10-Q 1 nvro-10q_20180930.htm 10-Q nvro-10q_20180930.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2018

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 001-36715  

Nevro Corp.

(Exact name of registrant as specified in its charter)

 

Delaware

 

56-2568057

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

1800 Bridge Parkway

Redwood City, CA

(Address of principal executive offices)

94065

(Zip Code)

(650) 251-0005

(Registrant’s telephone number, including area code)

 

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, smaller reporting company, or an emerging growth company. See 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 13(a) of the Exchange Act.  

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

As of October 31, 2018 there were 30,156,127 shares of the registrant’s common stock, par value $0.001 per share, outstanding.

 

 

 

 


Nevro Corp.

TABLE OF CONTENTS

 

 

 

Page

 

 

 

PART I—FINANCIAL INFORMATION

 

3

 

 

 

Item 1. Condensed Consolidated Financial Statements (unaudited)

 

3

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017

 

3

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended September 30, 2018 and 2017

 

4

 

 

 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and 2017

 

5

 

 

 

Notes to Condensed Consolidated Financial Statements

 

6

 

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

22

 

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

31

 

 

 

Item 4. Controls and Procedures

 

32

 

 

 

PART II—OTHER INFORMATION

 

32

 

 

 

Item 1. Legal Proceedings

 

32

 

 

 

Item 1A. Risk Factors

 

33

 

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

63

 

 

 

Item 3. Defaults Upon Senior Securities

 

63

 

 

 

Item 4. Mine Safety Disclosures

 

63

 

 

 

Item 5. Other Information

 

63

 

 

 

Item 6. Exhibits

 

64

 

 

 

SIGNATURES

 

65

 

2


PART I—FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

Nevro Corp.

Condensed Consolidated Balance Sheets

(unaudited)

(in thousands, except share and per share data)

 

 

 

September 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Assets

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

21,377

 

 

$

42,845

 

Short-term investments

 

 

236,615

 

 

 

226,467

 

Accounts receivable, net of allowance for doubtful accounts of $884 and $1,333 at

   September 30, 2018 and December 31, 2017, respectively

 

 

73,993

 

 

 

67,287

 

Inventories

 

 

93,606

 

 

 

98,119

 

Prepaid expenses and other current assets

 

 

7,226

 

 

 

6,463

 

Total current assets

 

 

432,817

 

 

 

441,181

 

Property and equipment, net

 

 

13,312

 

 

 

8,819

 

Other assets

 

 

4,315

 

 

 

3,250

 

Restricted cash

 

 

606

 

 

 

806

 

Total assets

 

$

451,050

 

 

$

454,056

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

20,173

 

 

$

18,492

 

Accrued liabilities

 

 

33,518

 

 

 

39,390

 

Other current liabilities

 

 

104

 

 

 

122

 

Total current liabilities

 

 

53,795

 

 

 

58,004

 

Long-term debt

 

 

150,508

 

 

 

145,019

 

Other long-term liabilities

 

 

2,445

 

 

 

1,861

 

Total liabilities

 

 

206,748

 

 

 

204,884

 

Commitments and contingencies (Note 6)

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

 

Preferred stock, $0.001 par value, 10,000,000 shares authorized at September 30, 2018

   and December 31, 2017; zero shares issued and outstanding at September 30, 2018

   and December 31, 2017

 

 

 

 

 

 

Common stock, $0.001 par value, 290,000,000 shares authorized at September 30,

   2018 and December 31, 2017; 30,150,577 and 29,737,561 shares issued and

   outstanding at September 30, 2018 and December 31, 2017, respectively

 

 

30

 

 

 

30

 

Additional paid-in capital

 

 

541,695

 

 

 

508,228

 

Accumulated other comprehensive loss

 

 

(948

)

 

 

(1,242

)

Accumulated deficit

 

 

(296,475

)

 

 

(257,844

)

Total stockholders’ equity

 

 

244,302

 

 

 

249,172

 

Total liabilities and stockholders’ equity

 

$

451,050

 

 

$

454,056

 

 

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

 

 

3


Nevro Corp.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(unaudited)

(in thousands, except share and per share data)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenue

 

$

95,630

 

 

$

82,256

 

 

$

279,345

 

 

$

228,711

 

Cost of revenue

 

 

28,382

 

 

 

24,316

 

 

 

82,175

 

 

 

70,530

 

Gross profit

 

 

67,248

 

 

 

57,940

 

 

 

197,170

 

 

 

158,181

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

12,478

 

 

 

9,381

 

 

 

34,979

 

 

 

27,617

 

Sales, general and administrative

 

 

64,007

 

 

 

52,977

 

 

 

195,331

 

 

 

157,971

 

Total operating expenses

 

 

76,485

 

 

 

62,358

 

 

 

230,310

 

 

 

185,588

 

Loss from operations

 

 

(9,237

)

 

 

(4,418

)

 

 

(33,140

)

 

 

(27,407

)

Interest income

 

 

1,275

 

 

 

808

 

 

 

3,423

 

 

 

2,264

 

Interest expense

 

 

(2,622

)

 

 

(2,497

)

 

 

(7,759

)

 

 

(7,386

)

Other income (expense), net

 

 

(130

)

 

 

251

 

 

 

(845

)

 

 

1,198

 

Loss before income taxes

 

 

(10,714

)

 

 

(5,856

)

 

 

(38,321

)

 

 

(31,331

)

Provision for income taxes

 

 

551

 

 

 

374

 

 

 

1,277

 

 

 

1,016

 

Net loss

 

 

(11,265

)

 

 

(6,230

)

 

 

(39,598

)

 

 

(32,347

)

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in foreign currency translation adjustment

 

 

(155

)

 

 

165

 

 

 

104

 

 

 

(41

)

Changes in unrealized gains on short-term investments, net

 

 

269

 

 

 

13

 

 

 

191

 

 

 

107

 

Net change in other comprehensive loss

 

 

114

 

 

 

178

 

 

 

295

 

 

 

66

 

Comprehensive loss

 

$

(11,151

)

 

$

(6,052

)

 

$

(39,303

)

 

$

(32,281

)

Net loss per share, basic and diluted

 

$

(0.37

)

 

$

(0.21

)

 

$

(1.32

)

 

$

(1.10

)

Weighted average number of common shares used to

   compute basic and diluted net loss per share

 

 

30,123,188

 

 

 

29,513,842

 

 

 

29,997,201

 

 

 

29,342,883

 

 

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

 

 

4


Nevro Corp.

Condensed Consolidated Statements of Cash Flows

(unaudited)

(in thousands)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2018

 

 

2017

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(39,598

)

 

$

(32,347

)

Adjustments to reconcile net loss to net cash used in operating activities

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

2,845

 

 

 

1,774

 

Stock-based compensation expense

 

 

27,018

 

 

 

18,867

 

Accretion of discount on short-term investments

 

 

(563

)

 

 

(168

)

Provision for doubtful accounts

 

 

(444

)

 

 

(85

)

Write-down of inventory

 

 

870

 

 

 

3,675

 

Non-cash interest expense

 

 

5,494

 

 

 

5,120

 

Unrealized (gains) losses on foreign currency transactions

 

 

910

 

 

 

(1,074

)

Changes in operating assets and liabilities

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(5,376

)

 

 

288

 

Inventories

 

 

3,543

 

 

 

(13,399

)

Prepaid expenses and other current assets

 

 

(1,360

)

 

 

(296

)

Other assets

 

 

(1,065

)

 

 

(988

)

Accounts payable

 

 

1,786

 

 

 

1,791

 

Accrued liabilities

 

 

(5,352

)

 

 

4,392

 

Other long-term liabilities

 

 

584

 

 

 

620

 

Net cash used in operating activities

 

 

(10,708

)

 

 

(11,830

)

Cash flows from investing activities

 

 

 

 

 

 

 

 

Purchases of short-term investments

 

 

(137,867

)

 

 

(206,891

)

Proceeds from sales of short-term investments

 

 

 

 

 

5,993

 

Proceeds from maturity of short-term investments

 

 

128,474

 

 

 

208,811

 

Purchases of property and equipment

 

 

(7,876

)

 

 

(2,475

)

Net cash provided by (used in) investing activities

 

 

(17,269

)

 

 

5,438

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

Minimum tax withholding paid on behalf of employees for net share settlement

 

 

(1,025

)

 

 

(732

)

Proceeds from issuance of common stock to employees

 

 

7,480

 

 

 

9,337

 

Net cash provided by financing activities

 

 

6,455

 

 

 

8,605

 

Effect of exchange rate changes on cash and cash equivalents

 

 

(146

)

 

 

423

 

Net increase (decrease) in cash, cash equivalents and restricted cash

 

 

(21,668

)

 

 

2,636

 

Cash, cash equivalents and restricted cash

 

 

 

 

 

 

 

 

Cash, cash equivalents and restricted cash at beginning of period

 

 

43,651

 

 

 

42,212

 

Cash, cash equivalents and restricted cash at end of period

 

$

21,983

 

 

$

44,848

 

Significant non-cash transactions

 

 

 

 

 

 

 

 

Purchases of property and equipment in accounts payable

 

$

55

 

 

$

79

 

Vesting of early-exercised stock options

 

$

 

 

$

7

 

 

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

 

 

5


Nevro Corp.

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

1. Formation and Business of the Company

Nevro Corp. (the Company) was incorporated in Minnesota on March 10, 2006 to manufacture and market innovative active implantable medical devices for the treatment of neurological disorders initially focusing on the treatment of chronic pain. Subsequently, the Company was reincorporated in Delaware on October 4, 2006 and relocated to California.

Since inception, the Company has cumulatively incurred net losses and negative cash flows from operations. During the year ended December 31, 2017, the Company incurred a net loss of $36.7 million and used $14.3 million of cash in operations. For the nine months ended September 30, 2018, the Company incurred a net loss of $39.6 million and used $10.7 million of cash in operations. At September 30, 2018 and December 31, 2017, the Company had an accumulated deficit of $296.5 million and $257.8 million, respectively. The Company has financed operations to date primarily through private placements of equity securities, borrowings under a debt agreement, the issuance of common stock in its November 2014 initial public offering, its June 2015 underwritten public offering and its June 2016 underwritten public offering of convertible senior notes due 2021.  The Company’s ability to continue to meet its obligations and to achieve its business objectives for the foreseeable future is dependent upon, amongst other things, generating sufficient revenues and its ability to continue to control expenses. Failure to increase sales of its products, manage discretionary expenditures or raise additional financing, if required, may adversely impact the Company’s ability to achieve its intended business objectives.

The accompanying interim condensed consolidated financial statements as of September 30, 2018 and for the nine months ended September 30, 2018 and 2017, and the related interim information contained within the notes to the financial statements, are unaudited. The unaudited interim condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (U.S. GAAP) for interim financial information and on the same basis as the audited financial statements included on the Company’s Annual Report on Form 10-K (Annual Report) filed with the Securities and Exchange Commission (SEC) on February 22, 2018. In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements contain all adjustments (consisting of normal recurring adjustments) necessary to state fairly the Company’s financial position as of September 30, 2018, and the results of its operations and cash flows for the nine months ended September 30, 2018 and 2017. All such adjustments are of a normal and recurring nature. The interim financial data as of September 30, 2018 is not necessarily indicative of the results to be expected for the year ending December 31, 2018, or for any future period.

The accompanying 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, 2017 included in the Annual Report.

 

 

2. Summary of Significant Accounting Policies

Basis of Presentation

These condensed consolidated financial statements have been prepared in accordance with U.S. GAAP. The condensed consolidated financial statements include the Company’s accounts and those of its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated.

Segments

The chief operating decision maker for the Company is the Chief Executive Officer. The Chief Executive Officer reviews financial information presented on a consolidated basis, accompanied by information about revenue by geographic region, for purposes of allocating resources and evaluating financial performance. The Company has one business activity and there are no segment managers who are held accountable for operations, operating results or plans for levels or components below the consolidated unit level, other than revenue. Accordingly, the Company has determined that it has a single reportable and operating segment structure. The Company and its Chief Executive Officer evaluate performance based primarily on revenue in the geographic locations in which the Company operates.

6


Revenue by geography is based on the billing address of the customer. The United States was the only country with revenue accounting for more than 10% of the total revenue in any of the periods presented, as follows:

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

United States

 

 

83

%

 

 

81

%

 

 

82

%

 

 

80

%

 Long-lived assets and operating income located outside the United States are not material; therefore, disclosures have been limited to revenue.

Foreign Currency Translation

The Company’s consolidated financial statements are prepared in U.S. dollars (USD). Its foreign subsidiaries use their local currency as their functional currency and maintain their records in the local currency. Accordingly, the assets and liabilities of these subsidiaries are translated into USD using the current exchange rates in effect at the balance sheet date and equity accounts are translated into USD using historical rates. Revenues and expenses are translated using the monthly average exchange rates during the period when the transaction occurs. The resulting foreign currency translation adjustments from this process are recorded in accumulated other comprehensive income (loss) on the consolidated balance sheets.

Unrealized foreign exchange gains and losses from the remeasurement of assets and liabilities denominated in currencies other than the functional currency of the reporting entity are recorded in other income (expense), net. Additionally, realized gains and losses resulting from transactions denominated in currencies other than the local currency are recorded in other income (expense), net in the condensed consolidated statements of operations and comprehensive loss. The Company recorded net unrealized and net realized foreign currency transaction gains (losses) during the periods presented as follows (in thousands):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net unrealized foreign currency gain (loss)

 

$

(6

)

 

$

(223

)

 

$

(892

)

 

$

1,092

 

Net realized foreign currency gain (loss)

 

 

(75

)

 

 

518

 

 

 

217

 

 

 

254

 

 

As the Company’s international operations grow, its risks associated with fluctuations in currency rates will become greater, and the Company will continue to reassess its approach to managing this risk. In addition, currency fluctuations or a weakening USD can increase the costs of the Company’s international expansion. To date, the Company has not entered into any foreign currency hedging contracts. Based on its current international structure, the Company does not plan on engaging in hedging activities in the near future.

Use of Estimates

The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Significant accounting estimates and management judgments reflected in the condensed consolidated financial statements include items such as allowances for doubtful accounts; warranty obligations; clinical accruals; stock-based compensation; depreciation and amortization periods; inventory valuation; valuation of investments; and accounting for income taxes. Estimates are based on historical experience, where applicable, and other assumptions believed to be reasonable by the management. Actual results may differ from those estimates under different assumptions or conditions.

Concentration of Credit Risk and Other Risks and Uncertainties

Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash, cash equivalents and investments. The majority of the Company’s cash is held by one financial institution in the United States and is in excess of federally insured limits. The Company maintained investments in money market funds that were not federally insured during the periods ended September 30, 2018 and December 31, 2017.  The Company also held cash in foreign banks of approximately $3.4 million at September 30, 2018 and $4.5 million at December 31, 2017 that was not federally insured. The Company has not experienced any losses on its deposits of cash and cash equivalents.

The Company’s convertible note hedge transactions, entered into in connection with the 2021 Notes, subject the Company to credit risk such that the counterparties may be unable to fulfill the terms of the transactions.  The associated risk is mitigated by limiting the counterparties to major financial institutions.

7


In the international markets in which the Company participates, the Company uses a combination of a direct sales force, sales agents and independent distributors to sell its products, while in the United States the Company utilizes a direct sales force. The Company performs ongoing credit evaluations of its direct customers and distributors, does not require collateral, and maintains allowances for potential credit losses on customer accounts when deemed necessary.

During the three and nine months ended September 30, 2018 and 2017, no single customer accounted for 10% or more of the Company’s revenue. As of September 30, 2018 and December 31, 2017, no single customer accounted for 10% or more of the accounts receivable balance.

The Company is subject to risks common to medical device companies, including, but not limited to, new technological innovations, dependence on key personnel, protection of proprietary technology, compliance with government regulations, product liability, manufacturing quality and scaling, continued reimbursement from third-party payors, uncertainty of market acceptance of products and the need to obtain additional financing. The Company is dependent on third-party manufacturers and suppliers, which, in some cases, are sole- or single-source suppliers.

There can be no assurance that the Company’s products or services will continue to be accepted in its existing marketplaces, nor can there be any assurance that any future products or services can be developed or manufactured at an acceptable cost and with appropriate performance characteristics, or that such products or services will be successfully marketed, if at all.

The Company may choose to raise additional funds to further enhance its research and development efforts, for product expansion opportunities or to acquire a new business or products that are complementary to its business. There can be no assurance that such financing will be available or will be at terms acceptable by the Company.

Fair Value of Financial Instruments

The carrying amounts of certain of the Company’s financial instruments, including cash equivalents, short-term investments, accounts receivable, accounts payable and accrued liabilities, approximate fair value due to their relatively short maturities.

Cash and Cash Equivalents

The Company considers all highly-liquid investments purchased with an original maturity of three months or less at the date of purchase to be cash equivalents. Cash and cash equivalents include money market funds in the amount of $8.2 million and $30.3 million as of September 30, 2018 and December 31, 2017, respectively. At September 30, 2018 and December 31, 2017, the Company’s cash equivalents were held at institutions in the United States and include deposits in a money market fund which was unrestricted as to withdrawal or use.

Restricted Cash

Restricted cash as of September 30, 2018 and December 31, 2017 consists of a letter of credit of $0.6 million representing collateral for the Company’s Redwood City, California building lease pursuant to an agreement dated March 5, 2015. Restricted cash additionally includes certificates of deposit of $0.2 million as of December 31, 2017, collateralizing payment of charges related to the Company’s credit cards.

Investment Securities

The Company classifies its investment securities as available-for-sale. Those investments with original maturities greater than three months at the date of purchase and remaining maturities of less than 12 months are considered short-term investments. Those investments with remaining maturities greater than 12 months at the date of purchase are also classified as short-term investments as management considers them to be available for current operations if needed. The Company’s investment securities classified as available-for-sale are recorded at fair value. Unrealized gains and losses, deemed temporary in nature, are reported as a separate component of accumulated comprehensive income (loss).

A decline in the fair value of any security below cost that is deemed other than temporary results in a charge to earnings and the corresponding establishment of a new cost basis for the security. Premiums (discounts) are amortized (accreted) over the life of the related security as an adjustment to yield using the straight-line interest method. Dividend and interest income are recognized when earned. Realized gains and losses are included in earnings and are derived using the specific identification method for determining the cost of securities sold.

8


Inventories

Inventories are stated at the lower of cost to purchase or manufacture the inventory or the net realizable value of such inventory. Cost is determined using the standard cost method which approximates the first-in, first-out basis. Net realizable value is determined as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The Company regularly reviews inventory quantities in consideration of actual loss experiences, projected future demand and remaining shelf life to record a provision for excess and obsolete inventory when appropriate.

The Company writes down inventory that has become obsolete, inventory that has a cost basis in excess of its expected net realizable value, and inventory that is in excess of expected requirements. The estimate of excess quantities is subjective and primarily dependent on the Company’s estimates of future demand for a particular product. If the estimate of future demand is inaccurate based on actual sales, the Company may increase the write down for excess inventory for that component and record a charge to inventory impairment in the accompanying consolidated statements of operations and comprehensive loss. The Company periodically evaluates the carrying value of inventory on hand for potential excess amounts over demand using the same lower of cost or net realizable value approach that has been used to value inventory. The Company also periodically evaluates inventory quantities in consideration of actual loss experience. In addition, the Company determines at times that there may be certain inventory that does not meet its product requirements. As a result of these evaluations, the Company recognized total write downs of $0.5 million and $0.3 million for the three months ended September 30, 2018 and 2017, respectively, and $0.9 million and $3.7 million of its inventories for the nine months ended September 30, 2018 and 2017, respectively. The Company’s estimation of the future demand for any given particular component of the Senza product may vary and may result in changes in estimates of inventory values in any particular period.

Shipping and Handling Costs

The Company has made the accounting policy election under ASC 606 to account for shipping and handling costs as a fulfillment activity.  These costs are accrued when the related revenue is recognized.

Revenue Recognition

The Company has revenue arrangements that generally consist of a single performance obligation, although, in some instances, revenue arrangements may consist of two performance obligations. The Company recognizes revenue at the point in time when it transfers control of promised goods to its customers.  Revenue is measured as the amount of consideration it expects to receive in exchange for transferring goods.

See Note 3 for further discussion on Revenue Recognition.

Allowance for Doubtful Accounts

The Company makes estimates of the collectability of accounts receivable.  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.

Warranty Obligations

The Company provides a limited one- to five-year warranty and warrants that its products will operate substantially in conformity with product specifications.  The Company records an estimate for the provision for warranty claims in cost of revenue when the related revenues are recognized.  This estimate is based on historical and anticipated rates of warranty claims, the cost per claim and the number of units sold.  The Company regularly assesses the adequacy of its recorded warranty obligations and adjusts the amounts as necessary.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation of property and equipment, other than leasehold improvements, is computed using the straight-line method over the assets’ estimated useful lives of three to five years. Leasehold improvements are amortized on a straight-line basis over the shorter of the estimated useful life of the asset or the life of the lease. Upon retirement or sale, the cost and related accumulated depreciation are removed from the consolidated balance sheet and the resulting gain or loss is reflected in operations. Maintenance and repairs are charged to operations as incurred.

9


Impairment of Long-Lived Assets

The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group might not be recoverable. When such an event occurs, management determines whether there has been impairment by comparing the anticipated undiscounted future net cash flows to the related asset group’s carrying value. If an asset is considered impaired, the asset is written down to fair value, which is based either on discounted cash flows or appraised value, depending on the nature of the asset. There were no impairment charges or changes in estimated useful lives recorded through September 30, 2018.

Income Taxes

During the three and nine months ended September 30, 2018 and 2017, the Company calculated its interim tax provision to record taxes incurred on a discrete basis due to the variability of taxable income in the jurisdictions in which it operates. The provision for income taxes for the three and nine months ended September 30, 2018 and 2017 is primarily comprised of foreign and state taxes based upon income earned during the period with no tax benefit recorded for the loss jurisdictions.

The Company records uncertain tax positions on the basis of a two-step process whereby (1) a determination is made as to whether it is more likely than not that the tax positions will be sustained based on the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, the Company recognizes the largest amount of tax benefit that is greater than 50% likely to be realized upon ultimate settlement with the related tax authority. The Company’s policy is to recognize interest and penalties related to income taxes as a component of income tax expense. No interest or penalties related to income taxes have been recognized in the statements of operations and comprehensive loss for the three and nine months ended September 30, 2018 and 2017.

On December 22, 2017, the 2017 Tax Cuts and Jobs Act (the 2017 Tax Act) was enacted into law.  The 2017 Tax Act contains several key tax law changes, including a reduction of the corporate income tax rate to 21% effective January 1, 2018, and a one-time mandatory transition tax on accumulated foreign earnings, among others.  Consistent with guidance issued by the SEC, which provides for a measurement period of one year from the enactment date to finalize the accounting for effects of the 2017 Tax Act, as of December 31, 2017, the Company has made a reasonable estimate of the effects on its existing deferred taxes and related disclosures and the one-time transition tax. Due to its taxable losses and its federal valuation allowance position, the Company did not recognize any income tax expense or benefit as a result of the 2017 Tax Act.

During the nine months ended September 30, 2018, the Company did not make any adjustments to its provisional amounts included in its consolidated financial statements for the year ended December 31, 2017. The Company will continue to complete its analysis of these provisional amounts, which are still subject to change during the measurement period, and anticipates further guidance on accounting interpretations from the FASB and application of the law from the Department of the Treasury. The accounting is expected to be completed when the 2017 U.S. corporate income tax return is filed in the fourth quarter of 2018.

At September 30, 2018, the Company has not yet determined its policy election with respect to whether to record deferred taxes for basis differences expected to reverse as a result of the global intangible low-taxed income (GILTI) provisions in future periods or use the period cost method.  The Company has, however, considered the potential effects of GILTI in estimating its tax provision for 2018.  Due to its forecasted taxable losses for 2018 and its federal valuation allowance position, the Company is not forecasting any income tax expense or benefit as a result of the GILTI provisions.

Comprehensive Income (Loss)

Comprehensive income (loss) represents all changes in the stockholders’ equity except those resulting from distributions to stockholders. The Company’s changes in unrealized gains and losses on available-for-sale investment securities and foreign currency translation adjustments represent the components of other comprehensive income (loss) that are excluded from the reported net loss and have been presented in the consolidated statements of operations and comprehensive loss.

Research and Development

Research and development costs, including new product development, regulatory compliance and clinical research, are charged to operations as incurred in the consolidated statements of operations and comprehensive loss. Such costs include personnel-related costs, including stock-based compensation, supplies, services, depreciation, facilities and information services, clinical trial and related clinical manufacturing expenses, fees paid to investigative sites and other indirect costs.

10


Stock-Based Compensation

The Company accounts for stock-based compensation arrangements with employees in accordance with Accounting Standards Codification (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.

In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-09, Stock Compensation (Topic 718): Improvements to Employee Shared-Based Payment Accounting, which the Company adopted on January 1, 2017.  Under ASU 2016-09, entities are permitted to make an accounting policy election to either estimate forfeitures on share-based payment awards, as previously required, or to recognize forfeitures as they occur. The Company has elected to continue to estimate forfeitures expected to occur to determine the amount of compensation cost recognized in each period.  ASU 2016-09 also requires that entities recognize, on a prospective basis, all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement as discrete items in the reporting period in which they occur. The adoption did not result in a cumulative-effect adjustment to accumulated deficit as of January 1, 2017 using the modified retrospective method. Additionally, under ASU 2016-09, excess tax benefits are classified as an operating activity in the statement of cash flows. The Company has elected the presentation of excess tax benefits in the statement of cash flows using the prospective transition method.

The Company’s determination of the fair value of stock options on the date of grant utilizes the Black-Scholes option-pricing model, and is impacted by its common stock price as well as changes in assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the expected term that options will remain outstanding, the expected common stock price volatility over the term of the option awards, risk-free interest rates and expected dividends.  Changes in the assumptions can materially affect the fair value and ultimately how much stock-based compensation expense is recognized.

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. Stock-based compensation expense recognized at fair value includes the impact of estimated forfeitures. The Company estimates future forfeitures at the date of grant and revises the estimates, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

The Company estimates the fair value of the rights to purchase shares by employees under the Employee Stock Purchase Plan using the Black-Scholes option pricing formula. The Employee Stock Purchase Plan provides for consecutive six-month offering periods and the Company uses its own historical volatility data in the valuation.

Equity instruments issued to non-employees are recorded at their fair value on the measurement date and are subject to periodic adjustments as the underlying equity instruments vest. The fair value of options granted to consultants is expensed when vested.

The Company accounts for stock-based compensation for the restricted stock units at their fair value, based on the closing market price of the Company’s common stock on the grant date. These costs are recognized on a straight-line basis over the requisite service period, which is generally the vesting term of four years.

The Company also issues stock options and restricted stock units with vesting based upon completion of performance goals. The fair value for these performance-based awards is recognized over the period during which the goals are to be achieved.  Stock-based compensation expense recognized at fair value includes the impact of estimated probability that the goals would be achieved, which is assessed prior to the requisite service period for the specific goals.

Upon adoption of ASU 2016-09 as described above, excess tax benefits or deficiencies from share-based award activity are reflected in the consolidated statements of operations as a component of the provision for income taxes, whereas they were previously recognized as additional paid-in capital.

Net Loss per Share of Common Stock

Basic net loss per common share is calculated by dividing net loss by the weighted average number of common shares outstanding during the period, without consideration for potentially dilutive securities. Diluted net loss per share is computed by dividing net loss by the weighted average number of common shares and potentially dilutive securities outstanding for the period. For purposes of the diluted net loss per share calculation, the Company’s restricted stock units and options to purchase shares of common stock are considered to be potentially dilutive securities. Because the Company has reported a net loss in all periods presented, diluted net loss per common share is the same as basic net loss per common share for those periods.

11


Recent Accounting Pronouncements

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). In July 2018, the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842, Leases, which provides clarification to ASU 2016-02, and ASU No. 2018-11, Leases (Topic 842): Targeted Improvements), which provides another transition method in addition to the existing transition method by allowing entities to initially apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption (the optional transition method).  These ASU’s (collectively, the new lease standard) require an entity to recognize assets and liabilities for leases with lease terms of more than 12 months on the balance sheet. The new lease standard is effective for public entities for fiscal years beginning after December 15, 2018. The Company plans to adopt the new standard on January 1, 2019 and plans to elect the transition method that permits the optional transition method.  Further, the Company has developed a project plan, has reviewed its lease portfolio and has initially assessed the potential accounting impact for some of its significant lease arrangements.  The Company expects that all of its operating lease commitments with terms of more than 12 months will be subject to the new lease standard and will be recognized as operating lease liabilities and right-of-use assets upon adoption.  The Company expects to elect transitional practical expedients such that the Company will not need to reassess whether contracts are leases and will retain lease classification and initial direct costs for leases existing prior to the adoption of the new lease standard.  The Company also expects to elect the hindsight practical expedient.

In March 2017, the FASB issued ASU No. 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities.  This update shortens the premium amortization period for certain purchased callable debt securities held at a premium.  ASU 2017-08 is effective for public entities for annual periods beginning after December 15, 2018.  The Company has not determined the potential effects of the guidance on its consolidated financial statements.

In February 2018, the FASB issued ASU No. 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220).  This update provides companies with the option to reclassify stranded tax effects caused by the 2017 Tax Cuts and Jobs Act (the 2017 Tax Act) from accumulated other comprehensive income to retained earnings.  ASU 2018-02 is effective for public entities for annual periods beginning after December 15, 2018, with early adoption permitted.  The Company has not determined the potential effects of the guidance on its consolidated financial statements.

In March 2018, the FASB issued ASU No. 2018-05, Income Taxes (Topic 740).  This update amends the certain paragraphs in ASC 740 to reflect the provisions of SEC Staff Accounting Bulletin (SAB) 118, which provides guidance for companies that are not able to complete their accounting for income tax effects of the 2017 Tax Act in the period of enactment.  ASU 2018-05 is effective immediately.  The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

In June 2018, the FASB issued ASU No. 2018-07, Compensation-Stock Compensation (Topic 718), Improvements to Nonemployee Share-based Payments. This ASU expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees and aligns the accounting for share-based payments for employees and nonemployees. ASU 2018-07 is effective for public entities for annual periods beginning after December 15, 2018, with early adoption permitted.  The guidance should be applied to new awards granted after the date of adoption. The Company is currently evaluating the effect ASU 2018-07 will have on the consolidated financial statements.

 

 

3. Revenue

Adoption of ASC 606

On January 1, 2018, the Company adopted the new accounting standard ASC 606, Revenue from Contracts with Customers, using the modified retrospective method applied to contracts which were not completed as of that date.  Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period 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, 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 has not issued invoices.  These amounts are recorded as unbilled receivables, which are included in accounts receivable on the consolidated balance sheet, as the Company has an unconditional right to payment at the end of the applicable period.  

The Company recognized the cumulative effect of initially applying ASC 606 as an adjustment to the opening balance of accumulated deficit.  The cumulative effect of the changes made to the consolidated balance sheet as of January 1, 2018 for the adoption of ASC 606 were as follows (in thousands):

 

12


 

 

Balance at

 

 

Adjustments Due

 

 

Balance at

 

 

 

December 31, 2017

 

 

to ASC 606

 

 

January 1, 2018

 

Balance Sheet:

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable, net

 

$

67,287

 

 

$

1,447

 

 

$

68,734

 

Prepaid expenses and other current assets

 

 

6,463

 

 

 

(476

)

 

 

5,987

 

Accumulated other comprehensive loss

 

 

(1,242

)

 

 

4

 

 

 

(1,238

)

Accumulated deficit

 

 

(257,844

)

 

 

967

 

 

 

(256,877

)

In accordance with ASC 606, the disclosure of the impact of adoption on the Consolidated Balance Sheet was as follows (in thousands):

 

 

 

September 30, 2018

 

 

 

Balance

 

 

Balance Without

 

 

 

 

 

 

 

As Reported

 

 

ASC 606 Adoption

 

 

Effect of Change

 

Balance Sheet:

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable, net

 

$

73,993

 

 

$

72,833

 

 

$

1,160

 

Inventories

 

 

93,606

 

 

 

93,713

 

 

 

(107

)

Prepaid expenses and other current assets

 

 

7,226

 

 

 

8,136

 

 

 

(910

)

In accordance with ASC 606, the disclosure of the impact of adoption on the Consolidated Statements of Operations was as follows (in thousands):

 

 

 

Three Months Ended September 30, 2018

 

 

Nine Months Ended September 30, 2018

 

 

 

 

 

 

 

Balance Without

 

 

 

 

 

 

 

 

 

 

Balance Without

 

 

 

 

 

 

 

Balance As Reported

 

 

ASC 606 Adoption

 

 

Effect of Change

 

 

Balance As Reported

 

 

ASC 606 Adoption

 

 

Effect of Change

 

Statement of Operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

95,630

 

 

$

95,714

 

 

$

(84

)

 

$

279,345

 

 

$

279,626

 

 

$

(281

)

Cost of revenue

 

 

28,382

 

 

 

28,386

 

 

 

(4

)

 

 

82,175

 

 

 

81,621

 

 

 

554

 

Revenue Recognition

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 goods to its customers.  Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring the goods.

For a majority of sales, where the Company’s sales representative delivers its product at the point of implantation at hospitals or medical facilities, the Company recognizes revenue upon completion of the procedure and authorization, which represents the point in time when control transfers to the customers.

For the remaining sales, which are sent from the Company’s distribution centers directly to hospitals and medical facilities, as well as distributor sales, where product is ordered in advance of an implantation, the transfer of control occurs at the time of shipment of the product.  These customers are obligated to pay within specified terms regardless of when or if they ever sell or use the products. The Company does not offer rights of return or price protection. To the extent the Company has a post-delivery obligation, such as programming devices that have been delivered as part of a direct-ship order, the Company defers revenue and the associated cost of goods sold associated with the post-delivery obligation only if the amounts are deemed material.

Sales, value add, and other taxes the Company collects concurrent with revenue-producing activities are excluded from revenue. The expected costs associated with warranty obligations continue to be recognized as expense when the products are sold (see Note 6). The Company periodically provides incentive offers, in the form of rebates, to customers based on their aggregate levels of purchases.  Product revenue is recorded net of such incentive offers.

13


The following table presents revenue by geography, based on the billing address of the customer (in thousands):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

United States

 

$

79,624

 

 

$

66,281

 

 

$

230,159

 

 

$

182,419

 

International

 

 

16,006

 

 

 

15,975

 

 

 

49,186

 

 

 

46,292

 

Total revenue

 

$

95,630

 

 

$

82,256

 

 

$

279,345

 

 

$

228,711

 

Practical Expedients and Exemptions

The Company recognizes revenue upon the transfer of control of the product and there are no material future performance obligations beyond such transfer.  As a result, 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. The Company does not capitalize incremental costs when the amortization period of the asset is less than a year.

 

 

4. Fair Value Measurements

Fair value is defined as the exchange price that would be received for an asset or an exit price paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.

The fair value hierarchy defines a three-level valuation hierarchy for disclosure of fair value measurements as follows:

 

Level 1—Observable inputs, such as quoted prices in active markets for identical assets or liabilities.

 

Level 2—Observable inputs other than Level 1 prices, 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 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Cash Equivalents and Short-Term Investments

The Company’s cash equivalents are comprised of investments in money market funds that are classified as Level 1 of the fair value hierarchy. The Company’s money market funds are classified within Level 1 of the fair value hierarchy and are valued based on quoted prices in active markets for identical securities.  The Company’s short-term investments are comprised of commercial paper and corporate notes. All short-term investments have been classified within Level 1 or Level 2 of the fair value hierarchy because of the sufficient observable inputs for revaluation. The Company’s Level 2 investments are valued using third-party pricing sources. The pricing services utilize industry-standard valuation models, including both income and market-based approaches, for which all significant inputs are observable, either directly or indirectly, to estimate fair value. These inputs include reported trades of and broker/dealer quotes on the same or similar investments, issuer credit spreads, benchmark investments, prepayment/default projections based on historical data and other observable inputs. The following table sets forth the Company’s financial instruments that were measured at fair value on a recurring basis by level within the fair value hierarchy (in thousands):

 

Balance as of September 30, 2018

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds (i)

 

$

8,204

 

 

$

 

 

$

 

 

$

8,204

 

Commercial paper (ii)

 

 

 

 

 

67,627

 

 

 

 

 

 

67,627

 

Corporate notes (ii)

 

 

 

 

 

168,988

 

 

 

 

 

 

168,988

 

Total assets

 

$

8,204

 

 

$

236,615

 

 

$

 

 

$

244,819

 

 

14


Balance as of December 31, 2017

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds (i)

 

$

30,278

 

 

$

 

 

$

 

 

$

30,278

 

Commercial paper (ii)

 

 

 

 

 

61,086

 

 

 

 

 

 

61,086

 

Corporate notes (ii)

 

 

 

 

 

165,381

 

 

 

 

 

 

165,381

 

Total assets

 

$

30,278

 

 

$

226,467

 

 

$

 

 

$

256,745

 

 

(i)

Included in cash and cash equivalents on the condensed consolidated balance sheets.

(ii)

Included in short-term investments on the condensed consolidated balance sheets.

Convertible Senior Notes

As of September 30, 2018 and December 31, 2017, the fair value of the 1.75% convertible senior notes due 2021 was $171.2 million and $180.3 million, respectively.  The fair value was determined on the basis of market prices observable for similar instruments and is considered Level 2 in the fair value hierarchy (See Note 7).

 

 

5. Balance Sheet Components

Investments

The fair value of the Company’s cash equivalents and short-term investments approximates their respective carrying amounts due to their short-term maturity. The following is a summary of the gross unrealized gains and unrealized losses on the Company’s investment securities, excluding investments in money market funds (in thousands):

 

 

 

September 30, 2018

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Holding

Gains

 

 

Gross

Unrealized

Holding

Losses

 

 

Aggregate

Fair Value

 

Investment Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

$

67,665

 

 

$

 

 

$

(38

)

 

$

67,627

 

Corporate notes

 

 

169,171

 

 

 

1

 

 

 

(184

)

 

 

168,988

 

Total securities

 

$

236,836

 

 

$

1

 

 

$

(222

)

 

$

236,615

 

 

 

 

 

December 31, 2017

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Holding

Gains

 

 

Gross

Unrealized

Holding

Losses

 

 

Aggregate

Fair Value

 

Investment Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

$

61,167

 

 

$

 

 

$

(81

)

 

$

61,086

 

Corporate notes

 

 

165,712

 

 

 

1

 

 

 

(332

)

 

 

165,381

 

Total securities

 

$

226,879

 

 

$

1

 

 

$

(413

)

 

$

226,467

 

 

Realized gains or losses and other-than-temporary impairments, if any, on available-for-sale securities are reported in other income (expense), net as incurred. The cost of securities sold is determined based on the specific identification method. The amount of realized gains and realized losses on investments recorded for the periods presented has not been material.

The contractual maturities of the Company’s investment securities as of September 30, 2018 were as follows (in thousands):

 

 

 

Amortized Cost

 

 

Fair Value

 

Amounts maturing within one year

 

$

236,836

 

 

$

236,615

 

Amounts maturing after one year through five years

 

 

 

 

 

 

Total investment securities

 

$

236,836

 

 

$

236,615

 

15


Inventories (in thousands)

 

 

 

September 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Raw materials

 

$

37,698

 

 

$

51,602

 

Finished goods

 

 

55,908

 

 

 

46,517

 

Total inventories

 

$

93,606

 

 

$

98,119

 

 

Property and Equipment, Net (in thousands)

 

 

 

September 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Laboratory equipment

 

$

2,821

 

 

$

2,416

 

Computer equipment and software

 

 

7,771

 

 

 

5,076

 

Furniture and fixtures

 

 

3,866

 

 

 

2,241

 

Leasehold improvements

 

 

4,474

 

 

 

1,221

 

Construction in process

 

 

2,094

 

 

 

2,734

 

Total

 

 

21,026

 

 

 

13,688

 

Less: Accumulated depreciation and amortization

 

 

(7,714

)

 

 

(4,869

)

Property and equipment, net

 

$

13,312

 

 

$

8,819

 

 

The Company recognized depreciation and amortization expense on property and equipment as follows (in thousands):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Depreciation and amortization expense

 

$

1,078

 

 

$

666

 

 

$

2,845

 

 

$

1,774

 

 

Accrued Liabilities (in thousands)

 

 

 

September 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Accrued payroll and related expenses

 

$

21,986

 

 

$

26,108

 

Accrued professional fees

 

 

2,857

 

 

 

4,734

 

Accrued taxes

 

 

2,193

 

 

 

2,827

 

Accrued clinical and research expenses

 

 

837

 

 

 

1,279

 

Accrued interest

 

 

998

 

 

 

243

 

Accrued warranty

 

 

1,093

 

 

 

708

 

Accrued other

 

 

3,554

 

 

 

3,491

 

Total accrued liabilities

 

$

33,518

 

 

$

39,390

 

 

 

6. Commitments and Contingencies

Operating Leases

In March 2015, the Company entered into a lease agreement for approximately 50,000 square feet of office space located in Redwood City, California for a period beginning on June 30, 2015 and ending in May 2022, with initial annual payments of approximately $2.0 million, increasing to $2.4 million annually during the final year of the lease term. In December 2016, the Company entered into a first amendment to the lease for an additional approximately 50,000 square feet of office space adjacent to the premises under the original lease (the Expansion Premises), with initial annual payments of $1.2 million, increasing to $2.9 million in the final year of the amended lease term.  The lease for the Expansion Premises commenced on June 1, 2018. The first amendment also extends the lease term for the original premises to terminate on the same date as the amended lease, which is May 31, 2025.  In April 2017, the Company entered into a second amendment to the lease for a temporary space for a period beginning in May 2017 and which ended on June 1, 2018, the Commencement Date of the Expansion Premises.

In August 2014, the Company entered into a facility lease for warehouse space beginning on August 21, 2014 through May 31, 2015. In March 2015, the Company extended the warehouse lease through February 2017, at which time the lease terminated.

16


The Company entered into a separate non-cancellable facility lease for warehouse space beginning on March 1, 2017 through February 28, 2022, under which it is obligated to pay approximately $0.4 million in lease payments over the term of the lease.

The Company recognized rent expense during the periods indicated as follows (in thousands):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Rent expense

 

$

1,238

 

 

$

653

 

 

$

2,742

 

 

$

1,864

 

Warranty Obligations

The Company warrants that its products will operate substantially in conformity with product specifications and has a limited one- to five-year warranty to most customers.  Activities related to warranty obligations were as follows (in thousands):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Beginning balance

 

$

943

 

 

$

656

 

 

$

708

 

 

$

645

 

Provision for warranty

 

 

597

 

 

 

352

 

 

 

1,681

 

 

 

945

 

Utilization