMP certificate is effective as of July 8, 2016 and is valid for two years. The Silimed facility that has been approved for manufacturing is an alternate facility to where Sientra products were previously manufactured, which was damaged by a fire on October 22, 2015, and it remains unclear as to whether the alternate facility is fully equipped to manufacture our products. Moreover, even if the alternate facility was equipped to manufacture our products, such products cannot be sold in the U.S. until a PMA supplement for the facility is submitted, Silimed’s operations have been fully validated to U.S. FDA standards and they have successfully passed an FDA inspection, the timing of which remains uncertain.
Additionally, the suspension of Silimed’s CE certificate by TUV SUD, and the suspension on the commercialization of Silimed’s previously manufactured products in Europe by the MHRA remains in place and the determination of Silimed’s manufacturing facilities is still under evaluation, and we cannot predict the outcome of these matters. The FDA and other U.S. and foreign regulatory agencies have substantial discretion to require additional testing, to impose restrictions on marketed products or on us, including the withdrawal or recall of such products from the market.
Most recently, on November 6, 2016, Silimed filed a lawsuit against us alleging, among other things, a material breach of the existing manufacturing contract. For more information, see the risk factor above entitled “We are in litigation with Silimed, our sole source supplier of our silicone gel breast implants and certain other products.”
The suspension of the sale and manufacturing of Silimed’s products by foreign regulatory agencies, our uncertainty regarding the resolution of the regulatory inquiries or the Silimed litigation and our uncertainty as to whether Silimed may be able to resume manufacturing our products may result in a delay or inability for us to meet our demand to supply our products in a timely manner and as a result, our ability to generate net sales may be impaired, market acceptance of our products could be adversely affected and customers may instead purchase or use our competitors’ products, any of which could materially adversely and severely affect our business, financial condition and results of operations.
We depend on a positive reaction from our Plastic Surgeons and their patients to successfully re-enter the market after our voluntary suspension of the sale of Sientra devices manufactured by Silimed.*
As a result of the regulatory inquiries into SilimedSilimed-manufactured products, betweenon October 9, 2015, and March 1, 2016, we voluntarily placed a temporary hold on the sale of all Sientra devices manufactured by Silimed and recommended that plastic surgeons discontinue implanting the devices until further notice. We were in ongoing discussionsthen conducted extensive independent, third-party testing and analyses of our finished goods inventory which indicated no anticipated safety concerns with the use of Sientra’s products, including our breast implants, consistent with their FDA regarding European and Brazilian regulatory inquiries into Silimed products, and conducted our own review of the matter with the assistance of independent expertsapproval status in quality management systems, GMP and data-based risk assessment. Breast implants have stringent standards for manufacturing and robust quality systems, but there is no specific or defined standard for particles on breast implants.2012. Each of the FDA, ANVISA and MHRA also noted that no risks to patient health have been identified in connection with implanting SilimedSilimed-manufactured products, and, accordingly, there is no need to adopt any procedure or action for those patients who have received them. Additionally, the FDA and ANVISA indicated that there have been no reports of adverse
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events related to this issue. After extensive independent, third-party testing and analyses of our finished goods inventory indicated no anticipated significant safety concerns with the use of our products, including our breast implants, consistent with their FDA approval status in 2012, as ofTherefore, on March 1, 2016, we lifted the temporary hold on the sale of our devices manufactured by Silimed and also sent a letter toinformed our Plastic Surgeons informing them of our controlled market re-entry plans.plan designed to optimize our inventory levels, which continues to be limited. Although our market re-entry decision was based on extensive testing and detailed independent third party reviews, we depend on a continued positive reception from our Plastic Surgeon customers and their patients to be able to reestablish the market position we had prior to the voluntary suspension. OurAdditionally, our re-entry into the market requireshas required us to effectively and responsibly educate accounts on the results of our testing and reconfirm our strong clinical data, while providing the same high levels of customer service to which our Plastic Surgeons are accustomed. Our plastic surgery consultants are working diligently to solidify the trustconfidence and support of all our Plastic Surgeons during this important phase of our market re-entry,Surgeons; however, if we are not successful in re-establishing and maintaining these relationships adapting our business systems, or competing effectively in this market, our sales revenues, market share and financial performance will be affected negatively.
Contracting with any third-party manufacturer and supplier involves inherent risks and various factors outside our direct control that may adversely affect the manufacturing and supply of our breast implants, tissue expanders and other products.*
Our reliance on any third-party manufacturer, including Silimed,Vesta, Formulated Solutions, LLC, or Formulated Solutions, which supplies our Scar Management Products, andBIOCORNEUM® scar management products, SiMatrix, a Vesta subsidiary that supplies the tissue expanders we recently acquired from Specialty Surgical Products, Inc.,SSP, Healthcare Technology International which supplies bioTips for our miraDry system or SSP,any other third-party manufacturer we procure and qualify for the manufacture of our breast implants involves a number of risks. Manufacturing and supply of our breast implants, tissue expanders and other products is technically challenging. Changes that our manufacturermanufacturers may make outside the purview of our direct control, or other mistakes and mishandling of our products, can have an impact on our processes and quality, as well as the successful delivery of products to Plastic Surgeons. MistakesAdditionally, if any third-party manufacturer becomes unable or unwilling to supply our products, we may not be able to find an alternate supplier in a timely manner. For example, there are only a few suppliers of medical-grade silicone available, and mishandling areif these suppliers become unable or unwilling to supply medical-grade silicone to Vesta, Formulated Solutions, SiMatrix or any other manufacturer that we may engage with, an alternate supply of medical-grade silicone may not uncommonbe able to be found in a timely manner. Our existing manufacturing contracts will also expire, for example, our existing manufacturing
contract with SiMatrix expires on its terms on November 1, 2017, and there can affect productionbe no assurance that our contracting counterparties will agree to continue to manufacture and supply. supply our products or they may impose increased pricing terms if the contract is renegotiated or renewed.
Some of thesethe additional risks with relying on third-party manufacturers and suppliers include:
our products may not be manufactured in accordance with agreed upon specifications or in compliance with regulatory requirements or cGMP, or the manufacturing facilities may not be able to maintain compliance with regulatory requirements or cGMP, which could negatively affect the safety or efficacy of our products or cause delays in shipments of our products;
we may not be able to timely respond to unanticipated changes in customer orders, and if orders do not match forecasts, we may have excess or inadequate inventory of materials and components;
our products may be mishandled while in production or in preparation for transit;
we are subject to transportation and import and export risk, particularly given the global nature of our supply chain;
the third-party manufacturer may discontinue manufacturing and supplying products to us for risk management reasons;
the third-party manufacturer may lose access to critical services and components, resulting in an interruption in the manufacturing or shipment of our products;
the third-party manufacturer may encounter financial or other hardships unrelated to us and our demand for products, which could inhibit our ability to fulfill our orders;
there may be delays in analytical results or failure of analytical techniques that we depend on for quality control and release of products;
natural disasters, labor disputes, financial distress, lack of raw material supply, issues with facilities and equipment or other forms of disruption to business operations affecting our manufacturer or its suppliers may occur;
latent defects may become apparent after products have been released and which may result in a recall of such products; and
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The materialization of any of these risks and limitations inherent in a third-party manufacturing contractual relationship could significantly increase our costs, impair our ability to generate net sales, and adversely affect market acceptance of our products and customers may instead purchase or use our competitors’ products, which could materially adversely and severely affect our business, financial condition and results of operations.
We have incurred significant net operating losses since inception and cannot assure you that we will achieve profitability.*
Since our inception, we have incurred significant net operating losses. As of SeptemberJune 30, 2016,2017, we had an accumulated deficit of $207.4$247.3 million. To date, we have financed our operations primarily through sales of preferred stock,
borrowings under our term loans, sales of our products since the second quarter of 2012, our initial public offering and our follow-on public offering of our common stock. We have devoted substantially all of our resources to the acquisition and clinical development of our products, the commercial launch of our products, the development of a sales and marketing team and the assembly of a management team to manage our business.
For the ninesix months ended SeptemberJune 30, 2016,2017, our net loss was $32.0$31.8 million. The extent of our future operating losses and the timing of profitability are uncertain, especially in light of our inventory supply issues related to Silimed’s manufacturing capacity and ongoing regulatory and qualification concerns, and the uncertainty and timing of securing and qualifying an alternate manufacturer.issues. We will need to generate significant sales to achieve profitability, and we might not be able to do so. Even if we do generate significant sales, we might not be able to achieve, sustain or increase profitability on a quarterly or annual basis in the future. If our sales grow more slowly than we have forecasted, or if our operating expenses exceed our forecasts, our financial performance and results of operations will be adversely affected.
Our future profitability depends on the success of our Breast Products.*
Our Breast Products have historically accounted for substantially all of our net sales and we expect our Breast Products to continue to be a substantial majority of our net sales. Our inability to manage our inventory supply issues, related to Silimed’s ongoing manufacturing capacity and regulatory and qualification concerns, the inability to secure and qualify Vesta or another third party as an alternate manufacturer, the potential loss of market acceptance of our Breast Products, or any adverse rulings by regulatory authorities, any adverse publicity or other adverse events relating to us or our Breast Products, or the introduction of competitive products by our competitors and other third parties, would adversely affect our business, financial condition and results of operations.
Any negative publicity concerning our products could harm our business and reputation and negatively impact our financial results.*
The responses of potential patients, physicians, the news media, legislative and regulatory bodies and others to information about complications or alleged complications of our products including the suspension of Silimed’s CE certificate by TUV SUD, and the subsequent suspension by ANVISA on the manufacturing and shipment of all medical devices made by Silimed, including products manufactured for Sientra, could result in negative publicity and could materially reduce market acceptance of our products. These responses or any investigations and potential resulting negative publicity may have a material adverse effect on our business and reputation and negatively impact our financial condition, results of operations or the market price of our common stock. In addition, significant negative publicity could result in an increased number of product liability claims against us.
We may not realize the benefits of our recent acquisitions which may be subject to additional risks and uncertainties.*
In March 2016, wesuccessfully integrate newly acquired bioCorneum®, an advanced silicone gel scar management product from Enaltus. In November 2016, we acquired certain assets, consisting of the Dermaspan™, Softspan™, Allox® and Allox2® tissue expanders, from SSP. These acquisitions were made in an effort to add differentiated and complementary products that serve the needs of board-certified plastic surgeons while diversifyingbusinesses into our business mix.
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Our acquisition of bioCorneum® involves risks and uncertainties including that we have limited experience in the scar management industry, our management’s attention may be diverted from our existing business as we attempt to integrate bioCorneum® and the integration may not be successful. Additionally, bioCorneum+® is an over the counter product registered with the FDA, and there may be risks associated with the use of bioCorneum® including skin irritation, rash, itchingoperations or accidental application into the eye or ingestion. We also rely on Formulated Solutions as our sole source, third-party manufacturer of bioCorneum® and if Formulated Solutions becomes unable or unwilling to supply bioCorneum®, we may not be able to find an alternate supplier in a timely manner.
Our acquisition of the tissue expanders from SSP also involves risk and uncertainties including that our management’s attention may be diverted from our existing business as we integrate the Dermaspan™, Softspan™, Allox® and Allox2® tissue expanders; and the integration of these products into our existing business may not be successful or we may not achieve the anticipated benefits. Additionally, these SSP products are currently manufactured and supplied by SiMatrix, a Vesta subsidiary, and if SiMatrix becomes unable or unwilling to supply these products, we may not be able to find an alternate supplier in a timely manner.
We do not know if we will be able to successfully integrate these recently acquired products into our existing business, or whether unforeseen risks associated with their uses will materialize. Our inability to integrate these acquired products effectively or realize anticipated synergies may adversely affect our business, financial condition and results of operations.
Silimed relies on a sole source, third-party supplier of the medical-grade silicone used in its silicone gel breast implants, tissue expanders and certain other products.*
Historically, Silimed has relied on Applied Silicone Corporation, or ASC, an affiliate of Nusil Technology LLC, or Nusil, as its sole source, third-party supplier of medical-grade silicone based in Santa Paula, California, for the silicone used to manufacture breast implants, tissue expanders and certain other products. Other than ASC and Nusil, there are few suppliers of medical-grade silicone available. If ASC becomes unable or unwilling to supply medical-grade silicone to Silimed or another manufacturer, an alternate supply of medical-grade silicone may not be able to be found in a timely manner, since the availability of suppliers of medical-grade silicone is limited. In addition, ASC may discontinue manufacturing and supplying products to Silimed or another manufacturer for risk management reasons. A loss of access to critical services and components would likely result in an interruption in the manufacturing or shipment of our products. In addition, if ASC were to encounter financial or other hardships, ASC may be unable to fulfill future orders. If any of these risks related to the reliance on ASC materialize, our business, financial condition and results of operations could be adversely affected.
There are inherent risks in contracting with manufacturers located outside of the United States such as in Brazil.*
Silimed’s manufacturing plant is located in Brazil. There are inherent risks in contracting with manufacturers located outside of the United States such as in Brazil, including the risks of economic change, recession, labor strikes or disruptions, political turmoil, new or changing tariffs or trade barriers, new or different restrictions on importing or exporting, civil unrest, infrastructure failure, cultural differences in doing business, lack of contract enforceability, lack of protection for intellectual property, war and terrorism. If any of these risks were to materialize, we and Silimed would both be materially adversely affected and our business, financial condition and results of operations would suffer.
We may not realize the benefits of partnerships with other companies, acquisitions of complementary products or technologies or other strategic alternatives.*
In addition toAs a result of our recentacquisition of Miramar, and our prior acquisitions of bioCorneum®new products including BIOCORNEUM® and the tissue expanders from SSP, fromwe have undergone substantial changes in a short period of time to time,and our business has changed and broadened in size and the scope of products we offer. In addition, we may consider other opportunities to partner with or acquire other businesses, products or technologies that may enhance our product platform or technology, expand the breadth of our markets or customer base or advance our business strategies. Potential partnerships
Integrating the operations of a new business with that of our own is a complex, costly and time‑consuming process, which requires significant management attention and resources to integrate the business practice and operations. The integration process may disrupt the businesses and, if implemented ineffectively, would preclude realization of the full benefits expected by us. Our failure to meet the challenges involved in integrating new businesses in order to realize the anticipated benefits of the acquisition could cause an interruption of, or acquisitions involve numerous risks, including:a loss of momentum in, our activities and could adversely affect our results of operations. Prior to any acquisition, the acquired business operated independently, with its own business, corporate culture, locations, employees and systems. There may be substantial difficulties, costs and delays involved in any integration of other business with that of our own. These may include:
distracting management from day‑to‑day operations;
potential incompatibility of corporate cultures;
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risks associated with the assumption of contingent or other liabilities of acquisition targets;
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adverse effects on existing business relationships with suppliers or customers;
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inheriting and uncovering previously unknown issues, problems and costs from the acquired company;
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uncertainties associated with entering new markets in which we have limited or no experience;
increased legal and accounting costs relating to the partnership or acquisition or compliance with regulatory matters;
delays between our expenditures to acquire new products, technologies or businesses and the generation of revenues from those acquired products, technologies or businesses;
realization of assets and settlement of liabilities at amounts equal to estimated fair value as of the acquisition date of any acquisition or disposition;
costs and delays in implementing common systems and procedures (including technology, compliance programs, financial systems, distribution and general business operations, among others); and
increased difficulties in managing our business due to the addition of international locations.
We doAny one or all of these factors may increase operating costs or lower anticipated financial performance. Many of these factors are also outside of our control. In addition, even if the operations of a new business is integrated successfully, we may not know ifrealize the full benefits of the acquisition, including the synergies, cost savings or sales or growth opportunities that we willexpect. These benefits may not be able to identify partnerships or acquisitions we deem suitable, whether we will be able to successfully complete any such partnerships or acquisitions on favorable termsachieved within the anticipated time frame, or at all,all. Additional unanticipated costs may be incurred in the integration of the businesses. All of these factors could decrease or whether we will be able to successfully integrate any partnered or acquired products or technologies. Our potential inabilitydelay the expected accretive effect of the transaction, and negatively impact the price of our common stock. The failure to integrate the business operations of Miramar or any partnered or acquired products or technologies effectively or realize anticipated synergies may adversely affectbusiness successfully would have a material adverse effect on our business, financial condition and results of operations.
We have a limited operating history and may face difficulties encountered by companies early in their commercialization in competitive and rapidly evolving markets.
We commenced operations in 2007 and began commercializing silicone gel breast implants in the second quarter of 2012. Accordingly, we have a limited operating history upon which to evaluate our business and forecast our future net sales and operating results. In assessing our business prospects, you should consider the various risks and difficulties frequently encountered by companies early in their commercialization in competitive markets, particularly companies that develop and sell medical devices. These risks include our ability to:
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implement and execute our business strategy;
expand and improve the productivity of our sales force and marketing programs to grow sales of our existing and proposed products;
increase awareness of our brand and build loyalty among Plastic Surgeons;
manage expanding operations;
respond effectively to competitive pressures and developments;
enhance our existing products and develop new products;
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perform clinical trials with respect to our existing products and any new products; and
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attract, retain and motivate qualified personnel in various areas of our business.
Due to our limited operating history, we may not have the institutional knowledge or experience to be able to effectively address these and other risks that we may face. In addition, we may not be able to develop insights into trends that could emerge and negatively affect our business and may fail to respond effectively to those trends. As a result of these or other risks, we may not be able to execute key components of our business strategy, and our business, financial condition and operating results may suffer.
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If we fail to compete effectively against our competitors, both of which have significantly greater resources than we have, our net sales and operating results may be negatively affected.
Our industry is intensely competitive and subject to rapid change from the introduction of new products, technologies and other activities of industry participants. Our competitors, Mentor, a wholly owned subsidiary of Johnson & Johnson, and Allergan are well-capitalized global pharmaceutical companies that have been the market leaders for many years and have the majority share of the breast implant market in the United States. These competitors also enjoy several competitive advantages over us, including:
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greater financial and human resources for sales, marketing and product development;
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established relationships with health care providers and third-party payors;
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established reputations and name recognition among health care providers and other key opinion leaders in the plastic surgery industry;
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in some cases, an established base of long-time customers;
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products supported by long-term clinical data;
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larger and more established distribution networks;
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greater ability to cross-sell products; and
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more experience in conducting research and development, manufacturing, performing clinical trials and obtaining regulatory approval or clearance.
If we fail to compete effectively against our competitors, our net sales and operating results may be negatively affected.
Pricing pressure from customers and our competitors may impact our ability to sell our products at prices necessary to support our current business strategies.
Our 2012 entry into the U.S. breast implant market represented a significant expansion of the breast implant choices and technologies available in the United States. As a result of our entry into the U.S. breast implant market, our competitors intensified competitive pricing pressure for traditional round-shaped breast implants. If we are not successful in convincing customers or third-party payors of the differentiation of the gel technology used in our breast implants and selection of shapes and products as compared to our competitors’ products, third-party payors may not cover or adequately reimburse our products and customers may choose our competitors’ products.
The long-term safety of our products has not fully been established and our breast implants are currently under study in our PMA post-approval studies, which could reveal unanticipated complications.*
We have been marketingmarketing our silicone gel breast implants in the United States with pre-market approval from the FDA since 2012. However, there could still be unanticipated complications or unforeseen health consequences of being implanted with our silicone gel breast implants over the long-term (defined as 10 years or more). Additionally, we rely on our clinical data to make favorable comparisons of our product to our competitive products, and our longer-term data may change over time. Further, future studies or clinical experience may indicate that treatment with our products is not differentiated to treatment with competitive products. Such results could slow the adoption of our products and significantly reduce our sales, which could prevent us from achieving our forecasted sales targets or achieving or sustaining profitability. Moreover, if long-term results and experience indicate that our products cause unexpected or serious complications, we could be subject to mandatory product recalls, suspension or withdrawal of clearance or approval by the FDA or other applicable regulatory bodies and significant legal liability.
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Among the long-term health risks of breast implants which are being studied is the possible association between breast implants and a rare form of cancer called anaplastic large-cell lymphoma.*
In January 2011, the FDA indicated that there was a possible association between saline and silicone gel-filledgel breast implants and anaplastic large-cell lymphoma, or ALCL. Since our FDA approval in 2012, Sientra’s breast-implant product label, which is approved by the FDA, has been required to contain a description of ALCL as a possible, though rare, outcome. Since its report in January 2011, the FDA continuedcontinues to gather information about ALCL in women with breast implants through the review of medical device reports, review of medical literature, and collaboration with international regulators, scientific experts, the American Society of Plastic Surgeons, or ASPS, ASAPS, ISAPS, and other organizations. In January 2016,On February 1, 2017, the FDA provided further guidance on ALCL and has reiterated after a review of information since 2011, that ALCL is extremely rare, and stated that at this time, most data suggests that ALCL occurs more frequently following implantation of breast implants with textured surfaces rather than those with smooth surfaces. The FDA noted it does not recommend prophylactic breast implant removal in a very rare condition and the FDA recommended the same measures as it had before for health care providers and patients.patient without symptoms or other abnormality. Further studies or clinical experience may indicate that breast implants, including our products, expose individuals to a more substantial risk of developing ALCL or other unexpected complications.complications than currently anticipated. As a result, we may be exposed to increased regulatory scrutiny, negative publicity and lawsuits from any individual who may develop ALCL after using our products, any of which could have a significant negative impact on our results of operations or financial condition. Moreover, if long-term results and clinical experience indicate that our products cause unexpected or serious complications, we could be subject to mandatory product recalls, suspension or withdrawal of regulatory clearances and approvals and significant legal liability.
If we are unable to train Plastic Surgeons on the safe and appropriate use of our products, we may be unable to achieve our expected growth.
An important part of our sales process includes the ability to educate Plastic Surgeons about the availability of anatomically-shaped breast implants and train Plastic Surgeons on the safe and appropriate use of our products. If we become unable to attract potential new Plastic Surgeon customers to our education and training programs, we may be unable to achieve our expected growth.
There is a learning process involved for Plastic Surgeons to become proficient in the use of our anatomically-shaped products. It is critical to the success of our commercialization efforts to train a sufficient number of Plastic Surgeons and provide them with adequate instruction in the appropriate use of our products via preceptorships and additional demonstration surgeries. This training process may take longer than expected and may therefore affect our ability to increase sales. Following completion of training, we rely on the trained Plastic Surgeons to advocate the benefits of our products in the marketplace. Convincing Plastic Surgeons to dedicate the time and energy necessary for adequate training is challenging, and we cannot assure you that we will be successful in these efforts. If Plastic Surgeons are not properly trained, they may misuse or ineffectively use our products. This may also result in, among other things, unsatisfactory patient outcomes, patient injury, negative publicity or lawsuits against us, any of which could have an adverse effect on our business and reputation.
If we are unable to continue to enhance our existing Breast Products and develop and market new products that respond to customer needs and preferences and achieve market acceptance, we may experience a decrease in demand for our products and our business could suffer.
We may not be able to compete effectively with our competitors, and ultimately satisfy the needs and preferences of our customers, unless we can continue to enhance existing products and develop and market new innovative products. Product development requires the investment of significant financial, technological and other resources. Product improvements and new product introductions also require significant planning, design, development and testing at the technological, product and manufacturing process levels and we may not be able to timely develop product improvements or new products. Our competitors’ new products may beat our products to market, be more effective with new features, obtain better market acceptance or render our products obsolete. Any new or modified products that we develop may not receive clearance or approval from the FDA, or achieve market acceptance or otherwise generate any meaningful sales or profits for us relative to our expectations based on, among other things, existing and anticipated investments in manufacturing capacity and commitments to fund advertising, marketing, promotional programs and research and development.
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If changes in the economy and consumer spending reduce consumer demand for our products, our sales and profitability would suffer.
We are subject to the risks arising from adverse changes in general economic and market conditions. Certain elective procedures, such as breast augmentation and body contouring, are typically not covered by insurance. Adverse changes in the economy may cause consumers to reassess their spending choices and reduce the demand for these surgeries and could have an adverse effect on consumer spending. This shift could have an adverse effect on our net sales. Furthermore, consumer preferences and trends may shift due to a variety of factors, including changes in demographic and social trends, public health initiatives and product innovations, which may reduce consumer demand for our products.
We are required to maintain high levels of inventory, which could consume a significant amount of our resources and reduce our cash flows.
We need to maintain substantial levels of inventory to protect ourselves from supply interruptions, provide our customers with a wide range of shapes and sizes of our breast implants, and account for the high return rates we experience as Plastic Surgeons typically order our products in multiple sizes for a single surgery and then return what they do not use. As a result of ourthe substantial inventory levels we like to maintain, we are subject to the risk that a substantial portion of our inventory becomes obsolete. The materialization of any of these risks may have a material adverse effect on our earnings and cash flows due to the resulting costs associated with the inventory impairment charges and costs required to replace such inventory. Additionally, the suspension of Silimed’s manufacturing by ANVISA, the fire at Silimed’s facility that manufactures our breast implants and the potential feasibility, production capacity and timing related to Silimed’s ability to manufacture breast implants in other facilities, or our ability to find an alternate supplier in a timely manner, may affect our ability to maintain the level of inventory supply we require to protect ourselves from supply interruptions whichthat could have an unfavorable impact on our net sales.
Any disruption at our facilities could adversely affect our business and operating results.
Our principal offices are located in Santa Barbara, California. Substantially all of our operations are conducted at this location, including customer service, development and management and administrative functions. Substantially all of our inventory of finished goods is held at a second location in Santa Barbara, California. Despite our efforts to safeguard our facilities, including acquiring insurance, adopting health and safety protocols and utilizing off-site storage of computer data, vandalism, terrorism or a natural or other disaster, such as an earthquake, fire or flood, could damage or destroy our inventory of finished goods, cause substantial delays in our operations, result in the loss of key information and cause us to incur additional expenses. Our insurance may not cover our losses in any particular case. In addition, regardless of the level of insurance coverage, damage to our facilities may have a material adverse effect on our business, financial condition and operating results.
If there are significant disruptions in our information technology systems, our business, financial condition and operating results could be adversely affected.
The efficient operation of our business depends on our information technology systems. We rely on our information technology systems to effectively manage sales and marketing data, accounting and financial functions, inventory, product development tasks, clinical data, and customer service and technical support functions. Our information technology systems are vulnerable to damage or interruption from earthquakes, fires, floods and other natural disasters, terrorist attacks, computer viruses or hackers, power losses, and computer system or data network failures. In addition, a variety of our software systems are cloud-based data management applications hosted by third-party service providers whose security and information technology systems are subject to similar risks.
The failure of our or our service providers’ information technology could disrupt our entire operation or result in decreased sales, increased overhead costs and product shortages, all of which could have a material adverse effect on our reputation, business, financial condition and operating results.
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We may be adversely affected by earthquakes or other natural disasters and our business continuity and disaster recovery plans may not adequately protect us from a serious disaster.*
Our corporate headquarters and certain other facilities are located in Santa Barbara, California, which in the past has experienced both severe earthquakes and wildfires. We do not carry earthquake insurance. Earthquakes, wildfires or other natural disasters could severely disrupt our operations, and have a material adverse effect on our business, results of operations, financial condition and prospects.
If a natural disaster, power outage or other event occurred that prevented us from using all or a significant portion of our headquarters, that damaged critical infrastructure, such as our enterprise financial systems or manufacturing resource planning and enterprise quality systems, or that otherwise disrupted operations, it may be difficult or, in certain cases, impossible for us to continue our business for a substantial period of time. The disaster recovery and business continuity plans we have in place currently are limited and are unlikely to prove adequate in the event of a serious disaster or similar event. We may incur substantial expenses as a result of the limited nature of our disaster recovery and business continuity plans, which, particularly when taken together with our lack of earthquake insurance, could have a material adverse effect on our business.
Failure to obtain hospital or group purchasing organization contracts could have a material adverse effect on our financial condition and operating results.
A portion of our net sales is derived from sales to hospitals. Many hospital customers, through the contracting process, limit the number of breast implant suppliers that may sell to their institution. Hospitals may choose to contract with our competitors who have a broader range of products that can be used in a wider variety of procedures or our competitors may actively position their broader product portfolios against us during the hospital contracting process. Any limitations on the number of hospitals to which we can sell our products may significantly restrict our ability to grow.
In addition, contracts with hospitals and group purchasing organizations, or GPOs, often have complex insurance and indemnification requirements, which may not be beneficial to us, or we may not be able to successfully negotiate contracts with a substantial number of hospitals and GPOs at all, which could adversely affect our business, financial condition and results of operations.
Our business could suffer if we lose the services of key personnel or are unable to attract and retain additional qualified personnel.*
We are dependent upon the continued services of key personnel, including members of our executive management team who have extensive experience in our industry. The loss of any one of these individuals could disrupt our operations or our strategic plans. Additionally, our future success will depend on, among other things, our ability to continue to hire and retain the necessary qualified sales, marketing and managerial personnel, for whom we compete with numerous other companies, academic institutions and organizations. If we lose additional key employees, if we are unable
to attract or retain other qualified personnel, or if our management team is not able to effectively manage us through these events, our business, financial condition, and results of operations may be adversely affected.
We will need to increase the size of our organization, and we may experience difficulties in managing growth.*
As of SeptemberJune 30, 2016,2017, we had approximately 8695 full-time employees. Our management and personnel, and the systems and facilities we currently have in place, may not be adequate to support future growth. Effectively executing our growth strategy requires that we increase net sales through sales and marketing activities, recruit and retain additional employees and continue to improve our operational, financial and management controls, reporting systems and procedures. If we are not able to effectively expand our organization in these ways, we may not be able to successfully execute our growth strategy, and our business, financial condition and results of operations may suffer.
Our acquisition of Miramar has exposed us to risks and challenges associated with conducting business internationally.*
As a result of our acquisition of Miramar, we now face new risks inherent in conducting business internationally, including compliance with international and U.S. laws and regulations that apply to international operations. These laws and regulations are complex, and there is a risk that some provisions may be breached by us, for example through fraudulent or negligent behavior of individual employees, our failure to comply with certain formal documentation requirements, or otherwise. Violations of these laws and regulations could result in fines, criminal sanctions against us, our officers or our employees, requirements to obtain export licenses, implementation of compliance programs, and prohibitions on the conduct of our business. Any such violations could include prohibitions on our ability to offer our products in one or more countries and could damage our reputation, our brand, our international expansion efforts, our ability to attract and retain employees, our business and our operating results.
In addition to the foregoing, engaging in international business inherently involves a number of other difficulties and risks, including:
41longer payment cycles and difficulties in enforcing agreements and collecting receivables through certain foreign legal systems;
political and economic instability or sanctions in areas in which we operate;
Table of Contentspotentially adverse tax consequences, tariffs, customs charges, bureaucratic requirements and other trade barriers;
regulations related to customs and import/export matters;
tax issues, such as tax law changes and variations in tax laws;
challenges in collecting accounts receivable from customers in the jurisdictions in which we operate;
complying with laws, rules and regulations relating to the manufacturing, marketing, distribution and sale of products in the jurisdictions in which we do or will operate;
operating under regulations in jurisdictions related to obtaining eligibility for government or private payor reimbursement for our products at the wholesale/retail level;
difficulties and costs of staffing and managing foreign operations, including cultural and language differences and additional employment regulations, union workforce negotiations and potential disputes in the jurisdictions in which we operate;
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fluctuations in foreign currency exchange rates.
These factors or any combination of these factors could have a material adverse effect on our results of operations and financial condition.
Risks Related to Our Financial Results
Our debt obligations could impair our financial condition and limit our operating flexibility.*
We recently entered into the Credit Agreements with MidCap Financial Trust and the other lenders party thereto and borrowed $25 million thereunder. Our indebtedness and other financial obligations could:
impair our ability to obtain financing or additional debt in the future for working capital, capital expenditures, acquisitions or general corporate purposes;
impair our ability to access capital and credit markets on terms that are favorable to us;
have a material adverse effect on us if we fail to comply with financial and affirmative and restrictive covenants in our Credit Agreements and an event of default occurs as a result of a failure that is not cured or waived;
require us to dedicate a portion of our cash flow for interest payments on our indebtedness and other financial obligations, thereby reducing the availability of our cash flow to fund working capital and capital expenditures; and
limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate.
There is no guarantee that we will be able to pay the principal and interest under the Credit Agreements or that future working capital, borrowings or equity financing will be available to repay or refinance any amounts outstanding under the Credit Agreements. In addition, we may enter into debt agreements in the future that may contain similar or more burdensome terms and covenants, including financial covenants. See Liquidity and Capital Resources and Item 5 for a detailed discussion of our outstanding indebtedness.
Our quarterly net sales and operating results are unpredictable and may fluctuate significantly from quarter to quarter due to factors outside our control, which could adversely affect our business, results of operations and the trading price of our common stock.*
Our net sales and operating results may vary significantly from quarter to quarter and year to year due to a number of factors, many of which are outside of our control and any of which may cause our stock price to fluctuate. Our net sales and results of operations will be affected by numerous factors, including:
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the timing to qualify Vesta with the FDA and the availability of any alternative manufacturing sources to supply our silicone gel breast implants and certain other products;
our ability to integrate and achieve the anticipated benefits of our acquisitions of the Miramar, BIOCORNEUM® and the tissue expanders from SSP;
the impact of the buying patterns of patients and seasonal cycles in consumer spending;
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pricing pressure applicable to our products, including adverse third-party coverage and reimbursement outcomes;
Tableresults of Contentsclinical research and trials on our existing products;
the impact of the regulatory inquiries of Silimed on our brand and reputation;
timing of our research and development activities and initiatives;
the mix of our products sold due to different profit margins among our products;
timing of new product offerings, acquisitions, licenses or other significant events by us or our competitors;
the ability of our suppliers to timely provide us with an adequate supply of products;
the evolving product offerings of our competitors;
regulatory approvals and legislative changes affecting the products we may offer or those of our competitors;
increased labor and related costs;
interruption in the manufacturing or distribution of our products;
the effect of competing technological, industry and market developments;
changes in our ability to obtain regulatory clearance or approval for our products;
our ability to expand the geographic reach of our sales and marketing efforts.
Many of the products we may seek to develop and introduce in the future will require FDA approval or clearance before commercialization in the United States, and commercialization of such products outside of the United States would likely require additional regulatory approvals, CE Certificates of Conformity and importexport licenses. As a result, it will be difficult for us to forecast demand for these products with any degree of certainty. In addition, we will be increasing our operating expenses as we expand our commercial capabilities. Accordingly, we may experience significant, unanticipated quarterly losses. If our quarterly or annual operating results fall below the expectations of investors or securities analysts, the price of our common stock could decline substantially. Furthermore, any quarterly or annual fluctuations in our operating results may, in turn, cause the price of our common stock to fluctuate substantially. We believe that quarterly comparisons of our financial results are not necessarily meaningful and should not be relied upon as an indication of our future performance.
Our future capital needs are uncertain and we may need to raise additional funds in the future, and these funds may not be available on acceptable terms or at all.*
As of SeptemberJune 30, 2016,2017, we had $79.3$55.5 million in cash and cash equivalents. We believe that our available cash on hand will be sufficient to satisfy our liquidity requirements for at least the next 12 months. However, the planned growth of our business, including our manufacturing agreement with Vesta, our acquisition of Miramar, the expansion of our sales force and marketing programs, and research and development activities, and potential partnerships or strategic acquisitions could significantly increase our expenses. In addition, we expect that the recent events involving Silimed, including our voluntary hold on the sale and implanting of all Sientra devices manufactured by Silimed between October 9, 2015 and March 1, 2016, our uncertainty regarding the amount of additional expenses we may incur in connection with regulatory inquiries, as well as expenses we may incur in
connection with reestablishing our inventory supply, and expenses we may incur defending against litigation claims, including the Silimed litigation, may have a material effect on our future cash outflows and our financial condition.
Our future capital requirements will depend on many factors, including:
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the timing to qualify Vesta with the FDA and the availability of any alternative manufacturing sources and costs associated with procuring and qualifying such manufacturing capacity;
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net sales generated by our silicone gel breast implants and tissue expanders and any other future products that we may develop and commercialize;
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expenses we incur in connection with potential litigation or governmental investigations;
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costs associated with expanding our sales force and marketing programs;
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cost associated with developing and commercializing our proposed products or technologies;
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cost of obtaining and maintaining regulatory clearance or approval for our current or future products;
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cost of ongoing compliance with regulatory requirements;
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anticipated or unanticipated capital expenditures; and
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unanticipated general and administrative expenses.
As a result of these and other factors, we do not know whether and the extent to which we may be required to raise additional capital. We may in the future seek additional capital from public or private offerings of our capital stock, borrowings under term loans or other sources. If we issue equity or debt securities to raise additional funds, our existing stockholders may experience dilution, and the new equity or debt securities may have rights, preferences and privileges senior to those of our existing stockholders. In addition, if we raise additional funds through collaborations, licensing, joint ventures, strategic alliances, partnership arrangements or other similar arrangements, it may be necessary to relinquish
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valuable rights to our potential future products or proprietary technologies, or grant licenses on terms that are not favorable to us.
If we are unable to raise additional capital, we may not be able to expand our sales force and marketing programs, enhance our current products or develop new products, take advantage of future opportunities, or respond to competitive pressures, changes in supplier relationships, or unanticipated changes in customer demand. Any of these events could adversely affect our ability to achieve our strategic objectives, which could have a material adverse effect on our business, financial condition and operating results.
Our ability to use net operating losses to offset future taxable income may be subject to certain limitations.*
As of December 31, 2015,2016, we had federal net operating loss carryforwards, or NOLs, of approximately $137.8$171.0 million, which expire in various years beginningbegin expiring in 2027, if not utilized to offset taxable income. In general, under Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change NOLs to offset future taxable income. In general, an “ownership change” occurs if there is a cumulative change in our ownership by “5% shareholders” that exceeds 50 percentage points over a rolling three-year period. Our existing NOLs may be subject to limitations arising from previous ownership changes, and if we undergo one or more ownership changes in connection with future transactions in our stock, our ability to utilize NOLs could be further limited by Section 382 of the Code. As a result of these limitations, we may not be able to utilize a material portion of the NOLs reflected on our balance sheet and for this reason, we have fully reserved against the value of our NOLs on our balance sheet. We have not completed a Section 382 analysis to determine if an ownership change has occurred. Until such analysis is completed, we cannot be sure that the full amount of the existing federal NOLs will be available to us, even if we do generate taxable income before their expiration.
Future changes in financial accounting standards may cause adverse unexpected net sales or expense fluctuations and affect our reported results of operations.
A change in accounting standards could have a significant effect on our reported results and may even affect our reporting of transactions completed before the change is effective. New pronouncements and varying interpretations of existing pronouncements have occurred and may occur in the future. Changes to existing rules or current practices may adversely affect our reported financial results of our business.
Risks Related to Our Intellectual Property and Potential Litigation
If our intellectual property rights do not adequately protect our products or technologies, others could compete against us more directly, which would hurt our profitability.
Our success depends in part on our ability to protect our intellectual property rights. OurWe rely on a combination of trademarks, trade secrets, confidential information, copyrights, patent rights and other intellectual property portfolio consists of no patents or patent applications, and we do not currently plan to file for patent protection in the future, in the United States or elsewhere. We instead rely on trade secrets, proprietary know-how and regulatory barriersrights to protect our productsintellectual property. In addition, to protect our trade secrets, confidential information and technologiesother intellectual property rights, we have entered into confidentiality agreements with third parties, and seek protection of our rights, in part, through confidentialityconfidential information and proprietary information agreements.invention assignment agreements with employees, consultants and advisors. However, these agreements may not provide sufficient protection or adequate remedies for violation of our rights in the event of unauthorized use or disclosure of confidential and proprietary information. Without additional protection under the patent or other intellectual property laws, such unauthorized use or disclosure may enable competitors to duplicate or surpass our technological achievements. Moreover, the laws of certain foreign countries do not recognize intellectual property rights or protect them to the same extent as do the laws of the United States. Failure to protect our proprietary rights could seriously impair our competitive position.
The medical device industry is characterized by patent and other intellectual property litigation and we have and could become subject to litigation that could be costly, result in the diversion of management’s time and efforts, require us to pay damages or prevent us from marketing our existing or future products.
Our commercial success will depend in part on not infringing the patents or violating the other proprietary rights of others. Significant litigation regarding patent rights occurs in our industry. Our competitors in both the United States and abroad,
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many of which have substantially greater resources and have made substantial investments in patent portfolios and competing technologies, may have applied for or obtained or may in the future apply for and obtain, patents that will prevent, limit or otherwise interfere with our ability to make, use and sell our products. Generally,Absent specific circumstances, we do not generally conduct independent reviews of patents issued to third parties. We may not be aware of whether our products do or will infringe existing or future patents. In addition, patent applications in the United States and elsewhere can be pending for many years, and may be confidential for 18 months or more after filing, and because pending patent claims can be revised before issuance, there may be applications of others now pending of which we are unaware that may later result in issued patents that will prevent, limit or otherwise interfere with our ability to make, use or sell our products. We may not be aware of patents that have already issued that a third party might assert are infringed by our products. It is also possible that patents of which we are aware, but which we do not believe are relevant to our product candidates, could nevertheless be found to be infringed by our products. The large number of patents, the rapid rate of new patent applications and issuances, the complexities of the technology involved and the uncertainty of litigation increase the risk of business assets and management’s attention being diverted to patent litigation. In the future, we may receive communications from various industry participants alleging our infringement of their patents, trade secrets or other intellectual property rights and/or offering licenses to such intellectual property. Any lawsuits resulting from such allegations could subject us to significant liability for damages and invalidate our proprietary rights, even if they lack merit. Any existing or potential intellectual property litigation also could force us to do one or more of the following:
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stop making, selling or using products or technologies that allegedly infringe the asserted intellectual property;
lose the opportunity to license our technology to others or to collect royalty payments based upon successful protection and assertion of our intellectual property rights against others;
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pay substantial damages or royalties to the party whose intellectual property rights we may be found to be infringing;
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pay the attorney fees and costs of litigation to the party whose intellectual property rights we may be found to be infringing;
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redesign those products that contain the allegedly infringing intellectual property, which could be costly, disruptive and/or infeasible; or
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attempt to obtain a license to the relevant intellectual property from third parties, which may not be available on reasonable terms or at all.
Any litigation or claim against us, even those without merit, may cause us to incur substantial costs, and could place a significant strain on our financial resources, divert the attention of management from our core business, negatively impact shareholder value and harm our reputation. If we are found to infringe the intellectual property rights of third parties, we could be required to pay substantial damages (which may be increased up to three times of awarded damages) and/or substantial royalties and could be prevented from selling our products unless we obtain a license or are able to redesign our products to avoid infringement. Any such license may not be available on reasonable terms, if at all, and there can be no assurance that we would be able to redesign our products in a way that would not infringe the intellectual property rights of others. If we fail to obtain any required licenses or make any necessary changes to our products or technologies, we may have to withdraw existing products from the market or may be unable to commercialize one or more of our products, all of which could have a material adverse effect on our business, results of operations and financial condition.
In addition, we generally indemnify our customers with respect to infringement by our products of the proprietary rights of third parties. Third parties may assert infringement claims against our customers. These claims may require us to initiate or defend protracted and costly litigation on behalf of our customers, regardless of the merits of these claims. If any of these claims succeed, we may be forced to pay damages on behalf of our customers or may be required to obtain
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licenses for the products they use. If we cannot obtain all necessary licenses on commercially reasonable terms, our customers may be forced to stop using our products.
We may be subject to damages resulting from claims that we or our employees have wrongfully used or disclosed alleged trade secrets of our competitors or are in breach of non-competition or non-solicitation agreements with our competitors.
Many of our employees were previously employed at other medical device companies, including our competitors or potential competitors, in some cases until recently. We have been the subject of and may, in the future, be subject to claims that we, our employees have inadvertently or otherwise used or disclosed alleged trade secrets or other proprietary information of these former employers or competitors. In addition, we have been and may in the future be subject to claims that we caused an employee to breach the terms of his or her non-competition or non-solicitation agreement. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and could be a distraction to management. If our defense to those claims fails, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. Any litigation or the threat thereof may adversely affect our ability to hire employees. A loss of key personnel or their work product could hamper or prevent our ability to commercialize product candidates, which could have an adverse effect on our business, results of operations and financial condition.
We are and may be subject to substantial warranty or product liability claims or other litigation in the ordinary course of business that may adversely affect our business, financial condition and operating results.
As a supplier of medical devices, we are and may be subject to substantial warranty or product liability claims alleging that the use of our products has resulted in adverse health effects or other litigation in the ordinary course of business that may require us to make significant expenditures to defend these claims or pay damage awards. The breast implant
industry has a particularly significant history of product liability litigation. The risks of litigation exist even with respect to products that have received or in the future may receive regulatory approval for commercial sale, such as our Breast Products. In addition, our silicone gel breast implants are sold with a warranty providing for no-charge replacement implants in the event of certain ruptures that occur any time during the life of the patient and this warranty also includes cash payments to offset surgical fees if the rupture occurs within 10 years of implantation.
We maintain product liability insurance, but this insurance is limited in amount and subject to significant deductibles. There is no guarantee that insurance will be available or adequate to protect against all claims. Our insurance policies are subject to annual renewal and we may not be able to obtain liability insurance in the future on acceptable terms or at all. In addition, our insurance premiums could be subject to increases in the future, which may be material. If the coverage limits are inadequate to cover our liabilities or our insurance costs continue to increase as a result of warranty or product liability claims or other litigation, then our business, financial condition and operating results may be adversely affected.
Fluctuations in insurance cost and availability could adversely affect our profitability or our risk management profile.
We hold a number of insurance policies, including product liability insurance, directors’ and officers’ liability insurance, general liability insurance, property insurance, employment practices, and workers’ compensation insurance. If the costs of maintaining adequate insurance coverage increase significantly in the future, our operating results could be materially adversely affected. Likewise, if any of our current insurance coverage should become unavailable to us or become economically impractical, we would be required to operate our business without indemnity from commercial insurance providers. If we operate our business without insurance, we could be responsible for paying claims or judgments against us that would have otherwise been covered by insurance, which could adversely affect our results of operations or financial condition.
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Risks Related to Our Legal and Regulatory Environment
We are subject to extensive federal and state healthcare regulation, and if we fail to comply with applicable regulations, we could suffer severe criminal or civil sanctions or be required to restructure our operations, any of which could adversely affect our business, financial condition and operating results.
As a device manufacturer, even though we do not control referrals or bill directly to Medicare, Medicaid or other third-party payors, we are subject to healthcare fraud and abuse regulation and enforcement by the federal government and the states in which we conduct our business, as well as other healthcare laws and regulations. The healthcare laws and regulations that may affect our ability to operate include:
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the federal Anti-Kickback Statute, which applies to our business activities, including our marketing practices, educational programs, pricing policies and relationships with healthcare providers, by prohibiting, among other things, knowingly and willfully soliciting, receiving, offering or providing any remuneration (including any bribe, kickback or rebate) directly or indirectly, overtly or covertly, in cash or in kind, intended to induce or in return for the purchase or recommendation of any good, facility, item or service reimbursable, in whole or in part, under a federal healthcare program, such as the Medicare or Medicaid programs. A person or entity does not need to have actual knowledge of the federal Anti-Kickback Statute or specific intent to violate it in order to commit a violation. Rather, if “one purpose” of the remuneration is to induce referrals, the federal Anti-Kickback Statute is violated. In addition, following passage of the PPACA violations of the federal Anti-Kickback Statute became per se violations of the False Claims Act;
federal civil and criminal false claims laws and civil monetary penalty laws, including the FCA, that prohibit, among other things, knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid or other government payors that are false or fraudulent, or making a false statement to decrease or conceal an obligation to pay or transmit money or property to the federal government, and which may apply to entities that provide coding and billing advice to customers;
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| the federal Physician Payments Sunshine Act, enacted under the PPACA, which requires certain manufacturers of drugs, devices, biologics, and medical supplies for which payment is available under Medicare, Medicaid, or the Children’s Health Insurance Program, with specific exceptions, to make annual reports to the Centers for Medicare & Medicaid Services, or CMS, regarding any “transfers of value” provided to physicians and teaching hospitals. Failure to submit required information may result in civil monetary penalties of up to an aggregate of $150,000 per year and up to an aggregate of $1 million per year for “knowing failures,” for all payments, transfers of value or ownership or investment interests that are not timely, accurately, and completely reported in an annual submission. We are required to report detailed payment data and submit legal attestation to the accuracy of such data by March 31st of each calendar year; and |
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state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws that may apply to items or services reimbursed by any third-party payor, including commercial insurers; state laws that require device companies to comply with the industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government or otherwise restrict payments that may be provided to healthcare providers and entities; state laws that require device manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers and entities or marketing expenditures; and state laws governing the privacy and security of certain health information, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts.
Because of the breadth of these laws, it is possible that some of our business activities, including our relationships with physicians and other health care providers and entities, some of whom recommend, purchase and/or prescribe our products, could be subject to challenge under one or more of such laws. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business. If our operations are found to be in violation of any of the laws described above or any other governmental regulations that apply to us, we may be subject to penalties, including, without limitation, administrative, civil and/or criminal penalties, damages, fines, disgorgement, contractual damages, reputational harm, exclusion from governmental health care programs, diminished profits and future earnings, additional reporting requirements and oversight if we become subject to a corporate integrity agreement or similar agreement to resolve allegations of non-compliance with these laws, and the curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our business and our financial results.
Our medical device products and operations are subject to extensive governmental regulation both in the United States and abroad, and our failure to comply with applicable requirements could cause our business to suffer.
Our medical device products and operations are subject to extensive regulation by the FDA and various other federal, state and foreign governmental authorities, such as Health Canada. Government regulation of medical devices is meant to assure their safety and effectiveness, and includes regulation of, among other things: