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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
FORM 10-Q
REGISTRATION STATEMENT
Under
The Securities Act of 1933
 
 
 
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For transition period from               to
Commission File Number   001-38847     
 
 
 
SILK ROAD MEDICAL, INC.
(Exact name of registrant as specified in its charter)
 
 
 
Delaware
3841
20-8777622
(State or other jurisdiction of
incorporation or organization)
(Primary Standard Industrial
Classification Code Number)
(I.R.S. Employer
Identification Number)
1213 Innsbruck Dr. Sunnyvale, CA 94089, (408) 720-9002
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
 
 
 
Erica J. Rogers
Chief Executive Officer
1213 Innsbruck Dr. Sunnyvale, CA 94089 (408) 720-9002
(Name, address, including zip code, and telephone number, including area code, of agent for service)
 
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
Accelerated filer
Non-accelerated filer
 
Smaller reporting company
Emerging growth company
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.  
Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Act). Yes No
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock
SILK
Nasdaq Global Market
As of July 31, 2019, the number of outstanding shares of the registrant's common stock, par value $0.001 per share, was 30,761,483.










TABLE OF CONTENTS
 
Page
 
 
 
 
 
 
 
 
 
 
 

1


CAUTIONARY NOTES REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements concerning our business, operations and financial performance and condition, as well as our plans, objectives and expectations for our business, operations and financial performance and condition. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “assume,” “believe,” “contemplate,” “continue,” “could,” “due,” “estimate,” “expect,” “goal,” “intend,” “may,” “objective,” “plan,” “predict,” “potential,” “positioned,” “seek,” “should,” “target,” “will,” “would” and other similar expressions that are predictions of or indicate future events and future trends, or the negative of these terms or other comparable terminology.
These forward-looking statements include, but are not limited to, statements about:
our plans to conduct further clinical trials;
our plans and expected timeline related to our products, or developing new products, to address additional indications or otherwise;
the expected use of our products by physicians;
our expectations regarding the number of procedures performed with our products, the number of physicians we expect to train, and the number of our sales territories;
our ability to obtain, maintain and expand regulatory clearances for our products and any new products we create;
the expected growth of our business and our organization;
our expected uses of the net proceeds from our initial public offering;
our expectations regarding government and third-party payer coverage and reimbursement;
our ability to retain and recruit key personnel, including the continued development of a sales and marketing infrastructure;
our ability to obtain an adequate supply of materials and components for our products from our third-party suppliers, most of whom are single-source suppliers;
our ability to manufacture sufficient quantities of our products with sufficient quality;
our ability to obtain and maintain intellectual property protection for our products;
our ability to expand our business into new geographic markets;
our compliance with extensive Nasdaq requirements and government laws, rules and regulations both in the United States and internationally;
our estimates of our expenses, ongoing losses, future revenue, capital requirements and our need for, or ability to obtain, additional financing;
our expectations regarding the time during which we will be an emerging growth company under the JOBS Act;
our ability to identify and develop new and planned products and/or acquire new products; and

2


developments and projections relating to our competitors or our industry.
We believe that it is important to communicate our future expectations to our investors. However, there may be events in the future that we are not able to accurately predict or control and that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. These forward-looking statements are based on management’s current expectations, estimates, forecasts and projections about our business and the industry in which we operate and management’s beliefs and assumptions and are not guarantees of future performance or development and involve known and unknown risks, uncertainties and other factors that are in some cases beyond our control. As a result, any or all of our forward-looking statements in this Quarterly Report on Form 10-Q may turn out to be inaccurate. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q.
These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q. We assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future. You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. We undertake no obligation to update publicly any forward-looking statements for any reason after the date of this Quarterly Report on Form 10-Q to conform these statements to actual results or to changes in our expectations.
You should read this Quarterly Report on Form 10-Q and the documents that we reference in this Quarterly Report on Form 10-Q and have filed with the SEC as exhibits to this Quarterly Report on Form 10-Q with the understanding that our actual future results, levels of activity, performance and events and circumstances may be materially different from what we expect.


3


Part I. Financial Information
Item 1: Unaudited Condensed Consolidated Financial Statements
Silk Road Medical, Inc.
Condensed Consolidated Balance Sheets
(unaudited)
(in thousands, except share and per share data)
June 30,
 
December 31,
 
2019
 
2018
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
118,247

 
$
24,990

Accounts receivable, net
5,417

 
4,520

Inventories
8,963

 
5,744

Prepaid expenses and other current assets
3,249

 
1,408

Total current assets
135,876

 
36,662

Property and equipment, net
2,743

 
2,880

Restricted cash
310

 
310

Other non-current assets
3,723

 
1,029

Total assets
$
142,652

 
$
40,881

Liabilities, redeemable convertible preferred stock and stockholders' equity (deficit)
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
1,189

 
$
1,252

Accrued liabilities
8,299

 
7,586

Total current liabilities
9,488

 
8,838

Long-term debt
44,690

 
44,201

Redeemable convertible preferred stock warrant liability

 
16,091

Other liabilities
4,097

 
1,069

Total liabilities
58,275

 
70,199

Commitments and contingencies (Note 7)

 

Redeemable convertible preferred stock issuable in series, $0.001 par value
 
 
 
Shares authorized: None and 24,069,615 at June 30, 2019 and December 31, 2018, respectively
 
 
 
Shares issued and outstanding: None and 21,233,190 at June 30, 2019 and December 31, 2018, respectively
 
 
 
Liquidation preference: None and $121,144 at June 30, 2019 and December 31, 2018, respectively

 
105,235

Stockholders' equity (deficit):
 
 
 
Preferred stock, $0.001 par value
 
 
 
Shares authorized: 5,000,000 and none at June 30, 2019 and December 31, 2018, respectively
 
 
 
Shares issued and outstanding: none

 

Common stock, $0.001 par value
 
 
 
Shares authorized: 100,000,000 and 29,879,220 at June 30, 2019 and December 31, 2018, respectively
 
 
 
Shares issued and outstanding: 30,747,714 and 1,135,310 at June 30, 2019 and December 31, 2018, respectively
31

 
1

Additional paid-in capital
259,574

 
4,557

Accumulated deficit
(175,228
)
 
(139,111
)
Total stockholders' equity (deficit)
84,377

 
(134,553
)
Total liabilities, redeemable convertible preferred stock and stockholders' equity (deficit)
$
142,652

 
$
40,881


The accompanying notes are an integral part of these condensed consolidated financial statements.
4

Silk Road Medical, Inc.
Condensed Consolidated Statements of Operations and Comprehensive Loss
(unaudited)

 
 
 
 
 
 
 
 
(in thousands, except share and per share data)
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019

2018
 
2019
 
2018
Revenue
$
14,928

 
$
7,767

 
$
27,694

 
$
13,473

Cost of goods sold
3,697

 
2,391

 
7,035

 
4,325

Gross profit
11,231

 
5,376

 
20,659

 
9,148

Operating expenses:
 
 
 
 
 
 
 
Research and development
3,113

 
2,326

 
5,820

 
4,426

Selling, general and administrative
14,135

 
7,816

 
28,001

 
14,135

Total operating expenses
17,248

 
10,142

 
33,821

 
18,561

Loss from operations
(6,017
)
 
(4,766
)
 
(13,162
)
 
(9,413
)
Interest income
598

 
24

 
650

 
37

Interest expense
(1,207
)
 
(1,011
)
 
(2,560
)
 
(2,000
)
Other income (expense), net
(5,333
)
 
(1,898
)
 
(21,045
)
 
(1,682
)
Net loss and comprehensive loss
$
(11,959
)

$
(7,651
)
 
$
(36,117
)
 
$
(13,058
)
Net loss per share, basic and diluted
$
(0.42
)
 
$
(8.16
)
 
$
(2.42
)
 
$
(15.56
)
Weighted average common shares used to compute net loss per share, basic and diluted
28,458,793

 
938,052

 
14,905,052

 
839,229


The accompanying notes are an integral part of these condensed consolidated financial statements.
5

Silk Road Medical, Inc.
Condensed Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders' Equity (Deficit)
(unaudited)

(in thousands, except share data)
Redeemable Convertible
Preferred Stock
 
 
Common Stock
 
Additional
Paid-in Capital
 
Accumulated Deficit
 
Total
 
Shares
 
Amount
 
 
Shares
 
Amount
 
 
 
Balances at December 31, 2018
21,233,190

 
$
105,235

 
 
1,135,310

 
$
1

 
$
4,557

 
$
(139,111
)
 
$
(134,553
)
Exercise of stock options

 

 
 
251,305

 

 
375

 

 
375

Exercise of Series C preferred stock warrants
4,915

 
30

 
 

 

 

 

 

Employee stock-based compensation

 

 
 

 

 
241

 

 
241

Nonemployee stock-based compensation

 

 
 

 

 
21

 

 
21

Net loss and comprehensive loss

 

 
 

 

 

 
(24,158
)
 
(24,158
)
Balances at March 31, 2019
21,238,105

 
105,265

 
 
1,386,615

 
1

 
5,194

 
(163,269
)
 
(158,074
)
Exercise of stock options

 

 
 
176,576

 
1

 
363

 

 
364

Exercise of Series C preferred stock warrants
287,446

 
1,754

 
 

 

 

 

 

Exercise of common stock warrants

 

 
 
3,764

 

 
31

 

 
31

Net exercise of Series C preferred stock warrants upon IPO
1,653,004

 
37,121

 
 

 

 

 

 

Net exercise of common stock warrants upon IPO

 

 
 
2,204

 

 

 

 

Conversion of preferred stock to common stock upon IPO
(23,178,555
)
 
(144,140
)
 
 
23,178,555

 
23

 
144,117

 

 
144,140

Issuance of common stock in connection with IPO, net of underwriting discount, commissions and offering costs of $2,561

 

 
 
6,000,000

 
6

 
109,033

 

 
109,039

Employee stock-based compensation

 

 
 

 

 
814

 

 
814

Nonemployee stock-based compensation

 

 
 

 

 
22

 

 
22

Net loss and comprehensive loss

 

 
 

 

 

 
(11,959
)
 
(11,959
)
Balances at June 30, 2019

 
$

 
 
30,747,714

 
$
31

 
$
259,574

 
$
(175,228
)
 
$
84,377


The accompanying notes are an integral part of these condensed consolidated financial statements.
6

Silk Road Medical, Inc.
Condensed Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders' Equity (Deficit)
(unaudited)

(in thousands, except share data)
Redeemable Convertible
Preferred Stock
 
 
Common Stock
 
Additional
Paid-in Capital
 
Accumulated Deficit
 
Total
 
Shares
 
Amount
 
 
Shares
 
Amount
 
 
 
Balances at December 31, 2017
21,233,190

 
$
105,235

 
 
663,270

 
$
1

 
$
2,977

 
$
(101,556
)
 
$
(98,578
)
Exercise of stock options

 

 
 
186,944

 

 
284

 

 
284

Employee stock-based compensation

 

 
 

 

 
164

 

 
164

Nonemployee stock-based compensation

 

 
 

 

 
(2
)
 

 
(2
)
Cumulative effect of change in accounting principle - ASC 606 adoption

 

 
 

 

 

 
87

 
87

Cumulative effect of change in accounting treatment - ASU 2016-09

 

 
 

 

 
13

 
(13
)
 

Net loss and comprehensive loss

 

 
 

 

 

 
(5,408
)
 
(5,408
)
Balances at March 31, 2018
21,233,190

 
105,235

 
 
850,214

 
1

 
3,436

 
(106,890
)
 
(103,453
)
Exercise of stock options

 

 
 
106,732

 

 
148

 

 
148

Employee stock-based compensation

 

 
 

 

 
178

 

 
178

Nonemployee stock-based compensation

 

 
 

 

 
151

 

 
151

Net loss and comprehensive loss

 

 
 

 

 

 
(7,651
)
 
(7,651
)
Balances at June 30, 2018
21,233,190

 
$
105,235

 
 
956,946

 
$
1

 
$
3,913

 
$
(114,541
)
 
$
(110,627
)



The accompanying notes are an integral part of these condensed consolidated financial statements.
7

Silk Road Medical, Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited)

(in thousands)
Six Months Ended June 30,
 
2019
 
2018
Cash flows from operating activities
 
 
 
Net loss
$
(36,117
)
 
$
(13,058
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization expense
350

 
131

Stock-based compensation expense
1,099

 
491

Change in fair value of redeemable convertible preferred stock warrant liability
21,030

 
1,678

Amortization of debt discount and debt issuance costs
22

 
46

Amortization of right-of-use asset
300

 

Non-cash interest expense
555

 
782

Provision for accounts receivable allowances
724

 
663

Provision for excess and obsolete inventories
43

 

Changes in assets and liabilities
 
 
 
Accounts receivable
(1,622
)
 
475

Inventories
(3,262
)
 
(1,054
)
Prepaid expenses and other current assets
(1,841
)
 
(478
)
Other assets
756

 
(52
)
Accounts payable
(45
)
 
24

Accrued liabilities
377

 
170

Other liabilities
(372
)
 
244

Net cash used in operating activities
(18,003
)
 
(9,938
)
 
 
 
 
Cash flows from investing activities
 
 
 
Purchases of property and equipment
(206
)
 
(1,004
)
Net cash used in investing activities
(206
)
 
(1,004
)
 
 
 
 
Cash flows from financing activities
 
 
 
Proceeds from initial public offering, net of underwriting discount, commissions and offering costs paid
108,913

 

Proceeds from issuance of common stock
738

 
432

Proceeds from exercise of redeemable convertible preferred stock warrants
1,784

 

Proceeds from exercise of common stock warrants
31

 

Net cash provided by financing activities
111,466

 
432

Net change in cash, cash equivalents and restricted cash
93,257

 
(10,510
)
Cash, cash equivalents and restricted cash, beginning of period
25,300

 
33,841

Cash, cash equivalents and restricted cash, end of period
$
118,557

 
$
23,331

 
 
 
 
Supplemental disclosure of cash flow information
 
 
 
Cash paid for interest
$
1,982

 
$
1,172

 
 
 
 
Non-cash investing and financing activities:
 
 
 
Accounts payable and accrued liabilities for purchases of property and equipment
$
7

 
$
696

Landlord paid tenant improvements
$

 
794

Offering costs in accounts payable and accrued liabilities
$
358

 
$

Right-of-use asset obtained in exchange for lease obligation
$
3,982

 
$

Net exercise of convertible preferred stock warrants to preferred stock
$
37,121

 
$

Conversion of convertible preferred stock to common stock upon initial public offering
$
144,140

 
$


The accompanying notes are an integral part of these condensed consolidated financial statements.
8

Silk Road Medical, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)


1.    Formation and Business of the Company
The Company
Silk Road Medical, Inc. (the “Company”) was incorporated in the state of Delaware on March 21, 2007. The Company has developed a technologically advanced, minimally-invasive solution for patients with carotid artery disease who are at risk for stroke. The Company's portfolio of TCAR products enable a new procedure, referred to as transcarotid artery revascularization, or TCAR, that combines the benefits of endovascular techniques and surgical principles. The Company manufactures and sells in the United States its portfolio of TCAR products which are designed to provide direct access to the carotid artery, effective reduction in stroke risk throughout the procedure, and long-term restraint of carotid plaque. The Company commercialized its products in the United States in April 2016.
Reverse Stock Split
On March 13, 2019, the Company's Board of Directors approved an amendment to the Company's amended and restated certificate of incorporation to effect a 2.7-for-1 reverse stock split of the Company's common stock and redeemable convertible preferred stock. The par values of the common stock and redeemable convertible preferred stock were not adjusted as a result of the reverse stock split. All common stock, redeemable convertible preferred stock, stock options and warrants, and related per share amounts in the condensed consolidated financial statements have been retroactively adjusted for all periods presented to give effect to the reverse stock split. The reverse stock split was effected on March 27, 2019.
Initial Public Offering
In April 2019, the Company issued and sold 6,000,000 shares of its common stock in its initial public offering (“IPO”) at a public offering price of $20.00 per share, for net proceeds of approximately $109,039,000 after deducting underwriting discounts and commissions of approximately $8,400,000 and expenses of approximately $2,561,000. Upon the closing of the IPO, all shares of redeemable convertible preferred stock then outstanding converted into shares of common stock and the Company's outstanding warrants to purchase shares of common and redeemable convertible preferred stock were exercised, or automatically net exercised absent a prior election. The exercises resulted in the reclassification of the fair value of the related redeemable convertible preferred stock warrant liability to additional paid-in capital.
2.    Summary of Significant Accounting Policies
Basis of Preparation
The accompanying financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America, or U.S. GAAP, and applicable rules and regulations of the Securities and Exchange Commission, or 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, 2018, and related disclosures, have been derived from the audited consolidated financial statements at that date but does not include all of the information required by U.S. GAAP for complete consolidated financial statements. These unaudited condensed consolidated financial statements have been prepared on the same basis as the Company’s annual consolidated financial statements and, in the opinion of management, reflect all adjustments (consisting only of normal recurring adjustments) that are necessary for the fair statement of the Company’s condensed consolidated financial information. The results of operations for the three and six months ended June 30, 2019 are not necessarily indicative of the results

9

Silk Road Medical, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)

to be expected for the year ending December 31, 2019 or for any other interim period or for any other future year.
The accompanying interim unaudited condensed consolidated financial statements and related financial information should be read in conjunction with the audited consolidated financial statements and the related notes thereto for the year ended December 31, 2018 included in the Company’s prospectus dated April 3, 2019 filed pursuant to Rule 424(b)(4) with the SEC on April 4, 2019.
Principles of Consolidation
Through December 17, 2018, the condensed consolidated financial statements of the Company include the accounts of Silk Road Medical, Inc. and its consolidated variable interest entity (“VIE”), NeuroCo, Inc. On December 17, 2018, the Company acquired all assets and assumed all liabilities of its VIE. As a result of the Merger, NeuroCo merged into the Company with the Company being the surviving corporation. All intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts and disclosures reported in the financial statements. Management uses significant judgment when making estimates related to the common stock valuation and related stock-based compensation, the valuation of the redeemable convertible preferred stock warrants, the valuation of deferred tax assets, provisions for doubtful accounts receivable and excess and obsolete inventories, clinical trial accruals, and the reserves for sales returns. Management bases its estimates on historical experience and on various other assumptions that are believed 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. Although these estimates are based on the Company’s knowledge of current events and actions it may undertake in the future, actual results may ultimately materially differ from these estimates and assumptions.
Fair Value of Financial Instruments
The Company has evaluated the estimated fair value of its financial instruments as of June 30, 2019 and December 31, 2018. The carrying amounts of cash equivalents, restricted cash, accounts receivable, accounts payable and accrued liabilities approximate their respective fair values because of the short-term nature of these instruments. Management believes that its borrowings bear interest at the prevailing market rates for instruments with similar characteristics; accordingly, the carrying value of this instrument approximates its fair value. Prior to its IPO, fair value accounting was applied to the redeemable convertible preferred stock warrant liability.
Cash, Cash Equivalents and Restricted Cash
The Company considers all highly liquid investments with an original maturity of three months or less at the time of purchase to be cash equivalents. Cash equivalents are considered available-for-sale marketable securities and are recorded at fair value, based on quoted market prices. As of June 30, 2019 and December 31, 2018, the Company’s cash equivalents are entirely comprised of investments in money market funds.
Restricted cash as of June 30, 2019 and December 31, 2018 consists of a letter of credit of $310,000 representing collateral for the Company's facility lease.

10

Silk Road Medical, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)

Concentration of Credit Risk, and Other Risks and Uncertainties
Financial instruments that potentially subject the Company to credit risk consist of cash and cash equivalents and accounts receivable to the extent of the amounts recorded on the condensed consolidated balance sheet.
The Company’s policy is to invest in money market funds, which are classified as cash equivalents on the condensed consolidated balance sheet. The Company's cash is held in Company accounts at two financial institutions and such amounts may exceed federally insured limits. The Company's money market funds are invested in highly rated money market funds.
The Company provides for uncollectible amounts when specific credit problems are identified. In doing so, the Company analyzes historical bad debt trends, customer credit worthiness, current economic trends and changes in customer payment patterns when evaluating the adequacy of the allowance for doubtful accounts.
The Company’s accounts receivable are due from a variety of health care organizations in the United States. At June 30, 2019 and December 31, 2018, no customer represented 10% or more of the Company’s accounts receivable. For the three and six months ended June 30, 2019 and June 30, 2018, there were no customers that represented 10% or more of revenue.
The Company manufactures certain of its commercial products in-house. Certain of the Company’s product components and sub-assemblies continue to be manufactured by sole suppliers, the most significant of which is the ENROUTE stent. Disruption in component or sub-assembly supply from these manufacturers or from in-house production would have a negative impact on the Company’s financial position and results of operations.
The Company is subject to certain risks, including that its devices may not be approved or cleared for marketing by governmental authorities or be successfully marketed. There can be no assurance that the Company’s products will achieve widespread adoption in the marketplace, nor can there be any assurance that existing devices or any future devices can be developed or manufactured at an acceptable cost and with appropriate performance characteristics. The Company is also subject to risks common to companies in the medical device industry, including, but not limited to, new technological innovations, dependence upon third-party payers to provide adequate coverage and reimbursement, dependence on key personnel and suppliers, protection of proprietary technology, product liability claims, and compliance with government regulations.
Existing or future devices developed by the Company may require approvals or clearances from the FDA or international regulatory agencies. In addition, in order to continue the Company’s operations, compliance with various federal and state laws is required. If the Company were denied or delayed in receiving such approvals or clearances, it may be necessary to adjust operations to align with the Company’s currently approved portfolio. If clearance for the products in the current portfolio were withdrawn by the FDA, this would have a material adverse impact on the Company.
Deferred Public Offering Costs
Specific incremental legal, accounting and other fees and costs directly attributable to a proposed or actual offering of securities may properly be deferred and charged against the gross proceeds of the offering. As of June 30, 2019 and December 31, 2018, there were $0 and $950,000, respectively, of offering costs primarily consisting of legal and accounting fees that were capitalized in other non-current assets on the condensed consolidated balance sheet.
Leases

11

Silk Road Medical, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)

The Company adopted ASC 842, "Leases," on January 1, 2019 and used the modified retrospective method for all leases not substantially completed as of the date of adoption and the package of practical expedients available in the standard. As a result of adopting ASC 842, the Company recorded an operating lease right-of-use ("ROU") asset of $3,982,000 included within other non-current assets and operating lease liabilities of $5,190,000 included within accrued liabilities and other liabilities on the condensed consolidated balance sheet related to its facility lease, based on the present value of the future lease payments on the date of adoption. The operating lease right-of-use asset also includes adjustments for prepayments and excludes lease incentives. The adoption did not have an impact on prior periods or on its condensed consolidated statements of operations and comprehensive loss.
In accordance with ASC 842, the disclosure impact of adoption on the condensed consolidated balance sheet were as follows (in thousands):
Balance Sheet:
Balance at December 31, 2018
 
Adjustments Due to ASC 842
 
Balance at January 1, 2019
Other non-current assets
$

 
$
3,982

 
$
3,982

Accrued liabilities
139

 
582

 
721

Other liabilities
1,069

 
3,400

 
4,469


The Company recognizes ROU assets and lease liabilities when it obtains the right to control an asset under a leasing arrangement with an initial term greater than twelve months. The Company evaluates the nature of each lease at the inception of an arrangement to determine whether it is an operating or financing lease and recognizes the right-of-use asset and lease liabilities based on the present value of future minimum lease payments over the expected lease term. The Company’s leases do not generally contain an implicit interest rate and therefore the Company uses the incremental borrowing rate it would expect to pay to borrow on a similar collateralized basis over a similar term in order to determine the present value of its lease payments. The Company’s considers renewal options in the determination of the lease term if the option to renew is reasonably certain. The Company has elected to account separately for contracts that contain lease and non-lease components consistent with its historical practice. Variable lease payments will be expensed as incurred.
Redeemable Convertible Preferred Stock Warrant Liability
Prior to its IPO, the Company accounted for its warrants for shares of redeemable convertible preferred stock as a liability based upon the characteristics and provisions of each instrument. Redeemable convertible preferred stock warrants classified as a liability were initially recorded at their fair value on the date of issuance and were subject to remeasurement at each subsequent balance sheet date. Any change in fair value as a result of a remeasurement was recognized as a component of other income (expense), net in the condensed consolidated statements of operations and comprehensive loss. The Company recorded adjustments to the estimated fair value of the redeemable convertible preferred stock warrants until they were exercised in connection with its initial public offering in April 2019. At such time, the final fair value of the warrant liability was reclassified to stockholders’ equity (deficit). The Company will no longer record any related periodic fair value adjustments.
Redeemable Convertible Preferred Stock
Prior to its IPO, the Company recorded its redeemable convertible preferred stock at fair value on the dates of issuance, net of issuance costs, and classified the redeemable convertible preferred stock outside of stockholders’ equity (deficit) on the balance sheet as events triggering the liquidation preferences were not solely within the Company’s control. Upon the closing of the Company's IPO, all shares of convertible preferred stock then outstanding converted into an aggregate of 23,178,555 shares

12

Silk Road Medical, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)

of common stock resulting in the reclassification of $144,140,000 from outside of stockholders’ equity (deficit) to additional paid-in capital.
Revenue Recognition
On January 1, 2018, the Company adopted Accounting Standards Codification (“ASC”) Topic 606, "Revenue from Contracts with Customers," using the modified retrospective method applied to contracts which were not completed as of that date.  Revenue for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period revenue amounts are not adjusted and continue to be reported in accordance with the Company’s historic accounting under ASC 605, "Revenue Recognition." Under ASC 606, revenue is recognized when a customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the Company performs the following five steps:
(i) identify the contract(s) with a customer;
(ii) identify the performance obligations in the contract;
(iii) determine the transaction price;
(iv) allocate the transaction price to the performance obligations in the contract; and
(v) recognize revenue when (or as) the entity satisfies a performance obligation.
Under ASC 606, assuming all other revenue recognition criteria have been met, the Company will recognize revenue earlier for arrangements where the Company has satisfied its performance obligations but have not issued invoices.  As of June 30, 2019 and December 31, 2018, the Company recorded $161,000 and $128,000, respectively, of unbilled receivables, which are included in accounts receivable, net on the condensed consolidated balance sheet, as the Company has an unconditional right to payment as of the end of the applicable period.  
The Company’s revenue is generated from the sale of its products to hospitals and medical centers in the United States through direct sales representatives. Revenue is recognized when obligations under the terms of a contract with customers are satisfied, which occurs with the transfer of control of the Company’s products to its customers, either upon shipment of the product or delivery of the product to the customer under the Company’s standard terms and conditions.  The Company’s products are readily available for usage as soon as the customer possesses it. Upon receipt, the customer controls the economic benefits of the product, has significant risks and rewards, and the legal title. The Company has present right to payment; therefore, the transfer of control is deemed to happen at a point in time. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring the goods.
For sales where the Company’s sales representative hand delivers product directly to the hospital or medical center from the sales representative’s trunk stock inventory, the Company recognizes revenue upon delivery, which represents the point in time when control transfers to the customer. Upon delivery there are legally-enforceable rights and obligations between the parties which can be identified, commercial substance exists and collectability is probable. For sales which are sent directly from the Company to hospitals and medical centers, the transfer of control occurs at the time of shipment or delivery of the product.  There are no further performance obligations by the Company or the sales representative to the customer after delivery under either method of sale. As allowed under the practical expedient, the Company does not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which it recognizes revenue at the amount to which it has the right to invoice for services performed.

13

Silk Road Medical, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)

The Company is entitled to the total consideration for the products ordered by customers as product pricing is fixed according to the terms of customer contracts and payment terms are short. Payment terms fall within the one-year guidance for the practical expedient which allows the Company to forgo adjustment of the promised amount of consideration for the effects of a significant financing component. The Company excludes taxes assessed by governmental authorities on revenue-producing transactions from the measurement of the transaction price.
Costs associated with product sales include commissions and royalties. The Company applies the practical expedient and recognizes commissions and royalties as expense when incurred because the expense is incurred at a point in time and the amortization period is less than one year.  Commissions are recorded as selling expense and royalties are recorded as cost of revenue in the condensed consolidated statements of operations and comprehensive loss.
The Company accepts product returns at its discretion or if the product is defective as manufactured. The Company establishes estimated provisions for returns based on historical experience.  The Company elected to expense shipping and handling costs as incurred and includes them in the cost of goods sold. In those cases where the Company bills shipping and handling costs to customers, it will classify the amounts billed as a component of revenue.
Cost of Goods Sold
The Company manufactures certain of its portfolio of TCAR products at its facility and purchases other products from third party manufacturers. Cost of goods sold consists primarily of costs related to materials, components and subassemblies, manufacturing overhead costs, direct labor, reserves for excess, obsolete and non-sellable inventories as well as distribution-related expenses. A significant portion of the Company’s cost of goods sold currently consists of manufacturing overhead costs. These overhead costs include the cost of quality assurance, material procurement, inventory control, facilities, equipment and operations supervision and management. Cost of goods sold also includes depreciation expense for production equipment and certain direct costs such as shipping costs and royalties.
Stock–Based Compensation
The Company accounts for stock-based compensation in accordance with Financial Accounting Standards Board (“FASB”) ASC 718, "Compensation-Stock Compensation." ASC 718 requires the recognition of compensation expense, using a fair-value based method, for costs related to all share-based payments including stock options. ASC 718 requires companies to estimate the fair value of all share-based payment option awards on the date of grant using an option pricing model. The fair value of stock options is recognized over the period during which an optionee is required to provide services in exchange for the option award, known as the requisite service period (usually the vesting period), on a straight-line basis. For performance-based stock options, the Company will assess the probability of performance conditions being achieved in each reporting period. The amount of stock-based compensation expense recognized in any one period related to performance-based stock options can vary based on the achievement or anticipated achievement of the performance conditions. The Company accounts for option forfeitures as they occur.
Income Taxes
The Company accounts for income taxes under the liability method, whereby deferred tax assets and liabilities are determined based on the difference between the condensed consolidated financial statements and tax bases of assets and liabilities using the enacted tax rates in effect for the year in which the differences are expected to affect taxable income. A valuation allowance is established when necessary to reduce deferred tax assets to the amounts expected to be realized. As the Company has historically incurred operating losses, it has established a full valuation allowance against its net deferred tax assets, and there is no provision for income taxes.

14

Silk Road Medical, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)

The Company also follows the provisions of ASC 740-10, "Accounting for Uncertainty in Income Taxes." ASC 740-10 prescribes a comprehensive model for the recognition, measurement, presentation and disclosure in financial statements of any uncertain tax positions that have been taken or expected to be taken on a tax return. No liability related to uncertain tax positions is recorded on the condensed consolidated financial statements. It is the Company's policy to include penalties and interest expense related to income taxes as part of the provision for income taxes.
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, without consideration for potential dilutive common shares. Diluted net loss per share is computed by dividing the net loss by the weighted average number of shares of common stock and potentially dilutive securities outstanding for the period. For purposes of the diluted net loss per share calculation, redeemable convertible preferred stock and warrants, and common stock options are considered to be potentially dilutive securities. Since the Company was in a loss position for all periods presented, basic net loss per share is the same as diluted net loss per share as the inclusion of all potential dilutive common shares would have been anti-dilutive.
The Company allocates no loss to participating securities because they have no contractual obligation to share in the losses of the Company. The shares of the Company’s redeemable convertible preferred stock participate in any dividends declared by the Company and are therefore considered to be participating securities.
Net loss per share was determined as follows (in thousands, except share and per share data):
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Net loss
$
(11,959
)
 
$
(7,651
)
 
$
(36,117
)
 
$
(13,058
)
Weighted average common stock outstanding used to compute net loss per share, basic and diluted
28,458,793

 
938,052

 
14,905,052

 
839,229

Net loss per share, basic and diluted
$
(0.42
)
 
$
(8.16
)
 
$
(2.42
)
 
$
(15.56
)

The following potentially dilutive securities outstanding have been excluded from the computation of diluted weighted average shares outstanding because such securities have an antidilutive impact due to the Company's net loss, in common stock equivalent shares:
 
June 30,
 
2019
 
2018
Redeemable convertible preferred stock outstanding

 
21,233,190

Redeemable convertible preferred stock warrants outstanding

 
2,672,502

Common stock options
4,683,811

 
4,326,073

Common stock warrants outstanding

 
7,527

 
4,683,811

 
28,239,292



15

Silk Road Medical, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)

Comprehensive Loss
For the three and six months ended June 30, 2019 and June 30, 2018, there was no difference between comprehensive loss and the Company’s net loss.
Segment and Geographical Information
The Company operates and manages its business as one reportable and operating segment. The Company’s chief executive officer, who is the chief operating decision maker, reviews financial information on an aggregate basis for purposes of allocating resources and evaluating financial performance. All of the Company’s long-lived assets are based in the United States. Long-lived assets are comprised of property and equipment. All of the Company’s revenue was in the United States for the three and six months ended June 30, 2019 and June 30, 2018, based on the shipping location of the external customer.
3.    Recent Accounting Pronouncements
Recently Adopted Accounting Standards
In February 2016, the FASB issued ASU No. 2016-02, "Leases," that supersedes ASC 840, "Leases." Subsequently, the FASB issued several updates to ASU No. 2016-02, codified in ASC Topic 842 (“ASC 842”). The Company adopted ASC 842 on January 1, 2019 using the modified retrospective method for all leases not substantially completed as of the date of adoptionThe Company elected to apply the package of practical expedients, which allowed the Company to not reassess: (i) whether expired or existing contracts contain leases; (ii) lease classification for any expired or existing leases; and (iii) initial direct costs for any existing lease.
Recently Issued Accounting Standards
In June 2016, the FASB issued ASU 2016-13, "Measurement of Credit Losses on Financial Statements." This update provides financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The update replaces the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU No. 2016-13 is effective for public entities for annual periods beginning after December 15, 2019. The Company is evaluating the impact of adopting this guidance to its consolidated financial statements and related disclosures.

16

Silk Road Medical, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)

In August 2018, the FASB issued ASU 2018-13, "Fair Value Measurement," which changed the disclosure requirements for fair value measurements by removing, adding and modifying certain disclosures. The standard is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. The Company is evaluating the impact of adopting this guidance to its consolidated financial statements and related disclosures.
In August 2018, the FASB issued ASU 2018-15, "Cloud Computing Arrangements," which aligns the requirements for capitalizing implementation costs in a Cloud Computing Arrangement service contract with the requirements for capitalizing implementation costs incurred for an internal-use software license. The standard is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. The Company is evaluating the impact of adopting this guidance to its consolidated financial statements and related disclosures.
4.    Fair Value Measurements
The Company measures certain financial assets and liabilities at fair value on a recurring basis. Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. A three-tier fair value hierarchy is established as a basis for considering such assumptions and for inputs used in the valuation methodologies in measuring fair value:
Level 1 – quoted prices in active markets for identical assets or liabilities;
Level 2 – observable inputs other than quoted prices in active markets for identical assets and liabilities;
Level 3 – unobservable inputs.
The Company’s cash equivalents are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency.
In August 2014 through April 2016, the Company issued warrants to purchase 2,672,502 shares of Series C redeemable convertible preferred stock at the exercise price of $6.11 per share. As a derivative liability, the redeemable convertible warrants were initially recorded at fair value and were subject to remeasurement at each balance sheet date through the date of the Company's initial public offering in April 2019. Any change in fair value as a result of a remeasurement was recognized as a component of other income (expense), net in the condensed consolidated statements of operations and comprehensive loss. The Company’s redeemable convertible warrant liability was classified within Level 3 of the fair value hierarchy.

17

Silk Road Medical, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)

At December 31, 2018, the fair value of the redeemable convertible warrant liability was determined by using an option pricing model to allocate the total enterprise value to the various securities within the Company's capital structure. As of December 31, 2018, the fair value of the redeemable convertible warrant liability was based on both the estimated fair value of the Company's common stock and on valuation models discounted at current implied market rates which are based on Level 3 inputs. Additionally, the model's inputs reflect assumptions that market participants would use in pricing the instrument in a current period transaction and included:
 
 
December 31,
 
 
2018
Time to liquidity (years)
 
0.57
Expected volatility
 
62.5%
Discounted cash flow rate
 
12.0%
Risk-free interest rate
 
2.6%
Marketability discount rate
 
14%

The final fair value of the redeemable convertible warrants was remeasured on the date of the Company's initial public offering in April 2019. The final fair value of the redeemable convertible warrant liability was based on the estimated fair value of the Company's common stock at the time of its initial public offering. Subsequent to April 2019, there were no changes in fair value.
The following table sets forth the fair value of the Company’s financial liabilities measured on a recurring basis as of December 31, 2018 (in thousands), as of June 30, 2019, there was no redeemable convertible warrant liability:
 
December 31, 2018
 
Level 1
 
Level 2
 
Level 3
 
Total
Liabilities
 
 
 
 
 
 
 
Redeemable convertible warrant liability
$

 
$

 
$
16,091

 
$
16,091

The changes in the redeemable convertible warrant liability are summarized below (in thousands):
Fair Value at December 31, 2018
$
16,091

Change in fair value recorded in other income (expense), net
21,030

Reclassification upon IPO
(37,121
)
Fair Value at June 30, 2019
$


There were no transfers between fair value hierarchy levels during the three and six months ended June 30, 2019 and 2018.

18

Silk Road Medical, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)

5.    Balance Sheet Components
Inventories
Components of inventories were as follows:
(in thousands)
June 30,
 
December 31,
 
2019
 
2018
Raw materials
$
866

 
$
1,054

Finished products
8,097

 
4,690

Total
$
8,963

 
$
5,744


As of June 30, 2019 and December 31, 2018, there were no work-in-process inventories.
Accrued liabilities consist of the following:
(in thousands)
June 30,
 
December 31,
 
2019
 
2018
Accrued payroll and related expenses
$
4,609

 
$
5,157

Accrued professional services
1,024

 
1,014

Operating lease liability
730

 

Accrued royalty expense
389

 
313

Deferred revenue
257

 
137

Accrued travel expenses
443

 
270

Accrued clinical expenses
354

 
244

Accrued other expenses
493

 
451

Total
$
8,299

 
$
7,586


6.    Long-term Debt
In October 2015, the Company entered into a term loan agreement with CRG. The term loan agreement provides for up to $30,000,000 in term loans split into two tranches as follows: (i) the Tranche A Loans provided for $20,000,000 in term loans, and (ii) the Tranche B Loans provided for up to $10,000,000 in term loans. The Company drew down the Tranche A Loans on October 13, 2015. The Tranche B Loans were available to be drawn prior to March 29, 2017. In January 2017, the term loan agreement was amended to extend the commitment period of the Tranche B Loans to April 28, 2017. In April 2017, the Company drew down $5,000,000 of the available Tranche B Loans.
In September 2018, the Company entered into Amendment No. 5 to the term loan agreement with CRG. Under the amended terms of the amended loan agreement the maturity date was extended to December 31, 2022 and the repayment schedule of the existing term loans were changed to interest only so that the outstanding principal amount of the term loans will be payable in a single installment at maturity. The related fixed interest rate was changed to equal 10.75% per annum, due and payable quarterly in arrears. At the election of the Company, 2.75% of the interest due and payable may be “paid in kind”, or PIK, and added to the then outstanding principal and 8.0% of the interest due and payable paid in cash. All unpaid principal, and accrued and unpaid interest, is due and payable in full on December 31, 2022. The amended term loan agreement also provided for additional term loans in an aggregate principal amount of up to $25,000,000. In September 2018, the Company drew down an additional $15,000,000 under the

19

Silk Road Medical, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)

term loan agreement with CRG. As provided for under the terms of the amended term loan agreement, the related fixed interest rate was further reduced to 10.00% upon the consummation of the Company's IPO in April 2019. Also, post consummation of the Company's IPO, 8.00% of the interest is due and payable in cash and at the election of the Company, 2.00% of the interest due and payable may be PIK.
The Company may voluntarily prepay the borrowings in full. The Tranche A borrowing required a payment, on the borrowing date, of a financing fee equal to 1.75% of the borrowed loan principal, which is recorded as a discount to the debt. In addition, a facility fee equal to 5.0% of the amounts borrowed plus any PIK is payable at the end of the term or when the borrowings are repaid in full. A long-term liability is being accreted using the effective interest method for the facility fee over the term of the loan agreement. The borrowings are collateralized by a security interest in substantially all of the Company’s assets.
The Company is subject to financial covenants related to liquidity and minimum trailing revenue targets that begin in December 31, 2016 and are tested on an annual basis. The liquidity covenant requires the Company to maintain an amount which shall exceed the greater of (i) $3,000,000 and (ii) the minimum cash balance, if any, required of the Company by a creditor to the extent the Company has incurred permitted priority debt. The Company had to achieve minimum net revenue of $1,000,000 in 2016, $5,000,000 in 2017, $15,000,000 in 2018, and must achieve minimum net revenue of $30,000,000 in 2019 and $40,000,000 in 2020. The liquidity financial covenant has a 90-day equity cure period following end of the calendar year to issue additional shares of equity interests in exchange for cash, or to borrow permitted cure debt. In addition, the term loan agreement prohibits the payment of cash dividends on the Company’s capital stock and also places restrictions on mergers, sales of assets, investments, incurrence of liens, incurrence of indebtedness and transactions with affiliates. CRG may accelerate the payment terms of the term loan agreement upon the occurrence of certain events of default set forth therein, which include the failure of the Company to make timely payments of amounts due under the term loan agreement, the failure of the Company to adhere to the covenants set forth in the term loan agreement, the insolvency of the Company or upon the occurrence of a material adverse change. As of June 30, 2019, the Company was in compliance with all applicable financial covenants. As of June 30, 2019, management does not believe that it is probable that the above clauses will be triggered within the next twelve months, and therefore, the debt is classified as long-term on the condensed consolidated balance sheet.
In June 2019, the Company entered into Amendment No. 7 to the term loan agreement with CRG to reflect flexibility with respect to permitted cash equivalents.
The issuance costs and debt discount have been netted against the borrowed funds on the condensed consolidated balance sheet. The long-term debt balance as of June 30, 2019 was $44,690,000.

20

Silk Road Medical, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)

Future maturities under the term loan agreement as of June 30, 2019 are as follows (in thousands):
Period Ending December 31:
 
Amount
2019
 
$
2,239

2020
 
4,454

2021
 
4,442

2022
 
48,256

 
 
59,391

Add: Accretion of closing fees
 
1,040

 
 
60,431

Less: Amount representing interest
 
(15,578
)
Less: Amount representing debt discount and debt issuance costs
 
(163
)
Present value of minimum payments
 
$
44,690


In October 2015, CRG purchased 327,759 shares of the Company’s Series C redeemable convertible preferred stock at $6.11 per share. In addition, CRG received warrants to purchase 163,877 shares of the Company’s Series C redeemable convertible preferred stock. The warrants are immediately exercisable, at an exercise price per share of $6.11, and expire the earlier of October 2023 or upon the consummation of a change of control or initial public offering of the Company.
In July 2017, CRG purchased 163,877 shares of the Company’s Series C convertible preferred stock at $6.11 per share.
7.    Commitments and Contingencies
Operating Lease and Rights of Use
The Company’s operating lease obligation consists of leased office, laboratory, and manufacturing space under a non-cancellable operating lease that expires in October 2024. Operating lease costs were $217,000 and $434,000 for the three and six months ended June 30, 2019, respectively. Cash paid for amounts included in the measurement of operating lease liabilities was $169,000 and $363,000 for the three and six months ended June 30, 2019, respectively. As of June 30, 2019, the weighted average discount rate was approximately 6.50% and the weighted average remaining lease term was 5.33 years. Balance sheet information as of June 30, 2019 consists of the following (in thousands):
Operating Lease:
 
June 30, 2019
Operating lease right-of-use asset in other non-current assets
 
$
3,683

Operating lease liability in accrued liabilities
 
$
730

Operating lease liability in other liabilities
 
4,097

Total operating lease liabilities
 
$
4,827


The following table summarizes the Company’s operating lease maturities as of June 30, 2019 (in thousands):

21

Silk Road Medical, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)

Period Ending December 31:
 
Amount
2019
 
$
510

2020
 
1,037

2021
 
1,066

2022
 
1,096

2023
 
1,127

2024
 
904

Total lease payments
 
5,740

Less: imputed interest
 
(913
)
       Present value of lease liabilities
 
$
4,827


Minimum future lease payments previously disclosed under ASC 840 in the Company’s prospectus dated April 3, 2019 filed pursuant to Rule 424(b)(4) with the SEC on April 4, 2019 for the year ended December 31, 2018 are as follows (in thousands):
Year Ending December 31:
 
Total Minimum
Lease Payments
2019
 
$
1,002

2020
 
1,002

2021
 
1,031

2022
 
1,044

2023
 
1,920

 
 
$
5,999


Purchase Obligations
Purchase obligations consist of agreements to purchase goods and services entered into in the ordinary course of business. The Company had non-cancellable commitments for inventory that were payable within one year to suppliers for purchases totaling $1,448,000 as of June 30, 2019.
Indemnification
In the normal course of business, the Company enters into contracts and agreements that contain a variety of representations and warranties and may provide for indemnification of the counterparty. The Company’s exposure under these agreements is unknown because it involves claims that may be made against it in the future but have not yet been made. To date, the Company has not been subject to any claims or been required to defend any action related to its indemnification obligations.
The Company indemnifies each of its directors and officers for certain events or occurrences, subject to certain limits, while the director is or was serving at the Company’s request in such capacity, as permitted under Delaware law and in accordance with its certificate of incorporation and bylaws. The term of the indemnification period lasts as long as a director may be subject to any proceeding arising out of acts or omissions of such director in such capacity. The maximum amount of potential future indemnification is unlimited; however, the Company currently holds director liability insurance. This insurance allows the transfer of risk associated with the Company’s exposure and may enable it to recover a portion of any future amounts paid. The Company believes that the fair value of these indemnification obligations is

22

Silk Road Medical, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)

minimal. Accordingly, the Company has not recognized any liabilities relating to these obligations as of June 30, 2019.
Contingencies
The Company is not involved in any pending legal proceedings that it believes could have a material adverse effect on its financial condition, results of operations or cash flows. From time to time, the Company may pursue litigation to assert its legal right and such litigation may be costly and divert the efforts and attention of its management and technical personnel which could adversely affect its business. The Company accrues a liability for such matters when it is probable that future expenditures will be made and such expenditures can be reasonably estimated. There were no contingent liabilities requiring accrual at June 30, 2019 and December 31, 2018.
Legal Matters
In February 2019, a former employee, through counsel, advised the Company that he had filed a charge of discrimination against the Company with the California Department of Fair Employment & Housing, or DFEH.  The former employee’s complaint alleges sexual harassment and retaliation in violation of the California Department of Fair Employment & Housing Act.  The complaint does not allege specific damages. To date, the DFEH has not contacted the Company. The Company denies the complaint’s allegations and intends to vigorously defend itself. No accrual was included in the Company's balance sheet as of June 30, 2019.
The Company and the former employee participated in mediation on July 30, 2019 and reached a settlement that requires the Company to pay an amount that is not material to its consolidated financial statements.
8.    Redeemable Convertible Preferred Stock
The Company had the following redeemable convertible preferred stock issued and outstanding at December 31, 2018:
 
December 31, 2018
 
Shares
Authorized
 
Shares Issued and
Outstanding
 
Per share
Preference
 
Preferential
Liquidation Value (in thousands)
 
Carrying Value (in thousands)
Series
 
 
 
 
 
 
 
 
 
Series A
1,629,629

 
1,629,626

 
$
2.70

 
$
4,400

 
$
4,369

Series A-1
1,111,111

 
1,111,109

 
$
3.38

 
3,755

 
3,723

Series B
6,264,470

 
6,264,463

 
$
6.11

 
38,276

 
38,014

Series C
15,064,405

 
12,227,992

 
$
6.11

 
74,713

 
59,129

 
24,069,615

 
21,233,190

 
 
 
$
121,144

 
$
105,235


Upon the closing of the IPO, all shares of convertible preferred stock then outstanding converted into shares of common stock. As of June 30, 2019, the Company does not have any convertible preferred stock issued or outstanding.

23

Silk Road Medical, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)

Preferred Stock Warrants
Upon the closing of the IPO, all of the outstanding convertible preferred stock warrants were exercised, or net exercised based on the IPO price of $20.00 per share, into 1,945,365 shares of common stock.
As of June 30, 2019 and December 31, 2018, warrants to purchase an aggregate of 0 and 2,672,502, respectively, shares of Series C redeemable convertible preferred stock were outstanding.
9.    Stockholders Equity (Deficit)
Preferred Stock
At June 30, 2019, the Company’s certificate of incorporation, as amended and restated, authorizes the Company to issue up to 5,000,000 shares of preferred stock with $0.001 par value per share, of which no shares were issued and outstanding.
Common Stock
At June 30, 2019, the Company’s certificate of incorporation, as amended and restated, authorizes the Company to issue up to 100,000,000 shares of common stock with $0.001 par value per share, of which 30,747,714 shares were issued and outstanding. The holders of common stock are also entitled to receive dividends whenever funds are legally available, when and if declared by the Board of Directors. As of June 30, 2019, no dividends have been declared to date. Each share of common stock is entitled to one vote.
Common Stock Warrants
In connection with the IPO, the common stock warrants were cash, or net exercised based on the IPO price of $20.00 per share, into 5,968 shares of common stock. As of June 30, 2019 and December 31, 2018, warrants to purchase an aggregate of 0 and 7,527 shares of common stock were outstanding.
10.    Stock Option Plans
In 2007, the Company established its 2007 Stock Option Plan which provided for the granting of stock options to employees, directors and consultants of the Company. In connection with its acquisition of NeuroCo in December 2018, the Company also assumed NeuroCo’s 2015 Equity Incentive Plan, or the NeuroCo Plan. In March 2019, the Company's Board of Directors approved the termination of the 2007 Stock Option Plan and the NeuroCo 2015 Equity Incentive Plan and the adoption of the 2019 Equity Incentive Plan, or the 2019 Plan, which became effective immediately prior to the Company's IPO. The 2019 Plan provides for the grant of ISOs to employees and for the grant of NSOs, restricted stock, restricted stock units, stock appreciation rights, performance units and performance shares to employees, directors and consultants. A total of 2,317,000 shares of common stock were initially reserved for issuance pursuant to the 2019 Plan. In addition, the shares reserved for issuance under the 2019 Plan will also include shares reserved but not issued under the 2007 Stock Option Plan, plus any share awards granted under the 2007 Stock Option Plan that expire or terminate without having been exercised in full or that are forfeited or repurchased. In addition, the number of shares available for issuance under the 2019 Plan will also include an annual increase on the first day of each fiscal year beginning in fiscal 2020, equal to the lesser of (i) 3,000,000 shares; (ii) 4.0% of the outstanding shares of common stock as of the last day of the immediately preceding fiscal year; or (iii) an amount as determined by the Board of Directors. As of June 30, 2019, the Company has reserved 2,351,732 shares of common stock for issuance under the 2019 Plan.

24

Silk Road Medical, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)

The exercise price of ISOs and NSOs shall not be less than 100% and 85% of the estimated fair value of the shares on the date of grant, respectively, as determined by the Board of Directors. The exercise price of ISOs and NSOs granted to a 10% stockholder shall not be less than 110% of the estimated fair value of the shares on the date of grant as determined by the Board of Directors. To date, options have a term of 10 years and generally vest over 4 years from the date of grant.
Activity under the Company’s 2007 Stock Option Plan and 2019 Plan is set forth below:
 
 
 
Options Outstanding
 
Shares Available for Grant
 
Number of Shares
 
Weighted Average Exercise Price
 
Weighted Average Remaining Contractual Term (in Years)
 
Aggregate Intrinsic Value (in thousands)
Balances, December 31, 2018
57,889

 
4,364,377

 
$
3.79

 
7.36
 
$
33,132

Authorized
2,317,000

 
 
 
 
 
 
 
 
Options granted
(757,108
)
 
757,108

 
$
20.97

 
 
 
 
Options exercised

 
(427,881
)
 
$
1.73

 
 
 
 
Options cancelled
9,793

 
(9,793
)
 
$
3.99

 
 
 
 
Balances, June 30, 2019
1,627,574

 
4,683,811

 
$
6.76

 
7.50
 
$
195,326

Vested and exercisable at June 30, 2019
 
 
2,493,493

 
$
3.09

 
6.36
 
$
113,136

Vested and expected to vest at June 30, 2019
 
 
4,383,811

 
$
6.76

 
7.50
 
$
195,326


The aggregate intrinsic value of options exercised during the six months ended June 30, 2019 was $9,077,000. The aggregate intrinsic value was calculated as the difference between the exercise prices of the underlying options and the estimated fair value of the common stock on the date of exercise.
2019 Employee Stock Purchase Plan
In March 2019, the Company's Board of Directors adopted the 2019 Employee Stock Purchase Plan, or 2019 ESPP, under which eligible employees are permitted to purchase common stock at a discount through payroll deductions. A total of 434,000 shares of common stock are reserved for issuance and will be increased on the first day of each fiscal year, beginning in 2020, by an amount equal to the lesser of (i) 1,200,000 shares (ii) 1.0% of the outstanding shares of common stock as of the last day of the immediately preceding fiscal year; or (iii) an amount as determined by the Board of Directors. The price of the common stock purchased will be the lower of 85% of the fair market value of the common stock at the beginning of an offering period or at the end of a purchase period. The 2019 ESPP was effective upon adoption by the Company's Board of Directors but was not in use until the completion of the IPO in April 2019. The 2019 ESPP is intended to qualify as an "employee stock purchase plan" within the meaning of Section 423 of the Internal Revenue Code of 1986, as amended.

25

Silk Road Medical, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)

Stock‑Based Compensation
The Company estimated the fair value of stock options using the Black–Scholes option pricing model. The fair value of employee and nonemployee stock options is being amortized on a straight–line basis over the requisite service period of the awards. The fair value of employee and nonemployee stock options was estimated using the following assumptions for the three and six months ended June 30, 2019 and 2018:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Expected term (in years)
5.00 - 6.25
 
5.00 - 6.25
 
5.00 - 6.25
 
5.00 - 6.25
Expected volatility
42.7% - 42.9%
 
38.0% - 38.1%
 
42.7% - 42.9%
 
38.0% - 38.1%
Risk-free interest rate
1.86% - 2.37%
 
2.71% - 2.74%
 
1.86% - 2.54%
 
2.68% - 2.74%
Dividend yield
%
 
%
 
%
 
%

As of June 30, 2019, there was total unrecognized compensation costs of $8,683,000 related to these stock options. These costs are expected to be recognized over a period of approximately 3.33 years.
The fair value of the shares to be issued under the Company’s 2019 ESPP was estimated using the Black-Scholes valuation model with the following assumptions for the three months ended June 30, 2019:
 
Three Months Ended
 
June 30, 2019
Expected term (in years)
0.63
Expected volatility
47.8%
Risk-free interest rate
2.45%
Dividend yield
%

Total stock-based compensation expense recognized during the three and six months ended June 30, 2019 and 2018, is as follows (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Cost of goods sold
$
54

 
$
11

 
$
69

 
$
24

Research and development expenses
127

 
162

 
155

 
190

Selling, general and administrative expenses
655

 
156

 
875

 
277

 
$
836

 
$
329

 
$
1,099

 
$
491


11.    Subsequent Events
Public Offering of Common Stock
In August 2019, the Company completed a secondary public offering of 4,200,000 shares of its common stock sold by certain selling stockholders, and the exercise in full of the underwriters' option to purchase 630,000 additional shares of its common stock from certain selling stockholders, at a public offering price

26

Silk Road Medical, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)

of $39.50 per share. The Company did not receive any of the proceeds from the sale of the shares of its common stock by the selling stockholders.
Item 2: Management Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition and results of operations together with the section entitled “Selected consolidated financial data” and our condensed consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q. This discussion and other parts of this Quarterly Report on Form 10-Q contain forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions, that are based on the beliefs of our management, as well as assumptions made by, and information currently available to, our management. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section of this Quarterly Report on Form 10-Q entitled “Risk Factors.”
Overview
We are a medical device company focused on reducing the risk of stroke and its devastating impact. We believe a key to stroke prevention is minimally-invasive and technologically advanced intervention to safely and effectively treat carotid artery disease, one of the leading causes of stroke. We have pioneered a new approach for the treatment of carotid artery disease called transcarotid artery revascularization, or TCAR, which we seek to establish as the standard of care. We manufacture and sell in the United States our portfolio of TCAR products, which are designed to provide direct access to the carotid artery, effective reduction in stroke risk throughout the procedure, and long-term restraint of carotid plaque.
We began commercializing our products in the United States in late 2015. Our products are currently the only devices cleared and approved by the FDA specifically for transcarotid use. While our current commercial focus is on the U.S. market, our products have obtained CE Mark approval, allowing us to commercialize in Europe in the future. We also intend to pursue regulatory clearances in China, Japan, and other select international markets. TCAR is reimbursed based on established current procedural technology, or CPT, codes and International Classification of Diseases, or ICD-10, codes related to carotid stenting that track to Medicare Severity Diagnosis Related Group, or MS‐DRG, classifications.
We designed our commercial strategy and built our direct sales force with a particular focus on vascular surgery practices. Vascular surgeons are skilled in endovascular procedures, and our sales and marketing efforts are focused on driving adoption and supporting their practice development by offering them an innovative, safe, effective and minimally-invasive alternative for treating carotid artery disease. We also market to other specialists with experience in CEA or CAS with the appropriate skill set for TCAR, including neurosurgeons, cardiothoracic surgeons and non-surgical interventionalists in radiology, neuroradiology and cardiology. We also work on developing strong relationships with physicians and hospitals that we have identified as key opinion leaders. We consider the hospitals and medical centers where the procedure is performed to be our customers, as they typically are responsible for purchasing our products.
We manufacture and distribute the ENROUTE NPS at our facility in Sunnyvale, California, using components and sub-assemblies manufactured both in-house and by third party manufacturers and suppliers. We purchase our other products from third-party contract manufacturers, including our ENROUTE stent. Many of these third-party manufacturers and outside vendors are currently single-source suppliers. We expect that our existing manufacturing facility will be sufficient to meet our anticipated growth through at least the next four years.
Prior to our initial public offering, our primary sources of capital were private placements of convertible preferred stock, debt financing arrangements and revenue from sales of our products. Since inception, we have raised a total of $105.2 million in net proceeds from private placements of redeemable