| Summary of Significant Accounting Policies | 2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly‑owned subsidiary, Osiris Therapeutics International GmbH, which was formed in 2016. All intercompany transactions have been eliminated in consolidation. Osiris Therapeutics International GmbH does not have any operations.
Use of Estimates
We make certain estimates and assumptions in preparing our consolidated financial statements in accordance with generally accepted accounting principles in the United States (“GAAP”). These estimates and assumptions affect the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statement and the reported amounts of revenue and expenses for the period presented. Actual results may differ from these estimates.
Cash and Cash Equivalents
Cash and cash equivalents includes all financial instruments purchased with an initial maturity of three months or less when purchased, which includes certificates of deposit that can be redeemed on demand and have maturities of less than three months, when purchased. As of December 31, 2018, approximately $5.0 million of the Company’s cash and cash equivalents were certificates of deposits with one financial institution.
Certificates of Deposit
The Company considers certificates of deposit that can be redeemed on demand and have maturities of less than three months, when purchased, to be cash equivalents, and therefore, excludes them from the Certificates of Deposit line in the accompanying consolidated balance sheets. Certificates of deposit with an initial maturity date exceeding three months and which can be redeemed upon demand are included in this classification. The Company invested approximately $10.0 million in certificates of deposit during 2018 with an initial maturity date exceeding three months and has classified them accordingly in the accompanying consolidated balance sheets as of December 31, 2018.
Investments
All of the Company’s investments are classified as “available‑for‑sale” and are carried at fair value, with the exception of the Mesoblast Limited common stock, which was classified as a trading security (see Note 3). Securities which have been classified as Level 1 are measured using quoted market prices in active markets for identical assets or liabilities while those which have been classified as Level 2 are measured using quoted prices for identical assets and liabilities in markets that are not active (see Note 9). The Company’s policy is to classify all investments with contractual maturities within one year as current. Investment income is recognized when earned and reported net of investment expenses. Net unrealized holding gains or losses on non-equity securities are excluded from earnings and are reported as “Accumulated other comprehensive income (loss)” in the accompanying consolidated balance sheets and consolidated statements of comprehensive income (loss) until realized, unless the losses are deemed to be other‑than‑temporary. Realized gains or losses, including any provision for other‑than‑temporary declines in value, are included in “Other income (expense), net” in the accompanying consolidated statements of comprehensive income.
If a debt security is in an unrealized loss position and the Company has the intent to sell the debt security, or it is more likely than not that the Company will have to sell the debt security before recovery of its amortized cost basis, the decline in value is deemed to be other‑than‑temporary and is recorded to other‑than‑temporary impairment losses recognized in income in the consolidated statements of comprehensive income. For impaired debt securities that the Company does not intend to sell or it is more likely than not that the Company will not have to sell such securities, but the Company expects that it will not fully recover the amortized cost basis, the credit component of the other‑than‑temporary impairment is recognized in other‑than‑temporary impairment losses recognized in income in the consolidated statements of comprehensive income and the non‑credit component of the other‑than‑temporary impairment is recognized in other comprehensive loss.
The credit component of an other‑than‑temporary impairment is determined by comparing the net present value of projected future cash flows with the amortized cost basis of the debt security. The net present value is calculated by discounting the best estimate of projected future cash flows at the effective interest rate implicit in the debt security at the date of acquisition. Cash flow estimates are driven by assumptions regarding probability of default, including changes in credit ratings, and estimates regarding timing and amount of recoveries associated with a default. Furthermore, unrealized losses entirely caused by non‑credit related factors related to debt securities for which the Company expects to fully recover the amortized cost basis continue to be recognized in accumulated other comprehensive loss.
As of December 31, 2018 and 2017, there were no unrealized losses that the Company believed to be other‑than‑temporary.
Trade Receivables, net
Trade receivables, net are reported net of an allowance for doubtful accounts. We consider receivables outstanding longer than the time specified in the respective customer’s contract to be past due. In making the determination of the appropriate allowance for doubtful accounts, management considers prior experience with customers, analysis of accounts receivable aging reports, changes in customer payment patterns, and historical write‑offs.
Inventory, net
Inventory, net consists of raw materials, products in process, finished goods available for sale and products held by customers under consignment sales arrangements. We determine our inventory values using the first‑in, first‑out method. The Company periodically reviews its quantities of inventories on hand and compares these amounts to the expected usage of each particular product. The Company records as a charge to Cost of revenue any amounts required to reduce the carrying value of inventories to net realizable value. Inventory excludes units that we anticipate distributing for clinical evaluation.
Property and Equipment, net
Property and equipment, net are valued at cost less accumulated depreciation. Depreciation is recognized on a straight‑line basis over the estimated useful lives of the related assets and is allocated between cost of sales and selling, general and administrative expenses. Maintenance and repairs, which do not improve or extend the life of the respective assets, are charged to expense as incurred. Assets recorded under capital leases are included in property and equipment and are amortized using the straight‑line method over the shorter of the estimated useful lives of the assets or the lease term and is recorded in depreciation expense in the consolidated statements of comprehensive income.
We review long‑lived assets, which consist solely of property and equipment, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or group of assets may not be fully recoverable based on the criteria for accounting for the impairment or disposal of long‑lived assets under Accounting Standard Code (“ASC”) Topic 360, Property, Plant and Equipment . These events or changes in circumstances may include a significant deterioration of operating results, changes in business plans, or changes in anticipated future cash flows. If an impairment indicator is present, we evaluate recoverability by a comparison of the carrying amount of the assets group to future undiscounted net cash flows expected to be generated by the assets group. Assets are grouped at the lowest level for which there is identifiable cash flows that are largely independent of the cash flows generated by other asset groups. If the total of the expected undiscounted future cash flows is less than the carrying amount of the asset, an impairment loss is recognized for the difference between the fair value and carrying value of assets within the group. Fair value is generally determined by estimates of discounted cash flows. The discount rate used in any estimate of discounted cash flows would be the rate required for a similar investment of like risk. There were no impairment losses recognized during the years ended December 31, 2018 or 2017.
Accrued liabilities
As of December 31, 2018 and 2017, accrued liabilities consisted of:
December 31,
(in $000's)
2018
2017
Payroll and related
$
3,098
$
1,980
Commissions
5,968
5,651
Accounting and audit fees
1,859
905
Lease liabilities
321
120
Other
2,574
743
Total
$
13,820
$
9,399
Stockholders’ Equity
On June 26, 2018, the Company amended its charter, which was approved by the Company’s stockholders, which decreased the total number of authorized shares of common stock from ninety million (90,000,000) shares to seventy-two million (72,000,000) shares and the total number of authorized shares of preferred stock from twenty million (20,000,000) shares to five million (5,000,000) shares.
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Revenue Recognition
The Company began accounting for revenue in accordance with Topic 606 on January 1, 2018, using the modified retrospective method. Under the new revenue standard for arrangements that are determined to be within the scope of Topic 606, the Company recognizes revenue following the five-step model: (i) identify the contract(s) with a customer; (ii) identify the performance obligation(s) in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the Company will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of Topic 606, the Company assesses the goods or services promised within each contract and determines the performance obligations, and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.
Accordingly, the Company recognizes revenue when title to the product, ownership and risk of loss transfer to the customer, which is either the date of receipt by the customer or when we receive appropriate notification that the product has been used or implanted in a patient, which is consistent with revenue recognition under ASC 605, which was applicable for the year ended December 31, 2017. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to in exchange for transferring the goods. The nature of the Company’s contracts gives rise to certain types of variable consideration, including rebates and other discounts. The Company includes estimated amounts of variable consideration in the transaction price to the extent that it is probable there will not be a significant reversal of revenue. Estimates are based on historical or anticipated performance and represent our best judgment at the time. Any estimates are evaluated on a quarterly basis until the uncertainty is resolved.
The Company provides a variety of products and services to its customers. Most of the Company’s contracts consist of a single, distinct performance obligation or promise to transfer goods to a customer. For contracts that include multiple performance obligations, the Company allocates the total transaction price to each performance obligation using our best estimate of the standalone selling price of each identified performance obligation.
The Company’s incremental costs of obtaining a contract would generally have less than a one-year duration; therefore, the Company applies the practical expedient available and expenses costs to obtain a contract when incurred.
In December 2014, we entered into exclusive distribution agreements with a subsidiary of Stryker Corporation for the marketing and distribution of BIO 4 , previously branded by the Company as OvationOS, our viable bone matrix allograft. Pursuant to the agreement, Stryker has been granted worldwide distribution rights to the product and any improvements, for all surgical applications. We are responsible for supply, manufacturing, inventory management, shipments to customers, continued research and product improvement activities. We maintain all inventory and collection risk and we control the product. We recognize revenue as the principal in the arrangement, for the amounts charged to end‑use customers for the BIO 4 product. Commissions and administrative support fees paid to Stryker are accounted for as selling expenses, as Stryker is acting as an outside sales and marketing agent for the Company. We received an up‑front payment of $5.0 million from Stryker in 2015, related to its initial exclusivity, and are entitled to additional fees upon any exercise by Stryker of its right to extend the initial term, whether on an exclusive or non‑exclusive basis. The exclusivity fee is recognized as a reduction of commission expense over the four‑year term of the agreement. The exclusivity fee was fully recognized during fiscal year 2018 with no remaining balance at December 31, 2018. At December 31, 2017, we had a remaining balance of $1.4 million related to the exclusivity payment of which $1.25 million was classified as other current liabilities in the consolidated balance sheets at the end of the year.
In February 2019, Stryker extended the exclusive period for an additional four years. We received an exclusivity fee of $3.9 million in February 2019 to extend the initial term, which will be recognized as a reduction of commissions expense over the exclusivity period.
In October 2014, we entered into an exclusive marketing and sales representative agreement for our cartilage product, Cartiform, with Arthrex. The agreement provides Arthrex with exclusive commercial distribution rights to Cartiform beginning in 2015. We are responsible for manufacturing, continued research and product improvement activities. Pursuant to the agreement, Arthrex is entitled to a certain commission on Cartiform sales. We maintain all inventory and collection risk. We recognize revenue as the principal in the agreement, for the amounts charged to end‑use customers for the Cartiform product. We account for the commission payments to Arthrex as sales and marketing expense, as Arthrex is acting as outside sales and marketing agent for the Company.
The following table presents our revenues disaggregated by product line:
Year Ended December 31,
2018
2017
(in $000’s)
Grafix/Stravix
$
105,287
$
85,344
BIO4
27,685
24,166
Cartiform
9,845
8,988
Other
7
16
Total
$
142,824
$
118,514
Research and Development Costs (“R&D”)
R&D expenditures are charged to expense as incurred. R&D expenses include the costs of certain personnel, preclinical studies, clinical trials, regulatory affairs, biostatistical data analysis, and manufacturing costs for development of drug materials for use in clinical trials. We accrue R&D expenses for activity as incurred during the fiscal year and prior to receiving invoices from clinical sites and third party clinical research organizations.
Share‑Based Compensation
We account for share‑based employee compensation under the fair value recognition and measurement provisions in accordance with applicable accounting standards, which require all share‑based payments to employees, including grants of stock options, to be measured based on the grant date fair value of the awards, with the resulting expense generally recognized on an accelerated basis over the period during which the employee is required to perform service in exchange for the award.
Income Taxes
We use the asset and liability method of accounting for income taxes. Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that such tax rate changes are enacted. The measurement of a deferred tax asset is reduced, if necessary, by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized.
We use a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more‑likely‑than‑not to be sustained upon examination by taxing authorities. We recognize interest and penalties accrued on any unrecognized tax exposures as a component of income tax expense.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was enacted into law and the new legislation contains certain key tax provisions that affected the Company, including a reduction of the corporate income tax rate to 21% effective January 1, 2018, the repeal of Alternative Minimum Tax (“AMT”) (and changes to the utilization of AMT credit carryforwards that exist at December 31, 2017), among others. We recognized the effect of the tax law changes in the period of enactment, such as re‑measuring our U.S. deferred tax assets and liabilities as well as reassessing the net realizability of our deferred tax assets and liabilities. See Note 10 for additional information.
Concentration of Risk
We maintain cash with high credit quality financial institutions and do not believe we are exposed to a significant credit risk, although such balances exceed federally insured limits. We also invest excess cash in certificates of deposit or investment‑grade securities with average maturities of approximately two years.
Accounting Pronouncements Adopted
In August 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-15, “Statement of Cash Flows Topic 203.” This ASU addresses eight specific cash flow issues and clarifies their presentation and classification in the statement of cash flows. The Company adopted this ASU on January 1, 2018 and concluded that the adoption of this ASU did not have a material impact on our condensed consolidated financial statements. As such, no retrospective adjustment was recorded.
On December 22, 2017, the SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the newly-enacted U.S. Tax Cuts and Jobs Act (the “Act”). SAB 118 allows registrants to include a provisional amount to account for the implications of the Act where a reasonable estimate can be made and requires the completion of the accounting no later than one year from the date of enactment of the Act or December 22, 2018. We finalized our accounting for the effects of the Act in 2018 with no significant changes to provisional amounts recorded in 2017.
Accounting Pronouncements Not Yet Adopted
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” This ASU requires, among other things, a lessee to recognize assets and liabilities associated with the rights and obligations attributable to most leases but also recognize expenses similar to current lease accounting. This ASU also requires certain qualitative and quantitative disclosures designed to assess the amount, timing and uncertainty of cash flows arising from leases, along with additional key information about leasing arrangements. Originally, entities were required to adopt Leases (Topic 842) using a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application. However, in July 2018, the FASB issued ASU 2018-11, “Leases (Topic 842): Targeted Improvements,” which now allows entities the option of recognizing the cumulative effect of applying the new standard as an adjustment to the opening balance of retained earnings in the year of adoption while continuing to present all prior periods under previous lease accounting guidance. In July 2018, the FASB also issued ASU 2018-10, “Codification Improvements to Topic 842, Leases,” which clarifies how to apply certain aspects of ASU 2016-02. ASU 2016-02, ASU 2018-10 and ASU 2018-11 (now commonly referred to as ASC Topic 842 (ASC 842)) is effective for the Company’s fiscal year beginning January 1, 2019. The Company plans to elect the transition option provided under the ASU, which will not require adjustments to comparative periods nor require modified disclosures in those comparative periods. Upon adoption, the Company expects to elect the transition package of practical expedients permitted within the new standard, which among other things, allows the carryforward of the historical lease classification. Based on its anticipated election of practical expedients, the Company anticipates recognizing right of use assets and a lease liability of approximately $6.2 million related to its leases on its consolidated balance sheet as of January 1, 2019. The Company will apply this ASU and its related updates on a modified retrospective basis as of January 1, 2019. The impact on the consolidated statement of comprehensive income and the consolidated statement of cash flows is not expected to be material.
In June 2016, the FASB issued ASU 2016‑13, “ Financial Instruments—Credit Losses Topic 326” . The guidance eliminates the probable initial recognition threshold that was previously required prior to recognizing a credit loss on financial instruments. The credit loss estimate can now reflect an entity’s current estimate of all future expected credit losses. Under the previous guidance, an entity only considered past events and current conditions. The guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The adoption of certain amendments of this guidance must be applied on a modified retrospective basis and the adoption of the remaining amendments must be applied on a prospective basis. The Company is currently evaluating the impact of this guidance although we do not believe the impact of adoption will be material.
In February 2018, the FASB issued ASU 2018-02, “Income Statement - Reporting Comprehensive Income (Topic 220), Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” This ASU gives entities the option to reclassify the disproportionate income tax effects caused by the Act from accumulated other comprehensive income to retained earnings. The update also requires new disclosures, some of which are applicable for all entities. The guidance in ASU 2018-02 is effective for annual reporting periods beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the impact of this ASU on its consolidated financial statements and the timing of adoption although we do not believe the impact of adoption will be material.
In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820), Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement.” This ASU eliminates, adds, and modifies certain disclosure requirements for fair value measurements. Entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but public companies will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. The guidance in ASU 2018-13 is effective for annual reporting periods beginning after December 15, 2019, with early adoption permitted. The Company is currently evaluating the impact of this ASU on its consolidated financial statements and the timing of adoption although we do not believe the impact of adoption will be material .
In August 2018, the FASB issued ASU 2018-15, “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” This ASU requires implementation costs incurred by customers in cloud computing arrangements to be deferred over the non-cancellable term of the cloud computing arrangements plus any optional renewal periods (1) that are reasonably certain to be exercised by the customer or (2) for which exercise of the renewal option is controlled by the cloud service provider. The guidance in ASU 2018-15 is effective for annual reporting periods beginning after December 15, 2019, with early adoption permitted. The Company is currently evaluating the impact of this ASU on its consolidated financial statements and the timing of adoption although we do not believe the impact of adoption will be material. |
