NOTE

– SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). The consolidated financial statements include the accounts of AirXpanders, Inc. and its Australian branch office. Intercompany transactions and balances have been eliminated in consolidation. Certain amounts presented in prior periods have been reclassified to the current year presentation. Such changes had

effect on the previously reported net loss or accumulated deficit.

The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP) and applicable rules and regulations of the Securities and Exchange Commission (SEC) regarding interim financial reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by U.S. GAAP have been condensed or omitted, and accordingly the balance sheet as of

December 31, 2017

has been derived from audited consolidated financial statements at that date but does

not

include all of the information required by U.S. GAAP for complete financial statements. These unaudited interim condensed consolidated financial statements have been prepared on the same basis as our annual financial statements and, in the opinion of management, reflect all adjustments (consisting only of normal recurring adjustments) that are necessary for a fair presentation of the Company’s financial information. The results of operations for the

three

months ended

March 31, 2018

are

not

necessarily indicative of the results to be expected for the year ending

December 31, 2018

or for any other interim period or for any other future year. The condensed consolidated financial statements include the accounts of AirXpanders, Inc. and its Australian branch. Intercompany transactions and balances have been eliminated in consolidation. Certain amounts presented in prior periods have been reclassified to the current year presentation. Such changes had

effect on the previously reported net loss or accumulated deficit.

Foreign Currency

The Company transacts business in Australia. The functional currency of its Australian branch is the U.S. dollar. Monetary assets and liabilities are translated at the year-end exchange rate and non-monetary assets and liabilities are translated at historical rates and items in the statement of operations are translated at average rates with gains and losses from remeasurement being recorded in other expense (income), net in the accompanying condensed consolidated statements of operations and comprehensive loss. Foreign currency translation and remeasurement gains or losses included in other expense (income), net in the accompanying condensed consolidated statements of operations and comprehensive loss was a loss of

$0.1

million and a gain of

$0.1

million during the

three

months ended

March 31, 2018

and

2017,

respectively.

Use of Estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of expenses during the reporting period. Actual results could differ materially from those estimates. The Company

’s most significant estimates relate to the valuation of its common stock prior to the IPO, valuation of stock options, estimate of sales returns and valuation of its inventory at the lower of cost or market.

Certain Significant Risks and Uncertainties

The Company operates in a dynamic, highly competitive industry and believes that changes in any of the following areas could have a material adverse effect on the Company

’s future financial position, results of operations, or cash flows: ability to obtain future financing; advances and trends in new technologies and industry standards; regulatory approval and market acceptance of the Company’s products; development of sales channels; certain supplier relationships; litigation or claims against the Company based on intellectual property, patent, product, regulatory, or other factors including the Company’s ability to attract and retain employees necessary to support its growth.

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to credit risk consist primarily of cash and cash equivalents. The Company maintains all of its U.S. cash balances at

one

financial institution, which at times

may

exceed the Federal Deposit Insurance Corporation (FDIC) limits of

$250,000

for interest-bearing accounts. At

March

31,

2018

and

December 31, 2017,

the Company had unrestricted cash balances of approximately

$0.7

million and

$3.7

million , respectively, that were in excess of the FDIC limits. The Company currently maintains its Australian cash balances at

two

financial institutions, which, at times,

may

exceed the Australian government guaranteed limit of USD

$0.2

million (AU$

250,000

). At

March 31, 2018

and

December

31,

2017,

the Company had

cash balances that were in excess of the Australian guaranteed limit. At

March 31, 2018

and

December 31, 2017,

the Company maintained cash and investment balances of

$13.4

million and

$22.4

million, respectively, with

one

U.S. financial institution.

Cash, Cash Equivalents and Short-Term Investments

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

three

months or less, when purchased, to be cash equivalents. Short term investments are classified as “available-for-sale” and are reported at fair value with unrealized gains and losses reported in stockholders' equity as a component of other comprehensive loss. Gross realized gains and losses on sales and maturities of securities are recorded in other expense (income), net, in our statement of operations. As of

March 31, 2018

and

December 31, 2017,

the Company's investments consisted of U.S. Treasury Securities, and amortized cost approximated fair value. The cost of securities sold is based on the specific identification method. The Company classifies its investments as current based on the nature of the investment and their availability for use in current operations. The Company reviews its investment portfolio quarterly to determine if any securities

may

be other-than-temporarily impaired due to increased credit risk, changes in industry or sector of a certain instrument or ratings downgrades.

Inventory

Inventory is valued at the lower of cost or market value, with cost determined by the

first

-in,

first

-out method. When needed, the Company provides reserves for excess or obsolete inventory.

Property and Equipment

Property and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation and amortization is computed using the straight-line method over the following estimated useful lives of the assets:

Machinery and equipment	5 years
Computer equipment	3 years
Furniture and fixtures	5 years
Software licenses	1 - 3 years
Office equipment	3 years

Leasehold improvements and property and equipment under capital leases are amortized over the shorter of the estimated useful lives of the assets or the lease terms. Construction in process assets are stated at cost and will be depreciated over their estimated useful lives once placed in service.

Expenditures for repairs and maintenance are charged to expense as incurred. Upon disposition of an asset, the cost and related accumulated depreciation are removed from the accounts and the resulting gain or loss is reflected in the consolidated statement of operations.

Impairment of Long-Lived Assets

The Company

’s long-lived assets and other assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset

may

not

be recoverable. Recoverability of an asset to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated by the asset. If such asset is considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the asset exceeds its fair value. Through

March 31, 2018,

the Company had

not

experienced impairment losses on its long-lived assets.

Fair Value of Financial Instruments

The Company follows Financial Accounting Standards Board (“FASB”) Accounting Standards Codification Topic

No.

820,

Fair Value Measurement (“ASC

820”

), which clarifies fair value as an exit price, establishes a hierarchal disclosure framework for measuring fair value, and requires extended disclosures about fair value measurements. The provisions of ASC

820

apply to all financial assets and liabilities measured at fair value.

As defined in ASC

820,

fair value represents the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As a result, fair value is a market-based approach that should be determined based on assumptions that market participants would use in pricing an asset or a liability. As a basis for considering these assumptions, ASC

820

defines a

three

-tier value hierarchy that prioritizes the inputs used in the valuation methodologies in measuring fair value.

Level

–

Quoted prices in active markets for identical assets or liabilities.

Level

–

Inputs other than Level

that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are

not

active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level

–

Unobservable inputs that are supported by little or

market activity and that are significant to the fair value of the assets or liabilities.

The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

The following table sets forth by level, within the fair value hierarchy, the Company

’s assets measured at fair value on a recurring basis in the balance sheet as of the following dates (in thousands):

	March 31, 2018
	Fair Value Measurements
	Using Input Types
	Level 1		Level 2		Level 3		Total
Cash and cash equivalents	$	1,182	$	—	$	—	$	1,182
Short-term investments		12,441		—		—		12,441
Total assets at fair value	$	13,623	$	—	$	—	$	13,623

	Dec 31, 2017
	Fair Value Measurements
	Using Input Types
	Level 1		Level 2		Level 3		Total
Cash and cash equivalents	$	4,162	$	—	$	—	$	4,162
Short-term investments		18,428		—		—		18,428
Total assets at fair value	$	22,590	$	—	$	—	$	22,590

Long-term debt is valued at carrying value which is considered to be representative of its fair value based on current market rates available to the Company for comparable borrowing facilities as well as due to its short time of maturity (Level

measurement).

Revenue Recognition

The Company recognizes revenue from sales of its products in accordance with the Revenue Recognition Topic ASC

605.

The Company recognizes revenue from product sales when the following

four

criteria are met: delivery has occurred, there is persuasive evidence of an arrangement, the fee is fixed or determinable, and collectability of the related receivable is reasonably assured. The Company recognizes revenue when title to the product and risk of loss transfer to customers, provided there are

remaining performance obligations required of the Company or any written matters requiring customer acceptance. Revenue recognition generally occurs upon either shipment or implantion of our device. In the United States, the Company offers a

thirty

day return policy and recognizes revenue net of sales returns and allowances. Appropriate reserves are established for anticipated sales returns based on historical experience, recent gross sales and any notification of pending returns. Actual sales returns in any future period are inherently uncertain and thus

may

differ from the estimates. If actual sales returns differ significantly from the estimates, an adjustment to revenue in the current or subsequent period would be recorded.

The Company has established an allowance for sales returns of

$0.2

million as of

March 31, 2018,

recorded net against accounts receivable in the balance sheet.

amount was recorded as of

March 31, 2017,

as all a majority of sales were recorded in Australia.

Shipping and Handling Costs

Shipping and handling costs are included as a component of cost of goods sold.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable are stated at cost, net of allowance for doubtful accounts. Credit is extended to customers based on an evaluation of their financial condition and other factors. The Company does

not

charge interest on past due balances. The Company generally does

not

require collateral or other security to support accounts receivable. The Company performs ongoing credit evaluations of its customers and maintains an allowance for doubtful accounts.

The Company estimates its allowance for doubtful accounts by evaluating specific accounts where information indicates that customers

may

have an inability to meet their financial obligations and receivable amounts are outstanding for an extended period beyond the invoice terms. In these cases, the Company uses assumptions and judgment, based on the best available facts and circumstances, to either record a specific allowance against these customer balances or to write the balances off. The accounts receivable aging is reviewed on a regular basis and write-offs are recorded on a case-by-case basis net of any amounts that

may

be collected. Allowance charges are recorded as operating expenses. Based on the Company

’s customer analysis, it did

not

have an allowance for doubtful accounts at

March 31, 2018

and

December 31, 2017.

Revenue and Receivables Concentration

customer accounts for more than

10%

of net revenues for

three

months ended

March 31, 2018

and

2017,

respectively,

or of the accounts receivable balance as of

March 31, 2018

and

December 31, 2017.

U.S. product sales are to hospitals and accounted for

89%

and

40%

of total net revenues for the

three

months ended

March 31, 2018

and

2017,

respectively, with the remainder to hospitals in Australia.

Stock-Based Compensation

Stock-based compensation is measured at the grant date based on the fair value of the award. The fair value of the award that is ultimately expected to vest is recognized as expense on a straight-line basis over the requisite service period, which is generally the vesting period. The expense recognized for the portion of the award that is expected to vest has been reduced by an estimated forfeiture rate. The forfeiture rate is determined at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

The Company uses the Black-Scholes option-pricing model (the "Black-Scholes model") as the method for determining the estimated fair value of stock options.

Expected Term

The Company's expected term represents the period that the Company's stock-based awards are expected to be outstanding and is determined using the simplified method, which essentially equates to a weighted average of the vesting periods and total term of the award.

Expected Volatility

Expected volatility is estimated using comparable public company

’s volatility for similar terms as the Company does

not

have a long enough operating period as a public company to estimate its own volatility. Over time as the Company develops its own volatility history it will begin to incorporate that history into its expected volatility estimates.

Expected Dividend

The Black-Scholes model calls for a single expected dividend yield as an input. The Company has never paid dividends and has

current plans to pay dividends on its common stock.

Risk-Free Interest Rate

The risk-free interest rate used in the Black-Scholes model is based on the U.S. Treasury

zero

coupon issues in effect at the time of grant for periods corresponding with the expected term of the option.

The Company recognizes the fair value of stock options granted to nonemployees as stock-based compensation expense over the period in which the related services are received.

Research and Development

Costs incurred in research and development activities (including clinical trials) are expensed as incurred. Research and development costs include, but are

not

limited to, payroll and personnel expenses, laboratory supplies, consulting costs, travel, parts and materials, equipment expenses, and equipment depreciation.

Income Taxes

The Company accounts for income taxes using the asset and liability method. Under this method, deferred income tax assets and liabilities are recorded based on the estimated future tax effects of differences between the financial statement and income tax basis of assets and liabilities. In addition, deferred tax assets are recorded for the future benefit of utilizing net operating loss and tax credit carryovers. Deferred tax assets and liabilities are measured using the enacted tax rates applied to taxable income. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided against the Company

’s deferred income tax assets when it is more likely than

not

that the asset will

not

be realized.

Significant judgment is required in determining any valuation allowance recorded against deferred tax assets. In assessing the need for a valuation allowance, the Company considers all available evidence, including past operating results, estimates of future taxable income and the feasibility of tax planning strategies. In the event that the Company changes its determination as to the amount of deferred tax assets that are more likely than

not

to be realized, the Company will adjust its valuation allowance with a corresponding impact to the provision for income taxes in the period in which such determination is made.

The Company follows authoritative guidance regarding uncertain tax positions. This guidance requires that realization of an uncertain income tax position must be more likely than

not

(i.e. greater than

50%

likelihood of receiving a benefit) before it can be recognized in the financial statements. The guidance further prescribes the benefit to be realized assumes a review by tax authorities having all relevant information and applying current conventions. The interpretation also clarifies the financial statement classification of tax related penalties and interest and sets forth disclosures regarding unrecognized tax benefits. The Company recognizes potential accrued interest and penalties related to unrecognized tax benefits as income tax expense.

Segments

The Company has determined the chief executive officer is the chief operating decision maker. The Company

’s chief executive officer reviews financial information presented for purposes of assessing performance and making decisions on how to allocate resources. The Company has determined that it operates in a single reporting segment.

Basic and Diluted Net Loss Per Share

Basic net loss per share is computed by dividing the net loss by the weighted-average number of shares of common stock outstanding during the period. Diluted net loss per share is computed by giving effect to all potential shares of common stock, resulting from the conversion or exercise of stock options, stock warrants, convertible debt and convertible preferred stock to the extent dilutive. For the periods presented, all such common stock equivalents have been excluded from diluted net loss per share as the effect to net loss per share would be anti-dilutive.

Following is a table summarizing the potentially dilutive common shares that were excluded from diluted weighted-average common shares outstanding for the

three

and

nine

months ended

March 31, 2018

and

2017,

respectively, as there effects would be antidilutive (in thousands):

	2018		2017
Shares of common stock issuable upon exercise of warrants		615		337
Shares of common stock issuable upon exercise of stock options		8,153		5,695
Potential common shares excluded from diluted net loss per share		8,768		6,032

Recent Accounting Pronouncements

The Company assesses the adoption impact of recently issued accounting standards by the Financial Accounting Standards Board on our financial statements. The above describes the impact of newly issued standards as well as material updates to our previous assessments, if any, from our audited financial statements included in our registration statement on Form

10,

as amended, filed with the SEC on

July 17, 2018.