| Significant Accounting Policies | 3. Significant Accounting Policies Cash and Cash Equivalents : All highly liquid investments with original maturities of three months or less are classified as cash equivalents. Investments : Excess cash is invested in high-quality marketable securities. Our investments are classified as either short- or long-term based on their maturity dates. Investments with a maturity of less than one year are classified as short-term; all others are classified as long-term. We have categorized the investments as “held-to-maturity” based on our intent and ability to hold to maturity. Our investments are stated at cost; their fair value is determined each reporting period through quoted market prices of similar instruments in active markets. During the reporting period there were no declines in fair value that were deemed to be other than temporary. Property and Equipment : Property and equipment is stated at cost, less accumulated depreciation and amortization. Depreciation is determined using the straight-line method over the estimated useful lives of the related assets, generally three to five years. Amortization of leasehold improvements is determined using the straight-line method over the lesser of the useful life of the asset or the term of the underlying lease. Upon disposition or retirement of an asset, its cost and related accumulated depreciation or amortization are removed from the accounts and any gain or loss is recognized in the consolidated statement of operations. Patents : Costs related to patent development, filing, and maintenance are expensed as incurred since the underlying technology associated with these assets is purchased or incurred in connection with our research and development efforts and the future realizable value cannot be determined. Impairment of Long-Lived Assets : We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable and exceeds its undiscounted future cash flows. The amount of impairment, if any, is determined by comparing an asset’s estimated fair value to the asset’s respective carrying amount. During the years ended December 31, 2013, 2014, and 2015 we determined there were no indications of asset impairment. Concentrations of Credit Risk : Our financial instruments, which potentially subject us to concentration of credit risk, comprise cash, cash equivalents, and investments. We maintain our cash and cash equivalents in bank accounts, the balances of which generally exceed limits that are insured by the Federal Deposit Insurance Corporation (“FDIC”). Cash balances are insured by the FDIC up to $250,000 per bank. Our cash and cash equivalents at December 31, 2015 exceeded the balance insured by the FDIC by $16,645,000. Our investments, if any, are held in custody by a large financial asset manager in the United States. Management believes the Company is not exposed to significant credit risk due to the financial position of the depository institutions in which the assets are held. Additionally, we maintain our cash and investments in accordance with our investment policy, which is designed to maintain safety and liquidity. We have not realized any losses in our investments and believe we are not exposed to significant credit risk related to our cash and cash equivalents. Convertible Notes Payable : Convertible notes payable are analyzed at issue date to determine balance sheet classification, issue discounts or premiums, and embedded or derivative features. Embedded or derivative features are evaluated in accordance with accounting guidance for derivative securities and, if the features give rise to separate accounting, we make an election to account for the notes at cost or at fair value. If fair value accounting is elected, on the issue date we record the difference between the issue price of the notes and their fair value as a gain or loss in the consolidated statement of operations. We remeasure the fair value at each reporting date and record a gain (upon a decrease in fair value) or loss (upon an increase in fair value) for the change in fair value. Through September 30, 2015, the fair values were determined using a binomial valuation model; we moved to a least squares Monte Carlo simulation model for the December 31, 2015 valuation as it was considered better aligned with the inputs to and features of the Notes. This change in models did not have a material effect on the fair value of the Notes. Inputs to the models include the market value of the underlying stock, a life equal to the contractual life of the notes, incremental borrowing rates that correspond to debt with similar credit worthiness, and estimated volatility based on the historical prices of our trading securities. We also make assumptions as to our abilities to test and commercialize our product(s), to obtain future financings when and if needed, and to comply with the terms and conditions of the notes. Following an analysis of their embedded and derivative features and a projection of the volatility of their effective interest rates under the cost method, we elected to utilize fair value accounting for the convertible notes payable we issued in November 2014. Management believes the fair value method of accounting provides a more appropriate presentation of these liabilities than would be provided under the cost method. 3. Significant Accounting Policies (continued) Common Stock Warrants : We record the fair value of warrants issued for the purchase of common stock as a liability since the warrants call for issuance of registered shares upon exercise, a condition that we may not be able to accommodate and which would then result in a net settlement of the warrants. Until the time the warrants are exercised or expire, the fair value is assessed at each reporting date. Through September 30, 2015, the values were determined utilizing a binomial valuation model since two exercise prices were possible; we moved to a Black-Scholes valuation model to determine the value at December 31, 2015 because Company conditions had been met that resulted in a fixed exercise price per share of $2.6073. This change in models did not have a material effect on the fair value of the warrants. Any change in value is recorded as a gain or loss component of other income (expense) in our consolidated statement of operations. Inputs to the valuation model are of the same nature as those used for our convertible notes payable. Research and Development : Research and development costs are expensed as incurred. These costs include salaries, employee benefits, laboratory supplies, consulting services, manufacturing products and services, preclinical and clinical costs, technology license fees, laboratory equipment depreciation, facility costs, and certain indirect costs. Segment Information : We operate in one business segment, which is the development and commercialization of medical devices. Foreign Currency : The functional currency of our subsidiary REVA Germany GmbH is the Euro. Balance sheet accounts of our subsidiary are translated into United States dollars using the exchange rate in effect at the balance sheet date while expenses are translated using the average exchange rate in effect during the period. Gains and losses arising from translation of our subsidiary’s financial statements are recorded to other comprehensive income (loss). These gains and losses, in the aggregate, were insignificant through December 31, 2015. Income Taxes : We account for income taxes using the asset and liability method, under which the current income tax expense or benefit is the amount of income tax expected to be payable or refundable in the current year. Deferred tax assets and liabilities are recorded for the estimated future tax consequences of temporary differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases, and for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the year in which the temporary differences are expected to be recovered or settled. We evaluate the realizability of our deferred tax assets and establish a valuation allowance when it is more likely than not that all or a portion of our deferred tax assets will not be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies, and results of recent operations. If we determine that we would be able to realize our deferred tax assets in the future in excess of their net recorded amount, we would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes. We account for the uncertainty in income tax components based on tax positions taken or expected to be taken in a tax return. To recognize a benefit, a tax position must be more likely than not to be sustained upon examination by taxing authorities. We do not recognize tax benefits that have a less than 50 percent likelihood of being sustained. Our policy is to recognize interest and tax penalties related to unrecognized tax benefits in income tax expense; no interest or tax penalties on uncertain tax benefits have been recorded through December 31, 2015. We are subject to taxation in U.S. and California jurisdictions. As of December 31, 2015, we are no longer subject to U.S. federal or state examinations for years before 2011 and 2010, respectively. However, to the extent allowed by law, the tax authorities may have the right to examine prior periods where net operating losses were generated and carried forward and to make adjustments up to the amount of the net operating loss carryforward amount. We are not currently under Internal Revenue Service (“IRS”), state, or local tax examination. 3. Significant Accounting Policies (continued) Stock-Based Compensation : We recognize stock-based compensation expense in connection with stock option grants, restricted stock awards, and restricted stock unit (“RSU”) awards to employees, directors, and consultants. For options granted to employees and directors, we determine the compensation expense based on estimated grant date fair values utilizing the Black-Scholes option valuation model. The Black-Scholes model requires the input of assumptions, including volatility, the expected term, and the fair value of the underlying common stock on the date of grant, among other inputs. We adjust stock-based compensation expense for estimated option forfeitures based on our five-year historical average of actual forfeitures. For restricted stock and RSUs, the grant date fair value is equal to the closing market price of our common stock on the date of award. We use the straight-line method to allocate compensation expense to reporting periods over each recipient’s requisite service period, which is generally from one to four years. All stock-based compensation expense is recorded as either research and development or general and administrative expense based on a recipient’s work classification. For stock options and RSUs that vest to a recipient based on achievement of performance milestones, we only record compensation expense for the performance milestones that are probable of being achieved, with such expense recorded on a straight-line basis over the expected vesting period. During the year ended December 31, 2015, we determined that two of the three performance targets for our performance-based awards were probable of being achieved and, therefore, recorded expense for those awards only. We reassess our performance-based estimates each reporting period and, if the estimated service period changes, we recognize all remaining compensation expense over the remaining service period and, if the probability of achievement changes to or from “probable,” recognize a cumulative effect. For options granted to consultants, we estimate fair values at the date of grant and at each subsequent reporting period and record compensation expense based on the fair value during the service period of the consultant. We estimate the fair value utilizing the Black-Scholes option valuation model with the same approach to inputs and assumptions as we use to estimate the fair value of employee options, except we use the remaining term as the expected life of the option. Net Income or Net Loss Per Common Share : Basic net income or net loss per common share is calculated by dividing the net income or net loss attributable to common stockholders by the weighted average number of common shares outstanding for the period, without consideration for common stock equivalents. Diluted net loss per share is computed by dividing the net loss attributable to common stockholders by the weighted average number of common share equivalents outstanding for the period determined using the treasury-stock method and the if-converted method, as applicable. For purpose of this calculation, common stock options and restricted stock subject to forfeiture are considered to be common stock equivalents; common share equivalents are included in the calculation of diluted net loss per share only when their effect is dilutive. The following equivalent shares were excluded from the computation of diluted net loss per share because including them would have been antidilutive:
Year Ended December 31,
2013
2014
2015
Weighted Average Shares Excluded:
Options to purchase common stock
3,901,316
4,355,536
4,812,372
Unvested restricted stock
96,347
91,750
61,623
Restricted stock units
—
—
768,908
Warrants to purchase common stock
—
1,150,685
7,647,260
Common share equivalents of convertible notes
—
1,513,138
11,506,156
3,997,663
7,111,109
24,796,319
3. Significant Accounting Policies (continued) Fair Value Measurements : We measure the fair value of our financial and non-financial assets and liabilities at each reporting date. Fair value is defined as the exchange price at which an asset or liability would be transferred in the principal or most advantageous market in an orderly transaction between market participants as of a measurement date. Accounting guidance provides an established hierarchy to be used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs; observable inputs are required to be used when available. Observable inputs are those used by market participants to value an asset or liability and are developed based on market data obtained from sources independent of us. Unobservable inputs are those that reflect our assumptions about factors that market participants would use to value an asset or liability. Fair value measurements are classified and disclosed in one of the following three categories:
Level 1
–
Quoted market prices for identical assets or liabilities in active markets at the measurement date;
Level 2
–
Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities in active or non-active markets, or other inputs that can be corroborated by observable market data for substantially the full term of an asset or liability; and,
Level 3
–
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of an asset or liability, including management’s best estimate of the factors that market participants would use in pricing an asset or liability at the measurement date. We carry our convertible notes payable and common stock warrant liability at fair value. We carry our other financial instruments at amortized cost; these items include cash, investments, accounts payable, and accrued expenses. The carrying amounts of our cash and cash equivalents, accounts payable, and accrued expenses are considered to be reasonable estimates of their respective fair values due to their short-term nature and, therefore, fair value information is not provided in the following table. Utilizing the lowest level inputs available under the measurement hierarchy, the fair values of our measured financial instruments comprise the following (we had no Level 1 financial instruments):
Level 2
Level 3
(in thousands)
Fair Value at December 31, 2014:
Assets:
Certificates of deposit due in one year or less
$
991
$
—
Liabilities:
Convertible notes payable
—
37,780
Common stock warrant liability
—
15,389
$
—
$
53,169
Fair Value at December 31, 2015:
Liabilities:
Convertible notes payable
—
75,365
Common stock warrant liability
—
19,622
$
—
$
94,987
Our Level 2 financial assets consist of certificates of deposit (“CDs”) that are held to maturity and carried at cost; their fair value is determined each reporting period through quoted market prices of similar instruments in active markets. We had $4,000 in unrealized losses on our CDs as of December 31, 2014. We held no CDs as of December 31, 2015. 3. Significant Accounting Policies (continued) Fair Value Measurements : Our Level 3 financial liabilities, which are recurring, consist of convertible notes payable (the “Notes”) and warrants for the purchase of common stock, all of which were issued on November 14, 2014. The fair values of these liabilities as of their issuance date and subsequent measurement dates through September 30, 2015 were determined utilizing a binomial model. Valuation of the Notes at December 31, 2015 was determined utilizing a least squares Monte Carlo simulation model and valuation of the warrants at December 31, 2015 was determined utilizing a Black-Scholes valuation model. This change in models did not have a material effect on the fair values of the securities. All of these valuation models require use of unobservable inputs that are determined by management, with the assistance of independent experts. These inputs represent our best estimates, but involve certain inherent uncertainties. We used the market value of the underlying stock, a life equal to the contractual life of the financial instrument, incremental borrowing rates and bond yields that correspond to instruments of similar credit worthiness and the instrument’s remaining life, an estimate of volatility based on the historical prices of our trading securities, and we made assumptions as to our abilities to test and commercialize our product(s), to obtain future financings when and if needed, and to comply with the terms and conditions of our Notes. A summary of the weighted-average assumptions used to value the Notes and warrants is as follows:
Year Ended December 31,
2014
2015
Weighted Average Assumptions:
Market price per share of common stock
$3.03
$5.14
Risk-free interest rate
2.6%
1.7%
Expected volatility of common stock
87.7%
81.7%
Expected life (in years)
4.94
4.21
Bond yield of equivalent securities
29.2%
29.0% A significant change in the market price per share, expected volatility, or bond yield of equivalent securities, in isolation, would result in significantly higher or lower fair value measurements. In combination, changes in these inputs could result in a significantly higher or lower fair value measurement if the input changes were to be aligned, or could result in a minimally higher or lower fair value measurement if the input changes were of a compensating nature. A total of $56,788,000 in unrealized losses arising from the change in fair value of our Level 3 financial liabilities was recorded during the year ended December 31, 2015. Our Level 3 fair value activity is as follows:
Level 3
(in thousands)
Balance at December 31, 2013
$
—
Fair value on Issuance Date:
Convertible notes payable
29,689
Warrants to purchase common stock
10,938
Balance at November 14, 2014
40,627
Losses from Change in Fair Value:
Convertible notes payable
8,091
Warrants to purchase common stock
4,451
Balance at December 31, 2014
53,169
Transfer to additional paid-in capital upon exercise of warrants
(14,970
)
Losses from Change in Fair Value:
Convertible notes payable
37,585
Warrants to purchase common stock
19,203
Balance at December 31, 2015
$
94,987
3. Significant Accounting Policies (continued) Recent Accounting Pronouncements : In April 2014, ASU 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity , was issued. ASU 2014-08 raises the threshold for a disposal to qualify as a discontinued operation and requires new disclosures for certain other disposals that do not meet the definition of a discontinued operation. We adopted this ASU January 1, 2015; its adoption did not have an effect on our financial position or results of operations. In August 2014, ASU 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern |
