UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

 

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

 

For the quarterly period ended September 30, 2019

 

OR

 

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

 

 

 

For the transition period from ______________ to _______________

 

Commission File Number 1-11388

 

VIVEVE MEDICAL, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

04-3153858

(State or other jurisdiction of incorporation or organization)

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

 

 345 Inverness Drive South

Building B, Suite 250

Englewood, CO 80112

(Address of principal executive offices)

(Zip Code)

 

(720) 696-8100

(Registrant’s telephone number, including area code)     

  

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

 

Title of each class

Trading symbol(s)

Name of each exchange on which registered

Common Stock

VIVE

Nasdaq Capital Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

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

 

 Large accelerated filer ☐

 

Accelerated filer ☒

  

 

  

Non-accelerated filer ☐

 

Smaller reporting company ☒

 

 

  

 

 

 

Emerging growth company ☐

  

  

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐  No ☒

 

As of November 6, 2019, the issuer had 1,477,529 shares of common stock, par value $0.0001 per share, outstanding.

 

 

 

 

 

TABLE OF CONTENTS

 

Note About Forward-Looking Statements

 

 

 

Page 

No.

PART I

FINANCIAL INFORMATION  

 

  

  

  

Item 1.

Condensed Consolidated Financial Statements (unaudited)

4

  

  

 

Item 2.

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

25

  

  

  

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

37

  

  

  

Item 4.

Controls and Procedures

38

  

  

  

PART II

OTHER INFORMATION

  

  

  

 

Item 1.

Legal Proceedings

38

  

  

 

Item 1A.

Risk Factors

38

  

  

  

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

40

  

  

  

Item 3.

Defaults Upon Senior Securities

40

  

  

  

Item 4.

Mine Safety Disclosures

40

  

  

  

Item 5.

Other Information

40

  

  

  

Item 6.

Exhibits

41

  

  

  

SIGNATURES

42

 

2

 

 

 

NOTE ABOUT FORWARD-LOOKING STATEMENTS 

 

 

This Quarterly Report on Form 10-Q (the “Quarterly Report”) contains forward-looking statements that involve substantial risks and uncertainties. All statements contained in this Quarterly Report other than statements of historical fact, including statements regarding our future results of operations and financial position, our business strategy and plans, and our objectives for future operations, are forward-looking statements. The words "believe," "may," "will," "estimate," "continue," "anticipate," "intend," "expect," and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in Part II, Item 1A. "Risk Factors" in this Quarterly Report. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this Quarterly Report may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

 

You should read this Quarterly Report on Form 10-Q and the documents that we have filed as exhibits to this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results, performance or achievements may be materially different from what we expect. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

 

Unless expressly indicated or the context requires otherwise, the terms "Viveve Medical," the "Company," "we," "us," and "our" in this document refer to Viveve Medical, Inc., a Delaware corporation, and, where appropriate, its wholly owned subsidiaries.     

 

3

 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. 

Financial Statements (unaudited)  

 

 

VIVEVE MEDICAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

 

   

September 30,

   

December 31,

 
   

2019

   

2018

 

 

 

(unaudited)

   

(1)

 
ASSETS                

Current assets:

               

Cash and cash equivalents

  $ 9,086     $ 29,523  

Accounts receivable, net of allowance for doubtful accounts of $543 and $284 as of September 30, 2019 and December 31, 2018, respectively

    2,806       5,704  

Inventory

    4,141       4,119  

Prepaid expenses and other current assets

    3,051       2,558  

Total current assets

    19,084       41,904  

Property and equipment, net

    3,066       2,916  

Investment in limited liability company

    1,412       1,843  

Other assets

    587       171  

Total assets

  $ 24,149     $ 46,834  

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

               

Current liabilities:

               

Accounts payable

  $ 1,791     $ 3,994  

Accrued liabilities

    4,457       6,766  

Total current liabilities

    6,248       10,760  

Note payable, noncurrent portion

    31,694       30,528  

Other noncurrent liabilities

    997       634  

Total liabilities

    38,939       41,922  

Commitments and contingences (Note 8)

               

Stockholders’ equity (deficit):

               

Common stock, $0.0001 par value; 75,000,000 shares authorized as of September 30, 2019 and December 31, 2018; 1,469,789 and 463,630 shares issued and outstanding as of September 30, 2019 and December 31, 2018, respectively

    -       -  

Additional paid-in capital

    168,304       160,297  

Accumulated deficit

    (183,094 )     (155,385 )

Total stockholders’ equity (deficit)

    (14,790 )     4,912  

Total liabilities and stockholders’ equity (deficit)

  $ 24,149     $ 46,834  

 

 (1) The condensed consolidated balance sheet as of December 31, 2018 has been derived from the audited consolidated financial statements as of that date. 

 

Note: All share and per share data has been adjusted to reflect the 1-for-100 reverse stock split which became effective after market close on September 18, 2019, as discussed in Note 2.

 

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

 

4

 

 

 

VIVEVE MEDICAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share data)

(unaudited)

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2019

   

2018

   

2019

   

2018

 
                                 

Revenue

  $ 1,052     $ 4,821     $ 5,116     $ 14,045  

Cost of revenue

    1,099       3,327       3,981       8,390  

Gross profit (loss)

    (47 )     1,494       1,135       5,655  
                                 

Operating expenses:

                               

Research and development

    1,449       3,442       6,831       10,870  

Selling, general and administrative

    5,032       9,114       17,188       27,482  

Restructuring costs

    -       -       742       -  

Total operating expenses

    6,481       12,556       24,761       38,352  

Loss from operations

    (6,528 )     (11,062 )     (23,626 )     (32,697 )

Interest expense, net

    (1,209 )     (1,106 )     (3,519 )     (3,239 )

Other expense, net

    (51 )     (4 )     (133 )     (14 )

Net loss from consolidated companies

    (7,788 )     (12,172 )     (27,278 )     (35,950 )

Loss from minority interest in limited liability company

    (168 )     (132 )     (431 )     (539 )

Comprehensive and net loss

  $ (7,956 )   $ (12,304 )   $ (27,709 )   $ (36,489 )
                                 
                                 

Net loss per share:

                               

Basic and diluted

  $ (13.51 )   $ (39.07 )   $ (54.73 )   $ (123.41 )
                                 

Weighted average shares used in computing net loss per common share:

                               

Basic and diluted

    588,976       314,899       506,329       295,677  

  

Note: All share and per share data has been adjusted to reflect the 1-for-100 reverse stock split which became effective after market close on September 18, 2019, as discussed in Note 2.

   

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

 

5

 

 

 

VIVEVE MEDICAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

(in thousands, except share and per share data)

(unaudited)

 

   

Common Stock,

   

Additional

           

Total

 
    $0.0001 par value    

Paid-In

   

Accumulated

   

Stockholders’

 
   

Shares

   

Amount

   

Capital

   

Deficit

   

Equity (Deficit)

 
                                         

Balances as of December 31, 2018

    463,630     $ -     $ 160,297     $ (155,385 )   $ 4,912  

Stock-based compensation expense

    -       -       470       -       470  

Issuance of common shares from employee stock purchase plan

    429       -       35       -       35  

Issuance of restricted common shares in connection with consulting agreement

    274       -       25       -       25  

Issuance of common shares in connection with restricted stock award to employee

    6       -       1       -       1  

Net loss

    -       -       -       (10,029 )     (10,029 )

Balances as of March 31, 2019

    464,339       -       160,828       (165,414 )     (4,586 )

Stock-based compensation expense

    -       -       562       -       562  

Issuance of common shares from employee stock purchase plan

    602       -       20       -       20  

Restricted stock awards issued to directors for quarterly compensation

    527       -       48       -       48  

Issuance of restricted common shares in connection with consulting agreement

    250       -       11       -       11  

Issuance of common shares in connection with restricted stock award to employee

    6       -       -       -       -  

Net loss

    -       -       -       (9,724 )     (9,724 )

Balances as of June 30, 2019

    465,724       -       161,469       (175,138 )     (13,669 )

August 2019 ATM Facility, net of issuance cost

    1,004,171       -       6,322       -       6,322  

Stock-based compensation expense

    -       -       503       -       503  

Issuance of common shares from employee stock purchase plan

    200       -       1       -       1  

Restricted stock awards issued to directors for quarterly compensation

    378       -       14       -       14  

Issuance of common shares in connection with restricted stock award to employee

    4       -       -       -       -  

Reverse stock split - cancellation and payout of fractional shares

    (688 )     -       (5 )     -       (5 )

Net loss

    -       -       -       (7,956 )     (7,956 )

Balances as of September 30, 2019

    1,469,789     $ -     $ 168,304     $ (183,094 )   $ (14,790 )

 

   

Common Stock

   

Additional

           

Total

 
    $0.0001 par value    

Paid-In

   

Accumulated

   

Stockholders’

 
   

Shares

   

Amount

   

Capital

   

Deficit

   

Equity (Deficit)

 
                                         

Balances as of December 31, 2017

    195,033     $ -     $ 102,981     $ (105,581 )   $ (2,600 )

February 2018 Offering, net of issuance costs

    115,000       -       32,225       -       32,225  

November 2017 ATM Facility, net of issuance cost

    2,082       -       1,011       -       1,011  

Stock-based compensation expense

    -       -       645       -       645  

Issuance of restricted stock awards to directors and consultant

    221       -       108       -       108  

Issuance of common shares from employee stock purchase plan

    207       -       65       -       65  
Cumulative effect adjustment from adoption of new accounting standard – ASC 606     -       -       -       177       177  

Net loss

    -       -       -       (12,669 )     (12,669 )

Balances as of March 31, 2018

    312,543       -       137,035       (118,073 )     18,962  

November 2017 ATM Facility, net of issuance cost

    652       -       171       -       171  

February 2018 Offering issuance costs

    -       -       (11 )     -       (11 )

Stock-based compensation expense

    -       -       709       -       709  

Issuance of common shares from employee stock purchase plan

    256       -       59       -       59  

Issuance of restricted stock awards to directors and consultant

    208       -       67       -       67  

Issuance of restricted common shares

    1,000       -       256       -       256  

Net loss

    -       -       -       (11,516 )     (11,516 )

Balances as of June 30, 2018

    314,659       -       138,286       (129,589 )     8,697  

November 2017 ATM Facility, net of issuance cost

    37       -       11       -       11  

Stock-based compensation expense

    -       -       698       -       698  

Issuance of common shares from employee stock purchase plan

    286       -       64       -       64  

Issuance of restricted stock awards to directors and consultant

    182       -       47       -       47  

Issuance of restricted common shares

    62       -       20       -       20  

Net loss

            -       -       (12,304 )     (12,304 )

Balances as of September 30, 2018

    315,226     $ -     $ 139,126     $ (141,893 )   $ (2,767 )

 

Note: All share and per share data has been adjusted to reflect the 1-for-100 reverse stock split which became effective after market close on September 18, 2019, as discussed in Note 2.

 

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

 

6

 

 

 

 VIVEVE MEDICAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

   

Nine Months Ended

 
   

September 30,

 
   

2019

   

2018

 
                 

Cash flows from operating activities:

               

Net loss

  $ (27,709 )   $ (36,489 )

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

               

Provision for doubtful accounts

    260       103  

Depreciation and amortization

    819       545  

Stock-based compensation

    1,634       2,294  

Fair value of common shares issued

    -       256  

Non-cash interest expense

    1,266       1,176  

Amortization of operating lease right-of-use assets and accretion of operating lease liabilities

    4       -  

Loss from minority interest in limited liability company

    431       539  

Loss on disposal of property and equipment

    93       -  

Changes in assets and liabilities:

               

Accounts receivable

    2,638       1,119  

Inventory

    (236 )     (2,317 )

Prepaid expenses and other current assets

    (493 )     61  

Other noncurrent assets

    40       1  

Accounts payable

    (2,203 )     (1,297 )

Accrued and other liabilities

    (2,566 )     502  

Other noncurrent liabilities

    160       262  

Net cash used in operating activities

    (25,862 )     (33,245 )
                 

Cash flows from investing activities:

               

Purchase of property and equipment

    (848 )     (983 )

Net cash used in investing activities

    (848 )     (983 )
                 

Cash flows from financing activities:

               

Proceeds from sale of common stock, net of issuance costs

    6,322       33,407  

Proceeds from issuance of common shares from employee stock purchase plan

    56       188  

Transaction costs in connection with note payable

    (100 )     -  

Reverse stock split - cancellation and payout of fractional shares

    (5 )     -  

Net cash provided by financing activities

    6,273       33,595  

Net decrease in cash and cash equivalents

    (20,437 )     (633 )
                 

Cash and cash equivalents - beginning of period

    29,523       20,730  

Cash and cash equivalents - end of period

  $ 9,086     $ 20,097  
                 

Supplemental disclosure:

               

Cash paid for interest

  $ 2,067     $ 1,991  

Cash paid for income taxes

  $ -     $ 2  
                 
                 

Supplemental disclosure of cash flow information as of end of period:

               

Issuance of note payable in settlement of accrued interest

  $ 973     $ 934  

Net transfer of equipment between inventory and property and equipment

  $ 214     $ 210  
                 

Supplemental cash flow information related to leases was as follows:

               

Operating cash outflows from operating leases

  $ 220          

Right-of-use assets obtained in exchange for operating lease liabilities (upon adoption of ASC 842)

  $ 629          

  

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

 

7

 

 

VIVEVE MEDICAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

    

 

 

1.

The Company and Basis of Presentation

 

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

 

ATM Equity Offerings

 

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

 

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

 

Public Offerings

 

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

 

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

   

Interim Unaudited Financial Information

 

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

 

8

 

 

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

    

Liquidity and Management Plans

 

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

  

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

 

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

  

 

2.

Summary of Significant Accounting Policies

 

Financial Statement Presentation

 

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

 

Reverse Stock Split

 

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

 

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

 

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

 

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

 

9

 

 

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

 

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

 

Use of Estimates

 

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

 

Changes in Accounting Policies

 

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

  

Adoption of New Accounting Standard - Leases

 

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

  

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

 

           

Adjustments

         
           

Due to

         
   

December 31,

   

Adoption of

   

January 1,

 
   

2018

   

ASC 842

   

2019

 
                         

Other assets

  $ 171     $ 629  (1)   $ 800  

Total assets

  $ 46,834     $ 629  (1)   $ 47,463  

Accrued liabilities

  $ 6,766     $ 230  (2)   $ 6,996  

Total current liabilities

  $ 10,760     $ 230  (2)   $ 10,990  

Other noncurrent liabilities

  $ 634     $ 399  (2)   $ 1,033  

Total liabilities

  $ 41,922     $ 629  (2)   $ 42,551  

Total liabilities and stockholders' equity

  $ 46,834     $ 629  (2)   $ 47,463  

 

 

(1)

Represents capitalization of operating lease right-of-use assets and reclassification of deferred rent. 

 

(2)

Represents recognition of operating lease liabilities.

 

10

 

 

Cash and Cash Equivalents

 

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

 

Concentration of Credit Risk and Other Risks and Uncertainties

 

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

 

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

 

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

  

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

 

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

 

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

  

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

 

Accounts Receivable and Allowance for Doubtful Accounts

 

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

  

11

 

 

Revenue Recognition

 

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

 

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

 

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

  

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

 

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

 

Customer Advance Payments

 

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

 

Contract Assets and Liabilities

 

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

  

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

 

   

September 30,

   

December 31,

   

Nine Months

 
   

2019

   

2018

   

Change

 
                         

Customer contracts liabilities:

                       

Marketing programs

  $ 470     $ 639     $ (169 )

Other

    -       47       (47 )

Total

  $ 470     $ 686     $ (216 )

 

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

 

Significant Financing Component

 

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

 

Contract Costs 

 

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

 

Shipping and Handling

 

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

    

Revenue by Geographic Area

 

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

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2019

   

2018

   

2019

   

2018

 
                                 

North America

  $ 652     $ 3,455     $ 3,106     $ 10,613  

Asia Pacific

    373       717       1,684       2,238  

Europe and Middle East

    27       612       316       1,143  

Latin America

    -       37       10       51  

Total

  $ 1,052     $ 4,821     $ 5,116     $ 14,045  

 

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

 

Investments in Unconsolidated Affiliates

 

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

  

13

 

 

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

 

Product Warranty

 

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

  

Accounting for Stock-Based Compensation

 

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

 

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

 

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

 

Comprehensive Loss

 

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

 

Net Loss per Share

 

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

 

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

 

   

Nine Months Ended

 
   

September 30,

 
   

2019

   

2018

 
                 

Stock options to purchase common stock

    50,471       42,917  

Warrants to purchase common stock

    5,549       6,408  

Restricted common stock awards

    3,432       600  

 

Other Recently Issued and Adopted Accounting Standards

 

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

 

14

 

 

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

  

 

3.

Fair Value Measurements

 

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

 

 

Level 1

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

 

 

Level 2

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

 

 

Level 3

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

 

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

  

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

 

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

 

There were no changes in valuation techniques from prior periods.

   

 

4.

Investment in Limited Liability Company

 

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

 

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

  

15

 

 

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

 

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

      

 

5.

Accrued Liabilities

 

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

 

   

September 30,

   

December 31,

 
   

2019

   

2018

 
                 

Accrued bonuses

  $ 728     $ 837  

Accrued interest

    704       683  

Deferred revenue - subscription rental program

    579       -  

Accrued payroll and other related expenses

    500       877  

Accrued professional fees

    494       978  

Customer contracts liabilities

    470       686  

Accrued sales commission

    423       1,743  

Current operating lease liabilities

    257       -  

Accrued clinical trial costs

    166       84  

Travel and entertainment

    54       280  

Accrued sales & use tax

    9       259  

Other accruals

    73       339  

Total accrued liabilities

  $ 4,457     $ 6,766  

 

 

  6.

Note Payable

  

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

 

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

   

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

  

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

 

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

  

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

 

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

 

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

   

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

 

Year Ending December 31,

       

2019 (remaining three months)

  $ 710  

2020

    2,901  

2021

    16,673  

2022

    19,306  

2023

    6,220  

Total payments

    45,810  

Less: Amount representing interest

    (13,087 )

Present value of obligations

    32,723  

Less: Unamortized debt discount

    (1,029 )

Note payable, noncurrent portion

  $ 31,694  

 

 

 7.

Leases

 

Lessee:

 

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

 

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

  

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

  

17

 

 

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

  

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

  

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

 

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

 

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

 

   

September 30,

   

January 1,

 
   

2019

   

2019

 
                 

Assets:

               

Operating lease right-of-use assets

  $ 456     $ 629  
                 

Liabilities:

               

Current operating lease liabilities

  $ 257     $ 230  

Noncurrent operating lease liabilities

    203       399  
    $ 460     $ 629  

 

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

 

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

 

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

 

Year Ending December 31,

       

2019 (remaining three months)

  $ 75  

2020

    303  

2021

    136  

Total lease payments

    514  

Less: Amount representing interest

    (54 )

Present value of lease liabilities

  $ 460  

 

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

  

Lessor:

 

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

 

18

 

 

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

 

Year Ending December 31,

       

2019 (remaining three months)

  $ 255  

2020

    324  

Thereafter

    -  

Total

  $ 579  

 

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

   

 

8.

Commitments and Contingencies

 

Indemnification Agreements

 

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

  

Loss Contingencies

 

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

   

 

9.

Common Stock

 

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

 

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

 

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

 

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

 

19

 

 

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

 

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

     

Warrants for Common Stock

 

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

 

                   

Number of

 
                   

Shares

 
                   

Outstanding

 
   

Exercisable

 

Expiration

 

Exercise

   

Under

 

Issuance Date

 

for

 

Date

 

Price

   

Warrants

 
                         

October 2014

 

Common Shares

 

October 13, 2019

  $ 424.00       288  

November 2014

 

Common Shares

 

November 12, 2019

  $ 424.00       125  

February 2015

 

Common Shares

 

February 17, 2025

  $ 400.00       754  

March 2015

 

Common Shares

 

March 26, 2025

  $ 272.00       14  

May 2015

 

Common Shares

 

May 12, 2025

  $ 424.00       362  

May 2015

 

Common Shares

 

May 17, 2020

  $ 424.00       215  

December 2015

 

Common Shares

 

December 16, 2025

  $ 560.00       267  

April 2016

 

Common Shares

 

April 1, 2026

  $ 608.00       250  

May 2016

 

Common Shares

 

May 11, 2021

  $ 774.00       50  

June 2016

 

Common Shares

 

June 20, 2026

  $ 498.00       1,004  

May 2017

 

Common Shares

 

May 25, 2027

  $ 950.00       2,220  
                      5,549  

 

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

 

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

  

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

     

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

 

20

 

 

 

10.

Summary of Stock Options

 

Stock Option Plans

 

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

 

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

  

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

 

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

 

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

      

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

 

   

Nine Months Ended September 30, 2019

 
                   

Weighted

         
           

Weighted

   

Average

         
   

Number

   

Average

   

Remaining

   

Aggregate

 
   

of

   

Exercise

   

Contractual

   

Intrinsic

 
   

Shares

   

Price

   

Term (years)

   

Value

 

Options outstanding, beginning of period

    40,144     $ 456.00       7.4     $ -  

Options granted

    23,344     $ 117.91                  

Options exercised

    -                          

Options canceled

    (13,017 )   $ 457.34                  

Options outstanding, end of period

    50,471     $ 298.99       8.3     $ -  
                                 

Vested and exercisable and expected to vest, end of period

    48,506     $ 302.18       8.3     $ -  
                                 

Vested and exercisable, end of period

    21,169     $ 397.45       7.4     $ -  

 

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

 

21

 

 

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

 

       

Number

   

Weighted

   

Average

   

Number

   

Weighted

 
       

Outstanding

   

Average

   

Remaining

   

Exercisable

   

Average

 

Range of

 

as of

   

Exercise

   

Contractual

   

as of

   

Exercise

 

Exercise Prices

 

September 30, 2019

   

Price

   

Term (Years)

   

September 30, 2019

   

Price

 
                                             

$38.00

- $58.00     1,650     $ 55.42       9.7       -     $ -  

$100.00

- $197.00     25,496     $ 138.25       9.1       6,839     $ 148.08  

$202.00

- $283.00     775     $ 252.06       8.3       305     $ 258.36  

$311.00

- $382.00     4,377     $ 357.96       8.1       2,318     $ 360.44  

$430.00

- $497.00     8,908     $ 452.58       7.7       4,576     $ 454.70  

$501.00

- $567.00     4,594     $ 536.63       6.9       3,126     $ 536.17  

$600.00

- $661.00     2,397     $ 601.91       5.9       2,236     $ 601.42  

$700.00

- $792.00     2,170     $ 769.23       6.3       1,665     $ 769.86  

$992.00

- $992.00     104     $ 992.00       3.3       104     $ 992.00  

Total:

        50,471     $ 298.99       8.3       21,169     $ 397.45  

 

Restricted Stock Awards (‘RSA”)

 

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

 

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

 

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

  

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

 

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

 

2017 Employee Stock Purchase Plan

 

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

 

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

 

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

  

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

 

22

 

 

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

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2019

   

2018

   

2019

   

2018

 
                                 

Expected term (in years)

    0.25       0.25       0.25       0.25  

Average volatility

    98 %     67 %     84 %     67 %

Risk-free interest rate

    2.21 %     1.93 %     2.40 %     1.71 %

Dividend yield

    0 %     0 %     0 %     0 %

 

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

 

Stock-Based Compensation

 

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

 

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

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2019

   

2018

   

2019

   

2018

 
                                 

Expected term (in years)

    N/A       5       5       5  

Average volatility

    N/A       70 %     73 %     73 %

Risk-free interest rate

    N/A       2.86 %     2.49 %     2.67 %

Dividend yield

    N/A       0 %     0 %     0 %

  

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

   

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

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2019

   

2018

   

2019

   

2018

 
                                 

Expected term (in years)

    N/A       10       5       10  

Average volatility

    N/A       66 %     73 %     66 %

Risk-free interest rate

    N/A       3.04 %     2.49 %     3.04 %

Dividend yield

    N/A       0 %     0 %     0 %

 

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

   

23

 

 

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

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2019

   

2018

   

2019

   

2018

 
                                 

Cost of revenue

  $ 25     $ 19     $ 91     $ 47  

Research and development

    41       79       134       266  

Selling, general and administrative

    451       667       1,409       1,981  

Total

  $ 517     $ 765     $ 1,634     $ 2,294  

 

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

    

 

11.

Income Taxes

 

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

 

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

 

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

   

 

12.

Related Party Transactions

 

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

   

 

13.

Restructuring Costs

 

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

 

24

 

 

 

Item 2.

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

 

You should read the following discussion of our financial condition and results of operations in conjunction with the condensed consolidated financial statements and the related notes included elsewhere in this Quarterly Report and with our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2018, as filed with the Securities and Exchange Commission on March 15, 2019. In addition to historical condensed consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Quarterly Report, particularly in Part II, Item 1A. "Risk Factors."

  

Overview of Our Business

  

In the discussion below, when we use the terms “we”, “us” and “our”, we are referring to Viveve Medical, Inc. and our wholly-owned subsidiaries, Viveve, Inc. and Viveve BV.

 

We design, develop, manufacture and market a platform medical technology, which we refer to as Cryogen-cooled Monopolar Radiofrequency (“CMRF”). Our proprietary CMRF technology is delivered through a radiofrequency generator, handpiece and treatment tip that, collectively, we refer to as the Viveve® System. The Viveve System is currently marketed and sold for a number of indications, depending on the relevant country-specific clearance or approval. Currently, the Viveve System is cleared for marketing in 57 countries throughout the world under the following indications for use: 

 

Indication for Use:

 No. of Countries:

General Surgical procedures for electrocoagulation and hemostasis

  

  4 (including the U.S.)

General Surgical procedures for electrocoagulation and hemostasis of vaginal tissue and for the treatment of vaginal laxity

 

32

For treatment of vaginal laxity

 

  4

For treatment of the vaginal introitus, after vaginal childbirth, to improve sexual function

 

14

General Surgical procedures for electrocoagulation and hemostasis and for the treatment of vaginal laxity

 

  1

For vaginal rejuvenation

 

  1

For treatment of vaginal laxity, urinary incontinence and sexual function

 

  1

 

In the U.S., the Viveve System is indicated for use in general surgical procedures for electrocoagulation and hemostasis and we market and sell primarily through a direct sales force. Outside the U.S., we primarily market and sell through distribution partners. As of September 30, 2019, we have a global installed base of 805 Viveve Systems and we have sold approximately 39,150 single-use treatment tips worldwide. 

 

Because the revenues we have earned to date have not been sufficient to support our operations, we have relied on sales of our securities, bank term loans and loans from related parties to fund our operations.

 

We are subject to risks, expenses and uncertainties frequently encountered by companies in the medical device industry. These risks include, but are not limited to, intense competition, whether we can be successful in obtaining U.S. Food and Drug Administration (“FDA”) and other governmental clearance or approval for the sale of our product for all desired indications and whether there will be a demand for the Viveve System, given that the cost of the procedure will likely not be reimbursed by the government or private health insurers. In addition, we will continue to require substantial funds to support our clinical trials and fund our efforts to expand regulatory clearance or approval for our products, including in the U.S. We cannot be certain that any additional required financing will be available when needed or on terms which are favorable to us. As noted above, our operations to date have been primarily funded through the sales of our securities, bank term loans and loans from related parties. Various factors, including our limited operating history with limited revenues to date and our limited ability to market and sell our products have resulted in limited working capital available to fund our operations. There are no assurances that we will be successful in securing additional financing in the future to fund our operations going forward. Failure to generate sufficient cash flows from operations, raise additional capital or reduce certain discretionary spending could have a material adverse effect on our ability to achieve our intended business objectives.

 

25

 

 

Recent Events

 

Nasdaq Delisting Notice

 

On May 13, 2019 and May 21, 2019, the Company received written notices from the Listing Qualifications Department of The Nasdaq Stock Market LLC (“Nasdaq”) notifying it that the Company was not in compliance with the minimum bid price requirements as well as the market value of listed securities requirements. Both notification letters state that the Company has 180 calendar days, or until November 11, 2019 and November 18, 2019, respectively, to regain compliance. 

 

On September 17, 2019, the Company filed a Certificate of Amendment to its Amended and Restated Certificate of Incorporation with the Secretary of State of the State of Delaware to effect a 1-for-100 reverse stock split of the Company’s issued and outstanding common stock. The reverse stock split became effective after the Nasdaq Capital Market trading closed on September 18, 2019 and the Company’s common stock began trading on a split-adjusted basis on the Nasdaq Capital Market on September 19, 2019.

 

On October 3, 2019, the Company was notified by Nasdaq that as of October 2, 2019, it had maintained a closing bid above $1.00 for a period of 10 consecutive trading days and therefore had regained compliance with the minimum bid price requirement. There can be no assurance that the Company will continue to be in compliance with the minimum bid price requirement or comply with Nasdaq’s other continued listing standards in the future.

 

We have until November 18, 2019 to regain compliance with the market value of listed securities requirement under Nasdaq Listing Rule 5550(b)(2). Alternatively, we could gain compliance with Nasdaq Listing Rule 5550(b)(1) or Nasdaq Listing Rule 5550(b)(3). In order to regain compliance with Nasdaq Listing Rule 5550(b)(2), we must maintain a market value of listed securities of at least $35 million for a minimum of ten (10) consecutive business days. If we do not regain compliance with Nasdaq Listing Rule 5550(b)(2) or, alternatively, gain compliance with Nasdaq Listing Rule 5550(b)(1) or Nasdaq Listing Rule 5550(b)(3), prior to the expiration of the compliance period, Nasdaq would notify us that our securities would be subject to delisting. In the event of such a notification, we may appeal the Staff’s determination to delist our securities, but there can be no assurance the Staff would grant our request for continued listing.

 

Reverse Stock Split

 

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

 

The par value of the Company’s common stock remained unchanged at $0.0001 per share after the reverse stock split. The number of authorized shares of common stock remained at 75 million.

 

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

 

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

 

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

 

“At-the-Market” Offering

 

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

 

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

 

26

 

 

Effective Shelf Registration Statements

 

In November 2017, we filed a universal shelf registration statement with the SEC on Form S-3 for the proposed offering from time to time of up to $50,000,000 of our securities, including common stock, preferred stock, and/or warrants (the “2017 Shelf Registration Statement”). The 2017 Shelf Registration Statement currently has a balance of $35,016,000 available for future issuance. However, on August 18, 2019, the Company filed a prospectus supplement in which the Company disclosed that as a result of the limitations of General Instruction I.B.6. of Form S-3, and in accordance with the terms of the Sales Agreement, the amount of shares of our common stock available for sale under the New Form S-3 was limited to one-third of the aggregate market value of our common equity held by non-affiliates of the Company over any rolling 12-month period.

 

On August 16, 2019, the Company entered into a Sales Agreement (the "Ladenburg Sales Agreement") with Ladenburg Thalmann & Co. Inc. ("Ladenburg") to sell up to $6,760,000 of its common stock, from time to time during the term of the Ladenburg Sales Agreement, through an "at the market" equity offering program under which Ladenburg will act as the Company’s sales agent (the “August 2019 ATM Facility”). This was effected through the filing of a prospectus supplement to the 2017 Shelf Registration Statement on August 16, 2019. Previously, in November 2017, the Company had established an “at-the-market” offering program with Cowen and Company, LLC (“Cowen”), also through the filing of a prospectus supplement to the 2017 Shelf Registration Statement (the “November 2017 ATM Facility”). In connection with the Company’s entry into the Ladenburg Sales Agreement, on August 16, 2019, the Company delivered written notice to Cowen that it was suspending and terminating, effective immediately, the prospectus supplement related to the November 2017 ATM Facility, pursuant to the terms of the Sales Agreement, dated November 8, 2017, by and between the Company and Cowen. As of September 30, 2019, the Company had sold all of the shares available under the August 2019 ATM Facility.

 

As of September 30, 2019, the Company had no remaining capacity to issue shares under the 2017 Shelf Registration Statement due to the limitations under General Instruction I.B.6.

  

Submission of an ITA to Conduct Short-Term Feasibility Study in SUI

 

In September 2019, the Company reported its submission of an Investigational Testing Application (ITA) to the Canadian Ministry of Health to conduct a three-arm, three-month feasibility study to compare Viveve’s cryogen-cooled monopolar radiofrequency (CMRF) treatment to cryogen-only treatment and to an inert sham treatment for the improvement of Stress Urinary Incontinence (SUI) in women. The proposed three-month study may provide a strategic path forward in its pursuit of global label expansion for SUI indications following the positive, yet inconclusive results of the LIBERATE-International trial reported in August 2019. Upon approval of the ITA by Health Canada, the Company intends to rapidly initiate the feasibility study. Study subjects will be randomized in a 1:1:1 ratio to the three arms and assessed using the 1-hour Pad Weight Test, 3-day Voiding Diary, the 24-hour Pad Weight Test and I-QOL at three months post treatment. If approved, the three-arm feasibility study is targeted for read-out in April 2020.  

  

CE Mark Clearance for Next Generation 2.0 Platform in Europe

 

In April 2019, the Company received CE Mark clearance for its next generation Viveve 2.0 CMRF system and tips in European Union and European Economic Area countries. As part of our ongoing regulatory strategy to expand the commercial launch of our Viveve 2.0 CMRF system globally, the Company’s next generation system and its consumable treatment tips are now available in over 30 countries in Europe. The Company’s Viveve 2.0 CMRF system significantly reduced manufacturing costs for both the next generation system and for the consumable tips since becoming available in the U.S. and it should have a positive impact on our overall gross margins going forward.

 

Enrollment Completed in VIVEVE II Clinical Study 

 

In March 2019, enrollment was completed for the VIVEVE II (VIveve treatment of the Vaginal Introitus to EValuate Effectiveness clinical study following IDE approval by the FDA. This is a prospective, randomized, double-blind, sham controlled study to evaluate the efficacy and safety of the Viveve System to improve symptoms of female sexual disfunction, associated with vaginal laxity. Nineteen (19) active clinical sites in the United States enrolled 250 female patients who were pre-menopausal, 18 years of age or older who experienced at least one full term vaginal delivery at least twelve months prior to enrollment date, randomized in a 2:1 ratio to either an active treatment group or sham-control group. Patients will be followed for twelve months post-treatment to assess the primary effectiveness and safety endpoints of the study with data being collected at one, three, six, nine and twelve months. Patients randomized to the sham arm will be offered the opportunity to receive a Viveve treatment once they have completed the twelve-month evaluation following the sham intervention.

 

27

 

 

The primary efficacy endpoint of the study is the mean change from baseline in the Female Sexual Function Index (FSFI) total score at twelve months post treatment. Secondary endpoints include evaluation of the mean change from baseline of the total FSFI score at six months, as well as evaluation of the mean change from baseline of the six different domains within the FSFI at six and twelve months. At months six and twelve, in addition to the FSFI, subjects will be asked to complete the Patient’s Global Impression of Improvement (PGI-I). Subjects will also be assessed for adverse events throughout the study. The Company intends to report final twelve-month clinical data from the study in the second quarter of 2020.

  

Clinical Results Reported from LIBERATE-International SUI Trial 

 

In August 2019, clinical results for the LIBERATE-International study in stress urinary incontinence ("SUI") were reported by the Company. While the study did not meet its primary endpoint, review of the full clinical data demonstrates a consistency of benefit at six months post-treatment across all endpoints in the majority of patients within both groups. The Company further analyzed the results and announced in September 2019 a potential strategic path forward for its SUI clinical development program. An Investigational Testing Application was submitted to the Canadian Ministry of Health and is under review for approval to conduct a three-arm, three-month SUI feasibility study.

 

In July 2019, topline results for the LIBERATE-International study in SUI were reported by the Company. Statistical significance was not achieved on the primary endpoint of mean change from baseline on the 1-hour Pad Weight Test at six months post-treatment compared to the control group. The median change from baseline at six months post-treatment was -8.0g in the active group of 66 subjects (baseline median 12.8g) and -8.0g in the sham-control group of 33 subjects (baseline median 12.9g).

 

LIBERATE International was a randomized, double-blind, sham-controlled study conducted at 9 sites in Canada and included enrollment of 99 patients suffering from mild-to-moderate SUI. Patients were randomized in a 2:1 ratio to either an active CMRF treatment (RF and cryogen-cooling) group or sham-control (cryogen-cooling only) group. Patients were followed for six months post-treatment to assess the primary effectiveness and safety endpoints of the study with data being collected at one, three and six months.

 

The primary efficacy endpoint was the 6-month change from baseline in the one-hour pad weight test, and the study protocol included 6 months of safety follow-up, as well as assessments of other secondary endpoints, including: 24-hour pad weight test, daily incontinence episodes, as well as composite scores from the validated UDI-6 (Urogenital Distress Inventory-Short Form), IIQ-7 (Incontinence Impact Questionnaire), and ICIQ-UI-SF (International Consultation on Incontinence Questionnaire-Urinary Incontinence-Short Form) outcome questionnaires.

 

Health Canada issued an authorization to conduct the investigational testing. The study was conducted in Canada to evaluate support for SUI indications in Canada, the European Union and several other international countries.

 

Reported Positive Twelve-Month Data from SUI Feasibility Study

 

In December 2018, the Company reported positive twelve-month interim data from its SUI feasibility study.  At twelve months post-treatment, 72% of women experienced improvement in one-hour pad weight test and 60% of patients experienced significant benefit as they had ≤ 1 gram of urine leakage in the one-hour pad weight test at twelve months. A clinically meaningful benefit was achieved across all patient-reported SUI symptoms and quality of life outcome measures. No device-related safety issues were reported for any of the patients.

 

This single-arm feasibility study included 36 subjects with mild to moderate SUI (based on the one-hour pad weight test) who underwent treatment with Viveve’s CMRF technology under a proprietary treatment protocol. Clinical results included the objective one-hour pad weight test and seven-day bladder voiding diary, as well as composite scores from multiple validated patient-reported outcomes, including: UDI-6 (Urogenital Distress Inventory-Short Form), IIQ-7 (Incontinence Impact Questionnaire) and ICIQ-UI-SF (International Consultation on Incontinence Questionnaire-Urinary Incontinence-Short Form).

 

Submission of IDE to FDA for Approval to Conduct SUI Trial in the United States

 

In September 2018, the Company submitted an Investigational Device Exemption (IDE) to the U.S. Food and Drug Administration (FDA) for authorization to begin LIBERATE-U.S., a multicenter, randomized, double-blinded, sham-controlled trial to evaluate the safety and efficacy of the Company’s proprietary CMRF technology for the improvement of SUI in women. Intended enrollment for the LIBERATE-U.S. trial is approximately 240 subjects at up to 25 study sites in the United States. Subjects will be randomized in a 2:1 ratio for active and sham treatments.

 

In October 2018, the FDA sent a letter to the Company stating that the FDA did not approve the IDE submission for the LIBERATE-U.S. study and requested the Company to submit additional safety testing as part of an IDE re-submission.  Viveve has had ongoing discussions with the FDA regarding such safety testing.  The decision and timing to conduct the safety testing and re-submit the IDE to the FDA upon testing completion is under strategic assessment by the Company and pending results of the SUI feasibility study for which an ITA has been submitted and is in review by Health Canada for authorization to conduct.

 

28

 

 

U.S. Commercial Sales Transition to Recurring Revenue Rental Model

 

In June 2019, U.S. sales of the Viveve System transitioned from a capital equipment sales model to a recurring revenue rental model. The new U.S. commercial sales model is intended to lower up-front costs for customers and thus lower hurdles to adoption, increase placement rates, and improve profitability by significantly reducing selling time per unit. The new commercial sales model successfully increased physician adoption rates in the first month and is continuing to gain traction in the U.S. market. In June 2019, Viveve Systems placed with new customers represented a higher monthly productivity rate per sales representative than any prior month in the company’s history. Sale of Viveve products outside of the U.S. will continue to be supported by the Company’s current distributors without significant change to the international business model.

 

Under the recurring revenue rental model, customers may lease the Viveve System for a set initial term. After the initial term, the customer may purchase the Viveve System, continue to pay a monthly rental amount or terminate the contract.

 

The rental program is accounted for under ASU Topic 842 and meets the classification criteria for an operating lease. Revenue from the rental program is included in revenue and is currently not a material amount. The Viveve Systems that are being leased are included in property and equipment, net and depreciated over their expected useful lives of 5 years. When other products (“nonlease components”), such as single-use treatment tips or ancillary consumables, are included in the offering, the Company follows the relevant guidance in ASC 606, Revenue from Contracts with Customers, to determine how to allocate contractual consideration between the lease and nonlease components.

 

Strategic Organizational Realignment

 

In January 2019, the Company implemented a strategic and organizational realignment plan (the “Strategic Organizational Realignment”) to reduce operating expenses and prepare the Company for expanded indications for its CMRF technology platform for improved sexual function and stress urinary incontinence in women. The Strategic Organizational Realignment included a reduction in total headcount of approximately 40 full-time employees. It also included a nearly two-thirds reduction in the Company’s direct sales organization, which has been repositioned to provide targeted market development activities to further expand awareness and adoption of Viveve’s CMRF technology in the before mentioned medical specialties. The Company’s current and prospective aesthetic medicine customers in the U.S. will be supported by a network of distributor partners under Viveve’s direction. International commercial distribution will remain unchanged through Viveve’s global network of distributor partners. The total restructuring costs for employee severance and other related termination benefits were approximately $742,000 and it was recorded in the quarter ended March 31, 2019. This restructuring contributed to a reduction in our total operating expenses in the first quarter of 2019 as planned and is expected to result in additional operating cost savings throughout the remainder of this year.

 

 Adoption of New Accounting Standard - Leases

 

The Company adopted the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASU”) No. 2016-02, Leases (Topic 842), as of January 1, 2019, using the modified retrospective approach. The modified retrospective approach provides a method for recording existing leases at the beginning of the period of adoption. In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed us to carry forward the historical lease classification and we elected the hindsight practical expedient to determine the lease term for existing leases. We determined that the renewal options for the facilities lease would be reasonably certain to be renewed and as such, included that renewal period in determining the expected lease term of that lease. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.

 

Plan of Operation

 

We intend to increase our sales both internationally and in the U.S. market by seeking additional regulatory clearances or approvals for the sale and distribution of our products, identifying and training qualified distributors, and expanding the scope of physicians who offer the Viveve System to include plastic surgeons, general surgeons, urologists and urogynecologists. 

 

In June 2019, we transitioned from a capital equipment sales model to a recurring revenue rental model in the U.S. market. The new U.S. commercial sales model is intended to lower up-front costs for customers and thus lower hurdles to adoption, increase placement rates, and improve profitability by significantly reducing selling time per unit. Sale of Viveve products outside of the U.S. will continue to be supported by our international distributors.

 

In addition, we intend to use the strategic relationships that we have developed with outside contractors and medical experts to improve our products by focusing our research and development efforts on various areas including, but not limited to:

 

 

designing new treatment tips optimized for both ease-of-use and to reduce procedure times for patients and physicians; and

 

 

developing new RF consoles.

  

29

 

 

The net proceeds received from sales of our securities and the term loans have been used to support commercialization of our product in existing and new markets, for our research and development efforts and for protection of our intellectual property, as well as for working capital and other general corporate purposes. We expect that our cash will be sufficient to fund our current operations through December 31, 2019; however, we will require additional capital from the sale of equity or debt securities to fully implement our plan of operation. Our operating costs include employee salaries and benefits, compensation paid to consultants, professional fees and expenses, costs associated with our clinical trials, capital costs for research and other equipment, costs associated with research and development activities including travel and administration, legal expenses, sales and marketing costs, general and administrative expenses, and other costs associated with an early stage public company subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We also expect to incur expenses related to obtaining regulatory clearance and approvals in the U.S. and internationally as well as legal and related expenses to protect our intellectual property. We expect capital expenditures, for the foreseeable future, to be less than $500,000 annually.

 

We intend to continue to meet our operating cash flow requirements through the sales of our products and by raising additional capital from the sale of equity or debt securities. If we sell our equity securities, or securities convertible into equity, to raise capital, our current stockholders will likely be substantially diluted. We may also consider the sale of certain assets, or entering into a strategic transaction, such as a merger, with a business complimentary to ours although we do not currently have plans for any such transaction. While we have been successful in raising capital to fund our operations since inception, other than as discussed in this Quarterly Report on Form 10-Q, we do not have any committed sources of financing and there are no assurances that we will be able to secure additional funding, or if we do secure additional financing that it will be on terms that are favorable to us. If we cannot obtain financing, then we may be forced to curtail our operations or consider other strategic alternatives.

 

Results of Operations 

 

Comparison of the Three Months Ended September 30, 2019 and 2018

 

Revenue

 

   

Three Months Ended

                 
   

September 30,

   

Change

 
   

2019

   

2018

   

$

   

%

 
   

(in thousands, except percentages)

 
                                 

Revenue

  $ 1,052     $ 4,821     $ (3,769 )     (78 )%

 

We recorded revenue of $1,052,000 for the three months ended September 30, 2019, compared to revenue of $4,821,000 for the three months ended September 30, 2018, a decrease of $3,769,000, or approximately 78%. The decrease in revenue was primarily due to lower sales volume of Viveve Systems sold as the Company transitioned its U.S. commercial sales model to a recurring revenue rental model versus selling systems under a capital equipment sales model. Sales in the third quarter of 2019 included 6 Viveve Systems and approximately 1,300 disposable treatment tips sold globally. Under the new subscription offering program, which was launched in June 2019, the Company placed 25 Viveve Systems in the U.S. market in the third quarter of 2019. Rental revenue on these leases will be recognized on a straight-line basis over the term of the lease (upon completion of system installation and training). Sales in the third quarter of 2018 included 64 Viveve Systems (which included 48 Viveve Systems sold in the U.S. market - 30 Viveve Systems through direct sales and 18 Viveve Systems through our distribution partner) and approximately 5,700 disposable treatment tips sold globally.

  

Gross profit (loss)

 

   

Three Months Ended

                 
   

September 30,

   

Change

 
   

2019

   

2018

   

$

   

%

 
   

(in thousands, except percentages)

 
                                 

Gross profit (loss)

  $ (47 )   $ 1,494     $ (1,541 )     (103 )%

 

 Gross loss was ($47,000), or (4%) of revenue, for the three months ended September 30, 2019, compared to a gross profit of $1,494,000, or 31% of revenue, for the three months ended September 30, 2018, a decrease of $1,541,000, or approximately 103%. The decrease in gross profit was primarily due to the lower sales volume of Viveve Systems sold as the Company transitioned its U.S. business model to a recurring revenue rental model versus selling systems under a capital equipment sales model during the second quarter of 2019.

     

30

 

 

Research and development expenses

 

   

Three Months Ended

                 
   

September 30,

   

Change

 
   

2019

   

2018

   

$

   

%

 
   

(in thousands, except percentages)

 
                                 

Research and development

  $ 1,449     $ 3,442     $ (1,993 )     (58 )%

 

 Research and development expenses totaled $1,449,000, for the three months ended September 30, 2019, compared to research and development expense of $3,442,000 for the three months ended September 30, 2018, a decrease of $1,993,000, or approximately 58%. Spending on research and development decreased in the third quarter of 2019 primarily due to reduced engineering and development work related to our products in the period as well as certain cost savings in connection with the Company’s Strategic Organizational Realignment which occurred in the first quarter of 2019. Research and development expense during the three months ended September 30, 2019 also included lower clinical study costs primarily due to the completion and readout of our LIBERATE-International SUI clinical trial in July 2019. Research and development spending in the third quarter of 2018 included higher costs associated with engineering and development work with our contract manufacturer related to product improvement efforts primarily for our next generation 2.0 platform in advance of the 2018 commercial product release as well as higher clinical study costs associated with our clinical development programs in female sexual function and SUI .

 

Selling, general and administrative expenses   

 

   

Three Months Ended

                 
   

September 30,

   

Change

 
   

2019

   

2018

   

$

   

%

 
   

(in thousands, except percentages)

 
                                 

Selling, general and administrative

  $ 5,032     $ 9,114     $ (4,082 )     (45 )%

 

Selling, general and administrative expenses totaled $5,032,000 for the three months ended September 30, 2019, compared to $9,114,000 for the three months ended September 30, 2018, a decrease of $4,082,000, or approximately 45%. The decrease in selling, general and administrative expenses in the third quarter of 2019 was primarily due to certain cost savings in connection with the Company’s Strategic Organizational Realignment which occurred in the first quarter of 2019 as well as lower professional and legal fees associated with our intellectual property. 

  

Interest expense, net 

 

   

Three Months Ended

                 
   

September 30,

   

Change

 
   

2019

   

2018

   

$

   

%

 
   

(in thousands, except percentages)

 
                                 

Interest expense, net

  $ 1,209     $ 1,106     $ 103       9 %

 

  During the three months ended September 30, 2019, we had interest expense, net of $1,209,000, compared to $1,106,000 for the three months ended September 30, 2018. The increase of $103,000, or approximately 9%, resulted primarily from the additional interest expense in 2019, which was computed on a higher term loan balance compared to 2018 due to the interest in-kind which has been added to the total outstanding principal loan amount each quarterly period.

 

Other expense, net

 

   

Three Months Ended

                 
   

September 30,

   

Change

 
   

2019

   

2018

   

$

   

%

 
   

(in thousands, except percentages)

 
                                 

Other expense, net

  $ (51 )   $ (4 )   $ (47 )     NM  

 

During the three months ended September 30, 2019, we had other expense, net, $51,000, compared to 4,000 for the three months ended September 30, 2018.

 

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Loss from minority interest in limited liability company

 

   

Three Months Ended

                 
   

September 30,

   

Change

 
   

2019

   

2018

   

$

   

%

 
   

(in thousands, except percentages)

 

Loss from minority interest in limited liability company

  $ 168     $ 132     $ 36       27 %

 

The Company uses the equity method to account for its investment in InControl Medical, LLC (“ICM”). For the three months ended September 30, 2019, the allocated net loss from ICM’s operations was $168,000, compared to $132,000 for the three months ended September 30, 2018       

  

Comparison of the Nine Months Ended September 30, 2019 and 2018

 

Revenue

 

   

Nine Months Ended

                 
   

September 30,

   

Change

 
   

2019

   

2018

   

$

   

%

 
   

(in thousands, except percentages)

 
                                 

Revenue

  $ 5,116     $ 14,045     $ (8,929 )     (64 )%

 

 We recorded revenue of $5,116,000 for the nine months ended September 30, 2019, compared to revenue of $14,045,000 for the nine months ended September 30, 2018, a decrease of $8,929,000, or approximately 64%. The decrease in revenue was primarily due to lower sales volume of Viveve Systems sold as the Company transitioned its U.S. commercial sales model to a recurring revenue rental model versus selling systems under a capital equipment sales model. In the nine months ended September 30, 2019 sales of 53 Viveve Systems (which included 30 Viveve Systems sold in the U.S. market – 19 Viveve Systems through direct sales and 11 Viveve Systems through our U.S. distribution partner) and approximately 5,850 disposable treatment tips sold globally. Under the new subscription offering program, which was launched in June 2019, the Company placed 49 Viveve Systems in the U.S. market. Rental revenue on these leases will be recognized on a straight-line basis over the term of the lease (upon completion of system installation and training). Sales in the nine months ended September 30, 2018 included 202 Viveve Systems (which included 155 Viveve Systems sold in the U.S. market – 137 Viveve Systems through direct sales and 18 Viveve Systems through our distribution partner), and higher quantities of disposable products sold (which included approximately 13,800 disposable treatment tips sold globally).

  

Gross profit

 

   

Nine Months Ended

                 
   

September 30,

   

Change

 
   

2019

   

2018

   

$

   

%

 
   

(in thousands, except percentages)

 
                                 

Gross profit

  $ 1,135     $ 5,655     $ (4,520 )     (80 )%

 

 Gross profit was $1,135,000, or 22% of revenue, for the nine months ended September 30, 2019, compared to a gross profit of $5,655,000 or 40% of revenue, for the nine months ended September 30, 2018, a decrease of $4,520,000, or approximately 80%. The decrease in gross profit was primarily due to the lower sales volume of Viveve Systems sold as the Company transitioned its U.S. business model to a recurring revenue rental model versus selling systems under a capital equipment sales model in the second quarter of 2019.

  

Research and development expenses  

  

   

Nine Months Ended

                 
   

September 30,

   

Change

 
   

2019

   

2018

   

$

   

%

 
   

(in thousands, except percentages)

 
                                 

Research and development

  $ 6,831     $ 10,870     $ (4,039 )     (37 )%

 

32

 

 

Research and development expenses totaled $6,831,000 for the nine months ended September 30, 2019, compared to research and development expense of $10,870,000 for the nine months ended September 30, 2018, a decrease of $4,039,000 or approximately 37%. Spending on research and development decreased in the first half of 2019 primarily due to reduced engineering and development work related to our products in the period as well as certain cost savings in connection with the Company’s Strategic Organizational Realignment, partially offset by higher clinical study costs associated with our clinical development programs in female sexual function and SUI. Research and development spending in the first half of 2018 included higher costs associated with engineering and development work with our contract manufacturer related to product improvement efforts primarily for our next generation 2.0 platform in advance of the 2018 commercial product release.

  

Selling, general and administrative expenses  

    

   

Nine Months Ended

                 
   

September 30,

   

Change

 
   

2019

   

2018

   

$

   

%

 
   

(in thousands, except percentages)

 
                                 

Selling, general and administrative

  $ 17,188     $ 27,482     $ (10,294 )     (37 )%

 

 Selling, general and administrative expenses totaled $17,188,000 for the nine months ended September 30, 2019, compared to $27,482,000 for the nine months ended September 30, 2018, a decrease of $10,294,000 or approximately 37%. The decrease in selling, general and administrative expenses in the first half of 2019 was primarily due to certain cost savings in connection with the Company’s Strategic Organizational Realignment as well as lower professional and legal fees associated with our intellectual property. Selling, general and administrative expenses in the first half of 2018 included higher professional and legal fees associated with strategies to protect the Company’s intellectual property. In June 2018, we reached a favorable settlement in the Company’s patent infringement litigation with ThermiGen, LLC.

 

Restructuring costs

 

   

Nine Months Ended

                 
   

September 30,

   

Change

 
   

2019

   

2018

   

$

   

%

 
   

(in thousands, except percentages)

 
                                 

Restructuring costs

  $ 742     $ -     $ 742       -  

 

In January 2019, the Company implemented the Strategic Organizational Realignment to reduce operating expenses and prepare the Company for expanded indications for its CMRF technology platform for improved sexual function and stress urinary incontinence in women. The restructuring included a reduction in headcount of approximately 40 full-time employees. The total restructuring costs recorded for the nine months ended September 30, 2019 were approximately $742,000. This restructuring contributed to a reduction in total operating expenses in the second quarter of 2019 as planned and is expected to result in additional operating cost savings throughout the remainder of this year.

 

Interest expense, net  

 

   

Nine Months Ended

                 
   

September 30,

   

Change

 
   

2019

   

2018

   

$

   

%

 
   

(in thousands, except percentages)

 
                                 

Interest expense, net

  $ 3,519     $ 3,239     $ 280       9 %

 

During the nine months ended September 30, 2019, we had interest expense, net of $3,519,000, compared to $3,239,000 for the nine months ended September 30, 2018. The increase of $280,000, or approximately 9%, resulted primarily from the additional interest expense in the first half of 2019, which was computed on a higher term loan balance compared to the first half of 2018 due to the interest in-kind which has been added to the total outstanding principal loan amount each quarterly period.

 

Other expense, net  

 

   

Nine Months Ended

                 
   

September 30,

   

Change

 
   

2019

   

2018

   

$

   

%

 
   

(in thousands, except percentages)

 
                                 

Other expense, net

  $ 133     $ 14     $ 119       NM  

 

33

 

 

During the nine months ended September 30, 2019, we had other expense, net, of $133,000, compared to $14,000 for the nine months ended September 30, 2018.

 

 Loss from minority interest in limited liability company

 

   

Nine Months Ended

                 
   

September 30,

   

Change

 
   

2019

   

2018

   

$