hair-10q_20190331.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 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  March 31, 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: 001-38238

 

Restoration Robotics, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

06-1681204

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer
Identification No.)

 

128 Baytech Drive

San Jose, CA

95134

(Address of principal executive offices)

(Zip Code)

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 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, 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.

 

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  

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

Title of each class

 

Name of each exchange on which registered

 

Ticker Symbol

Common Stock, $0.0001 par value per share

 

The Nasdaq Global Market

 

HAIR

 

As of May 3, 2019, the registrant had 40,857,012 shares of common stock, $0.0001 par value per share, outstanding.

 

 

 

 


 

Table of Contents

 

 

 

Page

Part I.

Financial Information

2

Item 1.

Condensed Consolidated Financial Statements (unaudited)

2

 

Condensed Consolidated Balance Sheets

2

 

Condensed Consolidated Statements of Operations

3

 

Condensed Consolidated Statements of Comprehensive Loss

4

 

Condensed Consolidated Statement of Stockholders’ Equity (Deficit)

5

 

Condensed Consolidated Statements of Cash Flows

6

 

Notes to the Condensed Consolidated Financial Statements

7

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

23

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

31

Item 4.

Controls and Procedures

31

PART II.

OTHER INFORMATION

32

Item 1.

Legal Proceedings

32

Item 1A.

Risk Factors

32

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

65

Item 3.

Defaults Upon Senior Securities

65

Item 4.

Mine Safety Disclosures

65

Item 5.

Other Information

66

Item 6.

Exhibits

67

Signatures

68

 

 

i


 

PART I

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

RESTORATION ROBOTICS, INC.

Condensed Consolidated Balance Sheets

(Unaudited)

(in thousands, except for shares and per share data)

 

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

ASSETS

 

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

14,957

 

 

$

16,122

 

Accounts receivable, net of allowance of $1,963 and $1,772 as of March 31, 2019 and December 31, 2018, respectively

 

 

6,699

 

 

 

6,569

 

Inventory

 

 

5,207

 

 

 

5,522

 

Prepaid expenses and other current assets

 

 

1,239

 

 

 

1,278

 

Total current assets

 

 

28,102

 

 

 

29,491

 

Property and equipment, net

 

 

1,471

 

 

 

1,299

 

Restricted cash

 

 

83

 

 

 

83

 

Other assets

 

 

166

 

 

 

100

 

TOTAL ASSETS

 

$

29,822

 

 

$

30,973

 

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

Accounts payable

 

$

4,193

 

 

$

3,815

 

Accrued compensation

 

 

1,515

 

 

 

1,771

 

Other accrued liabilities

 

 

2,920

 

 

 

2,337

 

Deferred revenue

 

 

1,384

 

 

 

1,407

 

Current portion of long-term debt, net of discount of $693 and $617 as of March 31, 2019 and December 31, 2018, respectively

 

 

1,974

 

 

 

49

 

Total current liabilities

 

 

11,986

 

 

 

9,379

 

Other long-term liabilities

 

 

655

 

 

 

594

 

Related party convertible promissory notes (Note 8)

 

 

5,000

 

 

 

 

Long-term debt, net of discount of $638 and $746 as of March 31, 2019 and December 31, 2018

 

 

17,655

 

 

 

19,418

 

TOTAL LIABILITIES

 

 

35,296

 

 

 

29,391

 

Commitments and Contingencies (Note 6)

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY (DEFICIT)

 

 

 

 

 

 

 

 

Convertible preferred stock, $0.0001 par value; 10,000,000 shares authorized, and no shares issued and outstanding as of March 31, 2019 and December 31, 2018

 

 

 

 

Common stock, $0.0001 par value; 300,000,000 shares authorized as of March 31, 2019 and December 31, 2018; 40,767,012 and 40,677,012 shares issued and outstanding as of March 31, 2019 and December 31, 2018, respectively

 

 

4

 

 

 

4

 

Additional paid-in capital

 

 

195,189

 

 

 

194,841

 

Accumulated other comprehensive loss

 

 

(14

)

 

 

(50

)

Accumulated deficit

 

 

(200,653

)

 

 

(193,213

)

TOTAL STOCKHOLDERS’ EQUITY (DEFICIT)

 

 

(5,474

)

 

 

1,582

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

 

$

29,822

 

 

$

30,973

 

 

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

2


 

RESTORATION ROBOTICS, INC.

Condensed Consolidated Statements of Operations

(Unaudited)

(in thousands, except for shares and per share data)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2019

 

 

2018

 

Revenue

 

$

5,394

 

 

$

5,005

 

Cost of revenue

 

 

2,457

 

 

 

3,185

 

Gross profit

 

 

2,937

 

 

 

1,820

 

Operating expenses:

 

 

 

 

 

 

 

 

Sales and marketing

 

 

4,570

 

 

 

4,384

 

Research and development

 

 

1,488

 

 

 

2,125

 

General and administrative

 

 

1,992

 

 

 

2,351

 

Merger related expenses

 

 

1,501

 

 

 

 

Total operating expenses

 

 

9,551

 

 

 

8,860

 

Loss from operations

 

 

(6,614

)

 

 

(7,040

)

Other expense, net:

 

 

 

 

 

 

 

 

Interest expense

 

 

(766

)

 

 

(358

)

Other expense, net

 

 

(46

)

 

 

(20

)

Total other expense, net

 

 

(812

)

 

 

(378

)

Net loss before provision for income taxes

 

 

(7,426

)

 

 

(7,418

)

Provision for income taxes

 

 

14

 

 

 

13

 

Net loss attributable to common stockholders

 

$

(7,440

)

 

$

(7,431

)

Net loss per share attributable to common stockholders, basic and diluted

 

$

(0.18

)

 

$

(0.26

)

Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted

 

 

40,753,012

 

 

 

28,962,269

 

 

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

3


 

RESTORATION ROBOTICS, INC.

Condensed Consolidated Statements of Comprehensive Loss

(Unaudited)

(in thousands)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2019

 

 

2018

 

Net loss

 

$

(7,440

)

 

$

(7,431

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

Cumulative translation adjustment

 

 

36

 

 

 

4

 

Comprehensive loss

 

$

(7,404

)

 

$

(7,427

)

 

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

4


 

RESTORATION ROBOTICS, INC.

Condensed Consolidated Statement of Stockholders’ Equity (Deficit)

(Unaudited)

(in thousands, except for shares)

 

 

Common Stock

 

 

Additional

Paid-in

 

 

Accumulated

Other

Comprehensive

 

 

Accumulated

 

 

Total

Stockholders’

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Income (Loss)

 

 

Deficit

 

 

Equity (Deficit)

 

Balance — December 31, 2018

 

40,677,012

 

 

$

4

 

 

$

194,841

 

 

$

(50

)

 

$

(193,213

)

 

$

1,582

 

Release of restricted stock awards

 

90,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

-

 

Stock-based compensation

 

 

 

 

 

 

 

348

 

 

 

 

 

 

 

 

 

348

 

Other comprehensive gain

 

 

 

 

 

 

 

 

 

 

36

 

 

 

 

 

 

36

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

(7,440

)

 

 

(7,440

)

Balance — March 31, 2019

 

40,767,012

 

 

$

4

 

 

$

195,189

 

 

$

(14

)

 

$

(200,653

)

 

$

(5,474

)

 

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

5


 

RESTORATION ROBOTICS, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(in thousands)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2019

 

 

2018

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net loss

 

$

(7,440

)

 

$

(7,431

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

149

 

 

 

132

 

Amortization of debt discounts and issuance costs

 

 

179

 

 

 

94

 

Stock-based compensation

 

 

348

 

 

 

125

 

Provision for bad debt

 

 

191

 

 

 

263

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(321

)

 

 

(876

)

Inventory

 

 

315

 

 

 

539

 

Prepaid expenses and other assets

 

 

(28

)

 

 

230

 

Accounts payable

 

 

403

 

 

 

300

 

Accrued and other liabilities

 

 

329

 

 

 

1,062

 

Deferred revenue

 

 

36

 

 

 

607

 

Net cash used in operating activities

 

 

(5,839

)

 

 

(4,955

)

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(346

)

 

 

(260

)

Net cash used in investing activities

 

 

(346

)

 

 

(260

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Proceeds from related party convertible promissory notes, net

 

 

4,984

 

 

 

 

Proceeds from exercised stock options

 

 

 

 

 

196

 

Principal payments on long-term debt

 

 

 

 

 

(2,000

)

Net cash provided by (used in) financing activities

 

 

4,984

 

 

 

(1,804

)

Effect of exchange rate changes on cash, cash equivalents and restricted cash

 

 

36

 

 

 

4

 

NET DECREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH

 

 

(1,165

)

 

 

(7,015

)

CASH, CASH EQUIVALENTS AND RESTRICTED CASH — Beginning of period

 

 

16,205

 

 

 

23,645

 

CASH, CASH EQUIVALENTS AND RESTRICTED CASH — End of period

 

$

15,040

 

 

$

16,630

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

 

 

 

 

 

 

 

 

Interest paid during the period

 

$

549

 

 

$

275

 

SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING INFORMATION:

 

 

 

 

 

 

 

 

Purchase of property and equipment included in accounts payable

 

$

25

 

 

$

10

 

Discounts in connection with amendment of long-term debt

 

$

130

 

 

$

 

 

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

 

 

6


 

RESTORATION ROBOTICS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(in thousands, except for shares, per share data and percentages)

1. Nature of Operations

Restoration Robotics, Inc. is a medical device 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) and implantation functionality for use in the field of hair transplantation and markets the ARTAS® Robotic System in the United States and certain other countries. In these notes to the unaudited condensed consolidated financial statements, the “Company” and “Restoration Robotics” refers to Restoration Robotics, Inc. and its subsidiaries on a consolidated basis.

Proposed Merger with Venus

On March 15, 2019, the Company entered into the Merger Agreement (the Merger Agreement) with Radiant Merger Sub Ltd., a company organized under the laws of Israel and a directly, wholly-owned subsidiary of the Company (“Merger Sub”), and Venus Concept Ltd., a company organized under the laws of Israel (Venus) to combine the companies in an all-stock transaction (the Merger). The Merger Agreement and the Merger have been approved by the Company’s board of directors and the board of directors of Venus. The transaction is expected to close in the third quarter of 2019, subject to customary closing conditions, including the approval by stockholders of the Company and Venus and receipt of all necessary regulatory approvals.

The Merger Agreement provides that, upon the terms and subject to the satisfaction or waiver of the conditions set forth therein, Merger Sub will be merged with and into Venus, with Venus continuing as the surviving corporation and a direct wholly-owned subsidiary of the Company.

Under the terms of the transaction, the Company and Venus shareholders will own approximately 15% and 85% of the combined company, respectively, on a fully diluted basis, without giving effect to the shares issued in the proposed equity financing that is expected to close immediately after the merger (the Equity Financing).  EW Healthcare Partners has committed to lead a $21,000 equity investment, priced at $0.825 per share (subject to adjustment for stock splits), in the combined company’s common stock contingent on the closing of the Merger. Additional investors committed to participating in the proposed equity financing include HealthQuest Capital, Madryn Asset Management, Longitude Capital Management, Fred Moll and Aperture Venture Partners. In addition to the equity financing, Fred Moll and InterWest Partners previously funded a $5.0 million convertible note to the Company, which will convert into the combined company’s common stock at the closing of the equity financing led by EW Healthcare, at a price of $0.825 per share (subject to adjustment for stock splits).

Concurrent with closing of the Merger, the Company anticipates effecting a reverse stock split. The Company expects to have approximately 283.2 million shares outstanding (or approximately 18.9 million shares outstanding after giving effect to an anticipated 1-for-15 reverse stock split) and after taking into account shares issued to the former Venus shareholders in the Merger, shares issued as part of the $21,000 equity investment, and shares issued upon conversion of the $5,000 convertible notes issued by the Company in February, 2019, as discussed in Note 8 to the condensed consolidated financial statements.

7


 

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, 2019, and December 31, 2018, the Company has an accumulated deficit of $200,653 and $193,213 and, as of such dates, and through the date of this filing, does 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, 2018 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.

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, 2019, the condensed consolidated statements of operations and condensed consolidated statements of comprehensive loss for the three months ended March 31, 2019 and 2018, the condensed consolidated statements of cash flows for the three months ended March 31, 2019 and 2018 and the condensed consolidated statement of stockholders’ equity (deficit) for the three months ended March 31, 2019 are unaudited. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting 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 periods are also unaudited. The condensed consolidated results of operations for the three months ended March 31, 2019 are not necessarily indicative of the results to be expected for the year ending December 31, 2019, or for any other future annual or interim period. The consolidated balance sheet as of December 31, 2018 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, 2018, with the SEC on March 20, 2019.

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, allowance for doubtful accounts, inventory valuation, stock-based

8


 

compensation, warranty accrual 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.

Cash, Cash Equivalents, and Restricted Cash

The Company considers all highly liquid investments with an original maturity of three months or less from the date of purchase to be cash equivalents. Cash and cash equivalents consist primarily of funds invested in readily available checking and savings accounts, investments in money market funds and short-term time deposits. The Company’s restricted cash is held in a separate money market account as collateral for credit cards.

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the balance sheets that sum to the total of the same amounts shown in the condensed consolidated statements of cash flows.

 

 

 

March 31, 2019

 

 

December 31, 2018

 

Cash and cash equivalents

 

$

14,957

 

 

$

16,122

 

Restricted cash

 

 

83

 

 

 

83

 

Total cash, cash equivalents and restricted cash in the condensed consolidated statements of cash flows

 

$

15,040

 

 

$

16,205

 

Segments

Operating segments are defined as components of an entity for which separate financial information is available and that is regularly reviewed by the Chief Operating Decision Maker (CODM) in deciding how to allocate resources to an individual segment and in assessing performance. The Company's CODM is its Chief Executive Officer. The Company has determined it operates in a single operating segment and has one reportable segment, as the CODM 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.

Concentration of Customers

For the three months ended March 31, 2019, one customer accounted for more than 10% of the Company’s revenue. For the three months ended March 31, 2018, no customer accounted for more than 10% of the Company’s revenue. As of March 31, 2019, and December 31, 2018, no customers accounted for more than 10% 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 (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 Adopted Accounting Standards

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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. ASU 2014-09 is required to be adopted, using either of two methods: (i) retrospective to each prior reporting period presented with the option to elect certain practical expedients as defined within ASU 2014-09; or (ii) retrospective with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application and providing certain additional disclosures. The Company adopted the new revenue standard on January 1, 2019, using the

9


 

modified retrospective transition method applied to those contracts which were not completed as of that date. See Note 3. Revenue, to our unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for additional details.

In June 2018, the FASB issued ASU No. 2018-7, Compensation – Stock Compensation (Topic 718)— Improvements to Nonemployee Share-Based Payment Accounting. This guidance supersedes ASC 505-50 and expands the scope of ASC 718 to include all share-based payment arrangements related to the acquisition of goods and services from both nonemployees and employees. The amendments should be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. The Company adopted this standard on January 1, 2019 using the modified retrospective adoption method. The adoption of this standard did not have a material impact on the Company’s condensed consolidated financial statements and related disclosures and no cumulative-effect adjustment was recorded to accumulated deficit at January 1, 2019.

Recently Issued Accounting Standards Not Yet Adopted

In February 2016, the FASB issued ASU No. 2016‑02, Leases (Topic 842), or ASU 2016‑02, as amended by ASU 2019-01 issued in March 2019, (collectively, 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. As an Emerging Growth Company, this standard is effective for the Company in 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 standard and its impact on the condensed consolidated financial statements. However, the Company does expect a material change in its consolidated assets and liabilities upon adoption of this standard.

3. REVENUE

Change in Accounting Principle

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). Topic 606 supersedes the revenue recognition requirements in Topic 605 Revenue Recognition (Topic 605) and requires entities to recognize revenue when control of the promised goods or services is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The FASB has issued several amendments to the standard, including clarifications on disclosure of prior-period performance obligations and remaining performance obligations.

The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the modified retrospective method). The Company adopted the standard effective January 1, 2019 using the modified retrospective method. This approach was applied to all contracts that were not completed as of January 1, 2019. The adoption of Topic 606 did not have a material impact on the Company’s historical net losses and, therefore, no adjustment was made to the opening balance of accumulated deficit at January 1, 2019. Therefore, the comparative 2018 period has not been adjusted and continues to be reported under Topic 605.

Topic 606’s core principle is that a reporting entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying this new guidance to contracts within its scope, an entity will:

 

Identify the contract(s) with a customer;

 

 

Identify the performance obligations in the contract;

 

 

Determine the transaction price;

 

 

Allocate the transaction price to the performance obligations in the contract; and

 

 

Recognize revenue when (or as) the entity satisfies a performance obligation.

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Impact on Financial Statements

 

In accordance with Topic 606, the disclosure of the impact of the change in accounting principle to the unaudited condensed consolidated statements of operations and balance sheets was as follows:

 

 

Three months ended March 31, 2019

 

Condensed Consolidated Statements of Operations Data

As Reported

 

 

Adjustments

 

 

Balance Without ASC 606 Adoption

 

Revenue

$

5,394

 

 

$

(169

)

 

$

5,225

 

Gross profit

 

2,937

 

 

 

(169

)

 

 

2,768

 

Total operating expenses

 

9,551

 

 

 

11

 

 

 

9,562

 

Loss from operations

 

(6,614

)

 

 

(180

)

 

 

(6,794

)

Net loss before provision for income taxes

 

(7,426

)

 

 

(180

)

 

 

(7,606

)

Net loss attributable to common stockholders

$

(7,440

)

 

$

(180

)

 

$

(7,620

)

Net loss per share attributable to common stockholders, basic and diluted

$

(0.18

)

 

$

(0.01

)

 

$

(0.19

)

Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted

 

40,753,012

 

 

 

 

 

 

 

40,753,012

 

 

 

 

March 31, 2019

 

Condensed Consolidated Balance Sheets Data

As Reported

 

 

Adjustments

 

 

Balance Without ASC 606 Adoption

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Prepaid expenses and other current assets

$

1,239

 

 

$

(132

)

 

$

1,107

 

Other assets

 

166

 

 

 

(48

)

 

 

118

 

Stockholders' deficit

 

 

 

 

 

 

 

 

 

 

 

Accumulated deficit

 

(200,653

)

 

 

(180

)

 

 

(200,833

)

 

Revenue Recognition

The Company generates revenue primarily through the sale and delivery of promised goods and services, which consists of the sale of ARTAS® and ARTAS® iX Systems, training on the systems, extended service contracts, consumables and marketing services. Revenue is recognized when control is transferred to customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for the goods or services. Sales prices are documented in the executed sales contract or purchase order prior to the transfer of control to the customer. Customers may enter into a separate extended service agreement (referred to as ARTAS Care) to purchase an extended warranty for products from the Company whereby the payment is due at the inception of the agreement or in monthly installment payments. Revenue for ARTAS Care is recognized ratably over the term of the agreement.

The Company also utilizes distributors to sell ARTAS® and ARTAS® iX Systems and related consumables in certain markets outside of the United States. The Company recognizes revenue when control of the goods or services is transferred to the distributors. Standard terms for all agreements with either end customers or distributors do not allow for right of return, refunds, payment contingent on obtaining financing or other terms that could impact the customer’s payment obligation. Payment terms for U.S. customers are generally at shipment, delivery, or within 30 day of shipment, while payment terms for customers outside of the U.S. vary between 30 and 180 days after shipment.

Performance Obligations, Determination and Allocation of Transaction Price and Method of Recognition

The Company's system sale arrangements generally contain multiple products and services. For these bundled sale arrangements, the Company accounts for individual products and services as separate performance obligations. These performance obligations include: ARTAS® or ARTAS® iX System, including related accessories and software license (considered as one performance obligation), product training, consumables (consisting of harvest or site making/implantation kits), extended service contracts and marketing services. All ARTAS® and ARTAS® iX Systems include an assurance-type standard warranty, generally for a 12-month period. ARTAS Care (extended warranty service contract) will commence at the expiration of the standard warranty period. For multiple performance obligations arrangements, the Company allocates revenue

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to each performance obligation based on its relative standalone selling price (SSP), which is based on a combination of observable prices or management’s best estimate of standalone selling price when an observable price is not available.

ARTAS® and ARTAS® iX Systems and consumables are performance obligations that are satisfied at a point in time (upon shipment), whereas ARTAS Care, product training, and marketing services are performance obligations that are satisfied over time (e.g. straight line over the performance period or as training and marketing services are performed).

The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied or partially unsatisfied at the end of the reporting period as follows (in thousands):

 

Revenue

2019

 

 

2020

 

 

2021

 

 

2022 and Thereafter

 

 

Total

 

System related

$

339

 

 

$

 

 

$

 

 

$

 

 

$

339

 

Procedure-based

 

238

 

 

 

 

 

 

 

 

 

 

 

 

238

 

Service-related fees

 

807

 

 

 

176

 

 

 

25

 

 

 

112

 

 

 

1,120

 

Total

$

1,384

 

 

$

176

 

 

$

25

 

 

$

112

 

 

$

1,697

 

Shipping and Freight Costs

Shipping and freight costs are treated as fulfillment costs. For shipments to end-customers, the customer bears the shipping and freight costs and has control of the product upon shipment. For shipments to distributors, the distributor bears the shipping and freight costs, including insurance, tariffs and other import/export costs. Additionally, sale taxes are excluded from revenue.

Practical Expedients

In connection with the Company’s adoption of Topic 606, the Company elected to use the following practical expedients (i) not to adjust the promised amount of consideration for the effects of a significant financing component when the Company expects, at contract inception, that the period between the Company's transfer of a promised product or service to a customer and when the customer pays for that product or service will be one year or less; (ii) to expense costs as incurred for costs to obtain a contract when the amortization period would have been one year or less; and (iii) not to recast revenue for contracts that begin and end in the same fiscal year.

Costs to Obtain Customer Contracts

Sales commissions and related expenses are considered incremental and recoverable costs of acquiring customer contracts. Except for sales commissions that would have been amortized in one year or less, which we have elected the practical expedient discussed above, certain sales commissions related to ARTAS Care and consumables that are sold bundled with the ARTAS® and ARTAS® iX Systems, are capitalized and amortized on a straight-line basis over the anticipated period of benefit, which we have estimated to be three years for ARTAS Care extended warranty service contracts and five years for consumables. We determined the period of benefit by taking into consideration the length of the customer contracts, the Company’s technology lifecycle, and other factors. Amortization expense is recorded in sales and marketing expense within the condensed consolidated statement of operations. As of March 31, 2019, short-term and long-term unamortized deferred compensation were $3 and $8, which are included in “Prepaid and other current assets” and “Other Assets,” respectively, on the condensed consolidated balance sheets.

12


 

Deferred Revenue (Remaining Performance Obligations)

The aggregate balance of remaining performance obligations represents contracted revenue that has not yet been recognized primarily from ARTAS Care extended warranty service contracts, product training and marketing services not yet rendered to customers.

 

 

Three months ended March 31, 2019

 

Balance at the beginning of the period

 

$

1,661

 

Additions

 

 

615

 

Recognition of deferred revenue

 

 

(579

)

Balance at the end of the period

 

$

1,697

 

Less: Deferred revenue - current

 

$

1,384

 

Deferred revenue - non-current (A)

 

$

313

 

 

(A)

Included in “Other long-term liabilities” on the condensed consolidated balance sheets as of March 31, 2019.

Disaggregation of Revenue

The Company disaggregates revenue from contracts with customers into geographical regions and by the timing of when goods and services are transferred. The Company determined that disaggregating revenue into these categories depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by regional economic factors.

The following tables provide information about disaggregated revenue from contracts with customers into geographic regions, and the nature of the products and services:

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2019

 

 

2018

 

United States

 

$

3,183

 

 

$

2,255

 

Europe and Middle East

 

 

1,115

 

 

 

973

 

Asia Pacific

 

 

688

 

 

 

1,104

 

Rest of World

 

 

408

 

 

 

673

 

Total revenue

 

$

5,394

 

 

$

5,005

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2019

 

 

2018

 

Systems

 

$

3,553

 

 

$

2,005

 

Procedure-based

 

 

1,362

 

 

 

2,473

 

Service-related fees

 

 

479

 

 

 

527

 

Total revenue

 

$

5,394

 

 

$

5,005

 

 

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4. 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.

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:

 

 

 

As of March 31,

 

 

 

2019

 

 

2018

 

Options to purchase common stock

 

 

3,970,513

 

 

 

1,950,853

 

Warrants for common stock

 

 

272,211

 

 

 

306,456

 

Total potential dilutive shares

 

 

4,242,724

 

 

 

2,257,309

 

 

 

5. 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 Term Loan with Solar and Convertible Promissory Notes (both discussed further in Note 8) 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.

14


 

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

 

 

 

Fair Value Measurements as of March 31, 2019

 

 

 

Quoted Prices

in Active

Markets

using Identical

Assets

(Level 1)

 

 

Significant

Other

Observable

Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash Equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market account

 

$

13,715

 

 

$

 

 

$

 

 

$

13,715

 

Restricted cash:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market account

 

 

83

 

 

 

 

 

 

 

 

 

83

 

Total assets

 

$

13,798

 

 

$

 

 

$

 

 

$

13,798

 

 

 

 

Fair Value Measurements as of December 31, 2018

 

 

 

Quoted Prices

in Active

Markets

using Identical

Assets

(Level 1)

 

 

Significant

Other

Observable

Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash Equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market account

 

$

13,968

 

 

$

 

 

$

 

 

$

13,968

 

Restricted cash:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market account

 

 

83

 

 

 

 

 

 

 

 

 

83

 

Total assets

 

$

14,051

 

 

$

 

 

$

 

 

$

14,051

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6. BALANCE SHEET COMPONENTS

Inventory

Inventory consists of the following:

 

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Raw materials

 

$

2,114

 

 

$

2,464

 

Work-in-process

 

 

92

 

 

 

323

 

Finished goods

 

 

3,001

 

 

 

2,735

 

Total inventory

 

$

5,207

 

 

$

5,522

 

Property and Equipment, Net

Property and equipment, net consist of the following:

 

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Equipment

 

$

3,844

 

 

$

3,531

 

Computer hardware and software

 

 

910

 

 

 

901

 

Leasehold improvements

 

 

874

 

 

 

874

 

Furniture and fixtures

 

 

457

 

 

 

457

 

Total property and equipment

 

 

6,085

 

 

 

5,763

 

Less: Accumulated depreciation and amortization

 

 

(4,614

)

 

 

(4,464

)

Total property and equipment, net

 

$

1,471

 

 

$

1,299

 

 

Depreciation and amortization expense was $149 and $132 for three months ended March 31, 2019 and 2018, respectively.

 

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7. COMMITMENTS AND CONTINGENCIES

Operating Leases

The Company has various operating leases including 23,000 square feet of office space and 2,500 square feet of manufacturing space in San Jose, California, which expire in April 2022 and April 2019, respectively. After April 2019, our manufacturing space is on a month-to-month lease arrangement.

Aggregate future minimum lease payments required under the Company’s operating leases as of March 31, 2019 are as follows:

 

Years Ending December 31,

 

 

 

 

2019 (remaining 9 months)

 

$

389

 

2020

 

 

534

 

2021

 

 

550

 

2022

 

 

188

 

Total future minimum lease payments

 

$

1,661

 

 

Total rent expense was $163 and $103 for three months ended March 31, 2019 and 2018, respectively.

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 up to $285 as of March 31, 2019.

In March 2018, the Company received U.S. FDA 510(k) clearance to expand the ARTAS® System technology to include an implantation functionality, referred to as ARTAS® iX. Based on manufacturing changes associated with the ARTAS® iX System, the Company determined that certain components procured or expected to be procured by Evolve, will be in excess of expected demand or usage based on the advance notice the Company provided to Evolve under the term of the agreement mentioned above. Additionally, in the fourth quarter of 2018, the Company recorded a $188 charge related to other excess purchase commitments from another vendor based on cost reduction changes in 2019. 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, 2019, the Company’s management recorded a loss contingency accrual of $473 which is included in “Other accrued liabilities” on the condensed consolidated balance sheets as of March 31, 2019.

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 perpetual license to a patent subject to this license agreement.  

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.

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Legal Proceedings

From time to time the Company is involved in litigation arising out of claims in the normal course of business. Based on the information presently available, management believes that there are no claims or actions pending or threatened against the Company, the ultimate resolution of which will have a material effect on the Company’s financial position, liquidity or results of operations, although the results of litigation are inherently uncertain.

Purported Shareholder Class Action

On May 23, 2018, a putative shareholder class action complaint was filed in Superior Court of the State of California, County of San Mateo (the “Superior Court”), captioned Wong v. Restoration Robotics, Inc., et al., No. 18CIV02609. On June 21, 2018 and June 28, 2018, two putative class action complaints were filed in the United States District Court for the Northern District of California, captioned Guerrini v. Restoration Robotics, Inc., et al., No. 5:18-cv-03712-EJD and Yzeiraj v. Restoration Robotics, Inc., et al., No. 5:18-cv-03883-BLF, respectively. On July 24, 2018, the U.S. Northern District Court related the Guerrini and Yzeiraj actions and reassigned the Yzeiraj action to Judge Edward J. Davila. The Wong and Guerrini complaints name the Company as defendants, and certain of its current and former executive officers and directors, certain of its venture capital investors and the underwriters in the Company’s IPO. The Yzeiraj complaint names the Company as defendants and certain of its current and former executive officers and directors. The Wong complaint asserts claims under Sections 11, 12(a)(2) and 15 of the Securities Act of 1933, or the Securities Act. The Guerrini and Yzeiraj complaints assert claims under Sections 11 and 15 of the Securities Act. The complaints all allege, among other things, that the Company’s Registration Statement filed with the SEC on September 1, 2017 and the Prospectus filed with the SEC on October 13, 2017 in connection with the Company’s IPO were inaccurate and misleading, contained untrue statements of material facts, omitted to state other facts necessary to make the statements made not misleading and omitted to state material facts required to be stated therein. The complaints seek unspecified monetary damages, other equitable relief and attorneys’ fees and costs.

On August 8, 2018, the Company, along with certain of its current and former executive officers and directors, filed a motion to dismiss the Wong complaint based on the forum selection clause designating the federal district courts as the exclusive forum for claims arising under the Securities Act contained in the Company’s Amended and Restated Certificate of Incorporation, and which asked the court in the alternative to stay the Wong action. Also, on August 8, 2018, the venture capital investor and underwriters’ defendants in the Wong action filed demurrers to the Wong complaint, and the Company, along with certain of its current and former executive officers and directors, joined in the venture capital investor defendants’ demurrer. A hearing on the Company’s motion to dismiss and the demurrers to the Wong complaint was held on October 24, 2018.  On October 25, 2018, the Court ordered the defendants’ demurrers to the complaint sustained with leave to amend and granted an extension of time for plaintiff to serve a First Amended Complaint until further order of the Court. On January 31, 2019, the Court stayed the case and stayed any decision on the Company’s motion to dismiss on forum selection grounds pending resolution of an appeal of Sciabacucchi v. Salzberg, a case addressing similar issues in Delaware.

On October 2, 2018, the U.S. Northern District Court granted a Motion for Consolidation of Related Actions, Appointment as Lead Plaintiff and Approval of Lead Counsel filed by Plaintiff Edgardo Guerrini, which consolidated the Guerrini and Yzeiraj actions under the caption In re Restoration Robotics, Inc. Securities Litigation, Case No. 5:18-cv-03712-EJD. On November 30, 2018, Lead Plaintiff Edgardo Guerrini filed a Consolidated Amended Complaint for violations of federal securities laws asserting the same claims, against the same defendants, as his original complaint but adding certain allegations in support of those claims. On January 29, 2019, the Company, along with certain of its current and former executive officers and directors, filed a motion to dismiss the Consolidated Amended Complaint for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6). The venture capital defendants and underwriter defendants filed joinders to the Company’s motion to dismiss on the same day. A hearing on the Company’s motion to dismiss is scheduled for July 11, 2019. The Company is unable to predict the date on which the District Court will issue any decision on the motion to dismiss at this time.

The Company believes that these lawsuits are without merit and management intends to vigorously defend against these claims.

8. LONG-TERM DEBT

Issuance of Related Party Convertible Promissory Notes

On February 28, 2019, the Company entered into a Note Purchase Agreement pursuant to which the Company raised $5,000 through the issuance of two unsecured subordinated convertible promissory notes (the Notes) to Frederic Moll, M.D., one of the Company’s directors, and Interwest Partners IX, LP, one of the Company’s stockholders affiliated with Gil Kliman, M.D., one of the Company’s directors (together, the Investors).

17


 

The maturity date of the Notes is August 28, 2020 (the Maturity Date). The Notes bear interest on the unpaid principal amount at a rate of eight percent (8.0%) per annum from the date of issuance. The Notes are unsecured and subordinate in priority to the Company’s existing obligations under the Solar Agreement.

All of the outstanding principal and unpaid accrued interest on the Notes will automatically be converted into shares of the same class and series of capital stock of the Company issued to other investors in any Qualified Financing to occur after the date of the Notes, at a conversion price equal to the price per share of the securities of the Company sold in such Qualified Financing. A “Qualified Financing” means the first issuance or series of related issuances of capital stock of the Company after the date of the Notes with gross proceeds to the Company of at least $20,000. The Company anticipates that the potential Equity Financing discussed above will constitute a Qualified Financing. Upon the occurrence of certain events of default or the Maturity Date, the Notes require the Company to repay the principal amount of the Notes and any unpaid accrued interest. Issuance costs associated with the Notes were not significant and accrued interest of $35 through March 31, 2019 is reported in “Other Long-Term Liabilities” on the condensed consolidated balance sheets.

Loan and Security Agreement

In May 2018, the Company entered into a Loan and Security Agreement and as subsequently amended (the Solar Agreement) with Solar Capital Ltd. (Solar) and certain other lenders thereunder (together with Solar, the Lenders), and Solar, as the Collateral Agent. The Solar Agreement consists of a four-year term loan for an aggregate principal amount of $20,000 (the Borrowings), for working capital, to fund the Company’s general business requirements and to repay indebtedness of the Company to Oxford Finance LLC (the Oxford Agreement). The Company used $10,085 of the loan proceeds to repay the outstanding principal of $8,667, a final payment fee of $1,300 plus accrued interest and prepayment fees of $118 under the Oxford Agreement. The Borrowings under the Solar Agreement bear interest through maturity at a rate equal to the U.S. Dollar LIBOR rate plus 7.95% per annum (the Interest Rate). The outstanding balance on the loan was $20,000 and accrued interest totaled $180 as of March 31, 2019. The Interest Rate was 10.1% at March 31, 2019.

Pursuant to the terms of the Solar Agreement, the Company shall make interest only payments until December 1, 2019 (the Interest Only Period). The Interest Only Period may be extended up to three additional months, if the Company achieves certain revenue and capital fundraising thresholds. Following cessation of the Interest Only Period, the Company shall make equal monthly payments on the outstanding principal balance of the Borrowings and any unpaid and accrued interest such that the Borrowings shall be fully repaid on May 1, 2022.

In addition, pursuant to the Solar Agreement, the Company issued the Lenders warrants (the Warrants) to purchase an aggregate of 161,725 shares of the Company’s common stock, $0.0001 par value per share, at an exercise price of $3.71 per share. The Warrants were immediately exercisable upon issuance, and excluding certain mergers or acquisitions, will expire on the ten-year anniversary of the date of issuance. The fair value of the Warrants issued was determined to be $404 using a Black-Scholes valuation model with the following assumptions: common stock price at issuance of $3.71 per share; exercise price of $3.71; risk-free interest rate of 2.97% based upon observed risk-free interest rates; expected volatility of 55.50% based on the Company’s implied volatility; expected term of ten years, which is the contractual life of the Warrants; and a dividend yield of 0%. The fair value of the Warrants was recorded as a debt discount within notes payable and an increase to additional paid-in capital on the Company’s condensed consolidated balance sheet. The debt discount is being amortized as interest expense over the term of the Solar Agreement, using the effective interest method.

The third-party transaction costs (not paid directly to the lenders) related to the debt of $404 are accounted for as a debt discount and classified within notes payable on the Company’s condensed consolidated balance sheet and amortized as interest expense over the term of the loan using the effective interest method. Unamortized debt discounts related to the Oxford Agreement and all fees paid directly to Solar and Oxford totaling $505 in connection with the debt financing in May 2018 were written off to “Other income (expense), net” in the condensed consolidated statements of operations.

The obligations under the Solar Agreement are secured by a lien on substantially all the Company’s property. The Solar Agreement contains certain affirmative covenants, negative covenants and events of default, including, covenants and restrictions that among other things, require the Company and its subsidiary to satisfy certain financial covenants including covenants requiring the Company to satisfy certain revenue and liquidity thresholds, and restricts the ability of the Company and its subsidiary’s ability to, incur liens, incur additional indebtedness, make loans and investments, engage in mergers and acquisitions, engage in asset sales or sale and leaseback transactions, and declare dividends or redeem or repurchase capital stock. A failure to comply with these covenants could permit the Lenders under the Solar Agreement to declare the Borrowings, together with accrued but unpaid interest and certain Prepayment Fees, to be immediately due and payable. On November 2, 2018, the Solar Agreement was amended to modify the compliance requirement for certain revenue and liquidity thresholds. As part of this amendment, the Company paid a fee of $50 to the Lenders and cancelled 161,725 Warrants (originally issued in May 2018, as mentioned above) and issued 161,725 new warrants of the Company’s common stock, $0.0001 par value per share, at an exercise price of $1.76 per share. All other terms of the Warrants were unchanged.

18


 

On February 13, 2019, the Company entered into a Third Amendment to the Loan and Security Agreement (the Third Amendment), which amended the Solar Agreement with the Lenders. Pursuant to the terms of the Third Amendment, the Solar Agreement was amended to modify the compliance requirement for certain liquidity thresholds to provide the Company with additional flexibility. As part of the Third Amendment, the Final Fee (as defined in the Solar Agreement) that is payable to the Lenders upon prepayment, default and maturity of the Solar Agreement, was amended and increased to $960. In addition, the Solar Agreement was amended to include certain additional changes to covenants covering certain operational milestones. As of March 31, 2019, the Company was in compliance with all covenants under the Solar Agreement, as amended.

The Company is also required to make mandatory prepayments of the Borrowings, subject to specified exceptions, upon defaulting on any payments of principal or interest on the Borrowings, the occurrence of certain specified defaults of the covenants in the Solar Agreement, the occurrence of a material adverse change in the business, operations or conditions of the Company and specified other events (each, an Event of Default). Upon the occurrence and continuation of an Event of Default, the Borrowings shall accrue at the Interest Rate plus 4.0%.

If all or any of the Borrowings are prepaid or required to be prepaid under the Solar Agreement, then the Company shall pay, in addition to such prepayment, a prepayment premium (the Prepayment Premium) equal to (i) with respect to any such prepayment paid on or prior to May 1, 2019, 3.0% of the principal amount of the Borrowings being prepaid, (ii) with respect to any prepayments paid after May 1, 2019 but on or prior to May 1, 2020, 2.0% of the principal amount of the Borrowings being prepaid and (iii) with respect to any prepayments paid after May 1, 2020 but on or prior to May 1, 2021, 1.0% of the principal amount of the Borrowings being prepaid. Notwithstanding the foregoing, if the Lenders each participate in a refinancing of the Borrowings, then the Prepayment Premium shall be 0%.

The scheduled principal payments on the outstanding borrowings as of March 31, 2019 are as follows:

 

 

 

As of

 

 

 

March 31, 2019

 

2019 (remaining 9 months)

 

$

667

 

2020

 

 

13,000

 

2021

 

 

8,000

 

2022

 

 

4,293

 

2023

 

 

 

Total

 

 

25,960

 

Less debt discount

 

 

(1,331

)

Less current portion

 

 

(1,974

)

Non-current portion

 

$

22,655

 

Reported as:

 

 

 

 

Convertible promissory notes

 

$

5,000

 

Long-term debt

 

 

17,655

 

Total non-current portion

 

$

22,655

 

 

9. 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 common stock warrants, plus options granted and available for grant under the incentive plans.

 

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Outstanding common stock warrants

 

 

272,211

 

 

 

272,211

 

Outstanding and issued stock options

 

 

3,970,513

 

 

 

3,989,432

 

Shares reserved for future option grants

 

 

1,069,271

 

 

 

437,241

 

Total common stock reserved for issuance

 

 

5,311,995

 

 

 

4,698,884

 

 

19


 

10. STOCK OPTION PLAN

2005 and 2015 Plans

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 for its employees and non-employees in the accompanying consolidated statements of operations as follows:

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2019

 

 

2018

 

Cost of revenue

 

$

9

 

 

$

4

 

Sales and marketing

 

 

135

 

 

 

22

 

Research and development

 

 

24

 

 

 

15