2.	Summary of Significant Accounting Policies

Financial Statement Presentation

The condensed consolidated financial statements include the accounts of the Company and our wholly-owned subsidiaries, Viveve, Inc. and Viveve BV. All significant intercompany accounts and transactions have been eliminated in consolidation.

Reverse Stock Split

The Company effected a

-for-

100

reverse stock split of its common stock that became effective after market close on

September 18, 2019.

The reverse stock split uniformly affected all issued and outstanding shares of the Company’s common stock. The reverse stock split did

not

alter any stockholder's percentage ownership interest in the Company, except to the extent that the reverse stock split resulted in fractional shares.

fractional shares were issued in connection with the reverse stock split. Any fractional shares that resulted from the reverse stock split were rounded down, and stockholders were issued cash in lieu of such fractional share interest of approximately

$6,000.

The par value of the Company’s common stock remained unchanged at

$0.0001

per share after the reverse stock split.

The number of authorized shares of common stock remained at

75,000,000.

The reverse stock split proportionately affected the number of shares of common stock available for issuance under the Company’s equity incentive plans. All stock options, warrants and restricted stock awards of the Company outstanding shares immediately prior to the reverse stock split were adjusted in accordance with their terms.

On the effective date of the reverse stock split, (i) each

100

shares of outstanding common stock were reduced to

one

share of common stock; (ii) the number of shares of common stock into which each outstanding stock option or warrant to purchase common stock is exercisable were proportionately reduced on an

100

-to-

basis; (iii) the exercise price of each outstanding stock option or warrant to purchase common stock were proportionately increased on a

-to-

100

basis; and (iv) the number of shares of common stock each outstanding restricted stock award will be issued upon vesting were proportionally reduced on a

100

-to-

basis.

All of the share numbers, share prices, and exercise prices have been adjusted, on a retroactive basis, to reflect this

-for-

100

reverse stock split.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses and the related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are

not

readily apparent from other sources. Actual results

may

differ from these estimates. In addition, any change in these estimates or their related assumptions could have an adverse effect on our operating results.

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with an original maturity of

three

months or less, at the time of purchase, to be cash equivalents. The Company’s cash and cash equivalents are deposited in demand accounts primarily at

one

financial institution. Deposits in this institution

may,

from time to time, exceed the federally insured amounts.

Concentration of Credit Risk and Other Risks and Uncertainties

To achieve profitable operations, the Company must successfully develop, manufacture, and market its products. There can be

assurance that any such products can be developed or manufactured at an acceptable cost and with appropriate performance characteristics, or that such products will be successfully marketed. These factors could have a material adverse effect upon the Company’s financial results, financial position, and future cash flows.

Most of the Company’s products to date require clearance or approvals from the U.S. Food and Drug Administration (“FDA”) or other international regulatory agencies prior to commencing commercial sales. There can be

assurance that the Company’s products will receive any of these required clearances or approvals or for the indications requested. If the Company was denied such clearances or approvals or if such clearances or approvals were delayed, it would have a material adverse effect on the Company’s financial results, financial position and future cash flows.

The Company is subject to risks common to companies in the medical device industry including, but

not

limited to, new technological innovations, dependence on key personnel, protection of proprietary technology, compliance with government regulations, uncertainty of market acceptance of products, product liability, and the need to obtain additional financing. The Company’s ultimate success is dependent upon its ability to raise additional capital and to successfully develop and market its products.

The Company designs, develops, manufactures and markets a medical device that it refers to as the Viveve System, which is intended for the non-invasive treatment of vaginal introital laxity, for improved sexual function, for vaginal rejuvenation, for use in general surgical procedures for electrocoagulation and hemostasis, and stress urinary incontinence, depending on the relevant country-specific clearance or approval. The Viveve System consists of

three

main components: a radiofrequency generator housed in a table-top console, a reusable handpiece and a single-use treatment tip. Included with the system are single-use accessories (e.g. return pad, coupling fluid), as well as a cryogen canister that can be used for approximately

four

five

procedures, and a foot pedal. The Company outsources the manufacture and repair of the Viveve System to a single contract manufacturer. Also, certain other components and materials that comprise the device are currently manufactured by a single supplier or a limited number of suppliers. A significant supply interruption or disruption in the operations of the contract manufacturer or these

third

-party suppliers would adversely impact the production of our products for a substantial period of time, which could have a material adverse effect on our business, financial condition, operating results and cash flows.

In North America, the Company sells its products primarily through a direct sales force to health care practitioners. Outside North America, the Company sells through an extensive network of distribution partners. During the

three

months ended

March 31, 2020,

one

distributor accounted for

48%

of the Company’s revenue. During the

three

months ended

March 31, 2019,

three

distributors, collectively, accounted for

42%

of the Company’s revenue.

There were

direct sales customers that accounted for more than

10%

of the Company’s revenue during the

three

months ended

March 31, 2020

and

2019.

As of

March 31, 2020,

two

distributors, collectively, accounted for

49%

of total accounts receivable, net. As of

December 31, 2019,

two

distributors, collectively, accounted for

49%

of total accounts receivable, net.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable are recorded at the invoiced amount and are

not

interest bearing. Our typical payment terms vary by region and type of customer (distributor or physician). Occasionally, payment terms of up to

six

months

may

be granted to customers with an established history of collections without concessions. Should we grant payment terms greater than

six

months or terms that are

not

in accordance with established history for similar arrangements, revenue would be recognized as payments become due and payable assuming all other criteria for revenue recognition have been met. The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The Company makes ongoing assumptions relating to the collectability of its accounts receivable in its calculation of the allowance for doubtful accounts. In determining the amount of the allowance, the Company makes judgments about the creditworthiness of customers based on ongoing credit evaluations and assesses current economic trends affecting its customers that might impact the level of credit losses in the future and result in different rates of bad debts than previously seen. The Company also considers its historical level of credit losses. The allowance for doubtful accounts was

$481,000

as of

March 31, 2020

and

$407,000

as of

December 31, 2019.

There were

write-offs of customers’ accounts receivable during the

three

months ended

March 31, 2020

and

2019.

Revenue

from Contracts with Cus

omers

Revenue consists primarily of the sale of the Viveve System, single-use treatment tips and ancillary consumables. The Company applies the following

five

steps: (

) identify the contract with a customer, (

) identify the performance obligations in the contract, (

) determine the transaction price, (

) allocate the transaction price to the performance obligations in the contract, and (

) recognize revenue when a performance obligation is satisfied. The Company considers customer purchase orders to be the contracts with a customer. Revenues, net of expected discounts, are recognized when the performance obligations of the contract with the customer are satisfied and when control of the promised goods are transferred to the customer, typically when products, which have been determined to be the only distinct performance obligations, are shipped to the customer. Expected costs of assurance warranties and claims are recognized as expense. Revenue is recognized net of any sales taxes from the sale of the products.

Rental revenue is generated through the lease of the Viveve System. The Company’s operating leases for the Viveve System generally have a rental period of

six

nine

months and can be extended or terminated by the customer after that time or the Viveve System can be purchased by the customer. Rental revenue on those operating leases is recognized on a straight-line basis over the terms of the underlying leases. The Company began this rental program in the quarter ended

June 30, 2019

and the revenue associated with it has

not

been material to the periods presented. As of

March 31, 2020

and

December 31, 2019,

the Company had deferred revenue in the amounts of

$703,000

and

$662,000,

respectively, related to its rental program, which is included in accrued liabilities on the condensed consolidated balance sheets. During the

three

months ended

March 31, 2020,

the Company recognized revenue of

$297,000

which was deferred revenue as of

December 31, 2019.

In connection with the lease of the Viveve System, the Company offers single-use treatment tips and ancillary consumables that are considered non-lease components. In the contracts with lease and non-lease components, the Company follows the relevant guidance in ASC

606,

Revenue from Contracts with Customers, to determine how to allocate contractual consideration between the lease and non-lease components.

Sales of our products are subject to regulatory requirements that vary from country to country. The Company has regulatory clearance for differing indications, or can sell its products without a clearance, in many countries throughout the world, including countries within the following regions: North America, Latin America, Europe, the Middle East and Asia Pacific. In North America, we market and sell primarily through a direct sales force. Outside of North America, we market and sell primarily through distribution partners.

The Company does

not

provide its customers with a right of return.

Customer Advance Payments

From time to time, customers will pay for a portion of the products ordered in advance. Upon receipt of such payments, the Company records the customer advance payment as a component of accrued liabilities. The Company will remove the customer advance payment from accrued liabilities when revenue is recognized upon shipment of the products.

Contract Assets and Liabilities

The Company continually evaluates whether the revenue generating activities and advanced payment arrangements with customers result in the recognition of contract assets or liabilities.

such assets existed as of

March 31, 2020

December

31,

2019.

The Company had customer contract liabilities in the amount of

$25,000

and

$108,000,

primarily related to marketing programs that performance had

not

yet been delivered to its customers as of

March 31, 2020

and

December 31, 2019,

respectively. Contract liabilities are recorded in accrued liabilities on the consolidated balance sheet. During the

three

months ended

March 31, 2020,

the Company recognized revenue for these marketing programs of

$83,000

which was deferred as of

December 31, 2019.

The following table reflects the changes in our customer contract liabilities for the

three

months ended

March 31, 2020:

	March 31,		December 31,
	2020		2019		Change

Customer contracts liabilities:
Marketing programs	$	25	$	108	$	(83	)
Total	$	25	$	108	$	(83	)

Separately, accounts receivable, net represents receivables from contracts with customers.

Significant Financing Component

The Company applies the practical expedient to

not

make any adjustment for a significant financing component if, at contract inception, the Company does

not

expect the period between customer payment and transfer of control of the promised goods or services to the customer to exceed

one

year. During the

three

months ended

March 31, 2020

and

2019,

the Company did

not

have any contracts for the sale of its products with its customers with a significant financing component.

Contract Costs

The Company expects that commissions paid to obtain subscriptions are recoverable and has therefore capitalized them as a contract costs in the amount of

$211,000

and

$337,000

March 31, 2020

and

December 31, 2019,

respectively. The Company began its rental program in the quarter ended

June 30, 2019

and, therefore, there were

commissions paid associated with subscriptions in the

three

months ended

March 31, 2019.

Capitalized commissions are amortized based on the subscription periods to which the assets relate and are included in selling, general and administrative expenses. For the

three

months ended

March 31, 2020

and

2019,

the amount of amortization was

$198,000

and zero, respectively There was

impairment loss in relation to the costs capitalized. The Company has elected the practical expedient to recognize the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset that the Company otherwise would have recognized is

one

year or less.

Shipping and Handling

Shipping costs billed to customers are recorded as revenue. Shipping and handling expense related to costs incurred to deliver product are recognized within cost of goods sold. The Company accounts for shipping and handling activities that occur after control has transferred as a fulfillment cost as opposed to a separate performance obligation, and the costs of shipping and handling are recognized concurrently with the related revenue.

Revenue by Geographic Area

Management has determined that the sales by geography is a key indicator for understanding the Company’s financials because of the different sales and business models that are required in the various regions of the world (including regulatory, selling channels, pricing, customers and marketing efforts). The following table presents the revenue from unaffiliated customers disaggregated by geographic area for the

three

months ended

March 31, 2020

and

2019

(in thousands):

	Three Months Ended
	March 31,
	2020		2019

North America	$	688	$	1,792
Asia Pacific		597		967
Europe and Middle East		5		246
Latin America		14		-
Other		-		7
Total	$	1,304	$	3,012

The Company determines geographic location of its revenue based upon the destination of the shipments of its products.

Investments in Unconsolidated Affiliates

The Company uses the equity method to account for its investments in entities that it does

not

control but have the ability to exercise significant influence over the investee. Equity method investments are recorded at original cost and adjusted periodically to recognize (

) the proportionate share of the investees’ net income or losses after the date of investment, (

) additional contributions made and dividends or distributions received, and (

) impairment losses resulting from adjustments to net realizable value. The Company eliminates all intercompany transactions in accounting for equity method investments. The Company records the proportionate share of the investees’ net income or losses in equity in earnings of unconsolidated affiliates on the condensed consolidated statements of operations. The Company utilizes a

three

-month lag in reporting equity income from its investments, adjusted for known amounts and events, when the investee’s financial information is

not

available timely or when the investee’s reporting period differs from our reporting period.

The Company assesses the potential impairment of the equity method investments when indicators such as a history of operating losses, a negative earnings and cash flow outlook, and the financial condition and prospects for the investee’s business segment might indicate a loss in value. The carrying value of the investments is reviewed annually for changes in circumstances or the occurrence of events that suggest the investment

may

not

be recoverable.

impairment charges have been recorded in the condensed consolidated statements of operations during the

three

months ended

March 31, 2020

and

2019.

Product Warranty

The Company’s products sold to customers are generally subject to warranties between

one

and

three

years, which provides for the repair, rework or replacement of products (at the Company’s option) that fail to perform within stated specifications. The Company has assessed the historical claims and, to date, product warranty claims have

not

been significant.

Accounting for Stock-Based Compensation

Share-based compensation cost is measured at grant date, based on the fair value of the award, and is recognized as expense over the employee’s service period. The Company recognizes compensation expense on a straight-line basis over the requisite service period of the award.

The Company determined that the Black-Scholes option pricing model is the most appropriate method for determining the estimated fair value for stock options and purchase rights under the employee stock purchase plan. The Black-Scholes option pricing model requires the use of highly subjective and complex assumptions which determine the fair value of share-based awards, including the option’s expected term and the price volatility of the underlying stock.

Equity instruments issued to nonemployees are recorded in the same manner as similar instruments issued to employees.

Comprehensive Loss

Comprehensive loss represents the changes in equity of an enterprise, other than those resulting from stockholder transactions. Accordingly, comprehensive loss

may

include certain changes in equity that are excluded from net loss. For the

three

months ended

March 31, 2020

and

2019,

the Company’s comprehensive loss is the same as its net loss.

Net Loss per Share

The Company’s basic net loss per share is calculated by dividing the net loss by the weighted average number of shares of common stock outstanding for the period. The diluted net loss per share is computed by giving effect to all potentially dilutive common stock equivalents outstanding during the period. For purposes of this calculation, stock options and warrants to purchase common stock and restricted common stock awards are considered common stock equivalents. For periods in which the Company has reported net losses, diluted net loss per share is the same as basic net loss per share since dilutive common shares are

not

assumed to have been issued if their effect is anti-dilutive.

The following securities were excluded from the calculation of net loss per share because the inclusion would be anti-dilutive:

	Three Months Ended
	March 31,
	2020			2019

Series B convertible preferred stock		32,667	(a)		-
Warrants to purchase common stock		23,665,905			6,408
Stock options to purchase common stock		10,432,654			55,864
Restricted common stock awards		2,620			4,176

(a)

Each share of Series B preferred stock is convertible at the holder's option into shares of common stock at a conversion ratio of

-for-

653.59

per share determined by dividing the Series B liquidation amount of

$1,000

per share by the Series B conversion price of

$1.53

per share. However, under the terms of the Series B Preferred Stock and Warrant Purchase Agreement, as amended, CRG will

not

convert the Series B preferred stock or exercise the CRG warrants until the Company’s stockholders act to authorize additional number of shares of common stock sufficient to cover the conversion shares.

Recently Issued and Adopted Accounting Standards

November 2019,

the FASB issued ASU

2019

08,

“Stock Compensation (Topic

718

) and Revenue from Contracts with Customers (Topic

606

). The amendments in this Update require measurement and classification of share-based payment awards granted to a customer by applying the guidance in Topic

718.

This guidance is effective for annual reporting periods beginning after

December 15, 2019,

including interim periods within that reporting period, with early adoption permitted. We adopted this guidance as of

January 1, 2020

and the adoption of the guidance did

not

have a significant impact on the condensed consolidated financial statements.

December 2019,

the FASB issued ASU

2019

12,

“Income Taxes (Topic

740

). The amendments in this Update provide further simplification of accounting standards for the accounting for income taxes. Certain exceptions for are removed and requirements regarding the accounting for franchise taxes, tax basis of goodwill, and tax law rate changes are made. This guidance is effective for annual reporting periods beginning after

December 15, 2020,

including interim periods within that reporting period, with early adoption permitted. We will adopt this guidance as of

January 1, 2021

and the adoption of the guidance is

not

expected to have a significant impact on the consolidated financial statements. We have reviewed other recent accounting pronouncements and concluded they are either

not

applicable to the business, or

material effect is expected on the condensed consolidated financial statements as a result of future adoption.

We have reviewed other recent accounting pronouncements and concluded they are either

not

applicable to the business, or

material effect is expected on the condensed consolidated financial statements as a result of future adoption.