VIVEVE MEDICAL, INC. - Quarter Report: 2019 September (Form 10-Q)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

 

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2019

 

OR

 

☐	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 1-11388

 

VIVEVE MEDICAL, INC.

(Exact name of registrant as specified in its charter)

 

Delaware	04-3153858
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

 

 345 Inverness Drive South

Building B, Suite 250

Englewood, CO 80112

(Address of principal executive offices)

(Zip Code)

 

(720) 696-8100

(Registrant’s telephone number, including area code)     

  

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class	Trading symbol(s)	Name of each exchange on which registered
Common Stock	VIVE	Nasdaq Capital Market

 

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 every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or an emerging growth company. See definition of “accelerated filer,” and “large accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer ☐		Accelerated filer ☒
Non-accelerated filer ☐		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 November 6, 2019, the issuer had 1,477,529 shares of common stock, par value $0.0001 per share, outstanding.

 

 

 

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		September 30,				December 31,
		2019				2018
		(unaudited)				(1)
ASSETS
Current assets:
Cash and cash equivalents		$	9,086			$	29,523
Accounts receivable, net of allowance for doubtful accounts of $543 and $284 as of September 30, 2019 and December 31, 2018, respectively			2,806				5,704
Inventory			4,141				4,119
Prepaid expenses and other current assets			3,051				2,558
Total current assets			19,084				41,904
Property and equipment, net			3,066				2,916
Investment in limited liability company			1,412				1,843
Other assets			587				171
Total assets		$	24,149			$	46,834
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable		$	1,791			$	3,994
Accrued liabilities			4,457				6,766
Total current liabilities			6,248				10,760
Note payable, noncurrent portion			31,694				30,528
Other noncurrent liabilities			997				634
Total liabilities			38,939				41,922
Commitments and contingences (Note 8)
Stockholders’ equity (deficit):
Common stock, $0.0001 par value; 75,000,000 shares authorized as of September 30, 2019 and December 31, 2018; 1,469,789 and 463,630 shares issued and outstanding as of September 30, 2019 and December 31, 2018, respectively			-				-
Additional paid-in capital			168,304				160,297
Accumulated deficit			(183,094	)			(155,385	)
Total stockholders’ equity (deficit)			(14,790	)			4,912
Total liabilities and stockholders’ equity (deficit)		$	24,149			$	46,834

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		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2019				2018				2019				2018
Revenue		$	1,052			$	4,821			$	5,116			$	14,045
Cost of revenue			1,099				3,327				3,981				8,390
Gross profit (loss)			(47	)			1,494				1,135				5,655
Operating expenses:
Research and development			1,449				3,442				6,831				10,870
Selling, general and administrative			5,032				9,114				17,188				27,482
Restructuring costs			-				-				742				-
Total operating expenses			6,481				12,556				24,761				38,352
Loss from operations			(6,528	)			(11,062	)			(23,626	)			(32,697	)
Interest expense, net			(1,209	)			(1,106	)			(3,519	)			(3,239	)
Other expense, net			(51	)			(4	)			(133	)			(14	)
Net loss from consolidated companies			(7,788	)			(12,172	)			(27,278	)			(35,950	)
Loss from minority interest in limited liability company			(168	)			(132	)			(431	)			(539	)
Comprehensive and net loss		$	(7,956	)		$	(12,304	)		$	(27,709	)		$	(36,489	)
Net loss per share:
Basic and diluted		$	(13.51	)		$	(39.07	)		$	(54.73	)		$	(123.41	)
Weighted average shares used in computing net loss per common share:
Basic and diluted			588,976				314,899				506,329				295,677

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		Common Stock,								Additional								Total
		$0.0001 par value								Paid-In				Accumulated				Stockholders’
		Shares				Amount				Capital				Deficit				Equity (Deficit)
Balances as of December 31, 2018			463,630			$	-			$	160,297			$	(155,385	)		$	4,912
Stock-based compensation expense			-				-				470				-				470
Issuance of common shares from employee stock purchase plan			429				-				35				-				35
Issuance of restricted common shares in connection with consulting agreement			274				-				25				-				25
Issuance of common shares in connection with restricted stock award to employee			6				-				1				-				1
Net loss			-				-				-				(10,029	)			(10,029	)
Balances as of March 31, 2019			464,339				-				160,828				(165,414	)			(4,586	)
Stock-based compensation expense			-				-				562				-				562
Issuance of common shares from employee stock purchase plan			602				-				20				-				20
Restricted stock awards issued to directors for quarterly compensation			527				-				48				-				48
Issuance of restricted common shares in connection with consulting agreement			250				-				11				-				11
Issuance of common shares in connection with restricted stock award to employee			6				-				-				-				-
Net loss			-				-				-				(9,724	)			(9,724	)
Balances as of June 30, 2019			465,724				-				161,469				(175,138	)			(13,669	)
August 2019 ATM Facility, net of issuance cost			1,004,171				-				6,322				-				6,322
Stock-based compensation expense			-				-				503				-				503
Issuance of common shares from employee stock purchase plan			200				-				1				-				1
Restricted stock awards issued to directors for quarterly compensation			378				-				14				-				14
Issuance of common shares in connection with restricted stock award to employee			4				-				-				-				-
Reverse stock split - cancellation and payout of fractional shares			(688	)			-				(5	)			-				(5	)
Net loss			-				-				-				(7,956	)			(7,956	)
Balances as of September 30, 2019			1,469,789			$	-			$	168,304			$	(183,094	)		$	(14,790	)

		Common Stock								Additional								Total
		$0.0001 par value								Paid-In				Accumulated				Stockholders’
		Shares				Amount				Capital				Deficit				Equity (Deficit)
Balances as of December 31, 2017			195,033			$	-			$	102,981			$	(105,581	)		$	(2,600	)
February 2018 Offering, net of issuance costs			115,000				-				32,225				-				32,225
November 2017 ATM Facility, net of issuance cost			2,082				-				1,011				-				1,011
Stock-based compensation expense			-				-				645				-				645
Issuance of restricted stock awards to directors and consultant			221				-				108				-				108
Issuance of common shares from employee stock purchase plan			207				-				65				-				65
Cumulative effect adjustment from adoption of new accounting standard – ASC 606			-				-				-				177				177
Net loss			-				-				-				(12,669	)			(12,669	)
Balances as of March 31, 2018			312,543				-				137,035				(118,073	)			18,962
November 2017 ATM Facility, net of issuance cost			652				-				171				-				171
February 2018 Offering issuance costs			-				-				(11	)			-				(11	)
Stock-based compensation expense			-				-				709				-				709
Issuance of common shares from employee stock purchase plan			256				-				59				-				59
Issuance of restricted stock awards to directors and consultant			208				-				67				-				67
Issuance of restricted common shares			1,000				-				256				-				256
Net loss			-				-				-				(11,516	)			(11,516	)
Balances as of June 30, 2018			314,659				-				138,286				(129,589	)			8,697
November 2017 ATM Facility, net of issuance cost			37				-				11				-				11
Stock-based compensation expense			-				-				698				-				698
Issuance of common shares from employee stock purchase plan			286				-				64				-				64
Issuance of restricted stock awards to directors and consultant			182				-				47				-				47
Issuance of restricted common shares			62				-				20				-				20
Net loss							-				-				(12,304	)			(12,304	)
Balances as of September 30, 2018			315,226			$	-			$	139,126			$	(141,893	)		$	(2,767	)

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		Nine Months Ended
		September 30,
		2019				2018
Cash flows from operating activities:
Net loss		$	(27,709	)		$	(36,489	)
Adjustments to reconcile net loss to net cash used in operating activities:
Provision for doubtful accounts			260				103
Depreciation and amortization			819				545
Stock-based compensation			1,634				2,294
Fair value of common shares issued			-				256
Non-cash interest expense			1,266				1,176
Amortization of operating lease right-of-use assets and accretion of operating lease liabilities			4				-
Loss from minority interest in limited liability company			431				539
Loss on disposal of property and equipment			93				-
Changes in assets and liabilities:
Accounts receivable			2,638				1,119
Inventory			(236	)			(2,317	)
Prepaid expenses and other current assets			(493	)			61
Other noncurrent assets			40				1
Accounts payable			(2,203	)			(1,297	)
Accrued and other liabilities			(2,566	)			502
Other noncurrent liabilities			160				262
Net cash used in operating activities			(25,862	)			(33,245	)
Cash flows from investing activities:
Purchase of property and equipment			(848	)			(983	)
Net cash used in investing activities			(848	)			(983	)
Cash flows from financing activities:
Proceeds from sale of common stock, net of issuance costs			6,322				33,407
Proceeds from issuance of common shares from employee stock purchase plan			56				188
Transaction costs in connection with note payable			(100	)			-
Reverse stock split - cancellation and payout of fractional shares			(5	)			-
Net cash provided by financing activities			6,273				33,595
Net decrease in cash and cash equivalents			(20,437	)			(633	)
Cash and cash equivalents - beginning of period			29,523				20,730
Cash and cash equivalents - end of period		$	9,086			$	20,097
Supplemental disclosure:
Cash paid for interest		$	2,067			$	1,991
Cash paid for income taxes		$	-			$	2
Supplemental disclosure of cash flow information as of end of period:
Issuance of note payable in settlement of accrued interest		$	973			$	934
Net transfer of equipment between inventory and property and equipment		$	214			$	210
Supplemental cash flow information related to leases was as follows:
Operating cash outflows from operating leases		$	220
Right-of-use assets obtained in exchange for operating lease liabilities (upon adoption of ASC 842)		$	629

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1.	The Company and Basis of Presentation

 

Viveve Medical, Inc. (“Viveve Medical”, the “Company”, “we”, “our”, or “us”) designs, develops, manufactures and markets a platform medical technology, which we refer to as Cryogen-cooled Monopolar RadioFrequency, or CMRF. Our proprietary CMRF technology is delivered through a radiofrequency generator, handpiece and treatment tip, which collectively, we refer to as the Viveve® System. Viveve Medical competes in the women’s intimate health industry in some countries by marketing the Viveve System as a way to improve the overall well-being and quality of life of women suffering from vaginal introital laxity, for improved sexual function, or stress urinary incontinence, depending on the relevant country-specific clearance or approval.  In the United States, the Viveve System is currently indicated for use in general surgical procedures for electrocoagulation and hemostasis.

 

ATM Equity Offerings

 

The Company established an “at-the-market” equity offering program through the filing of a prospectus supplement to its shelf registration statement on Form S-3, which was filed on August 16, 2019, under which the Company may offer and sell, from time-to-time, up to $6,760,000 aggregate offering price of shares of its common stock (the “August 2019 ATM Facility”). The Company’s offering of $6,760,000 of its common stock under the August 2019 ATM Facility was completed in late September 2019. During the three months ended September 30, 2019, the Company sold 1,004,171 shares of common stock under the August 2019 ATM Facility for net proceeds, after deducting sales commissions and other offering costs, of approximately $6,322,000. As of September 30, 2019, the Company had no remaining capacity to issue shares under the August 2019 ATM Facility.

 

The Company had previously established an “at-the-market” equity offering program through the filing of a prospectus supplement to its shelf registration statement on Form S-3, which was filed on November 8, 2017, under which the Company could offer and sell, from time-to-time, up to $25,000,000 aggregate offering price of shares of its common stock (the “November 2017 ATM Facility”). On August 16, 2019, the Company suspended and subsequently terminated the November 2017 ATM Facility pursuant to the prospectus supplement, dated November 7, 2017. The Company will no longer make any sales of its common stock under the November 2017 ATM Facility. During the three and nine months ended September 30, 2019, the Company sold zero shares of common stock under the November 2017 ATM Facility. During the three and nine months ended September 30, 2018, the Company sold 37 and 2,771 shares of common stock under the November 2017 ATM Facility for net proceeds of approximately $11,000 and $1,194,000, respectively. Through the closing of the November 2017 ATM Facility in August 2019, the Company sold 3,364 shares of common stock under the equity offering program for net proceeds, after deducting sales commissions and other offering costs, of approximately $1,318,000.

 

Public Offerings

 

 In December 2018, in connection with the closing of a public offering (the “December 2018 Offering”), the Company issued an aggregate of 147,285 shares of common stock, including the shares issued in connection with the exercise of the underwriters’ overallotment option, for gross proceeds of approximately $22,093,000. The net proceeds to the Company, after deducting underwriting discounts and commissions and other offering expenses, were approximately $20,385,000.  

 

In February 2018, in connection with the closing of a public offering (the “February 2018 Offering”), the Company issued an aggregate of 115,000 shares of common stock, including the shares issued in connection with the exercise of the underwriters’ overallotment option, for gross proceeds of approximately $34,500,000. The net proceeds to the Company, after deducting underwriting discounts and commissions and other offering expenses, were approximately $32,214,000.  

   

Interim Unaudited Financial Information

 

The accompanying unaudited condensed consolidated financial statements of Viveve Medical have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and pursuant to the instructions to Form 10-Q and Article 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the condensed consolidated financial statements have been included.

 

 

The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2018, which was filed with the Securities and Exchange Commission on March 15, 2019. The results of operations for the three and nine months ended September 30, 2019 are not necessarily indicative of the results for the year ending December 31, 2019 or any future interim period.

    

Liquidity and Management Plans

 

The Company has adopted the Financial Accounting Standards Board’s (“FASB”) Accounting Standard Codification (“ASC”) Topic 205-40, Presentation of Financial Statements – Going Concern, which requires that management evaluate whether there are relevant conditions and events that, in the aggregate, raise substantial doubt about the entity’s ability to continue as a going concern and to meet its obligations as they become due within one year after the date that the financial statements are issued.

  

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. However, since inception, the Company has sustained significant operating losses and such losses are expected to continue for the foreseeable future. As of September 30, 2019, the Company had an accumulated deficit of $183,094,000, cash and cash equivalents of $9,086,000 and working capital of $12,836,000. Additionally, the Company used $6,608,000 in cash for operations in the three months ended September 30, 2019 and $25,862,000 in cash for operations for the nine months ended September 30, 2019. The Company will require additional cash funding to fund operations through November 2020. Accordingly, management has concluded that the Company does not have sufficient funds to support operations within one year after the date the financial statements are issued and, therefore, the Company concluded there was substantial doubt about the Company’s ability to continue as a going concern.

 

To fund further operations, the Company will need to raise additional capital. The Company may obtain additional financing in the future through the issuance of its common stock, or through other equity or debt financings. The Company’s ability to continue as a going concern or meet the minimum liquidity requirements in the future is dependent on its ability to raise significant additional capital, of which there can be no assurance. If the necessary financing is not obtained or achieved, the Company will likely be required to reduce its planned expenditures, which could have an adverse impact on the results of operations, financial condition and the Company’s ability to achieve its strategic objective. There can be no assurance that financing will be available on acceptable terms, or at all. The financial statements contain no adjustments for the outcome of these uncertainties. These factors raise substantial doubt about the Company’s ability to continue as a going concern and have a material adverse effect on the Company’s future financial results, financial position and cash flows.

  

 

2.	Summary of Significant Accounting Policies

 

Financial Statement Presentation

 

The condensed consolidated financial statements include the accounts of the Company and our wholly-owned subsidiaries, Viveve, Inc. and Viveve BV. All significant intercompany accounts and transactions have been eliminated in consolidation.

 

Reverse Stock Split

 

On September 18, 2019, the Company effected a 1-for-100 reverse stock split of its common stock that became effective after market close on September 18, 2019. The reverse stock split uniformly affected all issued and outstanding shares of the Company’s common stock. The reverse stock split did not alter any stockholder's percentage ownership interest in the Company, except to the extent that the reverse stock split resulted in fractional shares. No fractional shares were issued in connection with the reverse stock split. Any fractional shares that resulted from the reverse stock split were rounded down, and stockholders were issued cash in lieu of such fractional share interest.

 

The par value of the Company’s common stock remained unchanged at $0.0001 per share after the reverse stock split.

 

The number of authorized shares of common stock remained at 75 million.

 

The reverse stock split proportionately affected the number of shares of common stock available for issuance under the Company’s equity incentive plans. All stock options, warrants and restricted stock awards of the Company outstanding shares immediately prior to the reverse stock split were adjusted in accordance with their terms.

 

 

On the effective date of the reverse stock split, (i) each 100 shares of outstanding common stock were reduced to one share of common stock; (ii) the number of shares of common stock into which each outstanding stock option or warrant to purchase common stock is exercisable were proportionately reduced on an 100-to-1 basis; (iii) the exercise price of each outstanding stock option or warrant to purchase common stock were proportionately increased on a 1-to-100 basis; and (iv) the number of shares of common stock each outstanding restricted stock award will be issued upon vesting were proportionally reduced on a 100-to-1 basis.

 

All of the share numbers, share prices, and exercise prices have been adjusted, on a retroactive basis, to reflect this 1-for-100 reverse stock split.

 

Use of Estimates

 

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses and the related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. In addition, any change in these estimates or their related assumptions could have an adverse effect on our operating results. 

 

Changes in Accounting Policies

 

Except for the changes for the adoption of the new accounting standard for leases, the Company has consistently applied the accounting policies to all periods presented in these condensed consolidated financial statements.

  

Adoption of New Accounting Standard - Leases

 

The Company adopted FASB’s Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842), as of January 1, 2019, using the modified retrospective approach. The modified retrospective approach provides a method for recording existing leases at the beginning of the period of adoption. In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed us to carry forward the historical lease classification and we elected the hindsight practical expedient to determine the lease term for existing leases. We determined that the renewal options for the facilities lease would be reasonably certain to be renewed and as such, included that renewal period in determining the expected lease term of that lease. Adoption of the new standard resulted in the recording of operating lease right-of-use assets of $629,000 and operating lease liabilities of $629,000, as of January 1, 2019. The standard did not have an impact on our consolidated results of operations, cash flows or stockholders’ equity previously reported. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.

  

The effect of the changes made to our consolidated January 1, 2019 balance sheet for the adoption of the new lease standard was as follows (in thousands): 

 

 

	(1)	Represents capitalization of operating lease right-of-use assets and reclassification of deferred rent.
	(2)	Represents recognition of operating lease liabilities.

 

 

Cash and Cash Equivalents

 

The Company considers all highly liquid investments purchased with an original maturity of three months or less, at the time of purchase, to be cash equivalents. The Company’s cash and cash equivalents are deposited in demand accounts primarily at one financial institution. Deposits in this institution may, from time to time, exceed the federally insured amounts.

 

Concentration of Credit Risk and Other Risks and Uncertainties

 

To achieve profitable operations, the Company must successfully develop, manufacture, and market its products. There can be no assurance that any such products can be developed or manufactured at an acceptable cost and with appropriate performance characteristics, or that such products will be successfully marketed. These factors could have a material adverse effect upon the Company’s financial results, financial position, and future cash flows.

 

Most of the Company’s products to date require clearance or approvals from the U.S. Food and Drug Administration (“FDA”) or other international regulatory agencies prior to commencing commercial sales. There can be no assurance that the Company’s products will receive any of these required clearances or approvals or for the indications requested. If the Company was denied such clearances or approvals or if such clearances or approvals were delayed, it would have a material adverse effect on the Company’s financial results, financial position and future cash flows.

 

The Company is subject to risks common to companies in the medical device industry including, but not limited to, new technological innovations, dependence on key personnel, protection of proprietary technology, compliance with government regulations, uncertainty of market acceptance of products, product liability, and the need to obtain additional financing. The Company’s ultimate success is dependent upon its ability to raise additional capital and to successfully develop and market its products. 

  

The Company designs, develops, manufactures and markets a medical device that it refers to as the Viveve System, which is intended for the non-invasive treatment of vaginal introital laxity, for improved sexual function, for vaginal rejuvenation, for use in general surgical procedures for electrocoagulation and hemostasis, and stress urinary incontinence, depending on the relevant country-specific clearance or approval. The Viveve System consists of three main components: a RF, or radio frequency, generator housed in a table-top console, a reusable handpiece and a single-use treatment tip. Included with the system are single-use accessories (e.g. RF return pad, coupling fluid), as well as a cryogen canister that can be used for approximately four to five procedures, and a foot pedal. The Company outsources the manufacture and repair of the Viveve System to a single contract manufacturer. Also, certain other components and materials that comprise the device are currently manufactured by a single supplier or a limited number of suppliers. A significant supply interruption or disruption in the operations of the contract manufacturer or these third-party suppliers would adversely impact the production of our products for a substantial period of time, which could have a material adverse effect on our business, financial condition, operating results and cash flows.

 

In North America, the Company sells its products primarily through a direct sales force to health care practitioners. Outside North America, the Company sells through an extensive network of distribution partners. During the three months ended September 30, 2019, two distributors, collectively, accounted for 31 % of the Company’s revenue. During the three months ended September 30, 2018, three distributors accounted for 42% of the Company’s revenue. During the nine months ended September 30, 2019, one distributor accounted for 17 % of the Company’s revenue. During the nine months ended September 30, 2018, one distributor accounted for 21% of the Company’s revenue.

 

There were no direct sales customers that accounted for more than 10% of the Company’s revenue during the three and nine months ended September 30, 2019 and 2018.

  

As of September 30, 2019, four distributors, collectively, accounted for 67% of total accounts receivable, net. As of December 31, 2018, three distributors, collectively, accounted for 54% of total accounts receivable, net.

 

Accounts Receivable and Allowance for Doubtful Accounts

 

Accounts receivable are recorded at the invoiced amount and are not interest bearing. Our typical payment terms vary by region and type of customer (distributor or physician). Occasionally, payment terms of up to six months may be granted to customers with an established history of collections without concessions. Should we grant payment terms greater than six months or terms that are not in accordance with established history for similar arrangements, revenue would be recognized as payments become due and payable assuming all other criteria for revenue recognition have been met. The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The Company makes ongoing assumptions relating to the collectability of its accounts receivable in its calculation of the allowance for doubtful accounts. In determining the amount of the allowance, the Company makes judgments about the creditworthiness of customers based on ongoing credit evaluations and assesses current economic trends affecting its customers that might impact the level of credit losses in the future and result in different rates of bad debts than previously seen. The Company also considers its historical level of credit losses. The allowance for doubtful accounts was $543,000 as of September 30, 2019 and $284,000 as of December 31, 2018.

  

 

Revenue Recognition

 

Revenue consists primarily of the sale of the Viveve System, single-use treatment tips and ancillary consumables. The Company applies the following five steps: (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when a performance obligation is satisfied. The Company considers customer purchase orders to be the contracts with a customer. Revenues, net of expected discounts, are recognized when the performance obligations of the contract with the customer are satisfied and when control of the promised goods are transferred to the customer, typically when products, which have been determined to be the only distinct performance obligations, are shipped to the customer. Expected costs of assurance warranties and claims are recognized as expense. Revenue is recognized net of any sales taxes from the sale of the products.

 

Rental revenue is generated through the lease of the Viveve System. The Company’s operating leases for the Viveve System have a rental period of six months and can be extended or terminated by the customer after that time or the Viveve System can be purchased by the customer. Rental revenue on those operating leases is recognized on a straight-line basis over the terms of the underlying leases. The Company began this rental program in the quarter ended June 30, 2019 and the revenue associated with it has not been material to the periods presented. As of September 30, 2019, the Company had deferred revenue in the amount of $579,000 related to its rental program.

 

In connection with the lease of the Viveve System, the Company offers single-use treatment tips and ancillary consumables that are considered nonlease components. In the contracts with lease and nonlease components, the Company follows the relevant guidance in ASC 606, Revenue from Contracts with Customers, to determine how to allocate contractual consideration between the lease and nonlease components.

  

Sales of our products are subject to regulatory requirements that vary from country to country. The Company has regulatory clearance for differing indications, or can sell its products without a clearance, in many countries throughout the world, including countries within the following regions: North America, Latin America, Europe, the Middle East and Asia Pacific. In North America, we market and sell primarily through a direct sales force. Outside of North America, we market and sell primarily through distribution partners.

 

The Company does not provide its customers with a right of return.

 

Customer Advance Payments

 

From time to time, customers will pay for a portion of the products ordered in advance.  Upon receipt of such payments, the Company records the customer advance payment as a component of accrued liabilities.  The Company will remove the customer advance payment from accrued liabilities when revenue is recognized upon shipment of the products. 

 

Contract Assets and Liabilities

 

The Company continually evaluates whether the revenue generating activities and advanced payment arrangements with customers result in the recognition of contract assets or liabilities. No such assets existed as of September 30, 2019 or December 31, 2018. The Company had customer contracts liabilities in the amount of $470,000, primarily related to marketing programs that performance had not yet been delivered to its customers as of September 30, 2019 and $686,000 as of December 31, 2018.

  

The following table reflects the changes in our customer contract liabilities for the nine months ended September 30, 2019:

 

 

 

Separately, accounts receivable, net represents receivables from contracts with customers.

 

Significant Financing Component

 

The Company applies the practical expedient to not make any adjustment for a significant financing component if, at contract inception, the Company does not expect the period between customer payment and transfer of control of the promised goods or services to the customer to exceed one year. During the three and nine months ended September 30, 2019 and 2018, the Company did not have any contracts for the sale of its products with its customers with a significant financing component.

 

Contract Costs 

 

The Company expects that commissions paid to obtain subscriptions are recoverable and has therefore capitalized them as a contract costs in the amount of $198,000 and $0 at September 30, 2019 and 2018, respectively. Capitalized commissions are amortized based on the subscription periods to which the assets relate and are included in selling, general and administrative expenses. For the three and nine months ended September 30, 2019, the amount of amortization was $30,000 ($0 in 2018). There was no impairment loss in relation to the costs capitalized. The Company has elected the practical expedient to recognize the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset that the Company otherwise would have recognized is less than six months.

 

Shipping and Handling

 

Shipping costs billed to customers are recorded as revenue. Shipping and handling expense related to costs incurred to deliver product are recognized within cost of goods sold. The Company accounts for shipping and handling activities that occur after control has transferred as a fulfillment cost as opposed to a separate performance obligation, and the costs of shipping and handling are recognized concurrently with the related revenue.

    

Revenue by Geographic Area

 

Management has determined that the sales by geography is a key indicator for understanding the Company’s financials because of the different sales and business models that are required in the various regions of the world (including regulatory, selling channels, pricing, customers and marketing efforts). The following table presents the revenue from unaffiliated customers disaggregated by geographic area for the three and nine months ended September 30, 2019 and 2018 (in thousands):

 

 

The Company determines geographic location of its revenue based upon the destination of the shipments of its products.

 

Investments in Unconsolidated Affiliates

 

The Company uses the equity method to account for its investments in entities that it does not control but have the ability to exercise significant influence over the investee. Equity method investments are recorded at original cost and adjusted periodically to recognize (1) the proportionate share of the investees’ net income or losses after the date of investment, (2) additional contributions made and dividends or distributions received, and (3) impairment losses resulting from adjustments to net realizable value. The Company eliminates all intercompany transactions in accounting for equity method investments. The Company records the proportionate share of the investees’ net income or losses in equity in earnings of unconsolidated affiliates on the condensed consolidated statements of operations. The Company utilizes a three-month lag in reporting equity income from its investments, adjusted for known amounts and events, when the investee’s financial information is not available timely or when the investee’s reporting period differs from our reporting period.

  

 

The Company assesses the potential impairment of the equity method investments when indicators such as a history of operating losses, a negative earnings and cash flow outlook, and the financial condition and prospects for the investee’s business segment might indicate a loss in value. The carrying value of the investments is reviewed annually for changes in circumstances or the occurrence of events that suggest the investment may not be recoverable. No impairment charges have been recorded in the condensed consolidated statements of operations during the three and nine months ended September 30, 2019 and 2018.

 

Product Warranty

 

The Company’s products are generally subject to warranties between one and three years, which provides for the repair, rework or replacement of products (at the Company’s option) that fail to perform within stated specifications. The Company has assessed the historical claims and, to date, product warranty claims have not been significant.

  

Accounting for Stock-Based Compensation

 

Share-based compensation cost is measured at grant date, based on the fair value of the award, and is recognized as expense over the employee’s service period. The Company recognizes compensation expense on a straight-line basis over the requisite service period of the award.

 

The Company determined that the Black-Scholes option pricing model is the most appropriate method for determining the estimated fair value for stock options and purchase rights under the employee stock purchase plan. The Black-Scholes option pricing model requires the use of highly subjective and complex assumptions which determine the fair value of share-based awards, including the option’s expected term and the price volatility of the underlying stock.

 

Equity instruments issued to nonemployees are recorded at their fair value on the measurement date and are subject to periodic adjustment as the underlying equity instruments vest.

 

Comprehensive Loss

 

Comprehensive loss represents the changes in equity of an enterprise, other than those resulting from stockholder transactions. Accordingly, comprehensive loss may include certain changes in equity that are excluded from net loss. For the three months and nine months ended September 30, 2019 and 2018, the Company’s comprehensive loss is the same as its net loss. 

 

Net Loss per Share

 

The Company’s basic net loss per share is calculated by dividing the net loss by the weighted average number of shares of common stock outstanding for the period. The diluted net loss per share is computed by giving effect to all potentially dilutive common stock equivalents outstanding during the period. For purposes of this calculation, stock options and warrants to purchase common stock and restricted common stock awards are considered common stock equivalents. For periods in which the Company has reported net losses, diluted net loss per share is the same as basic net loss per share, since dilutive common shares are not assumed to have been issued if their effect is anti-dilutive.

 

The following securities were excluded from the calculation of net loss per share because the inclusion would be anti-dilutive. 

 

 

Other Recently Issued and Adopted Accounting Standards

 

In June 2018, the FASB issued ASU 2018-07, “Stock Compensation (Topic 718) – Improvements to Nonemployee Share- Based Payment Accounting”. The intent of this guidance is to simplify the accounting for nonemployee share-based payment accounting. The amendments in this guidance expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. Consistent with the accounting requirement for employee share-based payment awards, nonemployee share-based payment awards within the scope of Topic 718 are measured at grant-date fair value of the equity instruments that an entity is obligated to issue when the good has been delivered or the service has been rendered and any other conditions necessary to earn the right to benefit from the instruments have been satisfied. Equity- classified nonemployee share-based payment awards are measured at the grant date. Consistent with the accounting for employee share-based payment awards, an entity considers the probability of satisfying performance conditions when nonemployee share-based payment awards contain such conditions. This guidance is effective for annual reporting periods beginning after December 15, 2018, including interim periods within the reporting period. We adopted this guidance as of January 1, 2019 and the adoption of the guidance did not have a significant impact on the condensed consolidated financial statements.

 

 

We have reviewed other recent accounting pronouncements and concluded they are either not applicable to the business, or no material effect is expected on the consolidated financial statements as a result of future adoption.

  

 

3.	Fair Value Measurements

 

The Company recognizes and discloses the fair value of its assets and liabilities using a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to valuations based upon unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to valuations based upon unobservable inputs that are significant to the valuation (Level 3 measurements). Each level of input has different levels of subjectivity and difficulty involved in determining fair value.

 

Level 1

Inputs used to measure fair value are unadjusted quoted prices that are available in active markets for the identical assets or liabilities as of the reporting date. Therefore, determining fair value for Level 1 investments generally does not require significant judgment, and the estimation is not difficult.

 

Level 2

Pricing is provided by third party sources of market information obtained through investment advisors. The Company does not adjust for or apply any additional assumptions or estimates to the pricing information received from its advisors.

 

Level 3

Inputs used to measure fair value are unobservable inputs that are supported by little or no market activity and reflect the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions. The determination of fair value for Level 3 instruments involves the most management judgment and subjectivity.

 

Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires management to make judgments and consider factors specific to the asset or liability. 

  

There were no financial instruments that were measured at fair value on a recurring basis as of September 30, 2019 and December 31, 2018.

 

The carrying amounts of the Company’s financial assets and liabilities, including cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses as of September 30, 2019, and December 31, 2018 approximate fair value because of the short maturity of these instruments. Based on borrowing rates currently available to the Company for loans with similar terms, the carrying value of the note payable approximates fair value. 

 

There were no changes in valuation techniques from prior periods.

   

 

4.	Investment in Limited Liability Company

 

On August 8, 2017, the Company entered into an exclusive Distributorship Agreement (the “Distributorship Agreement”) with InControl Medical, LLC (“ICM”), a Wisconsin limited liability company focused on women's health, pursuant to which the Company will directly market, promote, distribute and sell ICM’s products to licensed medical professional offices and hospitals in North America.

 

Under the terms of the Distributorship Agreement, ICM agreed to not directly or indirectly appoint or authorize any third party to market, promote, distribute or sell any of the licensed products to any licensed medical professional offices and hospitals in the United States. In exchange, the Company agreed to not market, promote, distribute or sell (or contract to do so) any product which substantially replicates all or almost all of the key features of the licensed products. The Company has a minimum purchase requirement to purchase a certain quantity of ICM products per month during the term of this Distributorship Agreement. In addition, the parties agreed to certain mutual marketing obligations to promote sales of the licensed products. As of September 30, 2019, the Company has purchased approximately 4,800 units of ICM products. The Company paid ICM approximately zero and $27,000 for product related costs during the three and nine months ended September 30, 2019 respectively.  There were no amounts due to ICM for the accounts payable as of September 30, 2019 and December 31, 2018.

  

 

In connection with the Distributorship Agreement, the Company also entered into a Membership Unit Subscription Agreement with ICM and the associated limited liability company operating agreement of ICM, pursuant to which the Company invested $2,500,000 in, and acquired membership units of, ICM. This investment has been recorded in investment in a limited liability company in the condensed consolidated balance sheets. The Company used the equity method to account for the investment in ICM because the Company does not control it but has the ability to exercise significant influence over it. As of September 30, 2019, the Company owns approximately 7% ownership interest in ICM. The Company recognizes its allocated portion of ICM’s results of operations on a three-month lag due to the timing of financial information. For the three and nine months ended September 30, 2019, the allocated net loss from ICM’s operations was $168,000 and $431,000, respectively. For the three and nine months ended September 30, 2018, the allocated net loss from ICM’s operations was $132,000 and $539,000, respectively. The allocated net loss from ICM’s operations was recorded as loss from minority interest in limited liability company in the condensed consolidated statements of operations.

 

In February 2019, the Company executed a mutual termination of the Distributorship Agreement with ICM. As a result, the Company no longer has a minimum purchase requirement to purchase a certain quantity of ICM products per month.

      

 

5.	Accrued Liabilities

 

Accrued liabilities consisted of the following as of September 30, 2019 and December 31, 2018 (in thousands): 

 

 

 

6.	Note Payable

  

On May 22, 2017, the Company entered into a Term Loan Agreement (the “2017 Loan Agreement”) with affiliates of CRG LP (“CRG”). The credit facility consists of $20,000,000 drawn at closing and access to additional funding of up to an aggregate of $10,000,000 for a total of $30,000,000 available under the credit facility. On December 29, 2017, the Company accessed the remaining $10,000,000 available under the credit facility.

 

A portion of the initial loan proceeds were used to repay all of the amounts owed by the Company under its 2016 Loan Agreement with Western Alliance Bank. The remainder of the loan proceeds (after deducting loan origination costs and other fees and expenses incurred in connection with the 2017 Loan Agreement), plus any additional amounts that may be borrowed in the future, will be used for general corporate purposes and working capital.

   

The 2017 Loan Agreement has a six-year term with four years of interest-only payments after which quarterly principal and interest payments will be due through the maturity date. Amounts borrowed under the 2017 Loan Agreement accrue interest at an annual fixed rate of 12.5%, 4.0% of which may, at the election of the Company, be paid in-kind during the interest-only period by adding such accrued amount to the principal loan amount each quarter. During the three and nine months ended September 30, 2019, the Company paid interest in-kind of $331,000 and $973,000, respectively, which was added to the total outstanding principal loan amount. During the three and nine months ended September 30, 2018, the Company paid interest in-kind of $318,000 and $934,000, respectively, which was added to the total outstanding principal loan amount. The Company is also required to pay CRG a final payment fee upon repayment of the loans in full equal to 5.0% of the sum of the aggregate principal amount plus the deferred interest added to the principal loan amount during the interest-only period. The Company accounts for the final payment fee by accruing the fee over the term of the loan using the effective interest rate method. As of September 30, 2019, interest accrued related to the final payment fee in the amount of $756,000 was included in other noncurrent liabilities in the condensed consolidated balance sheets.

  

 

The Company may prepay all or a portion of the outstanding principal and accrued unpaid interest under the 2017 Loan Agreement at any time upon prior notice to CRG, subject to a prepayment fee during the first five years of the term (which reduces each year) and no prepayment fee thereafter.

 

As security for its obligations under the 2017 Loan Agreement, the Company entered into security agreements with CRG whereby the Company granted CRG a lien on substantially all of the Company’s assets, including intellectual property.

  

The terms of the 2017 Loan Agreement also require the Company to meet certain financial and other covenants. These covenants require the Company to maintain cash and cash equivalents of $2.0 million and, each year through the end of 2022, to meet a minimum total annual revenue threshold. In the event that the Company does not meet the minimum total annual revenue threshold for a particular year, then the Company can retroactively cure the shortfall by either issuing additional equity in exchange for cash or incurring certain additional permitted indebtedness, in each case, in an amount equal to 2.0 times the shortfall. Any such amounts shall be applied to prepay the loans. The 2017 Loan Agreement also contains customary affirmative and negative covenants for a credit facility of this size and type, including covenants that limit or restrict the Company’s ability to, among other things, incur indebtedness, grant liens, merge or consolidate, dispose of assets, make investments, make acquisitions, enter into transactions with affiliates, pay dividends or make distributions, license intellectual property rights on an exclusive basis or repurchase stock, in each case subject to customary exceptions. As of September 30, 2019, the Company was in compliance with all covenants.

 

As of September 30, 2019 and December 31, 2018, $31,694,000 and $30,528,000, respectively, was recorded on the balance sheets under the 2017 Loan Agreement, respectively, which is net of the remaining unamortized debt discount.

 

In connection with the 2017 Loan Agreement, the Company issued two 10-year warrants to CRG to purchase a total of 2,220 shares of the Company’s common stock at an exercise price of $950.00 per share (See Note 9). 

   

As of September 30, 2019, future minimum payments under the note payable are as follows (in thousands): 

 

 

 

7.

Leases

 

Lessee:

 

The following information pertains to those operating lease agreements where the Company is the lessee.

 

In January 2012, the Company entered into a lease agreement for office and laboratory facilities in Sunnyvale, California. The lease agreement, as amended, commenced in March 2012 and terminated in April 2018.

  

On February 1, 2017, the Company entered into a sublease agreement (the “Sublease”) for approximately 12,400 square feet of building space for the relocation of the Company’s corporate headquarters to Englewood, Colorado (the “Sublease Premises”), which was effective as of January 26, 2017. The lease term commenced on June 1, 2017 and will terminate in May 2020. The Company relocated its corporate headquarters from Sunnyvale, California to Englewood, Colorado in June 2017.

  

 

The monthly base rent under the Sublease is equal to $20.50 per rentable square foot of the Sublease Premises during the first year. The monthly base rent is equal to $21.12 and $21.75 per rentable square foot during the second and third years, respectively. In connection with the execution of the Sublease, the Company also agreed to pay a security deposit of approximately $22,000. The Company was also provided an allowance of approximately $88,000 for certain tenant improvements relating to the engineering, design and construction of the Sublease Premises which has been reimbursed.

  

Rent expense for the three and nine months ended September 30, 2018 was $65,000 and $293,000.

  

In September 2018, the Company entered into a 36-month noncancelable operating lease agreement for office equipment.  The lease commenced on September 20, 2018.  The monthly payment is approximately $3,000. 

 

After the adoption of ASU 842 – Leases on January 1, 2019, operating lease rentals are expensed on a straight-line basis over the life of the lease beginning on the date the Company takes possession of the property. At lease inception, the Company determines the lease term by assuming the exercise of those renewal options that are reasonably assured. The lease term is used to determine whether a lease is financing or operating and is used to calculate straight-line rent expense. Additionally, the depreciable life of leasehold improvements is limited by the expected lease term. Leases with an initial term of 12 months or less are not recorded on the balance sheet; the Company recognizes lease expense for these leases on a straight-line basis over the lease term.

 

The following table reflects the Company's lease assets and lease liabilities at September 30, 2019 and January 1, 2019 (in thousands):

 

 

The operating lease right-of-use assets are included in other assets on the condensed consolidated balance sheet. The operating lease liabilities are included in accrued liabilities and other noncurrent liabilities on the condensed consolidated balance sheet.

 

The operating leases expense for the three and nine months ended September 30, 2019 was $75,000 and $225,000, respectively.

 

As of September 30, 2019, the maturity of operating lease liabilities was as follows (in thousands):

 

 

The weighted average remaining lease term was approximately 20 months as of September 30, 2019. The weighted average discount rate for the three and nine months ended September 30, 2019 was 12.5%.

  

Lessor:

 

The following information pertains to those operating lease agreements where the Company is the lessor.

 

 

As of September 30, 2019, minimum future rentals from customers on non-cancellable operating leases of Viveve Systems are as follows (in thousands):

 

 

As of September 30, 2019, $456,000 of property and equipment is related to these operating lease agreements. The depreciation expense for that property and equipment for the three and nine months ended September 30, 2019 is $46,000 and $46,000, respectively.

   

 

8.	Commitments and Contingencies

 

Indemnification Agreements

 

The Company enters into standard indemnification arrangements in the ordinary course of business. Pursuant to these arrangements, the Company indemnifies, holds harmless and agrees to reimburse the indemnified parties for losses suffered or incurred by the indemnified party, in connection with performance of services within the scope of the agreement, breach of the agreement by the Company, or noncompliance of regulations or laws by the Company, in all cases provided the indemnified party has not breached the agreement and/or the loss is not attributable to the indemnified party’s negligence or willful malfeasance. The term of these indemnification agreements is generally perpetual any time after the execution of the agreement. The maximum potential amount of future payments the Company could be required to make under these arrangements is not determinable. The Company has never incurred costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, the Company believes the estimated fair value of these agreements is minimal. 

  

Loss Contingencies

 

The Company is or has been subject to proceedings, lawsuits and other claims arising in the ordinary course of business. The Company evaluates contingent liabilities, including threatened or pending litigation, for potential losses. If the potential loss from any claim or legal proceeding is considered probable and the amount can be estimated, the Company accrues a liability for the estimated loss. Because of uncertainties related to these matters, accruals are based upon the best information available. For potential losses for which there is a reasonable possibility (meaning the likelihood is more than remote but less than probable) that a loss exists, the Company will disclose an estimate of the potential loss or range of such potential loss or include a statement that an estimate of the potential loss cannot be made. As additional information becomes available, the Company reassesses the potential liability related to pending claims and litigation and may revise its estimates, which could materially impact its condensed consolidated financial statements.  Management does not believe that the outcome of any outstanding legal matters will have a material adverse effect on the Company's consolidated financial position, results of operations and cash flows.

   

 

9.	Common Stock

 

Through the August 2019 ATM Facility, the Company may offer and sell, from time-to-time, up to $6,760,000 aggregate offering price of shares of its common stock”). The Company’s offering of $6,760,000 of its common stock under the August 2019 ATM Facility was completed in late September 2019. During the three months ended September 30, 2019, the Company sold 1,004,171 shares of common stock under the August 2019 ATM Facility for net proceeds, after deducting sales commissions and other offering costs, of approximately $6,322,000.

 

In August 2019, the Company terminated the November 2017 ATM Facility under which the Company could offer and sell, from time-to-time, up to $25,000,000 aggregate offering price of shares of its common stock. During the three and nine months ended September 30, 2019, the Company sold zero shares of common stock under the November 2017 ATM Facility. During the three and nine months ended September 30, 2018, the Company sold 37 and 2,771 shares of common stock under the November 2017 ATM Facility for net proceeds, after deducting sales commissions and other offering costs, of approximately $11,000 and $1,194,000, respectively. Through the closing of the November 2017 ATM Facility in August 2019, the Company sold 3,364 shares of common stock under the equity offering program for net proceeds of approximately $1,318,000.

 

In March 2019, the Company issued 274 restricted shares of its common stock at an aggregate value of approximately $25,000.

 

In December 2018, in connection with the closing of the December 2018 Offering, the Company issued an aggregate of 147,285 shares of common stock, including the shares issued in connection with the exercise of the underwriters’ overallotment option, for gross proceeds of approximately $22,093,000. The net proceeds to the Company, after deducting underwriting discounts and commissions and other offering expenses, were approximately $20,385,000.  

 

 

In June 2018, the Company issued 1,000 restricted shares of its common stock at an aggregate value of approximately $256,000.

 

In February 2018, in connection with the closing of the February 2018 Offering, the Company issued an aggregate of 115,000 shares of common stock, including the shares issued in connection with the exercise of the underwriters’ overallotment option, for gross proceeds of approximately $34,500,000. The net proceeds to the Company, after deducting underwriting discounts and commissions and other offering expenses, were approximately $32,214,000.  

     

Warrants for Common Stock

 

As of September 30, 2019, outstanding warrants to purchase shares of common stock were as follows: 

 

 

 In connection with the 2017 Loan Agreement, the Company issued warrants to purchase a total of 2,220, shares of common stock at an exercise price of $950.00 per share. The warrants have a contractual life of ten years and are exercisable immediately in whole or in part. The Company determined the fair value of the warrants on the date of issuance to be $940,000 using the Black-Scholes option pricing model. Assumptions used were dividend yield of 0%, volatility of 55.1%, risk free interest rate of 2.25% and a contractual life of ten years. The fair value of the warrants along with financing and legal fees totaling $790,000, are recorded as debt issuance costs and presented in the condensed consolidated balance sheets as a deduction from the carrying amount of the note payable. The debt issuance costs are amortized to interest expense over the loan term. During the three and nine months ended September 30, 2019, the Company recorded $92,000 and $270,000, respectively, of interest expense relating to the debt issuance costs using the effective interest method. During the three and nine months ended September 30, 2018, the Company recorded $82,000 and $242,000, respectively, of interest expense relating to the debt issuance costs using the effective interest method.

 

No shares issuable pursuant to warrants were issued in connection with the exercise of warrants during the three and nine months ended September 30, 2019 and 2018.

  

No shares issuable pursuant to warrants have been cancelled during the three and nine months ended September 30, 2019 and 2018.

     

A total of 859 shares issuable pursuant to warrants expired during the three and nine months ended September 30, 2019. No shares issuable pursuant to warrants expired during the three and nine months ended September 30, 2018.

 

 

 

10.	Summary of Stock Options

 

Stock Option Plans

 

The Company has issued equity awards in the form of stock options and restricted stock awards (“RSAs”) from two employee benefit plans. The plans include the Viveve Amended and Restated 2006 Stock Plan (the “2006 Plan”) and the Company’s Amended and Restated 2013 Stock Option and Incentive Plan (the “2013 Plan”).

 

As of September 30, 2019, there are outstanding stock option awards issued from the 2006 Plan covering a total of 104 shares of the Company’s common stock and no shares are available for future awards. The weighted average exercise price of the outstanding stock options is $992.00 per share and the weighted average remaining contractual term is 3.3 years.

  

As of September 30, 2019, there are outstanding stock option awards issued from the 2013 Plan covering a total of 50,367 shares of the Company’s common stock and there remain reserved for future awards 11,770 shares of the Company’s common stock. The weighted average exercise price of the outstanding stock options is $297.56 per share, and the remaining contractual term is 8.3 years.

 

In January 2019, the board of directors approved the 2019 evergreen provision increasing the total stock reserved for issuance under the 2013 Plan by 20,431 shares from 49,140 shares to a total of 69,571 shares, which was effective January 1, 2019.

 

In September 2019, the Company’s stockholders approved an amendment to the 2013 Plan to increase the number of shares of common stock reserved for issuance thereunder to equal 18% of the issued and outstanding shares of common stock of the Company on a fully diluted basis calculated as of the earlier of: (1) the day immediately after the consummation of the Company’s next underwritten public equity offering with gross proceeds of $5.0 million or more; or (2) December 31, 2019.

      

Activity under the 2006 Plan and the 2013 Plan is as follows:

 

 

The aggregate intrinsic value reflects the difference between the exercise price of the underlying stock options and the Company’s closing share price as of September 30, 2019.

 

 

The options outstanding and exercisable as of September 30, 2019 are as follows: 

 

 

Restricted Stock Awards (‘RSA”)

 

In July 2019, the Company issued 378 shares of common stock under the 2013 Plan to members of the Company’s board of directors with a weighted average grant date fair value of $38.08 per share, based on the market price of the Company’s common stock on the award date. The RSAs were fully vested on the date of grant and 378 shares of common stock were issued.

 

In June 2019, the Company issued 250 shares to a consultant in connection with the vesting of an RSA granted to the consultant in June 2018.

 

In April 2019, the Company issued 525 shares of common stock under the 2013 Plan to board members as director compensation with a weighted average grant date fair value of $91.00 per share, based on the market price of the Company’s common stock on the award date. The RSAs were fully vested on the date of grant and 525 shares of common stock were issued.

  

In January 2019, the Company granted RSAs for 3,625 shares of common stock under the 2013 Plan to employees as part of their 2018 annual performance bonuses. The bonuses for 2018 performance were paid 50% in cash and 50% in the form of RSAs that will vest in full upon FDA approval of the Viveve System for improvement of sexual function or stress urinary incontinence in the United States. During the three and nine months ended September 30, 2019, a total of 421 and 443 shares, respectively, pursuant to these RSAs were cancelled. As of September 30, 2019, zero shares were vested and issued.

 

As of September 30, 2019, there are 3,432 shares of unvested restricted stock outstanding that have been granted pursuant to RSAs.

 

2017 Employee Stock Purchase Plan

 

The eighth offering period under the Company’s 2017 Employee Stock Purchase Plan (the “2017 ESPP”) began on July 1, 2019 and ended on September 30, 2019, and 200 shares were issued on September 30, 2019 at a purchase price of $3.75.

 

The seventh offering period under the Company’s 2017 ESPP began on April 1, 2019 and ended on June 30, 2019, and 602 shares were issued on June 28, 2019 at a purchase price of $32.30.

 

The sixth offering period under the Company’s 2017 ESPP began on January 1, 2019 and ended on March 31, 2019, and 429 shares were issued on March 29, 2019 at a purchase price of $79.88.

  

As of September 30, 2019, the remaining shares available for issuance under the 2017 ESPP were 1,392 shares.

 

 

The Company estimates the fair value of purchase rights under the ESPP using a Black-Scholes valuation model. The fair value of each purchase right was estimated on the date of grant using the Black-Scholes option valuation model and the straight-line attribution approach with the following weighted-average assumptions:

 

 

The weighted average grant date fair value of the purchase rights issued under the 2017 ESPP during the three and nine months ended September 30, 2019 was $13.16 and $2.12, respectively and during the three and nine months ended September 30, 2018 was $75.00 and $100.00, respectively.

 

Stock-Based Compensation

 

During the three months ended September 30, 2019, the Company did not grant any stock options to employees. During the three months ended September 30, 2018, the Company granted stock options to employees to purchase 2,375 shares of common stock with a weighted average grant date fair value of $301.17 per share, respectively. During the nine months ended September 30, 2019 and 2018, the Company granted stock options to employees to purchase 23,069 and 20,544 shares of common stock with a weighted average grant date fair value of $117.86 and $364.98 per share, respectively. There were no stock options exercised during the three and nine months ended September 30, 2019 and 2018.

 

The Company estimated the fair value of stock options using the Black-Scholes option pricing model. The fair value of employee stock options is being amortized on a straight-line basis over the requisite service period of the awards. The fair value of employee stock options granted was estimated using the following weighted average assumptions:   

 

  

During the three months ended September 30, 2019, the Company did not grant any stock options to nonemployees. During the nine months ended September 30, 2019, the Company granted stock options to nonemployees to purchase 275 shares of common stock with a weighted average grant date fair value of $121.82. During the three and nine months ended September 30, 2018, the Company granted stock options to nonemployees to purchase 100 and 2,123 shares of common stock with a weighted average grant date fair value of $283.00 and $241.69 respectively. There were no stock options exercised by nonemployees during the three and nine months ended September 30, 2019 and 2018.

   

The fair value of nonemployee stock options granted was estimated using the following weighted average assumptions: 

 

 

Option-pricing models require the input of various subjective assumptions, including the option’s expected life and the price volatility of the underlying stock. The expected stock price volatility is based on analysis of the Company’s stock price history over a period commensurate with the expected term of the options, trading volume of comparable companies’ stock, look-back volatilities and the Company specific events that affected volatility in a prior period. The expected term of employee stock options represents the weighted average period the stock options are expected to remain outstanding and is based on the history of exercises and cancellations on all past option grants made by the Company, the contractual term, the vesting period and the expected remaining term of the outstanding options. The risk-free interest rate is based on the U.S. Treasury interest rates whose term is consistent with the expected life of the stock options. No dividend yield is included as the Company has not issued any dividends and does not anticipate issuing any dividends in the future.  

   

 

The following table shows stock-based compensation expense included in the condensed consolidated statements of operations for the three and nine months ended September 30, 2019 and 2018 (in thousands):

 

 

As of September 30, 2019, the total unrecognized compensation cost in connection with unvested stock options was approximately $3,371,000. These costs are expected to be recognized over a period of approximately 2.2 years.

    

 

11.	Income Taxes

 

No provision for income taxes has been recorded due to the net operating losses incurred from inception to date, for which no benefit has been recorded.

 

For interim periods, the Company estimates its annual effective income tax rate and applies the estimated rate to the year-to-date income or loss before income taxes. The Company also computes the tax provision or benefit related to items reported separately and recognizes the items net of their related tax effect in the interim periods in which they occur. The Company also recognizes the effect of changes in enacted tax laws or rates in the interim periods in which the changes occur.

 

The Company’s effective tax rate is 0% for the three and nine months ended September 30, 2019. The Company expects that its effective tax rate for the full year 2019 will be 0%.

   

 

12.	Related Party Transactions

 

In June 2006, the Company entered into a Development and Manufacturing Agreement (the “Agreement”) with Stellartech Research Corporation (“Stellartech”). The Agreement was amended on October 4, 2007. Under the Agreement, the Company agreed to purchase 300 generators manufactured by Stellartech. As of September 30, 2019, the Company has purchased 855 units. The price per unit is variable and dependent on the volume and timing of units ordered. In conjunction with the Agreement, Stellartech purchased 375 shares of Viveve, Inc.’s common stock. Under the Agreement, the Company paid Stellartech approximately $720,000 and $3,015,000 for goods and services during the three months ended September 30, 2019 and 2018, respectively, and approximately $3,853,000 and $8,613,000 for the nine months ended September 30, 2019 and 2018, respectively. The amounts due to Stellartech for accounts payable as of September 30, 2019 and December 31, 2018 were approximately $ 456,000 and $960,000, respectively.

   

 

13.	Restructuring Costs

 

In January 2019, the Company implemented a strategic organizational realignment plan to reduce operating expenses and prepare the Company for expanded indications for its CMRF technology platform for improved sexual function and stress urinary incontinence in women. The restructuring included a reduction in headcount of approximately 40 full-time employees. The total restructuring costs were approximately $742,000 and have been recorded in operating expenses in the condensed consolidated statements of operations. As of September 30, 2019, the total restructuring costs have been fully paid out. The restructuring contributed to a reduction in total operating expenses in the first quarter of 2019 as planned and is expected to result in additional operating cost savings throughout the remainder of this year.

 

 

 

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