1.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

–

Nuvectra Corporation, together with its wholly-owned subsidiaries (i) Algostim, LLC (“Algostim”), (ii) PelviStim LLC (“PelviStim”), and (iii) NeuroNexus Technologies, Inc. (“NeuroNexus”) (collectively “Nuvectra” or the “Company”), is a neurostimulation company committed to helping physicians improve the lives of people with chronic neurological conditions. The Algovita® Spinal Cord Stimulation (“SCS”) System (“Algovita”) is the Company’s

first

commercial offering and is Conformité Européene (“CE”) marked and United States Food & Drug Administration (“FDA”) approved for the treatment of chronic pain of the trunk and/or limbs. Nuvectra’s innovative technology platform also has capabilities under development to support other neurological indications such as sacral neuromodulation (“SNM”) for the treatment of overactive bladder and deep brain stimulation (“DBS”) for the treatment of Parkinson’s Disease. In addition, the Company’s NeuroNexus subsidiary designs, manufactures and markets neural-interface technologies for the neuroscience clinical research market.

March 14, 2016

Integer Holdings Corporation, formerly known as Greatbatch, Inc. (“Integer”), completed the spin-off of the Company, at which time the Company became a separate public company (the “Spin-off”). Prior to the Spin-off, the Company was a limited liability company named QiG Group, LLC.

Basis of Presentation

– The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information (Accounting Standards Codification (“ASC”)

270,

Interim Reporting

) and with the instructions to Form

-Q and Article

of Regulation S-

Accordingly, they do

not

include all of the information necessary for a full presentation of financial position, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States of America. Operating results for interim periods are

not

necessarily indicative of results that

may

be expected for the fiscal year as a whole. In the opinion of management, the condensed consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the results of Nuvectra for the periods presented.

Liquidity and Capital Resources

– The

Company has incurred significant net losses and negative cash flows from operations since inception and expects to incur additional net losses for the foreseeable future. Immediately prior to completion of the Spin-off, Integer made a cash capital contribution to Nuvectra of

$75

million. This cash capital contribution, together with the Company’s cash on hand, cash generated from sales, and borrowings under its credit facility,

$25

million of which is subject to achieving trailing

six

month revenue milestones and compliance with specified conditions and covenants, is an amount that the Company estimates will, based on its current plans and expectations, meet its cash needs for at least the next

twelve

months. Based on the Company’s sequential quarterly revenue growth since the commercial release of its Algovita system into the United States market, and on its expectations of future and continued revenue growth, the Company believes that it should be able to achieve these trailing

six

month revenue milestones during the relevant periods, although there can be

assurances that the Company will be able to do so due to unforeseen obstacles that

may

negatively affect its business. The Company periodically evaluates its liquidity requirements, alternative uses of capital, capital needs and available resources. As a result of this process, the Company has in the past sought, and

may

in the future seek, to explore strategic alternatives to finance its business plan, including but

not

limited to, a public offering of its common stock, private equity or debt financings, or other sources, such as strategic partnerships. The Company

may

elect to make near-term decisions, including engaging in various capital generating initiatives, to provide additional liquidity. If the Company is unable to raise or is limited under the terms of the tax matters agreement with Integer from raising additional funds when needed, it

may

be required to delay, reduce, or terminate some or all of its development plans. The Company is also focusing on increasing the sales of its products to generate cash flow to fund its operations. However, there can be

assurance that the Company will be successful in its plans described above or in attracting alternative debt or equity

financing.

Fiscal Year End

– Prior to fiscal year

2017,

the Company utilized a

fifty

-two,

fifty-three

week fiscal year ending on the Friday nearest

December 31.

The

second

quarter and

first

six

month periods of fiscal year

2016

contained

weeks and

weeks, respectively, and ended on

July 1, 2016

and the Company’s year end was

December 30, 2016.

Beginning in fiscal year

2017,

the Company utilizes a calendar year end.

Use of Estimates

– The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of sales and expenses during the reporting period. Actual results could differ materially from those estimates. Significant items subject to such estimates and assumptions include inventories, tangible and intangible asset valuations, accrued liabilities, revenue, stock-based compensation, warrants, and income tax accounts.

Inventories

– The value of inventories, comprised solely of finished goods, are stated at the lesser of net realizable value or cost, determined using the

first

-in,

first

-out (“FIFO”) method. To value inventory, management must estimate excess or obsolete inventory, as well as inventory that is

not

of saleable quality. This valuation involves an inherent level of risk and uncertainty due to unpredictability of trends in the industry and customer demand for the Company’s products. In assessing the ultimate realization of inventories, management must make judgments as to future demand requirements and compare that with the current or committed inventory levels. Reserve requirements generally increase as demand decreases due to market conditions and technological and product life-cycle changes. Writedowns of excess and obsolete inventories were

$0.05

million and

in the

second

quarter of fiscal years

2017

and

2016,

respectively. Future events and variations in valuation methods or assumptions

may

cause significant fluctuations in this estimate and could have a material impact on the Company’s results.

Impairment of Long-Lived Assets

– The Company assesses the impairment of definite-lived long-lived assets or asset groups when events or changes in circumstances indicate that the carrying value

may

not

be recoverable. Factors that are considered in deciding when to perform an impairment review include: a significant decrease in the market price of the asset or asset group; a significant change in the extent or manner in which a long-lived asset or asset group is being used or in its physical condition; a significant change in legal factors or in the business climate that could affect the value of a long-lived asset or asset group, including an action or assessment by a regulator; an accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction; a current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset or asset group; or a current expectation that, more likely than

not,

a long-lived asset or asset group will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. The term more likely than

not

refers to a level of likelihood that is more than

percent.

Potential recoverability is measured by comparing the carrying amount of the asset or asset group to its related total future undiscounted cash flows. The projected cash flows for each asset or asset group considers multiple factors, including current revenue from existing customers, proceeds from the sale of the asset or asset group and expected profit margins giving consideration to historical and expected margins. If the carrying value is

not

recoverable, the asset or asset group is considered to be impaired. Impairment is measured by comparing the asset or asset group’s carrying amount to its fair value. When it is determined that useful lives of assets are shorter than originally estimated, and

impairment is present, the rate of depreciation is accelerated in order to fully depreciate the assets over their new shorter useful lives.

Goodwill Valuation

– The Company tests its goodwill balances for impairment on the last day of each fiscal year, or more frequently if certain indicators are present or changes in circumstances, as described above, suggest that impairment

may

exist. When evaluating goodwill for impairment, the Company compares the fair value of a reporting unit with its carrying amount. The Company recognizes an impairment charge for the amount by which the carrying amount of a reporting unit, including goodwill, exceeds its fair value; however, the loss recognized would

not

exceed the total amount of goodwill allocated to the reporting unit. The Company

first

assesses qualitative factors to determine whether it is necessary to perform the quantitative goodwill impairment test. If determined to be necessary, the quantitative impairment test is used to identify goodwill impairment and measure the amount for a goodwill impairment to be recognized, if any. On

December 30, 2016,

following its reassessment of its reporting units and reallocation of goodwill on a relative fair value basis, the Company conducted the

first

step of the

two

-step approach for all reporting units. Upon completing the

first

step of the goodwill impairment test, the Company determined that the fair value of both reporting units exceeded their carrying value by

4.5%

for the Nuvectra reporting unit and

34.1%

for the NeuroNexus reporting unit. As of

June 30, 2017

the Company also determined that it was more likely than

not

that the fair value of both reporting units exceeded their carrying value.

Warranty Reserve

– The Company offers a warranty on certain of its products and has established a warranty reserve, as a component of other current liabilities, for any potential claims. The Company estimates its warranty reserve based upon an analysis of all identified or expected claims and an estimate of the cost to resolve those claims. Factors that affect the Company’s warranty liability include the number of units sold, historical and anticipated rates of warranty claims, and differences between actual and expected warranty costs per claim. The Company periodically assesses the adequacy of its warranty liabilities and adjusts the amounts as necessary.

Revenue Recognition

– The Company recognizes revenue when it is realized or realizable and earned. This occurs when persuasive evidence of an arrangement exists, delivery has occurred, the risk of loss is transferred, the price is fixed or determinable, the buyer is obligated to pay (i.e.,

not

contingent on a future event), collectability is reasonably assured, and the amount of future returns can reasonably be estimated. In cases where the Company utilizes distributors or ships product directly to the end user, it generally recognizes revenue upon shipment provided all revenue recognition criteria have been met. When sales representatives deliver products at the point of implantation at hospitals or medical facilities, the Company recognizes revenue upon completion of the procedure and authorization.

Service revenue is recognized as the services are performed. The Company’s development services are typically provided on a fixed-fee basis. The revenues for such longer duration projects are typically recognized using the proportional performance method. In using the proportional performance method, revenues are generally recorded based on the percentage of effort incurred to date on a contract relative to the estimated total expected contract effort. Estimating total contract effort and progress to completion on the arrangements, as well as whether a loss is expected to be incurred on the contract, requires significant judgment. Management uses historical experience, project plans and an assessment of the risks and uncertainties inherent in the arrangements to establish these estimates. Various uncertainties

may

not

be within the Company’s control.

Deferred revenue consists primarily of service revenue

not

yet performed.

Subsequent Events

– The Company considers events or transactions that occur after the balance sheet date but prior to the issuance of the financial statements to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure.