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Note 2 - Summary of Significant Accounting Policies | 12 Months Ended
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Dec. 31, 2018
Notes to Financial Statements |
Significant Accounting Policies [Text Block] |
2. | Summary of Significant Accounting Policies
Principles of Consolidation The accompanying consolidated financial statements include the accounts of Heron Therapeutics, Inc. and its wholly owned subsidiary, Heron Therapeutics, B.V., which was organized in the Netherlands in March 2015. Heron Therapeutics, B.V. has no operations and no material assets or liabilities, and there have been no significant transactions related to Heron Therapeutics, B.V. since its inception. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and disclosures made in the accompanying notes to the financial statements. Our significant accounting policies that involve significant judgment and estimates include revenue recognition, inventory and related reserves, accrued clinical liabilities, income taxes and stock-based compensation. Actual results could differ materially from those estimates. Cash, Cash Equivalents and Short-Term Investments Cash and cash equivalents consist of cash and highly liquid investments with contractual maturities of three months or less from the original purchase date. Short-term investments consist of securities with contractual maturities of greater than three months to one year from the original purchase date. We have classified our short-term investments as available-for-sale securities in the accompanying consolidated financial statements. Available-for-sale securities are stated at fair market value, with the net change in unrealized gains and losses reported in other comprehensive loss and realized gains and losses included in other income (expense), net. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in interest income. Our bank and investment accounts have been placed under control agreements in accordance with our Senior Secured Convertible Notes (“Convertible Notes”) (see Note 8 ). Fair Value of Financial Instruments A company may elect to use fair value to measure accounts and loans receivable, available-for-sale and held-to-maturity securities, equity method investments, accounts payable, guarantees and issued debt. Other eligible items include firm commitments for financial instruments that otherwise would not be recognized at inception and non-cash warranty obligations where a warrantor is permitted to pay a third party to provide the warranty goods or services. If the use of fair value is elected, any upfront costs and fees related to the item such as debt issuance costs must be recognized in earnings and cannot be deferred. The fair value election is irrevocable and generally made on an instrument-by-instrument basis, even if a company has similar instruments that it elects not to measure based on fair value. Unrealized gains and losses on existing items for which fair value has been elected are reported as a cumulative adjustment to beginning retained earnings and any changes in fair value are recognized in earnings. We have elected to not apply the fair value option to our financial assets and liabilities. Financial instruments, including cash and cash equivalents, receivables, inventory, prepaid expenses, other current assets, accounts payable and accrued expenses, are carried at cost, which is considered to be representative of their respective fair values because of the short-term maturity of these instruments. Short-term available-for-sale investments are carried at fair value (see Note 3 ). Our Convertible Notes outstanding at December 31, 2018 do not have a readily available ascertainable market value, however, the carrying value is considered to approximate its fair value. Concentration of Credit Risk Cash, cash equivalents and short-term investments are financial instruments that potentially subject us to concentrations of credit risk. We deposit our cash in financial institutions. At times, such deposits may be in excess of insured limits. We may also invest our excess cash in money market funds, U.S. government and agencies, corporate debt securities and commercial paper. We have established guidelines relative to our diversification of our cash investments and their maturities in an effort to maintain safety and liquidity. These guidelines are periodically reviewed and modified to take advantage of trends in yields and interest rates. Our products are distributed in the U.S. through a limited number of specialty distributors and full line wholesalers (collectively, “Customers”) that resell our products to healthcare providers and hospitals, the end users. The following table includes the percentage of net product sales and accounts receivable balances for our three major Customers, each of which comprised 10% or more of our net product sales:
|  | Net Product Sales |  |  | Accounts Receivable |
|  | Year Ended December 31 , 2018 |  |  | As of December 31 , 2018 |
Customer A |  |  | 41.7 | % |  |  | 38.7 | %
Customer B |  |  | 34.9 | % |  |  | 46.1 | %
Customer C |  |  | 22.5 | % |  |  | 14.8 | %
Total |  |  | 99.1 | % |  |  | 99.6 | %
Accounts Receivable, Net Accounts receivable are recorded at the invoice amount, net of an allowance for doubtful accounts. The allowance for doubtful accounts reflects accounts receivable balances that are believed to be uncollectible. In estimating the allowance for doubtful accounts, we consider: ( 1 ) our historical experience with collections and write-offs; ( 2 ) the credit quality of our Customers and any recent or anticipated changes thereto; and ( 3 ) the outstanding balances and past due amounts from our Customers. We offered extended payment terms to our Customers in connection with our product launches of SUSTOL and CINVANTI in October 2016 and January 2018, respectively, in anticipation of the timing in reimbursement by government and commercial payers. Effective January 2018, we shortened payment terms to certain of our SUSTOL Customers. As of December 31, 2018, extended payment terms given to our Customers were evaluated in accordance with GAAP and did not impact the collectability of accounts receivables. As of December 31, 2018, we determined that an allowance for doubtful accounts was not required. For the year ended December 31, 2018, we did not write off any accounts receivable balances. Inventory Inventory is stated at the lower of cost or estimated net realizable value on a first -in, first -out, or FIFO, basis. We periodically analyze our inventory levels and write down inventory that has become obsolete, inventory that has a cost basis in excess of its estimated realizable value and inventory quantities that are in excess of expected sales requirements as cost of product sales. The determination of whether inventory costs will be realizable requires estimates by management. If actual market conditions are less favorable than projected by management, additional write-downs of inventory may be required, which would be recorded as cost of product sales. Property and Equipment Property and equipment is stated at cost less accumulated depreciation and amortization. Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets (generally five years). Leasehold improvements are stated at cost and amortized on a straight-line basis over the shorter of the estimated useful life of the asset or the lease term. Impairment of Long-Lived Assets If indicators of impairment exist, we assess the recoverability of the affected long-lived assets by determining whether the carrying value of such assets can be recovered through undiscounted future operating cash flows. If impairment is indicated, we measure the amount of such impairment by comparing the carrying value of the asset to the fair value of the asset and record the impairment as a reduction in the carrying value of the related asset with a corresponding charge to operating expenses. Estimating the undiscounted future operating cash flows associated with long-lived assets requires judgment and assumptions that could differ materially from actual results. Revenue Recognition In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014 - 09, Revenue from Contracts with Customers (“Topic 606” ). Topic 606 is based on the principle that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Topic 606 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Accordingly, in the first quarter of 2018, we adopted Topic 606 using the modified retrospective approach. Under this approach, incremental disclosures are provided to present each financial statement line item for 2018 under the prior standard. As a result of the adoption of Topic 606, we recorded a cumulative adjustment to accumulated deficit of $1.6 million on January 1, 2018. This adjustment reflects the acceleration of $2.9 million in gross product sales less $1.1 million in product sales allowances and $0.2 million in cost of product sales (see Note 5 ). Accrued Clinical Liabilities We accrue clinical costs based on work performed, which relies on estimates of the progress of the trials and the related expenses incurred. Clinical trial related contracts vary significantly in duration, and may be for a fixed amount, based on the achievement of certain contingent events or deliverables, a variable amount based on actual costs incurred, capped at a certain limit or contain a combination of these elements. Revisions are recorded to research and development expense in the period in which the facts that give rise to the revision become known. Historically, revisions have not resulted in material changes to research and development expense; however, a modification in the protocol of a clinical trial or cancellation of a clinical trial could result in a material charge to our results of operations. Research and Development Expense All costs of research and development are expensed in the period incurred. Research and development expense primarily consist of personnel and related costs, stock-based compensation expense, fees paid to outside service providers and consultants, facilities costs and materials used in clinical and preclinical trials and research and development. Patent Costs We incur outside legal fees in connection with filing and maintaining our various patent applications. All patent costs are expensed as incurred and are included in general and administrative expense in the consolidated statements of operations and comprehensive loss. Stock-Based Compensation Expense We estimate the fair value of stock-based payment awards using the Black-Scholes option pricing model. This fair value is then amortized using the straight-line single-option method of attributing the value of stock-based compensation to expense over the requisite service periods of the awards. The Black-Scholes option pricing model requires the input of complex and subjective assumptions, including each option’s expected life and price volatility of the underlying stock. As stock-based compensation expense is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures are estimated based on historical data. Warrants We have issued warrants to purchase shares of our common stock in conjunction with certain equity financings or in exchange for services. The terms of the warrants were evaluated to determine the appropriate classification as equity or a liability. Income Taxes We recognize the impact of a tax position in our consolidated financial statements if the position is more likely than not to be sustained on examination and on the technical merits of the position. The total amount of unrecognized tax benefits, if recognized, would affect other tax accounts, primarily deferred taxes in future periods, and would not affect our effective tax rate, since we maintain a full valuation allowance against our deferred tax assets (see Note 10 ). We recognize interest and penalties related to income tax matters in income tax expense. Comprehensive Loss Comprehensive loss is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources. Net changes in unrealized gains and losses on available-for-sale securities are included in other comprehensive loss and represent the difference between our net loss and comprehensive net loss for all periods presented. Net Loss per Share Basic net loss per share is calculated by dividing the net loss by the weighted-average number of common shares outstanding for the period, without consideration of common share equivalents. Diluted net loss per share is computed by dividing the net loss by the weighted-average number of common shares and common stock equivalents outstanding for the period determined using the treasury stock method. For purposes of this calculation, stock options, warrants and shares of common stock underlying Convertible Notes are considered to be common stock equivalents and are included in the calculation of diluted net loss per share only when their effect is dilutive. Because we have incurred a net loss for all periods presented in the consolidated statements of operations and comprehensive loss, the following common stock equivalents were not included in the computation of net loss per share because their effect would be anti-dilutive (in thousands):
|  | December 31 , |
|  | 2018 |  |  | 2017 |  |  | 2016 |
Stock options outstanding |  |  | 15,265 |  |  |  | 13,463 |  |  |  | 11,845 |
Warrants outstanding |  |  | 640 |  |  |  | 620 |  |  |  | 600 |
Shares of common stock underlying Convertible Notes outstanding |  |  | 8,473 |  |  |  | 7,983 |  |  |  | 7,521 |
Recent Accounting Pronouncements Recently Adopted In May 2017, the FASB issued ASU No. 2017 - 09, Compensation – Stock Compensation: Scope of Modification Accounting (“ASU 2017 - 09” ). The amendments in ASU 2017 - 09 provide guidance about which changes to the terms or conditions of a stock-based payment award require an entity to apply modification accounting in Topic 718. In the first quarter of 2018, we adopted the provisions of ASU 2017 - 09, which did not have a material impact on our results of operations or financial condition. Not Yet Adopted In February 2016, the FASB issued ASU No. 2016 - 02, Leases (Topic 842 ) (“ASU 2016 - 02” ), which provides principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. In July 2018, the FASB issued ASU No. 2018 - 11, Leases (Topic 842 ): Targeted Improvements and ASU No. 2018 - 10, Codification Improvements to Topic 842, Leases . ASU 2016 - 02 and the subsequent modifications are identified as “ASC 842.” ASC 842 requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than twelve months, regardless of classification. Leases with a term of twelve months or less will be accounted for similar to existing guidance for operating leases. ASC 842 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We adopted the provisions of ASU 2016 - 02 on January 1, 2019 using the alternative modified transition method. We are still in the process of finalizing our assessment of the impact of ASC 842 on our results of operations and related disclosures. We are also implementing additional internal controls to enable future preparation of financial information and disclosures in accordance with ASC 842. In August 2018, the FASB issued ASU No. 2018 - 13, Fair Value Measurement (Topic 820 ) - Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018 - 13” ), which is designed to improve the effectiveness of disclosures by removing, modifying and adding disclosures related to fair value measurements. ASU 2018 - 13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. We plan to adopt the provisions of ASU 2018 - 13 in the first quarter of 2020, and we are currently evaluating the impact on our consolidated financial statements.

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