| Summary of Significant Accounting Policies | 2. Summary of Significant Accounting Policies
Basis of Presentation
These condensed consolidated financial statements have been
prepared in accordance with accounting principles generally
accepted in the United States of America (U.S. GAAP). The
condensed consolidated financial statements include the
Company’s accounts and those of its wholly-owned
subsidiaries. All intercompany accounts and transactions have been
eliminated.
Segments
The chief operating decision maker for the Company is the Chief
Executive Officer. The Chief Executive Officer reviews financial
information presented on a consolidated basis, accompanied by
information about revenue by geographic region, for purposes of
allocating resources and evaluating financial performance. The
Company has one business activity and there are no segment managers
who are held accountable for operations, operating results or plans
for levels or components below the consolidated unit level.
Accordingly, the Company has determined that it has a single
reportable and operating segment structure. The Company and its
Chief Executive Officer evaluate performance based primarily on
revenue in the geographic locations in which the Company
operates.
To date, the Company has derived substantially all of its revenues
from sales to customers in Australia and Europe, and has only
recently begun to sell its products in the Unites States. Revenue
by geography is based on the billing address of the customer. The
following table sets forth countries with revenue accounting for
more than 10% of the total revenue during the periods
presented:
Three Months Six Months
2015 2014 2015 2014
Australia 30 % 39 % 29 % 33 %
United Kingdom 16 % 16 % 19 % 18 %
Germany 19 % 20 % 19 % 18 %
Netherlands 5 % 9 % 6 % 11 %
Long-lived assets located outside the United States are not
material; therefore, disclosures have been limited to revenue.
Foreign Currency Translation
The Company’s consolidated financial statements are prepared
in U.S. dollars (USD). Its foreign subsidiaries use their local
currency as their functional currency and maintain their records in
the local currency. Accordingly, the assets and liabilities of
these subsidiaries are translated into USD using the current
exchange rates in effect at the balance sheet date and equity
accounts are translated into USD using historical rates. Revenues
and expenses are translated using the monthly average exchange
rates during the period when the transaction occurs. The resulting
foreign currency translation adjustments from this process are
recorded in accumulated other comprehensive income (loss) in the
consolidated balance sheets.
Unrealized foreign exchange gains and losses from the remeasurement
of assets and liabilities denominated in currencies other than the
functional currency of the reporting entity are recorded in other
income (expense), net. Additionally, realized gains and losses
resulting from transactions denominated in currencies other than
the local currency are recorded in other income (expense), net in
the consolidated statements of operations. The Company recorded net
unrealized and net realized foreign currency transaction gain
(loss) during the periods presented as follows (in millions):
Three Months Ended Six Months Ended
2015 2014 2015 2014
Net unrealized foreign currency gain (loss) $ 1,158 $ 620 $ 665 $ 817
Net realized foreign currency gain (loss) $ (934 ) $ (456 ) $ (1,406 ) $ (394 )
As the Company’s international operations grow, its risks
associated with fluctuation in currency rates will become greater,
and the Company will continue to reassess its approach to managing
this risk. In addition, currency fluctuations or a weakening USD
can increase the costs of the Company’s international
expansion. To date, the Company has not entered into any foreign
currency hedging contracts. Based on its current international
structure, the Company does not plan on engaging in hedging
activities in the near future.
Use of Estimates
The preparation of financial statements in accordance with U.S.
GAAP requires management to make estimates and assumptions that
affect the amounts reported in the condensed consolidated financial
statements and accompanying notes. Significant accounting estimates
and management judgments reflected in the condensed consolidated
financial statements include items such as allowances for doubtful
accounts; clinical accruals; stock-based compensation; depreciation
and amortization periods; inventory valuation; valuation of
investments and deferred tax assets, including valuation
allowances. Estimates are based on historical experience, where
applicable, and other assumptions believed to be reasonable by the
management. Actual results may differ from those estimates under
different assumptions or conditions.
Concentration of Credit Risk and Other Risks and
Uncertainties
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash, cash equivalents and
investments. The majority of the Company’s cash is held by
one financial institution in the United States of America in excess
of federally insured limits. The Company maintained investments in
money market funds that were not federally insured during the
periods ended June 30, 2015 and December 31, 2014 and
held cash in foreign banks of approximately $5.5 million at
June 30, 2015 and $4.3 million at December 31, 2014
that was not federally insured. The Company has not experienced any
losses on its deposits of cash and cash equivalents.
Substantially all of the Company’s revenue has been derived
from sales of its products in international markets, principally
Australia and Europe. In the international markets in which the
Company participates, the Company uses both a direct sales force
and distributors to sell its products. The Company performs ongoing
credit evaluations of its direct customers and distributors, does
not require collateral and maintains allowances for potential
credit losses on customer accounts when deemed necessary.
During the three-month and six-month periods ended June 30,
2015, and during the three-month period ended June 30, 2014,
no customers accounted for more than 10% of the Company’s
revenue. During the six-month period ended June 30, 2014, one
customer accounted for 11% of the Company’s revenue. As of
June 30, 2015, one customer accounted for 10% of the accounts
receivable balance. As of December 31, 2014, no customers
accounted for more than 10% of the Company’s accounts
receivable balance.
The Company is subject to risks common to early-stage medical
device companies, including, but not limited to, new technological
innovations, dependence on key personnel, protection of proprietary
technology, compliance with government regulations, product
liability, manufacturing quality and scaling, uncertainty of market
acceptance of products and the need to obtain additional financing.
The Company is dependent on third-party manufacturers and
suppliers, in some cases sole- or single-source suppliers.
There can be no assurance that the Company’s products or
services will continue to be accepted in its existing marketplaces
or gain acceptance in the U.S. marketplace, nor can there be any
assurance that any future products or services can be developed or
manufactured at an acceptable cost and with appropriate performance
characteristics, or that such products or services will be
successfully marketed, if at all.
The Company expects to incur substantial operating losses for the
next several years and may need to obtain additional financing in
order to launch and commercialize any products or product
candidates for which it receives regulatory approval. There can be
no assurance that such financing will be available or will be at
terms acceptable by the Company.
Fair Value of Financial Instruments
The carrying amounts of certain of the Company’s financial
instruments, including cash equivalents, short-term investments,
accounts receivable, accounts payable and accrued liabilities,
approximate fair value due to their relatively short
maturities.
Cash and Cash Equivalents
The Company considers all highly-liquid investments purchased with
an original maturity of three months or less at the date of
purchase to be cash equivalents. Cash and cash equivalents include
money market funds in the amount of $41.5 million and
$10.6 million as of June 30, 2015 and December 31,
2014, respectively. At June 30, 2015 and December 31,
2014, the Company’s cash equivalents were held at
institutions in the United States and include deposits in a money
market fund which was unrestricted as to withdrawal or use.
Restricted Cash
Restricted cash as of June 30, 2015 consists of a certificate
of deposit collateralizing payment of charges related to the
Company’s credit cards of $0.3 million and a letter of credit
of $0.6 million representing collateral for the Company’s
building lease entered into in March 2015. Restricted cash of
$0.3 million as of December 31, 2014 represents a
certificate of deposit collateralizing payment of charges related
to the Company’s corporate credit cards.
Investment Securities
The Company classifies its investment securities as
available-for-sale. Those investments with maturities of less than
12 months at the date of purchase are considered short-term
investments. Those investments with maturities greater than
12 months at the date of purchase are considered long-term
investments. The Company’s investment securities classified
as available-for-sale are recorded at fair value based upon quoted
market prices at period end. Unrealized gains and losses, deemed
temporary in nature, are reported as a separate component of
accumulated comprehensive income (loss).
A decline in the fair value of any security below cost that is
deemed other than temporary results in a charge to earnings and the
corresponding establishment of a new cost basis for the security.
Premiums (discounts) are amortized (accreted) over the life of the
related security as an adjustment to yield using the straight-line
interest method. Dividend and interest income are recognized when
earned. Realized gains and losses are included in earnings and are
derived using the specific identification method for determining
the cost of securities sold.
Inventories
Inventories are stated at the lower of cost to purchase or
manufacture the inventory or the market value of such inventory.
Cost is determined using the standard cost method which
approximates the first-in, first-out basis. Market value is
determined as the lower of replacement cost or net realizable
value. The Company regularly reviews inventory quantities in
consideration of actual loss experiences, projected future demand
and remaining shelf life to record a provision for excess and
obsolete inventory when appropriate.
The Company’s policy is to write down inventory that is no
longer saleable, inventory that has a cost basis in excess of its
expected net realizable value and inventory in excess of expected
requirements. The estimate of excess quantities is subjective and
primarily dependent on the Company’s estimates of future
demand for a particular product. If the estimate of future demand
is inaccurate based on actual sales, the Company may increase the
write down for excess inventory for that component and record a
charge to inventory impairment in the accompanying consolidated
statements of operations and comprehensive loss. The Company
periodically evaluates the carrying value of inventory on hand for
potential excess amounts over demand using the same lower of cost
or market approach as that has been used to value the inventory.
The Company also periodically evaluates inventory quantities in
consideration of actual loss experience. In addition, the Company
determines at times that there may be certain inventory that does
not conform to our product requirements. As a result of these
evaluations, the Company recognized a total write down for Senza
inventories of $1.3 million and $12,000 for the six months ended
June 30, 2015 and 2014, respectively. The Company’s
estimation of the future demand for a particular component of the
Senza product may vary and may result in changes in estimates of
inventory values in any particular period.
Shipping and Handling Costs
Shipping and handling costs are expensed as incurred and are
included in cost of revenue.
Revenue Recognition
The Company recognizes revenue when all of the following criteria
are met:
• persuasive evidence of an arrangement
exists;
• the sales price is fixed or
determinable;
• collection of the relevant receivable
is probable at the time of sale; and
• delivery has occurred or services
have been rendered.
For a majority of sales, where the Company’s sales
representative delivers its product at the point of implantation at
hospitals or medical facilities, the Company recognizes revenue
upon completion of the procedure and authorization, which
represents satisfaction of the required revenue recognition
criteria. For the remaining sales, which are sent from the
Company’s distribution centers directly to hospitals and
medical facilities, as well as distributor sales, where product is
ordered in advance of an implantation procedure and a valid
purchase order has been received, the Company recognizes revenue at
the time of shipment of the product, which represents the point in
time when the customer has taken ownership and assumed the risk of
loss and the required revenue recognition criteria are satisfied.
The Company’s customers are obligated to pay within specified
terms regardless of when or if they ever sell or use the products.
The Company does not offer rights of return or price protection and
it has no post-delivery obligations.
The Company has a limited one- to five-year warranty to most
customers in the markets in which it operates. Estimated warranty
obligations are recorded at the time of sale and to date, warranty
costs have been insignificant.
Property and Equipment
Property and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation of property and
equipment is computed using the straight-line method over the
assets’ estimated useful lives of three to five years.
Leasehold improvements are amortized on a straight-line basis over
the shorter of the estimated useful life of the asset or the term
of the lease. Upon retirement or sale, the cost and related
accumulated depreciation are removed from the consolidated balance
sheet and the resulting gain or loss, if any, is reflected in
operations. Maintenance and repairs are charged to operations as
incurred.
Impairment of Long-Lived Assets
The Company reviews long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying
amount of an asset might not be recoverable. When such an event
occurs, management determines whether there has been impairment by
comparing the anticipated undiscounted future net cash flows to the
related asset group’s carrying value. If an asset is
considered impaired, the asset is written down to fair value, which
is determined based either on discounted cash flows or appraised
value, depending on the nature of the asset. There were no
impairment charges or changes in estimated useful lives recorded
through June 30, 2015.
Income Taxes
The Company prepares quarterly estimates of its tax provision using
a discrete approach. Additionally, the Company records income taxes
using the asset and liability method, which requires the
recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been recognized in the
Company’s condensed consolidated financial statements or
income tax returns. In estimating future tax consequences, expected
future events other than enactments or changes in the tax law or
rates are considered. Valuation allowances are provided when
necessary to reduce deferred tax assets to the amount expected to
be realized.
The Company operates in various tax jurisdictions and is subject to
audit by various tax authorities. To date, substantially all of the
Company’s revenues have been derived outside of the United
States, and the taxes paid have been predominantly due to income
taxes in foreign jurisdictions in which the Company conducts
business. The Company provides for tax contingencies whenever it is
deemed probable that a tax asset has been impaired or a tax
liability has been incurred for events such as tax claims or
changes in tax laws. Tax contingencies are based upon their
technical merits, relative tax law, and the specific facts and
circumstances as of each reporting period. Changes in facts and
circumstances could result in material changes to the amounts
recorded for such tax contingencies.
The Company records uncertain tax positions on the basis of a
two-step process whereby (1) a determination is made as to
whether it is more likely than not that the tax positions will be
sustained based on the technical merits of the position and
(2) for those tax positions that meet the more-likely-than-not
recognition threshold, the Company recognizes the largest amount of
tax benefit that is greater than 50% likely to be realized upon
ultimate settlement with the related tax authority.
Comprehensive Income (Loss)
Comprehensive income (loss) represents all changes in the
stockholders’ equity except those resulting from and
distributions to stockholders. The Company’s changes in
unrealized gains and losses on short-term available-for-sale
investment securities and foreign currency translation adjustments
represent the components of other comprehensive income (loss) that
are excluded from the reported net loss and have been presented in
the consolidated statements of operations and comprehensive
loss.
Research and Development
Research and development (R&D), costs, including new product
development, regulatory compliance and clinical research, are
charged to operations as incurred in the consolidated statements of
operations and comprehensive loss. Such costs include
personnel-related costs, including stock-based compensation,
supplies, services, depreciation, allocated facilities and
information services, clinical trial and related clinical
manufacturing expenses, fees paid to investigative sites and other
indirect costs.
Stock-Based Compensation
The Company accounts for stock-based compensation arrangements with
employees in accordance with ASC 718, Stock Based
Compensation
The Company’s determination of the fair value of stock
options on the date of grant utilizes the Black-Scholes
option-pricing model and is impacted by its common stock price as
well as changes in assumptions regarding a number of highly complex
and subjective variables. These variables include, but are not
limited to, expected term that options will remain outstanding,
expected common stock price volatility over the term of the option
awards, risk-free interest rates and expected dividends.
The fair value is recognized over the period during which an
optionee is required to provide services in exchange for the option
award, known as the requisite service period (usually the vesting
period) on a straight-line basis. Stock-based compensation expense
recognized at fair value includes the impact of estimated
forfeitures. The Company estimates future forfeitures at the date
of grant and revises the estimates, if necessary, in subsequent
periods if actual forfeitures differ from those estimates.
Equity instruments issued to non-employees are recorded at their
fair value on the measurement date and are subject to periodic
adjustments as the underlying equity instruments vest. The fair
value of options granted to consultants is expensed when vested.
The non-employee stock-based compensation expense was not material
for all periods presented.
Estimating the fair value of equity-settled awards as of the grant
date using valuation models, such as the Black-Scholes option
pricing model, is affected by assumptions regarding a number of
complex variables. Changes in the assumptions can materially affect
the fair value and ultimately how much stock-based compensation
expense is recognized. These inputs are subjective and generally
require significant analysis and judgment to develop. For all stock
options granted to date, the Company estimated the volatility data
based on a study of publicly traded industry peer companies. For
purposes of identifying these peer companies, the Company
considered the industry, stage of development, size and financial
leverage of potential comparable companies. The risk-free interest
rate is based on the yield available on U.S. Treasury zero-coupon
issues similar in duration to the expected term of the
equity-settled award.
The Company recognizes a benefit from stock-based compensation as
additional paid-in capital if an incremental tax benefit is
realized by following the with-and-without approach. In addition,
the company has also elected to ignore the indirect tax effects of
stock-based compensation deductions for financial and accounting
reporting purposes.
Net Loss per Share of Common Stock
Basic net loss per common share is calculated by dividing the net
loss attributable to common stockholders by the weighted average
number of common shares outstanding during the period, without
consideration for potentially dilutive securities. Diluted net loss
per share is computed by dividing the net loss attributable to
common stockholders by the weighted average number of common shares
and potentially dilutive securities outstanding for the period. For
purposes of the diluted net loss per share calculation, the
Company’s redeemable convertible preferred stock and
convertible preferred stock and common stock options are considered
to be potentially dilutive securities. Because the Company has
reported a net loss in all periods presented, diluted net loss per
common share is the same as basic net loss per common share for
those periods.
Recent Accounting Pronouncements
In July 2015, the Financial Accounting Standards Board (FASB)
issued ASU No. 2015-11, Inventory (Topic 330):
Simplifying the Measurement of Inventory, which permits companies
to measure inventory at the lower of cost and realizable value. ASU
2015-11 applies to all business entities and is effective for
public business entities for annual periods, and interim periods
within those annual periods, beginning after December 15,
2016. Early adoption is permitted. The Company is in the process of
evaluating whether the adoption of ASU 2015-11 will have a material
effect on its consolidated financial statements.
In April 2015, the FASB issued ASU No. 2015-03,
Interest—Imputation of Interest (Subtopic 835-30):
Simplifying the Presentation of Debt Issuance Costs
In May 2014, the FASB issued ASU No. 2014-09, Revenue from
Contracts with Customers Revenue
Recognition
In June 2014, the FASB issued ASU 2014-12, Accounting for
Share-Based Payments When the Terms of an Award Provide That a
Performance Target Could Be Achieved after the Requisite Service
Period
In August 2014, the FASB issued ASU No. 2014-15, Disclosure
of Uncertainties About an Entity’s Ability to Continue as a
Going Concern |
