UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

For the quarterly period ended March 31, 2018

OR

For the transition period from ____________ to ____________

Commission File Number: 001-38238

 

Restoration Robotics, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

 

Registrant’s telephone number, including area code: (408) 883-6888

 

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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

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 April 30, 2018, the registrant had 29,133,289 shares of common stock, $0.0001 par value per share, outstanding.

 

 

 

 

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Table of Contents

 

 

 

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PART I

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

RESTORATION ROBOTICS, INC.

Condensed Consolidated Balance Sheets

(Unaudited)

(in thousands, except share and per share data)

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

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RESTORATION ROBOTICS, INC.

Condensed Consolidated Statements of Operations

(Unaudited)

(in thousands, except share and per share data)

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

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RESTORATION ROBOTICS, INC.

Condensed Consolidated Statements of Comprehensive Loss

(Unaudited)

(in thousands, except share and per share data)

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

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RESTORATION ROBOTICS, INC.

Condensed Consolidated Statement of Stockholders’ Equity

(Unaudited)

(in thousands, except share and per share data)

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

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RESTORATION ROBOTICS, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(in thousands, except share and per share data)

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

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RESTORATION ROBOTICS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(in thousands, except share and per share data)

1. Nature of Operations

Restoration Robotics, Inc. is a medical technology company incorporated in the state of Delaware on November 22, 2002 and headquartered in San Jose, California. The Company develops an image-guided robotic system that enables follicular unit extraction (FUE) for use in the field of hair transplantation and markets the ARTAS® Robotic System in the United States and other countries.  In these notes to the unaudited condensed consolidated financial statements, the “Company,” “Restoration Robotics,” “we,” “us,” and “our” refers to Restoration Robotics, Inc. and its subsidiaries on a consolidated basis.

Initial Public Offering

On October 11, 2017, the Company’s Registration Statement on Form S-1 (File No. 333-220303) relating to the initial public offering (IPO) of its common stock was declared effective by the Securities and Exchange Commission (SEC). Pursuant to such Registration Statement, the Company completed its IPO of 3,897,910 shares of its common stock (inclusive of 322,910 shares of common stock from the subsequent exercise of the over-allotment option granted to the underwriters) at a price of $7.00 per share for aggregate cash proceeds of approximately $22,114, after deducting underwriting discounts and commissions, and offering costs of $5,171.

Immediately prior to the closing of the IPO, all outstanding shares of convertible preferred stock converted into 22,671,601 shares of common stock and all the outstanding convertible preferred stock warrants converted into common stock warrants resulting in the reclassification of our preferred stock warrant liabilities to additional paid-in capital. In addition, the principal and accrued interest on the outstanding Convertible Notes converted into 718,184 shares of common stock. The IPO closed on October 16, 2017.

Reverse Stock Split

On September 15, 2017, the Company effected a 1-for-10 reverse stock split of its common stock. Upon the effectiveness of the reverse stock split, (i) every 10 shares of outstanding common stock were combined into one share of common stock, (ii) the number of shares of common stock for which each outstanding option to purchase common stock is exercisable was proportionately decreased on a 1-for-10 basis, (iii) the exercise price of each outstanding option to purchase common stock was proportionally increased on a l-for-10 basis, and (iv) the conversion ratio for each share of outstanding preferred stock which is convertible into our common stock was proportionately reduced on a 1-for-10 basis. All of the outstanding common stock share numbers (including shares of common stock into which our outstanding convertible preferred stock shares are convertible), share prices, exercise prices and per share amounts have been adjusted in these consolidated statements, on a retroactive basis, to reflect this l-for-10 reverse stock split for all periods presented. The par value per share and the authorized number of shares of common stock and convertible preferred stock were not adjusted because of the reverse stock split.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Liquidity

These condensed consolidated financial statements are prepared on a going concern basis that contemplates the realization of assets and extinguishment of liabilities in the normal course of business. The Company has incurred net operating losses and negative cash flows from operations since inception. As of March 31, 2018, and December 31, 2017, the Company has an accumulated deficit of $171,918 and $164,487 and, as of such dates, did not have sufficient capital to fund its planned operations. Because of the Company’s recurring losses from operations and negative cash flows, the Company’s independent registered public accounting firm included an explanatory paragraph in its report on the Company’s consolidated financial statements as of, and for the year ended, December 31, 2017 that such factors raise substantial doubt about the Company’s ability to continue as a going concern. To continue its operations, the Company must achieve profitable operations and/or obtain additional financing. Until the Company generates revenue at a level to support its cost structure, the Company expects to continue to incur substantial operating losses and net cash outflows. The Company may never become profitable and even if it does attain profitable operations, it may not be able to sustain profitability or positive cash flows on a recurring basis.

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The Company will need to raise further capital in the future to service its debt or fund its operations until the time it can sustain positive cash flows. There can be no assurance that the Company will be successful in raising additional capital or that such capital, if available, will be on terms that are acceptable to the Company. If the Company is unable to raise sufficient additional capital, it may be compelled to reduce the scope of its operations and planned capital expenditures or sell certain assets, including intellectual property assets.

The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business, and, as such, the condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence.

Basis of Presentation

The condensed consolidated balance sheet as of March 31, 2018, the condensed consolidated statements of operations and condensed consolidated statements of comprehensive loss for the three months ended March 31, 2018 and 2017 and the condensed consolidated statements of cash flows for the three months ended March 31, 2018 and 2017 and the condensed consolidated statement of stockholders’ deficit for the three months ended March 31, 2018 are unaudited. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted counting principles in the United States (U.S. GAAP) and in the opinion of management, reflect all adjustments of a normal and recurring nature that are necessary for the fair presentation of the Company’s condensed consolidated financial statements included in this report. The condensed consolidated financial data disclosed in these notes to the condensed consolidated financial statements related to the three-month period are also unaudited. The condensed consolidated results of operations for the three months ended March 31, 2018 are not necessarily indicative of the results to be expected for the year ending December 31, 2018, or for any other future annual or interim period. The consolidated balance sheet as of December 31, 2017 included herein was derived from the audited consolidated financial statements as of that date. These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements included in its Annual Report filed on Form 10-K for the year ended December 31, 2017, with the SEC on March 5, 2018.

Principles of Consolidation

The accompanying condensed consolidated financial statements include the accounts of Restoration Robotics, Inc. and its wholly owned subsidiaries, which are organized in the United States, United Kingdom, Spain, Hong Kong and South Korea. All significant intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Significant estimates and assumptions made in the accompanying condensed consolidated financial statements include, but are not limited to revenue recognition, the fair value of common stock, and the recoverability of the Company’s net deferred tax assets and related valuation allowance. The Company evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors and adjusts those estimates and assumptions when facts and circumstances dictate. Actual results could materially differ from those estimates.

Reclassification

Certain amounts in the prior year's condensed consolidated balance sheet have been reclassified to conform to the current period's presentation. These reclassifications had no impact on the previously reported consolidated financial statements for the year ended December 31, 2017.

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Concentration of Customers

For the three months ended March 31, 2018, no customers accounted for more than 10% of the Company’s revenue. For the three months ended March 31, 2017, two customers accounted for 13% and 16% of the Company’s revenue. As of March 31, 2018, no customers accounted for more than 10% of the Company’s accounts receivable. As of December 31, 2017, two customers accounted for 10% and 11% of the Company’s accounts receivable.

JOBS Act Accounting Election

The Company is an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued after the enactment of the JOBS Act until those standards apply to private companies. The Company has elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that it is (i) no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, these condensed consolidated financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates.

Recently Issued Accounting Standards Not Yet Adopted

In May 2014, the Financial Accounting Standards Board (FASB) issued ASU No. 2014‑09, Revenue from Contracts with Customers (Topic 606), as amended by ASU No. 2015-14, ASU No. 2016-08, ASU No. 2016-10, ASU No. 2016-12, and ASU No. 2016-20, collectively, ASU 2014-09. ASU 2014-09 establishes a principle for recognizing revenue upon the transfer of promised goods or services to customers in an amount that reflects the expected consideration received in exchange for those goods or services and provides guidance on the recognition of costs related to obtaining and fulfilling customer contracts. For public entities, this standard is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. For all other entities, this standard is effective for annual reporting periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. Early adoption is permitted. ASU 2014‑09 may be adopted either retrospectively to each prior period presented (full retrospective method) or with the cumulative effect recognized as of the date of initial application (modified retrospective method). The Company expects to adopt this standard effective January 1, 2019 using the modified retrospective adoption method. The Company’s preliminary assessment of areas to be impacted by the new standard identified possible impact to the deferral of costs to obtain a contract, which are primarily commission expense directly incurred because of sales of products and related support, and the allocation of revenue between products and support and maintenance for certain arrangements. While the Company continues to assess the potential impact of the new standard, including the areas described above, it has not yet quantified the impact the new standard may have on its consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016‑02, Leases (Topic 842), or ASU 2016‑02, which requires lessees to record most leases on their balance sheets but recognize the expenses on their income statements in a manner similar to current practice. Under ASU 2016‑02, a lessee would recognize a lease liability for the obligation to make lease payments and a right‑to‑use asset for the right to use the underlying asset for the lease term. For public entities, this standard is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period. For all other entities, this standard is effective for annual reporting periods beginning after December 15, 2019, and interim periods within annual periods beginning after December 15, 2020. Early adoption is permitted. The Company is currently evaluating the impact and materiality that this standard will have on its condensed consolidated financial statements. However, the Company does expect an increase in its consolidated assets and liabilities upon adoption of this standard.

3. NET LOSS PER SHARE

Net Loss Per Share

Basic net loss per share is calculated by dividing net loss by the weighted-average number of common shares outstanding during the period, without consideration for common stock equivalents. Diluted net loss per share is computed by dividing net loss by the weighted-average number of common share equivalents outstanding for the period determined using the treasury-stock method. For purposes of this calculation, convertible preferred stock, preferred stock warrants and stock options are common stock equivalents and are only included in the calculation of diluted net loss per share when their effect is dilutive.

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The following outstanding shares of common stock equivalents were excluded from the calculation of diluted net loss per share attributable to common stockholders for the periods presented because including them would have been antidilutive:

 

 

 

4. FAIR VALUE MEASUREMENTS

Cash and cash equivalents, restricted cash, accounts receivable, accounts payable, and accrued liabilities approximate fair market value because of the short-term nature of those instruments. The Company’s lease obligation, term loan and Convertible Notes have fair values that approximate their carrying value.

U.S. GAAP establishes a framework for measuring fair value and a fair value hierarchy based on the inputs used to measure fair value. This framework maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the observable inputs be used when available. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It applies to both items recognized and reported at fair value in the condensed consolidated financial statements and items disclosed at fair value in the notes to the condensed consolidated financial statements.

Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from independent sources. Unobservable inputs reflect assumptions that market participants would use in pricing the asset or liability based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the transparency of inputs as follows:

Level 1 - Quoted prices are available in active markets for identical assets or liabilities as of the report date. A quoted price for an identical asset or liability in an active market provides the most reliable fair value measurement because it is directly observable to the market.

Level 2 - Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the report date. The nature of these securities includes investments for which quoted prices are available but traded less frequently and investments that are fair valued using other securities, the parameters of which can be directly observed.

Level 3 - Securities that have little to no pricing observability as of the report date. These securities are measured using management’s best estimate of fair value, where the inputs into the determination of fair value are not observable and require significant management judgment or estimation.

A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. However, the determination of what constitutes “observable” requires significant judgment by the Company. The categorization of a financial instrument within the hierarchy is based upon the pricing transparency of the instrument and does not necessarily correspond to the Company’s perceived risk of that instrument.

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The following tables summarize the levels of fair value measurements of the Company’s cash equivalents:

 

 

 

5. BALANCE SHEET COMPONENTS

Inventory

Inventory consists of the following:

 

 

Property and Equipment, Net

Property and equipment, net consist of the following:

 

 

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Depreciation and amortization expense was $132 and $142 for three months ended March 31, 2018 and 2017, respectively.  

 

6. COMMITMENTS AND CONTINGENCIES

Operating Leases

The Company has various operating leases including 23,000 square feet of office space in San Jose, California, which expires in April 2022.

Aggregate future minimum lease payments required under the Company’s operating leases as of March 31, 2018 are as follows:

 

 

Total rent expense was $103 and $105 for three months ended March 31, 2018 and 2017.

Commitments

The Company has two master agreements and a component pricing agreement with Evolve Manufacturing Technologies, Inc. (Evolve) for the supply of the ARTAS System and consumable products. The terms of these master agreements are substantially similar. The master agreement for the sale of ARTAS Systems was effective beginning on April 1, 2016 and the master agreement for the sale of kits used with the ARTAS System was effective beginning on March 1, 2016. Both agreements are effective for an initial term of two years and will continue to automatically renew for additional twelve-month periods, subject to either party’s right to terminate the agreement upon 180 days advance notice during the initial term, if our quarterly forecasted demand falls below 75% of our historical forecasted demand for the same period in the previous year or upon 120 days’ advance notice after the initial term. Under the agreements, the Company has future purchase commitments totaling $2,200 as of March 31, 2018.

In March 2018, the Company received U.S. FDA 510(k) clearance to expand the ARTAS System technology to include an implantation functionality. Based on manufacturing changes associated with the ARTAS system, the Company determined that certain components procured or expected to be procured by Evolve, will be in excess of expected demand or usage. Although the Company will be taking steps to minimize the adverse impact on the Company’s business, based on information available as of March 31, 2018, the Company’s management recorded a loss contingency accrual of $715 which is reported in “Cost of revenue” in the condensed consolidated statements of operations for the three-month ended March 31, 2018 and included in “Other accrued liabilities” on the condensed consolidated balance sheets as of March 31, 2018.

Licensing Agreements

In July 2006, the Company entered into a license agreement with Rassman Licensing, LLC (Rassman) for non-exclusive, royalty bearing, non-transferable, perpetual, world-wide rights for use on approved fields relating to robotically controlled hair removal and implantation procedures. In consideration for this license, the Company paid Rassman a one-time payment of $1,000. The agreement terminates on May 9, 2020. In February 2012, the Company amended its license agreement with Rassman. In exchange for a one-time $400 payment to Rassman, the Company now has a fully paid royalty-free license to a patent subject to this license agreement. Royalties for the three months ended March 31, 2018 and 2017 were $0.

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In July 2006, the Company entered into a license agreement with HSC Development, LLC for exclusive non-transferable, royalty-free worldwide rights for use in approved fields relating to a computer-controlled system in which a device is carried on a mechanized arm for extraction or implantation of a follicular unit without manual manipulation. In consideration for this license, the Company paid HSC Development, LLC a one-time payment of $25 and issued 2,500 shares of the Company’s common stock.  The agreement terminates on July 27, 2024.

7. LONG-TERM DEBT

Loan and Security Agreement

In May 2015, the Company entered into a loan and security agreement with Oxford Finance, LLC (Oxford) (the Oxford Agreement). Under the terms of the loan and security agreement, the Company borrowed $20,000 with an interest rate at the greater of (i) 8.5% per annum or (ii) U.S. Dollar LIBOR rate plus 8.0% per annum, which is collateralized by all personal property of the Company, excluding intellectual property, and issued 10-year warrants to purchase 110,486 shares of Series C Preferred Stock at $7.15 per share. No warrants were exercised in the first quarter of 2018. The estimated fair value of the warrants at issuance was recorded as a discount on the loan and amortized into interest expense over the expected life of the loan. In connection with the loan agreement, the Company recorded $246 of credit facility fees and $153 of debt issuance cost as of January 31, 2015. The credit facility fees and debt issuance costs are a discount on the debt and are being amortized to interest expense over the term of the loan using the effective-interest method. The loan will mature in July 2019, at which time the Company must repay the outstanding principal balance which includes a final payment of $1,300. The outstanding balance on the loan was $11,300 and accrued interest totaled $83 as of March 31, 2018. The interest rate was 10.3% at March 31, 2018.

Borrowings under the Oxford Agreement are collateralized by all personal property of the Company, excluding intellectual property. The Agreement includes customary restrictive covenants that impose operating and financial restrictions on the Company, including restrictions on our ability to take actions that could be in the Company’s best interests. These restrictive covenants include operating covenants restricting, among other things, the Company’s ability to incur additional indebtedness, effect certain acquisitions or make other fundamental changes. The Company was in compliance with all of the covenants as of March 31, 2018 and December 31, 2017.

The scheduled principal payments on the outstanding borrowings as of March 31, 2018 are as follows:

 

 

The entire outstanding principal balance plus accrued interest was paid off by the Company on May 10, 2018 in connection with the Company’s debt financing transactions in May 2018. Refer to Note 12 for additional information.

8. COMMON STOCK RESERVED FOR ISSUANCE

The Company is required to reserve and keep available out of its authorized but unissued shares of common stock a number of shares sufficient to affect the conversion of all outstanding shares of convertible preferred stock, of which, there are none, plus options granted and available for grant under the incentive plans.

 

 

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9. STOCK OPTION PLAN

2005 and 2015 Plan

The Company granted incentive stock options (ISOs) and non-statutory stock options (NSOs) pursuant to its 2005 Stock Option Plan (the 2005 Plan) until the Board of Directors approved the 2015 Stock Option Plan (the 2015 Plan), and all remaining shares available for future award under the 2005 Plan were transferred to the 2015 Plan and the 2005 Plan was terminated.  The Company granted ISOs and NSOs pursuant to its 2015 Plan until the 2017 Equity Incentive Plan (the 2017 Plan) was approved by the Board of Directors and became effective on October 11, 2017.  As a result of the 2017 Plan becoming effective, all remaining shares available for future award under the 2015 Plan were transferred to the 2017 Plan, the 2015 Plan was terminated, and no further grants will be made under the Company’s 2005 Plan and the 2015 Plan.  Any outstanding stock awards granted under the 2005 Plan and the 2015 Plan will remain outstanding, subject to the terms of the Company’s 2005 Plan and 2015 Plan and the applicable stock award agreements, until such outstanding stock awards that are stock options are exercised or until they terminate or expire by their terms, or until such stock awards are fully settled, terminated or forfeited.

2017 Plan

The Company’s 2017 Plan provides for the grant of ISOs, NSOs, stock appreciation rights, restricted stock awards, restricted stock unit awards, and other forms of equity compensation to employees, directors and consultants. In addition, the Company’s 2017 Plan provides for the grant of performance cash awards to employees, directors and consultants.

 

The Company recognized stock-based compensation expense for its employees and non-employees in the accompanying consolidated statements of operations as follows:

 

 

Determination of Fair Value

The estimated grant-date fair value of all of the Company’s stock-based awards was calculated using the Black-Scholes-Merton option pricing model, based on the following assumptions:

 

 

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The following table summarizes stock option activity under the Company’s stock option plan:

 

 

The weighted-average grant date fair value of options granted was $2.75 per share for three months ended March 31, 2018. There were no options granted for the three months ended March 31, 2017.

The total intrinsic value of options exercised was $14.8 and $0 for three months ended March 31, 2018 and 2017, respectively.

Unamortized stock-based compensation was $1.200 as of March 31, 2018, which is expected to be recognized over a weighted-average period of approximately 3.10 years.

10. INCOME TAXES

The Company generated a loss for the three months ended March 31, 2018 and incurred $13.0 of tax expense for the three months ended March 31, 2018. The Company’s effective tax rate is (0.17)% for income tax for the three months ended March 31, 2018 and the Company expects that its effective tax rate for the full year 2018 will be (0.17)%. Based on available evidence, including cumulative losses since inception and expected future losses, the Company has determined that it is more likely than not that the Company’s U.S. federal, U.S. state and Korea deferred tax assets will not be realized and therefore a valuation allowance has been provided on these net deferred tax assets.

The Company has substantial net operating loss carry forwards available to offset future taxable income for U.S. federal and state income tax purposes. The Company’s ability to utilize its net operating losses may be limited due to changes in its ownership as defined by Section 382 of the Internal Revenue Code (the Code). Under the provisions of Sections 382 and 383 of the Code, a change of control, as defined in the Code, may impose an annual limitation on the amount of the Company’s net operating loss and tax credit carryforwards, and other tax attributes that can be used to reduce future tax liabilities.

The Company files tax returns for U.S. federal and state tax returns along with tax returns in the United Kingdom, Hong Kong, Spain and South Korea. The Company is not currently subject to any income tax examinations. Since the Company’s inception, the Company had incurred losses from its U.S. operations, which generally allows all tax years to remain open.

Beginning in first quarter of 2018, the Company is subject to new provisions of the tax law, including provisions related to Global Low Taxed Intangible Income (GILTI), Foreign Derived Intangible Income deductions (FDII), and other changes. However, due to the Company’s losses and full valuation allowance in the U.S., these were determined to have no material impact to the Estimated Annual Effective Tax Rate due to the full Valuation Allowance in the U.S.

Uncertain Tax Positions

Effective January 1, 2009, the Company adopted ASC 740-10, which requires that the Company recognize the financial statement effects of a tax position when it becomes more likely than not, based upon the technical merits, that the position will be sustained upon examination. The gross amount of unrecognized tax benefits as of March 31, 2018 is approximately $1,400 and related to the reserve on R&D credits, none of which will affect the effective tax rate if recognized due to the valuation allowance. The Company does not expect any material changes in the next 12 months in unrecognized tax benefits.

The Company recognizes interest and/or penalties related to uncertain tax positions. To the extent accrued interest and penalties do not ultimately become payable, amounts accrued will be reduced and reflected in the period that such determination is made. The interest and penalties are recognized as other expense and not tax expense. The Company currently has no interest and penalties related to uncertain tax positions.

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11. SEGMENT AND GEOGRAPHIC INFORMATION

The Company has determined that it operates in a single operating segment and has one reportable segment, as its Chief Executive Officer, reviews financial information presented on a consolidated basis for purposes of making operating decisions, allocating resources, and evaluating financial performance. The Company does not assess the performance of individual product line on measures of profit or loss, or asset-based metrics. Therefore, the information below is presented only for revenues by geography.

 

The following table reflects revenue by geographic area by customer location:

 

 

As of March 31, 2018, and December 31, 2017, all long-lived assets were located within the United States.

12. SUBSEQUENT EVENTS

On May 10, 2018, the Company entered into a Loan and Security Agreement with Solar Capital Ltd. and certain other lenders (collectively, the “Lenders”) thereunder (the “Solar Agreement”).  Under the terms of the Solar Agreement, the Company borrowed $20,000 with an interest rate at U.S. Dollar LIBOR plus 7.95% per annum. All amounts borrowed pursuant to the Solar Agreement are secured by liens on all personal property of the Company, excluding intellectual property. Monthly payments on any amounts drawn shall consist of the interest only payments for the first 18 months, followed by payments of principal and accrued interest on a monthly basis thereafter until April 2022, which is the four year anniversary of the date of the Solar Agreement.   In connection with the Solar Agreement, the Company issued to the Lenders warrants to purchase an aggregate of 161,725 shares of its common stock exercisable at a price of $3.71 per share.  

The Company used approximately $10,100 of the net proceeds to repay the entire outstanding principal balance and accrued interest under its existing loan agreement with Oxford Finance LLC and terminated the loan agreement with Oxford.

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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 consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q and with our audited financial statements and notes thereto in the Company’s Annual Report filed on Form 10-K for the year ended December 31, 2017, filed with the Securities and Exchange Commission (SEC) and other filings we have made with the SEC.

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements are often identified by the use of words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “estimate,” or “continue,” and similar expressions or variations. These statements are based on the beliefs and assumptions of our management based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified herein, and those discussed in the section titled “Risk Factors,” set forth in Part II, Item 1A of this Form 10-Q and in our other SEC filings, including the Prospectus. You should review the risk factors for a more complete understanding of the risks associated with an investment in our securities. We disclaim any obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements. Therefore, you should not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this Quarterly Report on Form 10-Q. Our fiscal year end is December 31, and references throughout this Quarterly Report on Form 10-Q to a given fiscal year are to the twelve months ended on that date.

Overview

We are a medical technology company developing and commercializing a robotic device, the ARTAS^® System, which assists physicians in performing many of the repetitive tasks that are a part of a follicular unit extraction, or FUE surgery, a type of hair restoration procedure. We believe the ARTAS^® System is the first and only physician assisted robotic system that can identify and dissect hair follicular units directly from the scalp, create recipient implant sites and robotically implant the hair follicles into the implant sites. In addition to the ARTAS^® System, we also offer the ARTAS Hair Studio application, an interactive three-dimensional patient consultation tool that enables a physician to create a simulated hair transplant model for use in patient consultations. We received clearance from the U.S. Food and Drug Administration, or FDA, in April 2011 to market the ARTAS^® System in the U.S., and we have sold the ARTAS^® System into 29 other countries. In March 2018, we received 510(k) clearance from the FDA to expand the ARTAS^® technology to include implantation and plan to begin offering this additional functionality before the end of 2018. As of March 31, 2018, we have sold 97 ARTAS Systems in the U.S. and 164 internationally. As of March 31, 2018, the ARTAS^® System and ARTAS Hair Studio application are protected by over 80 patents in the U.S. and over 110 international patents.

On October 11, 2017, our Registration Statement on Form S-1 (File No. 333-220303) relating to our initial public offering (IPO) of its common stock was declared effective by the Securities and Exchange Commission (SEC). Pursuant to such Registration Statement, we sold an aggregate of 3,897,910 shares of its common stock (inclusive of 322,910 shares of common stock from the subsequent exercise of the over-allotment option granted to the underwriters) at a price of $7.00 per share for aggregate cash proceeds of approximately $22.1 million after deducting offering costs and commissions of $5.2 million.

We have funded our operations to date primarily from the issuance and sale of our common stock in our IPO, private placements of our equity securities and, to a lesser extent, through debt financings, exercises of our common stock warrants and payments from our customers. As of March 31, 2018, we had cash and cash equivalents of $16.5 million.

On May 10, 2018, we entered into a Loan and Security Agreement with Solar Capital Ltd. and certain other Lenders thereunder, or the Solar Agreement.   Pursuant to the terms of the Solar Agreement, we borrowed $20.0 million with an interest rate at U.S. Dollar LIBOR plus 7.95% per annum. All amounts borrowed under the Solar Agreement are secured by liens over all personal property of the Company, excluding intellectual property. Monthly payments on any amounts drawn shall consist of the interest only payments for the first 18 months, followed by payments of principal and accrued interest monthly thereafter until the four-year anniversary of the date of the Solar Agreement. In connection with the Solar Agreement, we granted the Lenders warrants to purchase an aggregate of 161,725 shares of our common stock exercisable at a price of $3.71 per share.

We used approximately $10.1 million of the net proceeds to repay the entire outstanding principal balance and accrued interest under our existing loan agreement with Oxford Finance, LLC and terminated our loan agreement with Oxford.

Factors Affecting our Results of Operations

We believe there are several important factors that have impacted, and that we expect will impact, our results of operations.

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Adoption of the ARTAS System

The growth of our business depends on our ability to gain broader acceptance of the ARTAS System and the ARTAS procedure by successfully marketing and distributing the ARTAS System and the ARTAS procedure. If we are unable to successfully commercialize our ARTAS System and the ARTAS procedure, we may not be able to generate sufficient revenue to achieve or sustain profitability. In the near term, we expect we will continue to operate at a loss and we anticipate we will finance our operations principally through offerings of our capital stock and by incurring debt. If we are unable to raise adequate additional capital, we will be unable to maintain our commercialization efforts and our revenue could decline.

Significant Investment in our Sales and Marketing

The Company has a new leadership team, made certain strategic changes to and investments in our U.S. sales and global marketing organizations, which included terminating certain personnel and hiring new personnel and realigning our reporting and leadership structure in the sales organization. For example, throughout 2018 we are increasing the size of our U.S. sales force by hiring sales professionals with extensive experience selling capital equipment and equipment to physicians in the aesthetic market. Strategically, we have been focused on our branding and have consolidated our regional marketing teams to standardize our messaging and focus of our marketing spending with an aim to be more efficient and cost-effective. As a result, we have seen a reduction in and improved efficiency of our marketing spending.

While we increased revenue in 2017 because of increased unit sales, these sales initiatives have also increased our sales and marketing expenses. Furthermore, we anticipate as we continue to advance the commercialization of the ARTAS System, our sales and marketing expenses will continue to increase in the near term.

Revenue Composition and Trends

The following table reflects revenue by category:

 

 

We derive our revenue from the sale and service of ARTAS Systems and procedure-based fees.

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Historically, the majority of our revenue and our revenue growth has been generated through system sales. While we would expect our procedure-based fees to continue to increase as our installed base of ARTAS Systems grows worldwide, the total number of procedures has not increased proportionally with the increase in our installed base and the number of procedures performed tends to vary from quarter-to-quarter. We sold eight ARTAS Systems during the three months ended March 31, 2018, representing an aggregate installed base growth of 3.2% from December 31, 2017, or 253 to 261 systems, yet our procedure-based fees increased by 18% compared to the same period in 2017. While procedure-based fees increased more than the installed base of ARTAS Systems during the aforementioned periods, we believe that revenue from procedure-based fees may not grow proportionally as compared to the increase in our installed base and that it could vary from quarter-to-quarter due to a number factors, including:

In order to increase the number of procedures performed per ARTAS System, and in turn increase revenue from procedure-based fees, we have, in connection with the leadership and sales and marketing changes, initiated programs to assist certain physicians in marketing efforts, patient education and practice optimization to increase utilization of the ARTAS System. If these efforts are successful, we anticipate that the growth in procedure-based fees will increase and that quarterly fluctuations in the number of total procedures performed will be reduced.

Growth in Revenue from Markets Outside the U.S.

Since launching the ARTAS System in 2011, we have obtained clearance to sell our products in over 60 countries. In June 2012, we obtained our CE mark to sell our product into the European Economic Area, or EEA. We have sold into 37 countries and sell directly into the U.S., Korea, Hong Kong, Singapore, Spain, Poland, Benelux, Scandinavia, Portugal, the Netherlands and through distributors in the other countries. We obtained clearance to sell in China in September 2016.

Revenue from markets outside of the U.S accounted for 55% of our total revenue in the first quarter of 2018, relatively unchanged from the same period in 2017. Although we will continue to invest resources outside of the U.S., including expansions into new international markets, we anticipate that the strategic shift in our sales strategy towards the U.S. market will impact the revenue mix between the U.S. and non-U.S. markets. However, the strategic shift may not take full effect until after December 31, 2018 due to the recent onboarding of our new Vice President of Sales and the anticipated expansion of our Regional Sales Managers throughout 2018.

The ARTAS System unit sales declined in the first quarter of 2018 relative to the first quarter of 2017 because of decreased unit sales in the U.S., Europe and Middle East and Asia Pacific regions, partially offset by increased units in the rest of the world region as well as increased procedure-based fees internationally.

We expect our operating expenses to increase because of increased sales and marketing activity to promote penetration in markets outside the U.S. where we already sell the ARTAS System and geographic expansion into new markets.

Factors Affecting Comparability

We anticipate that our quarterly results of operations may fluctuate for the foreseeable future due to several factors, including the performance of our direct sales force and international distributors and unanticipated interruptions and expenses related to our operations. In addition, due to the long lead time to finalize ARTAS System unit sales with our physician customers, and the significant impact each unit sale has on a period’s revenue due to the price of each unit, our quarterly revenue may not be comparable from one period to another.

Furthermore, our industry is characterized by seasonally lower demand during the third calendar quarter of the year, when both physicians and prospective patients take summer vacations. A detailed discussion of these and other factors that impact our business is provided in the “Risk Factors” section in this Quarterly Report on Form 10-Q.

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Results of Operations

Three Months Ended March 31, 2018 and 2017: