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| 1. | Nature of Operations |
The Company
Corindus Vascular Robotics, Inc. (the “Company”), a Nevada corporation (formerly named Your Internet Defender, Inc. (“YIDI”)), acquired Corindus, Inc., a privately-held company, in a reverse acquisition on August 12, 2014. The Company’s corporate headquarters and research and development facility are in Waltham, Massachusetts and the Company is engaged in the marketing, sales and development of robotic-assisted catheterization systems (“CorPath System”).
Since its inception on March 21, 2002, the Company has devoted its efforts principally to research and development, business development activities and raising capital. In July 2012, the Company received clearance from the FDA to market its CorPath System in the United States and shipped its first commercial product under this clearance in September 2012. In 2013, the Company moved into the growth stage, investing in sales and marketing in order to build the customer base. While the Company is initially cleared for and is targeting PCI procedures, the Company believes its technology platform has the capability to be developed in the future for other segments of the vascular market, including peripheral vascular, neurointerventional and other more complex cardiac interventions such as structural heart.
In October 2015, the Company announced that the FDA had given 510(k) clearance for its robotic-assisted CorPath System to be used during percutaneous coronary interventions performed via radial access. The 510(k) clearance was based on results of a clinical trial conducted at Spectrum Health, Grand Rapids, Michigan, and St. Joseph’s Hospital Health Center, Syracuse, New York.
The Company’s future capital requirements will depend upon many factors, including progress with developing, manufacturing and marketing its technologies, the time and costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims and other proprietary rights, its ability to establish collaborative arrangements, marketing activities and competing technological and market developments, including regulatory changes affecting medical procedure reimbursement, and overall economic conditions in its target markets.
Recent Equity Offerings
On May 28, 2015, the Company completed a public offering by issuing 12,650,000 shares of its common stock at $3.80 per share in exchange for proceeds of $44,392, net of underwriting discounts, commissions and other offering costs. In connection with the public offering, the Company’s common stock was approved for listing on the NYSE MKT, where it commenced trading on May 29, 2015 under the symbol “CVRS”.
Liquidity
The Company has incurred losses since inception and has funded its operations primarily through the issuance of capital stock and debt. As of December 31, 2015, the Company had an accumulated deficit of $113,640, and net borrowings outstanding of $7,978, of which $4,373 is contractually due over the next 12 months.
The Company has cash, cash equivalents and marketable securities of $42,666 and working capital of $37,988 at December 31, 2015. The Company believes that these available resources will be sufficient to meet the Company’s cash requirements through December 31, 2016, including funding its anticipated losses and scheduled debt maturities. Additionally, the Company is in compliance with its debt covenant requirements as of December 31, 2015 and expects to remain in compliance throughout 2016. As the Company continues to incur losses, transition to profitability is dependent upon achieving a level of revenues adequate to support the Company’s cost structure. The Company may never achieve profitability, and unless and until doing so, intends to fund future operations through additional debt or equity offerings. There can be no assurances, however, that additional funding will be available on terms acceptable to the Company, if at all.
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| 2. | Significant Accounting Policies |
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Corindus, Inc. and Corindus Security Corporation, which was created on December 21, 2012 to hold and invest the proceeds from issuance of equity. All intercompany transactions and balances have been eliminated in consolidation. The functional currency of both wholly-owned subsidiaries is the U.S. dollar and, therefore, the Company has not recorded any currency translation adjustments.
In the fourth quarter of 2014, the Company participated in the formation of a not-for-profit, which was established to generate awareness of the health risks linked to the use of fluoroscopy in hospital catheterization. As of December 31, 2015, the Company’s Chief Executive Officer and one of its senior executives represented two of the three voting members of the board of directors of the entity. As a result, under the voting model used for the consolidation of related parties, which are controlled by a company, the Company has consolidated the financial statements of the entity, and recognized expenses of $18 and $386 for the years ended December 31, 2014 and 2015, respectively. The entity had assets and liabilities of $56 and $75, respectively, on the Company's balance sheet at December 31, 2015. The entity did not have any assets or liabilities on the Company's balance sheet at December 31, 2014.
Segment Information
The Company operates in one business segment, which is the development, marketing and sales of robotic-assisted vascular interventions. Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker in making decisions regarding resource allocation and assessing performance. To date, the chief operating decision maker has made such decisions and assessed performance at the company level, as one segment. The Company’s chief operating decision maker is the Chief Executive Officer.
Revenues from domestic customers were $896, $2,068 and $2,684 for the years ending December 31, 2013, 2014 and 2015, respectively. Revenues from international customers, primarily in Dubai and Israel, were $0, $915 and $45 for the years ending December 31, 2013, 2014 and 2015, respectively.
Use of Estimates
The process of preparing financial statements in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of assets and liabilities at the date of the financial statements. Such management estimates include those relating to revenue recognition, inventory valuation, assumptions used in the valuation of stock-based awards, and valuation allowances against deferred income tax assets. Actual results could differ from those estimates.
Cash Equivalents
The Company considers highly liquid short-term investments, which consists of money market funds and certificates of deposit with original maturity dates of three months or less at the date of purchase, to be cash equivalents. From time to time, the Company’s cash balances may exceed federal deposit insurance limits.
Marketable Securities
The Company determines the appropriate classification of marketable securities at the time of purchase and reevaluates such designation at each balance sheet date. The Company has classified all of its marketable securities at December 31, 2015 as “available-for-sale” pursuant to ASC 320, Investments – Debt and Equity Securities. The Company records available-for-sale securities at fair value, with the unrealized gains and losses included in accumulated other comprehensive loss in stockholders’ equity.
The Company adjusts the cost of available-for-sale debt securities for amortization of premiums and accretion of discounts to maturity. The Company includes such amortization and accretion in interest and other income (expense). The cost of securities sold is based on the specific identification method. The Company includes interest income on securities classified as available-for-sale in interest and other income (expense).
The Company reviews marketable securities for other-than-temporary impairment whenever the fair value of a marketable security is less than the amortized cost and evidence indicates that a marketable security’s carrying amount is not recoverable within a reasonable period of time. Other-than-temporary impairments of investments are recognized in the consolidated statements of operations if the Company has experienced a credit loss, has the intent to sell the marketable security, or if it is more likely than not that the Company will be required to sell the marketable security before recovery of the amortized cost basis.
At December 31, 2015, the balance in the Company’s accumulated other comprehensive loss was composed solely of activity related to the Company’s available-for-sale securities. There were no realized gains or losses recognized on the maturity of available-for-sale securities during the year ended December 31, 2015, and as a result, the Company did not reclassify any amount out of accumulated other comprehensive loss during that same period.
The aggregate fair value of securities held by the Company in an unrealized loss position for less than twelve months as of December 31, 2015 consists of 13 certificates of deposit and two U.S. Treasuries. The Company has the intent and ability to hold such securities until recovery. As of December 31, 2015, the Company's available-for-sale securities had remaining maturities no greater than one year. The Company determined that there was no material change in the credit risk of the above investments. As a result, the Company determined it did not hold any investments with an other-than-temporary impairment as of December 31, 2015.
The following table summarizes available-for-sale securities held at December 31, 2015:
| Description | Amortized Cost | Unrealized Gain | Unrealized Loss | Fair Value | ||||||||||||
| December 31, 2015 | ||||||||||||||||
| U.S. government treasuries | $ | 15,885 | $ | 1 | $ | (10 | ) | $ | 15,876 | |||||||
| Certificates of deposit | 4,653 | — | (5 | ) | 4,648 | |||||||||||
| Total | $ | 20,538 | $ | 1 | $ | (15 | ) | $ | 20,524 | |||||||
Certain short-term securities with original maturities of less than 90 days are included in cash and cash equivalents on the consolidated balance sheet at December 31, 2015 and are not included in the table above. The Company did not hold any available-for-sale securities at December 31, 2014.
Fair Value Measurements
In accordance with ASC 820, Fair Value Measurements and Disclosures, the Company generally defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company uses a three-tier fair value hierarchy, which classifies the inputs used in measuring fair values. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements), and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:
| ● | Level 1 – inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. |
| ● | Level 2 – inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability. |
| ● | Level 3 – inputs are unobservable inputs for the asset or liability in which there is little, if any, market activity for the asset or liability at the measurement date. |
The following table sets forth the Company’s assets that are measured at fair value on a recurring basis as of December 31, 2015:
| Fair value measurement category | ||||||||||||||||
| Description | Total | Quoted prices in active markets (Level 1) |
Significant other observable inputs (Level 2) |
Significant unobservable inputs (Level 3) |
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| December 31, 2015: | ||||||||||||||||
| Assets: | ||||||||||||||||
| Cash equivalents | $ | 6,356 | $ | 6,107 | $ | 249 | $ | — | ||||||||
| Marketable securities: | ||||||||||||||||
| U.S. government treasuries | 15,876 | 15,876 | — | — | ||||||||||||
| Certificates of deposit | 4,648 | — | 4,648 | — | ||||||||||||
| Total assets | $ | 26,880 | $ | 21,983 | $ | 4,897 | $ | — | ||||||||
The Company’s financial instruments of deposits and notes receivable are carried at cost and approximate their fair values given the liquid nature of such items. The fair value of the Company’s long-term debt amounted to $9,111 and $7,715 at December 31, 2014 and 2015, respectively, based on discounted cash flow analysis, which included Level 3 inputs and fair value approximates recorded amounts.
Concentrations of Credit Risk and Significant Customers
The Company had the following customers that accounted for greater than 10% of its revenues for the year ended December 31, 2014 and 2015, respectively:
| For the Year ended December 31, | |||||||||
| 2014 | 2015 | ||||||||
| Customer | Percent of Revenues | Percent of Revenues | |||||||
| A | 27 | % | — | ||||||
| B | 12 | % | — | ||||||
| C | 11 | % | — | ||||||
| D | 11 | % | — | ||||||
| E | 10 | % | — | ||||||
| F | — | 13 | % | ||||||
| G | — | 11 | % | ||||||
| H | — | 10 | % | ||||||
Additionally, Customer B accounted for 27% of the Company’s accounts receivable balance at December 31, 2014, and Customer F accounted for 38% of the accounts receivable balance at December 31, 2015. The Company had one other customer that accounted for 25% of its accounts receivable balance at December 31, 2014, but did not exceed 10% of its revenues in 2014. The Company had one other customer that accounted for 38% of its accounts receivable balance at December 31, 2015, but did not exceed 10% of its revenues in 2015.
The Company had one customer, Philips, who accounted for approximately 71% of its revenues in 2013. The Company had no other customers that accounted for greater than 10% of its revenues in 2013.
The Company has no significant off-balance sheet risk such as foreign exchange contracts, option contracts, or other hedging arrangements.
Allowance for Doubtful Accounts
The Company evaluates the collectability of accounts receivable on a regular basis. The allowance for doubtful accounts, if any, is based upon various factors including the financial condition and payment history of customers, an overall review of collections experience on other accounts and economic factors or events expected to affect future collections experience. The Company’s accounts receivable consist primarily of amounts due from large, well-capitalized customers and while the Company reviews their creditworthiness, collectability is generally not an issue. The Company records an allowance for doubtful accounts, when necessary, based on the potential for collectability issues within the customer base. The Company’s allowance for doubtful accounts was $0 at December 31, 2014 and 2015.
Product Warranty
Customers are permitted to return defective products under the Company’s standard product warranty program. For CorPath Systems, the Company’s standard one-year warranty provides for the repair of any product that malfunctions. Return and replacement can only occur if a material breach of the warranty remains uncured for 30 days. A roll-forward of the Company’s warranty liability is as follows:
| Balance at December 31, 2013 | $ | 29 | ||
| Provision for warranty obligations | 96 | |||
| Settlements | (64 | ) | ||
| Balance at December 31, 2014 | 61 | |||
| Provisions for warranty obligations | 58 | |||
| Settlements | (51 | ) | ||
| Balance at December 31, 2015 | $ | 68 |
Inventories
Inventories are valued at the lower of cost or market using the first-in, first-out (FIFO) method. The Company routinely monitors the recoverability of its inventory and records the lower of cost or market reserves based on current selling prices and reserves for excess and obsolete inventory based on historical and forecasted usage, as required. Scrap and excess manufacturing costs are charged to cost of revenue as incurred and not capitalized as part of inventories. The Company only capitalizes pre-launch inventory when purchased for commercial use and it deems regulatory approval to be probable.
Property and Equipment
Property and equipment is carried at cost. Major items and betterments are capitalized; maintenance and repairs are charged to expense as incurred. The Company capitalizes certain costs incurred in connection with developing or obtaining internal-use software. Software costs that do not meet capitalization criteria are expensed as incurred. Demonstration equipment represents internally manufactured capital equipment that is used on-site at trade shows and at customer locations to demonstrate the CorPath System. Field equipment represents internally manufactured capital equipment placed at customer locations under a program that involves the placement of a system at the customer’s site and the customer’s agreement to purchase a minimum number of cassettes each month. At December 31, 2015, the Company had placed six field equipment units and four units for a customer’s evaluation under such arrangements.
Depreciation on the demonstration equipment is charged to selling, general and administrative and the deprecation on the field equipment is charged to cost of revenue. Depreciation is computed under the straight-line method over the estimated useful lives of the respective assets.
Depreciation is provided over the following estimated asset lives:
| Machinery and equipment | 5 years |
| Computer equipment | 3 years |
| Office furniture and equipment | 5 years |
| Leasehold improvements | Shorter of life of lease or useful life |
| Vendor tooling | 1.5 - 3 years, based on planned usage |
| Software | 4 years |
| Demonstration equipment | 3 years |
| Field equipment | 3 years |
Impairment of Long-Lived Assets
The Company’s long-lived assets principally consist of property and equipment. The Company continually monitors events and changes in circumstances that could indicate carrying amounts of long-lived assets may not be recoverable. An impairment loss is recognized when expected cash flows are less than an asset’s carrying value. Accordingly, when indicators of impairment are present, the Company evaluates the carrying value of such assets in relation to the operating performance and estimated future undiscounted cash flows of the underlying assets. The Company’s policy is to record an impairment loss when it is determined that the carrying amount of the asset may not be recoverable. No such impairment changes have been recognized.
Comprehensive Loss
Comprehensive loss is comprised of net loss and changes in the unrealized gains and losses on marketable securities. Accumulated other comprehensive loss, a component of stockholders’ equity, is comprised of the cumulative unrealized gains and/or losses from the change in fair market value of the Company’s marketable securities. Accumulated other comprehensive loss was $14 as of December 31, 2015.
Revenue Recognition
The CorPath System is a capital medical device used by hospitals and surgical centers to perform heart catheterizations. Use of the CorPath System requires a sterile, single-use cassette (the “CorPath Cassette”), which are sold separately, for each procedure. Products are sold to customers with no rights of return. The Company recognizes revenue on the sale of products when the following criteria are met:
| ● | Persuasive evidence of an arrangement exists | |
| ● | The price to the buyer is fixed or determinable | |
| ● | Collectability is reasonably assured | |
| ● | Risk of loss transfers and the product is delivered. |
In each arrangement, the Company is responsible for installation of the CorPath System and initial user training, which services are deemed essential to the functionality of the system. Therefore, the Company recognizes system revenue when the CorPath System is delivered and installed, and accepted by the end user customer.
Each CorPath System is sold with a standard one year warranty, which provides that the CorPath System will function as intended and during that one year period, the Company will either replace the product or a portion thereof or provide the necessary repair service during the Company’s normal service hours. The Company accrues for the estimated costs of the warranty once the CorPath System revenue is recognized.
The Company generally enters into multiple element arrangements, which include the sale of a CorPath System with an initial order of CorPath Cassettes, and may include either a basic service plan or a premium service plan. The basic service plan provides for an extended warranty period and the premium service plan provides for the extended warranty as well as component upgrades, when and if they become available during the service plan period. Deliverables, which are accounted for as separate units of accounting under multiple-element arrangements include: (a) the CorPath System, including installation and initial training, which are subject to customer acceptance and (b) the initial shipment of CorPath Cassettes to the customer, and may include either (c) an extended warranty or (d) component upgrades.
The Company recognizes revenue on multiple-element arrangements in accordance with Accounting Standards Update (“ASU”) 2009-13, Revenue Recognition (Topic 605): Multiple Deliverable Revenue Arrangements, based on the estimated selling price of each element. In accordance with ASU 2009-13, the Company uses vendor-specific objective evidence (“VSOE”), if available, to determine the selling price of each element. If VSOE is not available, the Company uses third-party evidence (“TPE”) to determine the selling price. If TPE is not available, the Company uses its best estimate to develop the estimated selling price (“BESP”). The Company uses BESP to determine the selling price of its systems as well as the basic and premium service plans. BESP is determined based on estimated costs plus a reasonable margin, and has generally been consistent with the price charged to the customer for such products and services. The determination of BESP also considers the price of the service plans charged to customers when such services are sold separately in subsequent transactions. The Company also uses BESP to determine the selling price of the initial order of cassettes, which considers the price at which it charges its customers when the cassettes are sold separately.
Revenue related to basic service plans is recognized on a straight-line basis over the life of the service contract. Revenue related to premium service plans is recognized over the life of the service contract, with consideration given to the expected timing of costs to be incurred related to the delivery of component upgrades. Revenues from accessories are recorded upon delivery and services provided by the Company outside of a basic or premium service contract are recognized as the services are provided.
There are no performance, cancellation, termination, and refund-type provisions under the Company’s multiple element arrangements.
On January 21, 2011, the Company entered into a distributor agreement with Philips Medical Systems Nederland, B.V. (“Philips”) appointing Philips to be the sole worldwide distributor for the promotion and sale of the Company’s CorPath System. Under the agreement, Philips sold the equipment directly to the end user and the Company was responsible for installation and initial training. Revenue was recognized on a net basis based on the amount billed to Philips and upon acceptance of the system by the end-user customer. This agreement with Philips expired on August 7, 2014. The Company continues to sell CorPath Systems through Philips on a sale by sale basis under a non-exclusive arrangement under mutually agreeable terms, which may include a continued level of discounted pricing, until such time the Company either executes a new distribution arrangement with Philips or the Company no longer does business with Philips. At December 31, 2014 and 2015, there were no amounts outstanding from Philips.
The Company also sells CorPath Cassettes under a CorPath Utilization Program (“CUP”), which is a multi-year arrangement that involves the placement of a CorPath System at a customer’s site free of charge and the customer agrees to purchase a minimum number of CorPath Cassettes each month at a premium over the regular price. The Company records revenue upon shipment of the cassettes based on the selling price of the CorPath Cassettes. The system is capitalized as field equipment in property and equipment and is depreciated on a straight line basis through cost of revenue over the estimated useful life of the system, which generally approximates the length of the CUP program contract, which is typically 36 months.
The Company also offers a One-Stent program to demonstrate its confidence in the CorPath System’s ability to help accurately measure anatomy and precisely place only one stent per lesion. The Company provides eligible customers registered under the program a $1 credit against future CorPath Cassette purchases for a qualifying CorPath percutaneous coronary intervention (“PCI”) procedure which uses more than one stent per lesion. The estimated cost of honoring the potential obligation under the stent program is recorded as a reduction of revenue at the time of shipment. These costs have not been significant to date.
The Company records shipping and handling costs as a selling expense in the period incurred, and records payments from customers for shipping costs as a reduction of selling expenses. Such amounts have not been material in the periods presented. The Company recorded medical device excise tax in the amount of $29, $40 and $34 for the years ended December 31, 2013, 2014 and 2015, respectively, which is included in selling, general and administrative expenses. At the present time the excise tax is suspended due to the operation of a provision in the Consolidated Appropriations Act of 2016, signed into law on December 18, 2015 but that two-year moratorium ends on December 31, 2017.
Research and Development
Costs for research and development are expensed as incurred. Research and development expense consists primarily of salaries, salary-related expenses and costs of contractors and materials.
Income Taxes
The Company accounts for income taxes using the liability method, whereby deferred tax asset and liability account balances are determined based on differences between financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates that will be in effect when the differences are expected to reverse. The Company provides a valuation allowance, if necessary, to reduce deferred tax assets to amounts that are realizable.
The Company accounts for uncertain tax positions using a “more-likely-than-not” threshold for recognizing and resolving uncertain tax positions. The evaluation of uncertain tax positions is based on factors including, but not limited to, changes in tax law, the measurement of tax positions taken or expected to be taken in tax returns, the effective settlement of matters subject to audit, new audit activity and changes in facts or circumstances related to a tax position. The Company evaluates these tax positions on an annual basis. The Company also accrues for potential interest and penalties related to unrecognized tax benefits in income tax expense.
The Company recognizes the tax benefit of tax positions to the extent that the benefit will more likely than not be realized. The determination as to whether the tax benefit will more likely than not be realized is based upon the technical merits of the tax position as well as consideration of the available facts and circumstances.
Stock-Based Compensation
The Company recognizes compensation costs resulting from the issuance of stock-based awards to employees and directors as an expense in the consolidated statements of operations over the requisite service period based on a measurement of fair value for each stock award. The awards issued to date have been stock options with service-based vesting periods over two or four years. The Company recognizes compensation costs resulting from the issuance of stock-based awards to non-employees as an expense in the consolidated statements of operations over the service period based on a measurement of fair value for each stock award at each performance date and period end.
Prior to the completion of the reverse acquisition, the fair value of the common stock was determined by the Board of Directors after considering a broad range of factors, including the results obtained from an independent third-party valuation, the illiquid nature of an investment in the Company’s Common Stock, the Company’s historical financial performance and financial position, the Company’s future prospects and opportunity for liquidity events, and recent sale and offer prices of Common and Preferred Stock in private transactions negotiated at arm’s length. Subsequent to the completion of the reverse acquisition, the fair value of the Common Stock was obtained from quoted market prices on the OTCQB as provided by OTC Market Groups, Inc. In connection with the public offering in May 2015, the Company’s common stock was approved for listing on the NYSE MKT, where it commenced trading under the symbol “CVRS”.
The following assumptions were used to estimate the fair value of stock options granted using the Black-Scholes-Merton option-pricing model (“Black-Scholes Model”):
| Years ended December 31, | ||||||||||||
| 2013 | 2014 | 2015 | ||||||||||
| Risk-free interest rate | 0.72% to 1.43% | 1.89% to 2.01% | 1.54% to 1.97% | |||||||||
| Expected term in years | 5.75 to 6.25 | 6.25 | 6.08 | |||||||||
| Expected volatility | 80% | 50% | 50% | |||||||||
| Expected dividend yield | 0% | 0% | 0% | |||||||||
The risk-free interest rate assumption is based upon observed U.S. government security interest rates with a term that is consistent with the expected term of the Company’s employee stock options. The expected term is based on the average of the vesting period and contractual term of the Company’s options given the lack of historical data available. The Company does not pay a dividend, and is not expected to pay a dividend in the foreseeable future.
Due to a lack of a public market for the Company’s Common Stock for an extended period of time, the Company utilized comparable public companies’ volatility rates as a proxy of its expected volatility for purposes of the Black-Scholes Model. Stock-based compensation expense is recorded net of estimated forfeitures and is adjusted periodically for actual forfeitures. The Company uses historical data to estimate forfeiture rates. For the years ended December 31, 2013, 2014 and 2015, forfeitures were estimated to be 4.9%, 6.0% and 5.0%, respectively.
Warrant Liability
The Company reviews the terms of warrants issued in connection with the applicable accounting guidance and classifies warrants as a long-term liability on the consolidated balance sheets if the warrant may conditionally obligate the Company to transfer assets, including repurchase of the Company’s capital stock, at some point in the future. Warrants to purchase shares of redeemable convertible preferred stock met these criteria and therefore required liability-classification. The Company classifies warrants within stockholders’ equity on the consolidated balance sheets if the warrants are considered to be indexed to the Company’s own capital stock, and otherwise would be recorded in stockholders’ equity.
Liability-classified warrants are subject to re-measurement at each balance sheet date, and any change in fair value is recognized as a component of other income (expense) in the consolidated statements of operations. The Company estimated the fair value of these warrants at issuance and each balance sheet date thereafter using the Black-Scholes Model as described in the stock-based compensation section above, based on the estimated market value of the underlying Redeemable Convertible Preferred Stock at the valuation measurement date, the remaining contractual term of the warrant, risk-free interest rates, expected dividends and expected volatility of the price of the underlying redeemable convertible preferred stock. The fair value of the Redeemable Convertible Preferred Stock was determined by the Board of Directors after considering a broad range of factors, including the results obtained from an independent third-party valuation, the illiquid nature of an investment in the Company’s Redeemable Convertible Preferred Stock, the Company’s historical financial performance and financial position, the Company’s future prospects and opportunity for liquidity events, and recent sale and offer prices of Common and Preferred Stock in private transactions negotiated at arm’s length.
The Company had warrants outstanding to purchase shares of Series A, D and E Redeemable Convertible Preferred Stock, which converted into warrants to purchase shares of Common Stock at the date of the Acquisition. Prior to the Acquisition, the warrant instruments required mark-to-market accounting which was recorded in the statements of operations based on their fair values determined using the Black-Scholes Model and the fair value of underlying Preferred Stock. The warrant instruments were re-valued for the last time at the date of the Acquisition and reclassified into stockholders’ equity in 2014, and at December 31, 2014 and 2015, the Company did not have a warrant liability.
Related-Party Transactions
On January 21, 2011, the Company entered into a distributor agreement with Philips appointing Philips to be the sole distributor for the promotion and sale of the Company’s CorPath System. The agreement was terminated on August 7, 2014. The Company continues to sell CorPath Systems through Philips on a sale by sale basis under a non-exclusive arrangement under mutually agreeable terms, which may include a continued level of discounted pricing, until such time the Company either executes a new distribution arrangement with Philips or the Company no longer does business with Philips.
For the years ended December 31, 2013, 2014 and 2015, the Company recorded revenues of $630, $315 and $125, respectively, from shipments to Philips under the distribution agreement. At December 31, 2014 and 2015, there were no amounts outstanding from Philips, resulting from selling activity under the agreement. As of December 31, 2015, Koninklijke Philips, N.V. ("Philips' Parent"), held approximately 15% of the Company's outstanding Common Stock.
Recent Accounting Pronouncements Not Yet Adopted
In May 2014, the FASB issued ASU 2014-09—Revenue from Contracts with Customers, which amends FASB Accounting Standards Codification Topic 606. ASU 2014-09 provides a single, comprehensive revenue recognition model for all contracts with customers. This standard contains principles for the determination of the measurement of revenue and the timing of when such revenue is recognized. Revenue recognition will reflect the transfer of goods or services to customers at an amount that is expected to be earned in exchange for those goods or services. ASU 2014-09 was scheduled to be effective for annual reporting periods beginning after December 15, 2016, and early adoption was not permitted. In August 2015, the FASB issued ASU No. 2015-14—Revenue from Contracts with Customers: Deferral of Effective Date, which defers the effective date of ASU 2014-09 by one year. ASU 2014-09 is now effective for annual periods after December 15, 2017 including interim periods within that reporting period. Early adoption is permitted, but not before the original effective date. The Company is currently assessing the impact of this standard to its consolidated financial statements.
In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The amendments in this update will explicitly require a company’s management to assess an entity’s ability to continue as a going concern, and to provide related footnote disclosures in certain circumstances. The new standard will be effective in the first annual period ending after December 15, 2016. Early adoption is permitted. If this standard had been adopted as of December 31, 2015, the Company believes that it would have concluded there was not substantial doubt about its ability to continue as a going concern. However, the Company faces certain risks and uncertainties, as further described in Note 1, Nature of Operations, that could have affected this analysis.
In January 2015, the FASB issued Financial Accounting Standards Update—Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items. Subtopic 225-20, Income Statement—Extraordinary and Unusual Items, previously required that an entity separately classify, present, and disclose extraordinary events and transactions. This update is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015 and may be applied prospectively or retrospectively to all prior periods presented in the financial statements. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. The Company does not expect the impact of adoption to be material to its consolidated financial statements.
In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810) to address financial reporting considerations for the evaluation as to the requirement to consolidate certain legal entities. ASU 2015-02 is effective for fiscal years and for interim periods within those fiscal years beginning after December 15, 2015. The Company does not expect the impact of ASU 2015-02 to be material to its consolidated financial statements.
In April 2015, the FASB issued ASU 2015-03, Interest—Imputation of Interest (Subtopic 835-30) as part of the initiative to reduce complexity in accounting standards. The update requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. ASU 2015-03 is effective for annual periods beginning after December 15, 2015 and for interim periods within those fiscal years. The Company does not expect the impact of ASU 2015-03 to be material to its consolidated financial statements.
In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. Under this accounting guidance, inventory will be measured at the lower of cost and net realizable value and other options that currently exist for market value will be eliminated. ASU 2015-11 defines net realizable value as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. No other changes were made to the current guidance on inventory measurement. The guidance is effective for annual reporting periods and interim periods within those annual reporting periods beginning after December 15, 2016. Early adoption is permitted and the prospective transition method should be applied. The Company is currently evaluating the impact of ASU 2015-11 on its consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The update addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments. ASU 2016-01 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted only for certain portions of the ASU related to financial liabilities. The Company is currently evaluating the impact of this standard on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which amends leasing accounting requirements. The new standard requires lessee recognition on the balance sheet of a right-of-use asset and a lease liability, initially measured at the present value of the lease payments. It further requires recognition in the income statement of a single lease cost, calculated so that the cost of the lease is allocated over the lease term on a generally straight-line basis. Finally, it requires classification of all cash payments within operating activities in the statement of cash flows. It is effective for fiscal years commencing after December 15, 2018 and early adoption is permitted. The Company is currently evaluating the impact of this standard on its consolidated financial statements.
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| 3. | Inventories |
The Company’s inventories are valued at the lower of cost or market using the FIFO method and consist of the following:
| December 31, | ||||||||
| 2014 | 2015 | |||||||
| Raw materials | $ | 737 | $ | 483 | ||||
| Work in progress | 198 | 79 | ||||||
| Finished goods | 584 | 767 | ||||||
| $ | 1,519 | $ | 1,329 | |||||
In the fourth quarter of 2015, the Company reclassified certain of its original equipment manufacturer (“OEM”) parts from raw materials to finished goods to be consistent with how all of its OEM parts were being classified. For the year ended December 31, 2014, the inventory balances include a reclassification of $124 from raw materials to finished goods in order to conform to the current year’s presentation.
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| 4. | Property and Equipment |
Property and equipment are stated at cost and are being depreciated using the straight-line basis over the assets’ estimated useful lives. Depreciation and amortization expense was $607, $622 and $706 for the fiscal years 2013, 2014 and 2015, respectively. Property and equipment consist of the following:
| December 31, | ||||||||
| 2014 | 2015 | |||||||
| Machinery and equipment | $ | 334 | $ | 441 | ||||
| Computer equipment | 273 | 286 | ||||||
| Office furniture and equipment | 355 | 360 | ||||||
| Leasehold improvements | 67 | 70 | ||||||
| Vendor tooling | 711 | 715 | ||||||
| Software | 490 | 498 | ||||||
| Demonstration equipment | 633 | 717 | ||||||
| Field equipment | 588 | 1,004 | ||||||
| Construction in progress | — | 126 | ||||||
| 3,451 | 4,217 | |||||||
| Less accumulated depreciation and amortization | (2,167 | ) | (2,835 | ) | ||||
| Property and equipment, net | $ | 1,284 | $ | 1,382 | ||||
Construction in progress at December 31, 2015 relates to vendor tooling that is currently in the design and testing stage which will be used in the Company's production process.
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| 5. | Notes Receivable |
On June 14, 2010, the Company loaned funds to certain stockholders of the Company for tax payments to be made to the Israel Tax Authority in connection with a tax ruling related to a reorganization that took place in 2008 and the Company received non-interest bearing notes receivable, which documented such loans. Total amount of notes receivable issued was $145.
The notes receivable are repayable upon the disposition of the Company’s Common Stock. Notes receivable in the amount of $136 were outstanding at both December 31, 2014 and 2015. The Company assessed the notes receivable for impairment and concluded that there was no impairment indicators at December 31, 2014 and 2015. The Company does not believe there is any collection risk associated with the notes receivable at December 31, 2015.
In February 2016, the Company received a payment of $65 related to this notes receivable balance as one of the stockholders had recently sold some of their shares of the Company's common stock.
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| 6. | Accrued Expenses |
Accrued expenses consist of the following:
| 2014 | 2015 | |||||||
| Payroll and benefits | $ | 185 | $ | 79 | ||||
| Professional and consultant fees | 496 | 444 | ||||||
| Travel expenses | 57 | 113 | ||||||
| Product development costs | 62 | 44 | ||||||
| Commissions | 85 | 187 | ||||||
| Warranty | 61 | 68 | ||||||
| Interest | 48 | 71 | ||||||
| Other | 143 | 193 | ||||||
| $ | 1,137 | $ | 1,199 | |||||
_______________________
Certain items classified as "Other" in the prior year, travel expense and interest, were changed to conform with the current year presentation.
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| 7. | Long-Term Debt |
On June 11, 2014, the Company entered into a Loan and Security Agreement pursuant to which the lender agreed to make available to the Company $10,000 in two separate $5,000 loans under secured promissory notes. The initial note was made on June 11, 2014 in an aggregate principal amount equal to $5,000 (the “Initial Promissory Note”) and is repayable in equal monthly installments of principal and interest over 27 months beginning on July 1, 2015. Prior to July 1, 2015, the Company was required to make interest only payments. The Initial Promissory Note bears interest at a rate equal to the greater of (a) 11.25% or (b) 11.25% plus the Wall Street Journal Prime Rate, less 3.25%, and includes an additional interest payment of $125 due no later than October 1, 2017, which is accreted over the term of the loan. The effective interest rate of the Initial Promissory Note was 11.50% at December 31, 2015.
On December 31, 2014, the Company borrowed the additional $5,000 (the “Second Promissory Note”) under the Loan and Security Agreement. The Second Promissory note is also repayable in equal monthly installments of principal and interest over 27 months beginning on July 1, 2015. Prior to July 1, 2015, the Company was required to make interest only payments. The Second Promissory Note bears interest at a rate equal to the greater of (a) 9.95% or (b) 9.95% plus the Wall Street Journal Prime Rate, less 3.25%, and also includes an additional interest payment of $125 due no later than October 1, 2017, which is accreted over the term of the loan. The effective interest rate of the Second Promissory Note was 10.20% at December 31, 2015. The notes are secured by substantially all the assets of the Company.
In connection with the Initial Promissory Note, the Company issued the lender warrants to purchase 177,514 shares of the Company’s Common Stock at an exercise price of $1.41 per share. The fair value of the warrant issued to the lender was determined to be $230 at the date of issuance, and was recorded as a discount on the debt. Additionally, in connection with the Second Promissory Note, the Company issued the lender warrants to purchase 177,514 shares of the Company’s Common Stock at an exercise price of $1.41 per share. The fair value of the warrant issued to the lender was determined to be $619 at the date of issuance, and was recorded as a discount on the debt. The Company amortizes the debt discount to interest expense over the term of the debt using the effective interest method.
The Company estimated the fair value of these warrants using the Black-Scholes Model based on the estimated market value of the underlying Common Stock at the valuation measurement date, the remaining contractual term of the warrant, risk-free interest rates, expected dividends and expected volatility of the price of the underlying common stock. The Company used the following assumptions for the valuation of its warrants issued on the following dates:
| June 11, 2014 | December 31, 2014 | |||||||
| Risk-free interest rate | 2.5 | % | 2.17 | % | ||||
| Dividend yield | 0.0 | % | 0.0 | % | ||||
| Expected volatility | 50.0 | % | 50.0 | % | ||||
| Expected term (years) | 10.00 | 9.44 | ||||||
The Loan and Security Agreement also contains covenants which include certain restrictions with respect to subsequent indebtedness, liens, loans and investments, asset sales and share repurchases and other restricted payments, subject to certain exceptions. The Loan and Security Agreement also contains financial reporting obligations. An event of default under the Loan and Security Agreement includes, but is not limited to, breach of covenants, insolvency, and occurrence of any default under any agreement or obligation of the Company. In addition, the Loan and Security Agreement contains a customary material adverse effect clause which states that in the event of a material adverse effect, an event of default would occur and the lender has the option to accelerate and demand payment of all or any part of the loan. A material adverse effect is defined in the Loan and Security Agreement as a material change in the Company’s business, operations, properties, assets or financial condition or a material impairment of its ability to perform all obligations under its Loan and Security Agreement. The Company was not in default of any conditions under the Loan and Security Agreements as of December 31, 2015.
Borrowings outstanding, net of unamortized discount of $414 and $150 of additional interest payments, amounted to $7,715 at December 31, 2015. Future principal payments under the borrowing arrangement as of December 31, 2015 are as follows:
| Year ending December 31: | |||||
| 2016 | $ | 4,373 | |||
| 2017 | 3,605 | ||||
| $ | 7,978 | ||||
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| 8. | Income Taxes |
There was no federal or state provision for income taxes for the years ended December 31, 2013, 2014 or 2015 due to the Company’s operating losses and a full valuation allowance on deferred income tax assets for all periods since inception. All of the Company’s loss before provision for income taxes is attributable to its United States operations.
The Company’s effective income tax rate differs from the statutory federal income tax rate as follows:
| Years Ended December 31, | ||||||||||||
| 2013 | 2014 | 2015 | ||||||||||
| Statutory U.S. federal rate | 34.0 | % | 34.0 | % | 34.0 | % | ||||||
| State income tax | 4.7 | 1.7 | 3.7 | |||||||||
| Permanent items | 0.6 | (3.8 | ) | (0.4 | ) | |||||||
| Change in taxing status in Massachusetts to a manufacturer | — | (4.9 | ) | — | ||||||||
| Other | (0.8 | ) | (0.7 | ) | (0.5 | ) | ||||||
| Change in state tax rate | — | — | 0.7 | |||||||||
| Federal R&D credits | 2.0 | 1.2 | 1.3 | |||||||||
| State R&D and other credits | 0.5 | 0.7 | 0.5 | |||||||||
| Change in valuation allowance | (41.0 | ) | (28.2 | ) | (39.3 | ) | ||||||
| Total expense (benefit) | — | % | — | % | — | % | ||||||
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and the related valuation allowance were as follows:
| December 31, | ||||||||
| 2014 | 2015 | |||||||
| Deferred income tax assets: | ||||||||
| Operating loss carryforwards | $ | 20,178 | $ | 30,832 | ||||
| Start-up expenditures | 2,807 | 2,711 | ||||||
| Property and equipment | 46 | 28 | ||||||
| Intangible assets | 2,589 | — | ||||||
| Stock-based compensation expense | 738 | 788 | ||||||
| Research and development credit carryforwards | 1,216 | 1,746 | ||||||
| Accrued expenses and other | 307 | 482 | ||||||
| Total deferred income tax assets | 27,881 | 36,587 | ||||||
| Valuation allowance | (27,881 | ) | (36,587 | ) | ||||
| Net deferred income tax assets | $ | — | $ | — | ||||
The Company has provided a full valuation allowance against the deferred income tax assets, since it has a history of losses, which are all attributable to the U.S. and currently does not have enough positive evidence required under U.S. GAAP to reverse its valuation allowance. Management does not believe it is more likely than not that its deferred tax assets relating to the loss carryforwards and other temporary differences will be realized in the future. For the years ended December 31, 2014 and 2015, the valuation allowance increased by $6,912 and $8,706 respectively, resulting principally from increased operating loss carryforward.
Deferred tax assets relating to tax benefits of employee share-based compensation have been reduced for stock options exercised in periods in which the Company was in a net operating loss (NOL) position. Some exercises resulted in tax deductions in excess of previously recorded benefits based on the stock option value at the time of the grant (windfalls). Althougth windfalls are reflected in NOL carryforwards in the tax return, the additional tax benefit associated with the windfalls is not recognized until the deduction reduces taxes payable pursuant to U.S. GAAP. Accordingly, since the tax benefit does not reduce the Company's current taxes payable due to NOL carryforwards, these windfall tax benefits are not reflected in the Company's NOLs in deferred tax assets. Windfalls included in NOL carryforwards but not reflected in deferred tax assets as of December 31, 2015 totaled $850.
At December 31, 2015, the Company had U.S. federal and state net operating loss carryforwards of approximately $82,989 and $56,585, respectively, that can be carried forward and offset against future taxable income. These net operating loss carryforwards will begin to expire in 2028. Utilization of net operating losses may be subject to a substantial annual limitation due to the “change in ownership” provisions of the Internal Revenue Code of 1986, and similar state provisions. The annual limitation may result in the expiration of net operating losses before utilization. The Company has determined no ownership changes have occurred to date that would place limitations on the ability to use net loss carryforwards, but will continue to monitor any future shifts in ownership that could cause limitations.
Significant judgment is required in evaluating the Company’s tax positions and in determining the Company’s provision for income taxes. In the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. As of December 31, 2015, the Company was not under audit in any tax jurisdiction. The U.S. statute of limitations will remain open to examination by the tax authorities until the utilization of net operating loss carryforwards. The Company accrues interest and penalties, if any, related to unrecognized tax benefits in income tax expense.
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| 9. | Stockholders’ Equity |
The Company is authorized to issue 250,000,000 shares of common stock. Holders of Common Stock are entitled to vote on all matters and are entitled to the number of votes equal to the number of common shares held. Holders of Common Stock shall be entitled to receive dividends when and if declared by the Board of Directors. No dividends have been declared to date. In certain events, including the liquidation, dissolution or winding up of the Company, the remaining assets of the Company shall be distributed ratably among the holders of Common Stock.
The Company is authorized to issue 10,000,000 shares of preferred stock. As of December 31, 2014 and 2015, the Company had no shares of preferred stock issued or outstanding.
At December 31, 2015, there were 23,569,951 shares of common stock reserved for the potential exercise of warrants (5,207,379) and stock options (8,778,503), and 9,584,069 shares that are available for grant under the 2014 Stock Award Plan.
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| 10. | Stock-Based Compensation |
In connection with the Company's reverse acquisition in August 2014, Corindus exchanged options to purchase shares of its Common Stock for YIDI’s options to purchase shares of YIDI’s Common Stock (the “Replacement Plan Options”). The 2014 Stock Award Plan is the replacement plan for options previously awarded under the Corindus, Inc. 2006 Umbrella Option Plan and the Corindus, Inc. 2008 Stock Incentive Plan and is the plan under which all future Company options will be issued. The 2014 Stock Award Plan was limited to award issuances which in the aggregate could not exceed 9,035,016 shares, all of which shares will be used for the issuance of the Company stock-based awards, including options to purchase common stock, restricted stock and restricted stock units. Replacement Plan Options are exercisable for up to ten years from the date of original vesting commencement date of the options.
On April 30, 2015, the Company’s Board of Directors and shareholders owning a majority of the Company’s outstanding shares of common stock approved an increase in the authorized shares of common stock under the 2014 Stock Award Plan from 9,035,016 shares to 18,661,856 shares.
A summary of the activity under the Company’s stock option plans is as follows. Such information has been retrospectively adjusted to give effect to the exchange of stock options that occurred upon the Acquisition.
| Options | Weighted- Average Exercise Price |
Weighted- Average Remaining Contractual Term (Years) |
Aggregate Intrinsic Value |
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| Outstanding at December 31, 2014 | 8,678,017 | $ | 0.64 | 6.30 | $ | 31,359 | ||||||||||
| Granted | 1,454,486 | $ | 3.51 | |||||||||||||
| Exercised | (347,392 | ) | $ | 0.28 | ||||||||||||
| Cancelled | (1,006,608 | ) | $ | 0.80 | ||||||||||||
| Outstanding at December 31, 2015 | 8,778,503 | $ | 1.11 | 5.98 | $ | 18,876 | ||||||||||
| Exercisable at December 31, 2015 | 6,673,104 | $ | 0.63 | 5.01 | $ | 17,220 | ||||||||||
| Vested and expected to vest at December 31, 2015 | 8,673,233 | $ | 1.09 | 5.95 | $ | 18,813 | ||||||||||
Stock-based compensation expense was allocated based on the employees’ function as follows:
| Years ended December 31, | ||||||||||||
| 2013 | 2014 | 2015 | ||||||||||
| Research and development | $ | 59 | $ | 95 | $ | 74 | ||||||
| Selling, general and administrative | 270 | 282 | 431 | |||||||||
| $ | 329 | $ | 377 | $ | 505 | |||||||
The fair value of employee options is estimated on the date of each grant using the Black-Scholes Model. The weighted-average grant date fair value of options granted during the year ended December 31, 2013, 2014 and 2015 were $0.24, $0.16 and $1.80, respectively. As of December 31, 2015, there was approximately $2,415 of unrecognized compensation cost related to non-vested stock-based compensation arrangements under the 2014 Stock Award Plan. That cost was expected to be recognized over a weighted-average period of 3.38 years.
The total intrinsic value of options exercised in 2015 was $995.
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| 11. | Warrants to Purchase Common Stock |
In connection with the Acquisition, the Company exchanged warrants to purchase 201,178 shares of Corindus, Inc. Series A, D and E Redeemable Convertible Preferred Stock at an average exercise price of $26.63 per share to warrants to purchase 5,029,865 shares of the Company’s Common Stock at the average exercise price of $1.07 per share.
Prior to the Acquisition, the warrants were treated as liability instruments and were measured on a recurring basis at their fair value with inputs categorized as Level 3 in the fair value hierarchy. The resulting gain or loss on revaluation was recorded as other income (expense) in the consolidated statements of operations. The Company estimated the fair value of these warrants using the Black-Scholes Model based on the estimated market value of the underlying Redeemable Convertible Preferred Stock at the valuation measurement date, the remaining contractual term of the warrant, risk-free interest rates, expected dividends and expected volatility of the price of the underlying Redeemable Convertible Preferred Stock.
The Company revalued the warrants for the final time at the date of the Acquisition, which resulted in a charge of $2,421 for the year ended December 31, 2014. A roll forward of the warrant liability is as follows:
| Balance at December 31, 2013 | $ | 3,152 | ||
| Issuance of warrants in connection with lending arrangement | 230 | |||
| Revaluation of warrants | 2,421 | |||
| Reclassification of warrant liability to stockholders’ equity | (5,803 | ) | ||
| Balance at December 31, 2014 | $ | — |
The Company used the following assumptions for the valuation of its warrant liability:
| August 12, 2014 | ||||
| Risk-free interest rate | 1.025 | % | ||
| Dividend yield | 0.0 | % | ||
| Expected volatility | 50.0 | % | ||
| Expected term (years) | 3.5 | |||
The Company has following warrants outstanding at December 31, 2015:
| Exercise Price | Date of Expiration | Number of Warrants | |||||
| $1.06 | October 11, 2017 | 4,728,191 | |||||
| $0.76 | May 31, 2017 | 124,160 | |||||
| $1.41 | May 28, 2020 | 355,028 | |||||
| 5,207,379 | |||||||
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| 12. | Commitments and Contingencies |
The Company has an operating lease for approximately 26,402 square feet at its corporate headquarters and manufacturing plant in Waltham, Massachusetts, which expires in January 2018 and the Company has an option to extend for an additional five years at market rates or the rates payable in the final years of the term of the lease, whichever is greater. The lease terms include escalating rent payments over the life of the lease and rent expense is recognized over the life of the lease on a straight-line basis. The difference between the amount expensed and actual rent payments are recorded as a deferred rent included within accrued expenses in the consolidated balance sheets. In connection with the lease, the Company is required to maintain a security deposit with its landlord, which declines every six months during the lease until January 2016, at which point the amount remains constant at $134. The total amount of the security deposit is approximately $178 at December 31, 2015, of which $45 is included in prepaid expenses and other current assets. The Company also leases copiers and vehicles under operating leases that expire at various points through 2019.
Total rent expense was $584, $577 and $574 for the years ending December 31, 2013, 2014 and 2015, respectively. At December 31, 2015, the Company’s future minimum lease payments are indicated below:
| Year ending December 31: | Total Lease Payments | ||||
| 2016 | $ | 573 | |||
| 2017 | 586 | ||||
| 2018 | 49 | ||||
| Total | $ | 1,208 | |||
The Company is subject to potential claims from time to time in the ordinary course of business. At December 31, 2015, the Company is not subject to any significant asserted or unasserted claims.
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| 14. | Restructuring Charge |
During 2014, the Company initiated reductions in workforce to control costs while the Company pursued new financing alternatives. During 2014, the Company recorded $175 in restructuring charges for severance and related costs, which were paid in 2014.
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| 15. | 401(k) Plan |
The Company has a tax-qualified employee savings and retirement 401(k) plan, covering all qualified employees. Participants may elect a salary deferral up to the statutorily prescribed annual limit for tax-deferred contributions. The Company has not made any matching contributions to date.
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| 16. | Selected Quarterly Financial Data (Unaudited) |
The following table presents unaudited operating results for each of the Company’s quarters in the years ended December 31, 2015 and 2014:
| Fiscal Year 2015 Quarters | ||||||||||||||||||||
| First | Second | Third | Fourth | Year | ||||||||||||||||
| Revenue | $ | 776 | $ | 909 | $ | 212 | $ | 832 | $ | 2,729 | ||||||||||
| Cost of revenue | 801 | 941 | 722 | 1 ,260 | 3 ,724 | |||||||||||||||
| Gross profit (loss) | (25 | ) | (32 | ) | (510 | ) | (428 | ) | (995 | ) | ||||||||||
| Operating expenses | 6 ,747 | 6 ,839 | 6 ,148 | 6 ,442 | 26,176 | |||||||||||||||
| Operating loss | (6,772 | ) | (6,871 | ) | (6,658 | ) | (6,870 | ) | (27,171 | ) | ||||||||||
| Total other expense, net | (397 | ) | (432 | ) | (404 | ) | (359 | ) | (1,592 | ) | ||||||||||
| Net loss | $ | (7,169 | ) | $ | (7,303 | ) | $ | (7,062 | ) | $ | (7,229 | ) | $ | (28,763 | ) | |||||
| Net loss per share - basic and diluted | $ | (0.07 | ) | $ | (0.07 | ) | $ | (0.06 | ) | $ | (0.06 | ) | $ | (0.25 | ) | |||||
| Fiscal Year 2014 Quarters | ||||||||||||||||||||
| First | Second | Third | Fourth | Year | ||||||||||||||||
| Revenue | $ | 730 | $ | 1,077 | $ | 554 | $ | 622 | $ | 2,983 | ||||||||||
| Cost of revenue | 1 ,383 | 1 ,058 | 793 | 1 ,670 | (1) | 4 ,904 | ||||||||||||||
| Gross profit (loss) | (653 | ) | 19 | (239 | ) | (1,048 | ) | (1,921 | ) | |||||||||||
| Operating expenses | 4 ,949 | 4 ,388 | 5 ,148 | 5 ,299 | 19,784 | |||||||||||||||
| Operating loss | (5,602 | ) | (4,369 | ) | (5,387 | ) | (6,347 | ) | (21,705 | ) | ||||||||||
| Total other income (expense) | 1 ,768 | (1,341 | ) | (3,062 | ) | (201 | ) | (2,836 | ) | |||||||||||
| Net loss | $ | (3,834 | ) | $ | (5,710 | ) | $ | (8,449 | ) | $ | (6,548 | ) | $ | (24,541 | ) | |||||
| Net loss per share - basic and diluted | $ | (0.05 | ) | $ | (0.08 | ) | $ | (0.10 | ) | $ | (0.06 | ) | $ | (0.29 | ) | |||||
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(1) Includes $536 from the correction of an immaterial error related to inventory overhead costs that were overstated in the 2013 consolidated financial statements.
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| 17. | Subsequent Events |
The Company has evaluated all events or transactions that occurred after December 31, 2015 through the date of filing of the Form 10-K. In the judgment of management, there were no material events that impacted the consolidated financial statements or disclosures.
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Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Corindus, Inc. and Corindus Security Corporation, which was created on December 21, 2012 to hold and invest the proceeds from issuance of equity. All intercompany transactions and balances have been eliminated in consolidation. The functional currency of both wholly-owned subsidiaries is the U.S. dollar and, therefore, the Company has not recorded any currency translation adjustments.
In the fourth quarter of 2014, the Company participated in the formation of a not-for-profit, which was established to generate awareness of the health risks linked to the use of fluoroscopy in hospital catheterization. As of December 31, 2015, the Company’s Chief Executive Officer and one of its senior executives represented two of the three voting members of the board of directors of the entity. As a result, under the voting model used for the consolidation of related parties, which are controlled by a company, the Company has consolidated the financial statements of the entity, and recognized expenses of $18 and $386 for the years ended December 31, 2014 and 2015, respectively. The entity had assets and liabilities of $56 and $75, respectively, on the Company's balance sheet at December 31, 2015. The entity did not have any assets or liabilities on the Company's balance sheet at December 31, 2014.
Segment Information
The Company operates in one business segment, which is the development, marketing and sales of robotic-assisted vascular interventions. Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker in making decisions regarding resource allocation and assessing performance. To date, the chief operating decision maker has made such decisions and assessed performance at the company level, as one segment. The Company’s chief operating decision maker is the Chief Executive Officer.
Revenues from domestic customers were $896, $2,068 and $2,684 for the years ending December 31, 2013, 2014 and 2015, respectively. Revenues from international customers, primarily in Dubai and Israel, were $0, $915 and $45 for the years ending December 31, 2013, 2014 and 2015, respectively.
Use of Estimates
The process of preparing financial statements in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of assets and liabilities at the date of the financial statements. Such management estimates include those relating to revenue recognition, inventory valuation, assumptions used in the valuation of stock-based awards, and valuation allowances against deferred income tax assets. Actual results could differ from those estimates.
Cash Equivalents
The Company considers highly liquid short-term investments, which consists of money market funds and certificates of deposit with original maturity dates of three months or less at the date of purchase, to be cash equivalents. From time to time, the Company’s cash balances may exceed federal deposit insurance limits.
Marketable Securities
The Company determines the appropriate classification of marketable securities at the time of purchase and reevaluates such designation at each balance sheet date. The Company has classified all of its marketable securities at December 31, 2015 as “available-for-sale” pursuant to ASC 320, Investments – Debt and Equity Securities. The Company records available-for-sale securities at fair value, with the unrealized gains and losses included in accumulated other comprehensive loss in stockholders’ equity.
The Company adjusts the cost of available-for-sale debt securities for amortization of premiums and accretion of discounts to maturity. The Company includes such amortization and accretion in interest and other income (expense). The cost of securities sold is based on the specific identification method. The Company includes interest income on securities classified as available-for-sale in interest and other income (expense).
The Company reviews marketable securities for other-than-temporary impairment whenever the fair value of a marketable security is less than the amortized cost and evidence indicates that a marketable security’s carrying amount is not recoverable within a reasonable period of time. Other-than-temporary impairments of investments are recognized in the consolidated statements of operations if the Company has experienced a credit loss, has the intent to sell the marketable security, or if it is more likely than not that the Company will be required to sell the marketable security before recovery of the amortized cost basis.
At December 31, 2015, the balance in the Company’s accumulated other comprehensive loss was composed solely of activity related to the Company’s available-for-sale securities. There were no realized gains or losses recognized on the maturity of available-for-sale securities during the year ended December 31, 2015, and as a result, the Company did not reclassify any amount out of accumulated other comprehensive loss during that same period.
The aggregate fair value of securities held by the Company in an unrealized loss position for less than twelve months as of December 31, 2015 consists of 13 certificates of deposit and two U.S. Treasuries. The Company has the intent and ability to hold such securities until recovery. As of December 31, 2015, the Company's available-for-sale securities had remaining maturities no greater than one year. The Company determined that there was no material change in the credit risk of the above investments. As a result, the Company determined it did not hold any investments with an other-than-temporary impairment as of December 31, 2015.
The following table summarizes available-for-sale securities held at December 31, 2015:
| Description | Amortized Cost | Unrealized Gain | Unrealized Loss | Fair Value | ||||||||||||
| December 31, 2015 | ||||||||||||||||
| U.S. government treasuries | $ | 15,885 | $ | 1 | $ | (10 | ) | $ | 15,876 | |||||||
| Certificates of deposit | 4,653 | — | (5 | ) | 4,648 | |||||||||||
| Total | $ | 20,538 | $ | 1 | $ | (15 | ) | $ | 20,524 | |||||||
Certain short-term securities with original maturities of less than 90 days are included in cash and cash equivalents on the consolidated balance sheet at December 31, 2015 and are not included in the table above. The Company did not hold any available-for-sale securities at December 31, 2014.
Fair Value Measurements
In accordance with ASC 820, Fair Value Measurements and Disclosures, the Company generally defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company uses a three-tier fair value hierarchy, which classifies the inputs used in measuring fair values. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements), and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:
| ● | Level 1 – inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. |
| ● | Level 2 – inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability. |
| ● | Level 3 – inputs are unobservable inputs for the asset or liability in which there is little, if any, market activity for the asset or liability at the measurement date. |
The following table sets forth the Company’s assets that are measured at fair value on a recurring basis as of December 31, 2015:
| Fair value measurement category | ||||||||||||||||
| Description | Total | Quoted prices in active markets (Level 1) |
Significant other observable inputs (Level 2) |
Significant unobservable inputs (Level 3) |
||||||||||||
| December 31, 2015: | ||||||||||||||||
| Assets: | ||||||||||||||||
| Cash equivalents | $ | 6,356 | $ | 6,107 | $ | 249 | $ | — | ||||||||
| Marketable securities: | ||||||||||||||||
| U.S. government treasuries | 15,876 | 15,876 | — | — | ||||||||||||
| Certificates of deposit | 4,648 | — | 4,648 | — | ||||||||||||
| Total assets | $ | 26,880 | $ | 21,983 | $ | 4,897 | $ | — | ||||||||
The Company’s financial instruments of deposits and notes receivable are carried at cost and approximate their fair values given the liquid nature of such items. The fair value of the Company’s long-term debt amounted to $9,111 and $7,715 at December 31, 2014 and 2015, respectively, based on discounted cash flow analysis, which included Level 3 inputs and fair value approximates recorded amounts.
Concentrations of Credit Risk and Significant Customers
The Company had the following customers that accounted for greater than 10% of its revenues for the year ended December 31, 2014 and 2015, respectively:
| For the Year ended December 31, | |||||||||
| 2014 | 2015 | ||||||||
| Customer | Percent of Revenues | Percent of Revenues | |||||||
| A | 27 | % | — | ||||||
| B | 12 | % | — | ||||||
| C | 11 | % | — | ||||||
| D | 11 | % | — | ||||||
| E | 10 | % | — | ||||||
| F | — | 13 | % | ||||||
| G | — | 11 | % | ||||||
| H | — | 10 | % | ||||||
Additionally, Customer B accounted for 27% of the Company’s accounts receivable balance at December 31, 2014, and Customer F accounted for 38% of the accounts receivable balance at December 31, 2015. The Company had one other customer that accounted for 25% of its accounts receivable balance at December 31, 2014, but did not exceed 10% of its revenues in 2014. The Company had one other customer that accounted for 38% of its accounts receivable balance at December 31, 2015, but did not exceed 10% of its revenues in 2015.
The Company had one customer, Philips, who accounted for approximately 71% of its revenues in 2013. The Company had no other customers that accounted for greater than 10% of its revenues in 2013.
The Company has no significant off-balance sheet risk such as foreign exchange contracts, option contracts, or other hedging arrangements.
Allowance for Doubtful Accounts
The Company evaluates the collectability of accounts receivable on a regular basis. The allowance for doubtful accounts, if any, is based upon various factors including the financial condition and payment history of customers, an overall review of collections experience on other accounts and economic factors or events expected to affect future collections experience. The Company’s accounts receivable consist primarily of amounts due from large, well-capitalized customers and while the Company reviews their creditworthiness, collectability is generally not an issue. The Company records an allowance for doubtful accounts, when necessary, based on the potential for collectability issues within the customer base. The Company’s allowance for doubtful accounts was $0 at December 31, 2014 and 2015.
Product Warranty
Customers are permitted to return defective products under the Company’s standard product warranty program. For CorPath Systems, the Company’s standard one-year warranty provides for the repair of any product that malfunctions. Return and replacement can only occur if a material breach of the warranty remains uncured for 30 days. A roll-forward of the Company’s warranty liability is as follows:
| Balance at December 31, 2013 | $ | 29 | ||
| Provision for warranty obligations | 96 | |||
| Settlements | (64 | ) | ||
| Balance at December 31, 2014 | 61 | |||
| Provisions for warranty obligations | 58 | |||
| Settlements | (51 | ) | ||
| Balance at December 31, 2015 | $ | 68 |
Inventories
Inventories are valued at the lower of cost or market using the first-in, first-out (FIFO) method. The Company routinely monitors the recoverability of its inventory and records the lower of cost or market reserves based on current selling prices and reserves for excess and obsolete inventory based on historical and forecasted usage, as required. Scrap and excess manufacturing costs are charged to cost of revenue as incurred and not capitalized as part of inventories. The Company only capitalizes pre-launch inventory when purchased for commercial use and it deems regulatory approval to be probable.
Property and Equipment
Property and equipment is carried at cost. Major items and betterments are capitalized; maintenance and repairs are charged to expense as incurred. The Company capitalizes certain costs incurred in connection with developing or obtaining internal-use software. Software costs that do not meet capitalization criteria are expensed as incurred. Demonstration equipment represents internally manufactured capital equipment that is used on-site at trade shows and at customer locations to demonstrate the CorPath System. Field equipment represents internally manufactured capital equipment placed at customer locations under a program that involves the placement of a system at the customer’s site and the customer’s agreement to purchase a minimum number of cassettes each month. At December 31, 2015, the Company had placed six field equipment units and four units for a customer’s evaluation under such arrangements.
Depreciation on the demonstration equipment is charged to selling, general and administrative and the deprecation on the field equipment is charged to cost of revenue. Depreciation is computed under the straight-line method over the estimated useful lives of the respective assets.
Depreciation is provided over the following estimated asset lives:
| Machinery and equipment | 5 years |
| Computer equipment | 3 years |
| Office furniture and equipment | 5 years |
| Leasehold improvements | Shorter of life of lease or useful life |
| Vendor tooling | 1.5 - 3 years, based on planned usage |
| Software | 4 years |
| Demonstration equipment | 3 years |
| Field equipment | 3 years |
Impairment of Long-Lived Assets
The Company’s long-lived assets principally consist of property and equipment. The Company continually monitors events and changes in circumstances that could indicate carrying amounts of long-lived assets may not be recoverable. An impairment loss is recognized when expected cash flows are less than an asset’s carrying value. Accordingly, when indicators of impairment are present, the Company evaluates the carrying value of such assets in relation to the operating performance and estimated future undiscounted cash flows of the underlying assets. The Company’s policy is to record an impairment loss when it is determined that the carrying amount of the asset may not be recoverable. No such impairment changes have been recognized.
Comprehensive Loss
Comprehensive loss is comprised of net loss and changes in the unrealized gains and losses on marketable securities. Accumulated other comprehensive loss, a component of stockholders’ equity, is comprised of the cumulative unrealized gains and/or losses from the change in fair market value of the Company’s marketable securities. Accumulated other comprehensive loss was $14 as of December 31, 2015.
Revenue Recognition
The CorPath System is a capital medical device used by hospitals and surgical centers to perform heart catheterizations. Use of the CorPath System requires a sterile, single-use cassette (the “CorPath Cassette”), which are sold separately, for each procedure. Products are sold to customers with no rights of return. The Company recognizes revenue on the sale of products when the following criteria are met:
| ● | Persuasive evidence of an arrangement exists | |
| ● | The price to the buyer is fixed or determinable | |
| ● | Collectability is reasonably assured | |
| ● | Risk of loss transfers and the product is delivered. |
In each arrangement, the Company is responsible for installation of the CorPath System and initial user training, which services are deemed essential to the functionality of the system. Therefore, the Company recognizes system revenue when the CorPath System is delivered and installed, and accepted by the end user customer.
Each CorPath System is sold with a standard one year warranty, which provides that the CorPath System will function as intended and during that one year period, the Company will either replace the product or a portion thereof or provide the necessary repair service during the Company’s normal service hours. The Company accrues for the estimated costs of the warranty once the CorPath System revenue is recognized.
The Company generally enters into multiple element arrangements, which include the sale of a CorPath System with an initial order of CorPath Cassettes, and may include either a basic service plan or a premium service plan. The basic service plan provides for an extended warranty period and the premium service plan provides for the extended warranty as well as component upgrades, when and if they become available during the service plan period. Deliverables, which are accounted for as separate units of accounting under multiple-element arrangements include: (a) the CorPath System, including installation and initial training, which are subject to customer acceptance and (b) the initial shipment of CorPath Cassettes to the customer, and may include either (c) an extended warranty or (d) component upgrades.
The Company recognizes revenue on multiple-element arrangements in accordance with Accounting Standards Update (“ASU”) 2009-13, Revenue Recognition (Topic 605): Multiple Deliverable Revenue Arrangements, based on the estimated selling price of each element. In accordance with ASU 2009-13, the Company uses vendor-specific objective evidence (“VSOE”), if available, to determine the selling price of each element. If VSOE is not available, the Company uses third-party evidence (“TPE”) to determine the selling price. If TPE is not available, the Company uses its best estimate to develop the estimated selling price (“BESP”). The Company uses BESP to determine the selling price of its systems as well as the basic and premium service plans. BESP is determined based on estimated costs plus a reasonable margin, and has generally been consistent with the price charged to the customer for such products and services. The determination of BESP also considers the price of the service plans charged to customers when such services are sold separately in subsequent transactions. The Company also uses BESP to determine the selling price of the initial order of cassettes, which considers the price at which it charges its customers when the cassettes are sold separately.
Revenue related to basic service plans is recognized on a straight-line basis over the life of the service contract. Revenue related to premium service plans is recognized over the life of the service contract, with consideration given to the expected timing of costs to be incurred related to the delivery of component upgrades. Revenues from accessories are recorded upon delivery and services provided by the Company outside of a basic or premium service contract are recognized as the services are provided.
There are no performance, cancellation, termination, and refund-type provisions under the Company’s multiple element arrangements.
On January 21, 2011, the Company entered into a distributor agreement with Philips Medical Systems Nederland, B.V. (“Philips”) appointing Philips to be the sole worldwide distributor for the promotion and sale of the Company’s CorPath System. Under the agreement, Philips sold the equipment directly to the end user and the Company was responsible for installation and initial training. Revenue was recognized on a net basis based on the amount billed to Philips and upon acceptance of the system by the end-user customer. This agreement with Philips expired on August 7, 2014. The Company continues to sell CorPath Systems through Philips on a sale by sale basis under a non-exclusive arrangement under mutually agreeable terms, which may include a continued level of discounted pricing, until such time the Company either executes a new distribution arrangement with Philips or the Company no longer does business with Philips. At December 31, 2014 and 2015, there were no amounts outstanding from Philips.
The Company also sells CorPath Cassettes under a CorPath Utilization Program (“CUP”), which is a multi-year arrangement that involves the placement of a CorPath System at a customer’s site free of charge and the customer agrees to purchase a minimum number of CorPath Cassettes each month at a premium over the regular price. The Company records revenue upon shipment of the cassettes based on the selling price of the CorPath Cassettes. The system is capitalized as field equipment in property and equipment and is depreciated on a straight line basis through cost of revenue over the estimated useful life of the system, which generally approximates the length of the CUP program contract, which is typically 36 months.
The Company also offers a One-Stent program to demonstrate its confidence in the CorPath System’s ability to help accurately measure anatomy and precisely place only one stent per lesion. The Company provides eligible customers registered under the program a $1 credit against future CorPath Cassette purchases for a qualifying CorPath percutaneous coronary intervention (“PCI”) procedure which uses more than one stent per lesion. The estimated cost of honoring the potential obligation under the stent program is recorded as a reduction of revenue at the time of shipment. These costs have not been significant to date.
The Company records shipping and handling costs as a selling expense in the period incurred, and records payments from customers for shipping costs as a reduction of selling expenses. Such amounts have not been material in the periods presented. The Company recorded medical device excise tax in the amount of $29, $40 and $34 for the years ended December 31, 2013, 2014 and 2015, respectively, which is included in selling, general and administrative expenses. At the present time the excise tax is suspended due to the operation of a provision in the Consolidated Appropriations Act of 2016, signed into law on December 18, 2015 but that two-year moratorium ends on December 31, 2017.
Research and Development
Costs for research and development are expensed as incurred. Research and development expense consists primarily of salaries, salary-related expenses and costs of contractors and materials.
Income Taxes
The Company accounts for income taxes using the liability method, whereby deferred tax asset and liability account balances are determined based on differences between financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates that will be in effect when the differences are expected to reverse. The Company provides a valuation allowance, if necessary, to reduce deferred tax assets to amounts that are realizable.
The Company accounts for uncertain tax positions using a “more-likely-than-not” threshold for recognizing and resolving uncertain tax positions. The evaluation of uncertain tax positions is based on factors including, but not limited to, changes in tax law, the measurement of tax positions taken or expected to be taken in tax returns, the effective settlement of matters subject to audit, new audit activity and changes in facts or circumstances related to a tax position. The Company evaluates these tax positions on an annual basis. The Company also accrues for potential interest and penalties related to unrecognized tax benefits in income tax expense.
The Company recognizes the tax benefit of tax positions to the extent that the benefit will more likely than not be realized. The determination as to whether the tax benefit will more likely than not be realized is based upon the technical merits of the tax position as well as consideration of the available facts and circumstances.
Stock-Based Compensation
The Company recognizes compensation costs resulting from the issuance of stock-based awards to employees and directors as an expense in the consolidated statements of operations over the requisite service period based on a measurement of fair value for each stock award. The awards issued to date have been stock options with service-based vesting periods over two or four years. The Company recognizes compensation costs resulting from the issuance of stock-based awards to non-employees as an expense in the consolidated statements of operations over the service period based on a measurement of fair value for each stock award at each performance date and period end.
Prior to the completion of the reverse acquisition, the fair value of the common stock was determined by the Board of Directors after considering a broad range of factors, including the results obtained from an independent third-party valuation, the illiquid nature of an investment in the Company’s Common Stock, the Company’s historical financial performance and financial position, the Company’s future prospects and opportunity for liquidity events, and recent sale and offer prices of Common and Preferred Stock in private transactions negotiated at arm’s length. Subsequent to the completion of the reverse acquisition, the fair value of the Common Stock was obtained from quoted market prices on the OTCQB as provided by OTC Market Groups, Inc. In connection with the public offering in May 2015, the Company’s common stock was approved for listing on the NYSE MKT, where it commenced trading under the symbol “CVRS”.
The following assumptions were used to estimate the fair value of stock options granted using the Black-Scholes-Merton option-pricing model (“Black-Scholes Model”):
| Years ended December 31, | ||||||||||||
| 2013 | 2014 | 2015 | ||||||||||
| Risk-free interest rate | 0.72% to 1.43% | 1.89% to 2.01% | 1.54% to 1.97% | |||||||||
| Expected term in years | 5.75 to 6.25 | 6.25 | 6.08 | |||||||||
| Expected volatility | 80% | 50% | 50% | |||||||||
| Expected dividend yield | 0% | 0% | 0% | |||||||||
The risk-free interest rate assumption is based upon observed U.S. government security interest rates with a term that is consistent with the expected term of the Company’s employee stock options. The expected term is based on the average of the vesting period and contractual term of the Company’s options given the lack of historical data available. The Company does not pay a dividend, and is not expected to pay a dividend in the foreseeable future.
Due to a lack of a public market for the Company’s Common Stock for an extended period of time, the Company utilized comparable public companies’ volatility rates as a proxy of its expected volatility for purposes of the Black-Scholes Model. Stock-based compensation expense is recorded net of estimated forfeitures and is adjusted periodically for actual forfeitures. The Company uses historical data to estimate forfeiture rates. For the years ended December 31, 2013, 2014 and 2015, forfeitures were estimated to be 4.9%, 6.0% and 5.0%, respectively.
Warrant Liability
The Company reviews the terms of warrants issued in connection with the applicable accounting guidance and classifies warrants as a long-term liability on the consolidated balance sheets if the warrant may conditionally obligate the Company to transfer assets, including repurchase of the Company’s capital stock, at some point in the future. Warrants to purchase shares of redeemable convertible preferred stock met these criteria and therefore required liability-classification. The Company classifies warrants within stockholders’ equity on the consolidated balance sheets if the warrants are considered to be indexed to the Company’s own capital stock, and otherwise would be recorded in stockholders’ equity.
Liability-classified warrants are subject to re-measurement at each balance sheet date, and any change in fair value is recognized as a component of other income (expense) in the consolidated statements of operations. The Company estimated the fair value of these warrants at issuance and each balance sheet date thereafter using the Black-Scholes Model as described in the stock-based compensation section above, based on the estimated market value of the underlying Redeemable Convertible Preferred Stock at the valuation measurement date, the remaining contractual term of the warrant, risk-free interest rates, expected dividends and expected volatility of the price of the underlying redeemable convertible preferred stock. The fair value of the Redeemable Convertible Preferred Stock was determined by the Board of Directors after considering a broad range of factors, including the results obtained from an independent third-party valuation, the illiquid nature of an investment in the Company’s Redeemable Convertible Preferred Stock, the Company’s historical financial performance and financial position, the Company’s future prospects and opportunity for liquidity events, and recent sale and offer prices of Common and Preferred Stock in private transactions negotiated at arm’s length.
The Company had warrants outstanding to purchase shares of Series A, D and E Redeemable Convertible Preferred Stock, which converted into warrants to purchase shares of Common Stock at the date of the Acquisition. Prior to the Acquisition, the warrant instruments required mark-to-market accounting which was recorded in the statements of operations based on their fair values determined using the Black-Scholes Model and the fair value of underlying Preferred Stock. The warrant instruments were re-valued for the last time at the date of the Acquisition and reclassified into stockholders’ equity in 2014, and at December 31, 2014 and 2015, the Company did not have a warrant liability.
Related-Party Transactions
On January 21, 2011, the Company entered into a distributor agreement with Philips appointing Philips to be the sole distributor for the promotion and sale of the Company’s CorPath System. The agreement was terminated on August 7, 2014. The Company continues to sell CorPath Systems through Philips on a sale by sale basis under a non-exclusive arrangement under mutually agreeable terms, which may include a continued level of discounted pricing, until such time the Company either executes a new distribution arrangement with Philips or the Company no longer does business with Philips.
For the years ended December 31, 2013, 2014 and 2015, the Company recorded revenues of $630, $315 and $125, respectively, from shipments to Philips under the distribution agreement. At December 31, 2014 and 2015, there were no amounts outstanding from Philips, resulting from selling activity under the agreement. As of December 31, 2015, Koninklijke Philips, N.V. ("Philips' Parent"), held approximately 15% of the Company's outstanding Common Stock.
Recent Accounting Pronouncements Not Yet Adopted
In May 2014, the FASB issued ASU 2014-09—Revenue from Contracts with Customers, which amends FASB Accounting Standards Codification Topic 606. ASU 2014-09 provides a single, comprehensive revenue recognition model for all contracts with customers. This standard contains principles for the determination of the measurement of revenue and the timing of when such revenue is recognized. Revenue recognition will reflect the transfer of goods or services to customers at an amount that is expected to be earned in exchange for those goods or services. ASU 2014-09 was scheduled to be effective for annual reporting periods beginning after December 15, 2016, and early adoption was not permitted. In August 2015, the FASB issued ASU No. 2015-14—Revenue from Contracts with Customers: Deferral of Effective Date, which defers the effective date of ASU 2014-09 by one year. ASU 2014-09 is now effective for annual periods after December 15, 2017 including interim periods within that reporting period. Early adoption is permitted, but not before the original effective date. The Company is currently assessing the impact of this standard to its consolidated financial statements.
In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The amendments in this update will explicitly require a company’s management to assess an entity’s ability to continue as a going concern, and to provide related footnote disclosures in certain circumstances. The new standard will be effective in the first annual period ending after December 15, 2016. Early adoption is permitted. If this standard had been adopted as of December 31, 2015, the Company believes that it would have concluded there was not substantial doubt about its ability to continue as a going concern. However, the Company faces certain risks and uncertainties, as further described in Note 1, Nature of Operations, that could have affected this analysis.
In January 2015, the FASB issued Financial Accounting Standards Update—Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items. Subtopic 225-20, Income Statement—Extraordinary and Unusual Items, previously required that an entity separately classify, present, and disclose extraordinary events and transactions. This update is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015 and may be applied prospectively or retrospectively to all prior periods presented in the financial statements. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. The Company does not expect the impact of adoption to be material to its consolidated financial statements.
In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810) to address financial reporting considerations for the evaluation as to the requirement to consolidate certain legal entities. ASU 2015-02 is effective for fiscal years and for interim periods within those fiscal years beginning after December 15, 2015. The Company does not expect the impact of ASU 2015-02 to be material to its consolidated financial statements.
In April 2015, the FASB issued ASU 2015-03, Interest—Imputation of Interest (Subtopic 835-30) as part of the initiative to reduce complexity in accounting standards. The update requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. ASU 2015-03 is effective for annual periods beginning after December 15, 2015 and for interim periods within those fiscal years. The Company does not expect the impact of ASU 2015-03 to be material to its consolidated financial statements.
In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. Under this accounting guidance, inventory will be measured at the lower of cost and net realizable value and other options that currently exist for market value will be eliminated. ASU 2015-11 defines net realizable value as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. No other changes were made to the current guidance on inventory measurement. The guidance is effective for annual reporting periods and interim periods within those annual reporting periods beginning after December 15, 2016. Early adoption is permitted and the prospective transition method should be applied. The Company is currently evaluating the impact of ASU 2015-11 on its consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The update addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments. ASU 2016-01 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted only for certain portions of the ASU related to financial liabilities. The Company is currently evaluating the impact of this standard on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which amends leasing accounting requirements. The new standard requires lessee recognition on the balance sheet of a right-of-use asset and a lease liability, initially measured at the present value of the lease payments. It further requires recognition in the income statement of a single lease cost, calculated so that the cost of the lease is allocated over the lease term on a generally straight-line basis. Finally, it requires classification of all cash payments within operating activities in the statement of cash flows. It is effective for fiscal years commencing after December 15, 2018 and early adoption is permitted. The Company is currently evaluating the impact of this standard on its consolidated financial statements.
|
|||
The following table summarizes available-for-sale securities held at December 31, 2015:
| Description | Amortized Cost | Unrealized Gain | Unrealized Loss | Fair Value | ||||||||||||
| December 31, 2015 | ||||||||||||||||
| U.S. government treasuries | $ | 15,885 | $ | 1 | $ | (10 | ) | $ | 15,876 | |||||||
| Certificates of deposit | 4,653 | — | (5 | ) | 4,648 | |||||||||||
| Total | $ | 20,538 | $ | 1 | $ | (15 | ) | $ | 20,524 | |||||||
The following table sets forth the Company’s assets that are measured at fair value on a recurring basis as of December 31, 2015:
| Fair value measurement category | ||||||||||||||||
| Description | Total | Quoted prices in active markets (Level 1) |
Significant other observable inputs (Level 2) |
Significant unobservable inputs (Level 3) |
||||||||||||
| December 31, 2015: | ||||||||||||||||
| Assets: | ||||||||||||||||
| Cash equivalents | $ | 6,356 | $ | 6,107 | $ | 249 | $ | — | ||||||||
| Marketable securities: | ||||||||||||||||
| U.S. government treasuries | 15,876 | 15,876 | — | — | ||||||||||||
| Certificates of deposit | 4,648 | — | 4,648 | — | ||||||||||||
| Total assets | $ | 26,880 | $ | 21,983 | $ | 4,897 | $ | — | ||||||||
The Company had the following customers that accounted for greater than 10% of its revenues for the year ended December 31, 2014 and 2015, respectively:
| For the Year ended December 31, | |||||||||
| 2014 | 2015 | ||||||||
| Customer | Percent of Revenues | Percent of Revenues | |||||||
| A | 27 | % | — | ||||||
| B | 12 | % | — | ||||||
| C | 11 | % | — | ||||||
| D | 11 | % | — | ||||||
| E | 10 | % | — | ||||||
| F | — | 13 | % | ||||||
| G | — | 11 | % | ||||||
| H | — | 10 | % | ||||||
A roll-forward of the Company’s warranty liability is as follows:
| Balance at December 31, 2013 | $ | 29 | ||
| Provision for warranty obligations | 96 | |||
| Settlements | (64 | ) | ||
| Balance at December 31, 2014 | 61 | |||
| Provisions for warranty obligations | 58 | |||
| Settlements | (51 | ) | ||
| Balance at December 31, 2015 | $ | 68 |
The following assumptions were used to estimate the fair value of stock options granted using the Black-Scholes-Merton option-pricing model (“Black-Scholes Model”):
| Years ended December 31, | ||||||||||||
| 2013 | 2014 | 2015 | ||||||||||
| Risk-free interest rate | 0.72% to 1.43% | 1.89% to 2.01% | 1.54% to 1.97% | |||||||||
| Expected term in years | 5.75 to 6.25 | 6.25 | 6.08 | |||||||||
| Expected volatility | 80% | 50% | 50% | |||||||||
| Expected dividend yield | 0% | 0% | 0% | |||||||||
|
|||
The Company’s inventories are valued at the lower of cost or market using the FIFO method and consist of the following:
| December 31, | ||||||||
| 2014 | 2015 | |||||||
| Raw materials | $ | 737 | $ | 483 | ||||
| Work in progress | 198 | 79 | ||||||
| Finished goods | 584 | 767 | ||||||
| $ | 1,519 | $ | 1,329 | |||||
|
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Property and equipment are stated at cost and are being depreciated using the straight-line basis over the assets’ estimated useful lives. Depreciation and amortization expense was $607, $622 and $706 for the fiscal years 2013, 2014 and 2015, respectively. Property and equipment consist of the following:
| December 31, | ||||||||
| 2014 | 2015 | |||||||
| Machinery and equipment | $ | 334 | $ | 441 | ||||
| Computer equipment | 273 | 286 | ||||||
| Office furniture and equipment | 355 | 360 | ||||||
| Leasehold improvements | 67 | 70 | ||||||
| Vendor tooling | 711 | 715 | ||||||
| Software | 490 | 498 | ||||||
| Demonstration equipment | 633 | 717 | ||||||
| Field equipment | 588 | 1,004 | ||||||
| Construction in progress | — | 126 | ||||||
| 3,451 | 4,217 | |||||||
| Less accumulated depreciation and amortization | (2,167 | ) | (2,835 | ) | ||||
| Property and equipment, net | $ | 1,284 | $ | 1,382 | ||||
|
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Accrued expenses consist of the following:
| 2014 | 2015 | |||||||
| Payroll and benefits | $ | 185 | $ | 79 | ||||
| Professional and consultant fees | 496 | 444 | ||||||
| Travel expenses | 57 | 113 | ||||||
| Product development costs | 62 | 44 | ||||||
| Commissions | 85 | 187 | ||||||
| Warranty | 61 | 68 | ||||||
| Interest | 48 | 71 | ||||||
| Other | 143 | 193 | ||||||
| $ | 1,137 | $ | 1,199 | |||||
_______________________
Certain items classified as "Other" in the prior year, travel expense and interest, were changed to conform with the current year presentation.
|
|||
The Company used the following assumptions for the valuation of its warrants issued on the following dates:
| June 11, 2014 | December 31, 2014 | |||||||
| Risk-free interest rate | 2.5 | % | 2.17 | % | ||||
| Dividend yield | 0.0 | % | 0.0 | % | ||||
| Expected volatility | 50.0 | % | 50.0 | % | ||||
| Expected term (years) | 10.00 | 9.44 | ||||||
Future principal payments under the borrowing arrangement as of December 31, 2015 are as follows:
| Year ending December 31: | |||||
| 2016 | $ | 4,373 | |||
| 2017 | 3,605 | ||||
| $ | 7,978 | ||||
|
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The Company’s effective income tax rate differs from the statutory federal income tax rate as follows:
| Years Ended December 31, | ||||||||||||
| 2013 | 2014 | 2015 | ||||||||||
| Statutory U.S. federal rate | 34.0 | % | 34.0 | % | 34.0 | % | ||||||
| State income tax | 4.7 | 1.7 | 3.7 | |||||||||
| Permanent items | 0.6 | (3.8 | ) | (0.4 | ) | |||||||
| Change in taxing status in Massachusetts to a manufacturer | — | (4.9 | ) | — | ||||||||
| Other | (0.8 | ) | (0.7 | ) | (0.5 | ) | ||||||
| Change in state tax rate | — | — | 0.7 | |||||||||
| Federal R&D credits | 2.0 | 1.2 | 1.3 | |||||||||
| State R&D and other credits | 0.5 | 0.7 | 0.5 | |||||||||
| Change in valuation allowance | (41.0 | ) | (28.2 | ) | (39.3 | ) | ||||||
| Total expense (benefit) | — | % | — | % | — | % | ||||||
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and the related valuation allowance were as follows:
| December 31, | ||||||||
| 2014 | 2015 | |||||||
| Deferred income tax assets: | ||||||||
| Operating loss carryforwards | $ | 20,178 | $ | 30,832 | ||||
| Start-up expenditures | 2,807 | 2,711 | ||||||
| Property and equipment | 46 | 28 | ||||||
| Intangible assets | 2,589 | — | ||||||
| Stock-based compensation expense | 738 | 788 | ||||||
| Research and development credit carryforwards | 1,216 | 1,746 | ||||||
| Accrued expenses and other | 307 | 482 | ||||||
| Total deferred income tax assets | 27,881 | 36,587 | ||||||
| Valuation allowance | (27,881 | ) | (36,587 | ) | ||||
| Net deferred income tax assets | $ | — | $ | — | ||||
|
|||
A summary of the activity under the Company’s stock option plans is as follows. Such information has been retrospectively adjusted to give effect to the exchange of stock options that occurred upon the Acquisition.
| Options | Weighted- Average Exercise Price |
Weighted- Average Remaining Contractual Term (Years) |
Aggregate Intrinsic Value |
|||||||||||||
| Outstanding at December 31, 2014 | 8,678,017 | $ | 0.64 | 6.30 | $ | 31,359 | ||||||||||
| Granted | 1,454,486 | $ | 3.51 | |||||||||||||
| Exercised | (347,392 | ) | $ | 0.28 | ||||||||||||
| Cancelled | (1,006,608 | ) | $ | 0.80 | ||||||||||||
| Outstanding at December 31, 2015 | 8,778,503 | $ | 1.11 | 5.98 | $ | 18,876 | ||||||||||
| Exercisable at December 31, 2015 | 6,673,104 | $ | 0.63 | 5.01 | $ | 17,220 | ||||||||||
| Vested and expected to vest at December 31, 2015 | 8,673,233 | $ | 1.09 | 5.95 | $ | 18,813 | ||||||||||
Stock-based compensation expense was allocated based on the employees’ function as follows:
| Years ended December 31, | ||||||||||||
| 2013 | 2014 | 2015 | ||||||||||
| Research and development | $ | 59 | $ | 95 | $ | 74 | ||||||
| Selling, general and administrative | 270 | 282 | 431 | |||||||||
| $ | 329 | $ | 377 | $ | 505 | |||||||
|
|||
A roll forward of the warrant liability is as follows:
| Balance at December 31, 2013 | $ | 3,152 | ||
| Issuance of warrants in connection with lending arrangement | 230 | |||
| Revaluation of warrants | 2,421 | |||
| Reclassification of warrant liability to stockholders’ equity | (5,803 | ) | ||
| Balance at December 31, 2014 | $ | — |
The Company used the following assumptions for the valuation of its warrant liability:
| August 12, 2014 | ||||
| Risk-free interest rate | 1.025 | % | ||
| Dividend yield | 0.0 | % | ||
| Expected volatility | 50.0 | % | ||
| Expected term (years) | 3.5 | |||
The Company has following warrants outstanding at December 31, 2015:
| Exercise Price | Date of Expiration | Number of Warrants | |||||
| $1.06 | October 11, 2017 | 4,728,191 | |||||
| $0.76 | May 31, 2017 | 124,160 | |||||
| $1.41 | May 28, 2020 | 355,028 | |||||
| 5,207,379 | |||||||
|
|||
At December 31, 2015, the Company’s future minimum lease payments are indicated below:
| Year ending December 31: | Total Lease Payments | ||||
| 2016 | $ | 573 | |||
| 2017 | 586 | ||||
| 2018 | 49 | ||||
| Total | $ | 1,208 | |||
|
|||
The following table presents unaudited operating results for each of the Company’s quarters in the years ended December 31, 2015 and 2014:
| Fiscal Year 2015 Quarters | ||||||||||||||||||||
| First | Second | Third | Fourth | Year | ||||||||||||||||
| Revenue | $ | 776 | $ | 909 | $ | 212 | $ | 832 | $ | 2,729 | ||||||||||
| Cost of revenue | 801 | 941 | 722 | 1 ,260 | 3 ,724 | |||||||||||||||
| Gross profit (loss) | (25 | ) | (32 | ) | (510 | ) | (428 | ) | (995 | ) | ||||||||||
| Operating expenses | 6 ,747 | 6 ,839 | 6 ,148 | 6 ,442 | 26,176 | |||||||||||||||
| Operating loss | (6,772 | ) | (6,871 | ) | (6,658 | ) | (6,870 | ) | (27,171 | ) | ||||||||||
| Total other expense, net | (397 | ) | (432 | ) | (404 | ) | (359 | ) | (1,592 | ) | ||||||||||
| Net loss | $ | (7,169 | ) | $ | (7,303 | ) | $ | (7,062 | ) | $ | (7,229 | ) | $ | (28,763 | ) | |||||
| Net loss per share - basic and diluted | $ | (0.07 | ) | $ | (0.07 | ) | $ | (0.06 | ) | $ | (0.06 | ) | $ | (0.25 | ) | |||||
| Fiscal Year 2014 Quarters | ||||||||||||||||||||
| First | Second | Third | Fourth | Year | ||||||||||||||||
| Revenue | $ | 730 | $ | 1,077 | $ | 554 | $ | 622 | $ | 2,983 | ||||||||||
| Cost of revenue | 1 ,383 | 1 ,058 | 793 | 1 ,670 | (1) | 4 ,904 | ||||||||||||||
| Gross profit (loss) | (653 | ) | 19 | (239 | ) | (1,048 | ) | (1,921 | ) | |||||||||||
| Operating expenses | 4 ,949 | 4 ,388 | 5 ,148 | 5 ,299 | 19,784 | |||||||||||||||
| Operating loss | (5,602 | ) | (4,369 | ) | (5,387 | ) | (6,347 | ) | (21,705 | ) | ||||||||||
| Total other income (expense) | 1 ,768 | (1,341 | ) | (3,062 | ) | (201 | ) | (2,836 | ) | |||||||||||
| Net loss | $ | (3,834 | ) | $ | (5,710 | ) | $ | (8,449 | ) | $ | (6,548 | ) | $ | (24,541 | ) | |||||
| Net loss per share - basic and diluted | $ | (0.05 | ) | $ | (0.08 | ) | $ | (0.10 | ) | $ | (0.06 | ) | $ | (0.29 | ) | |||||
___________________
(1) Includes $536 from the correction of an immaterial error related to inventory overhead costs that were overstated in the 2013 consolidated financial statements.
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