rmed-10q_20190930.htm

(Former name, former address and former fiscal year, if changed since last report)

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.

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 November 20, 2019, the registrant had 13,407,995 shares of common stock, par value $0.0001 per share, outstanding.

We were unable to timely file our Quarterly Report on Form 10-Q for the third quarter ended September 30, 2019 due to the previously reported Audit Committee investigation, which has now been substantially completed, and the previously reported Department of Justice investigation, both of which are more fully described herein.

	September 30, 2019			December 31, 2018
ASSETS
Current Assets
Cash and cash equivalents	$	14,512		$	64,315
Short-term investments		25,964			—
Accounts receivable, net		1,296			1,320
Inventories		2,572			2,097
Prepaid expenses and other current assets		1,108			1,501
Total current assets		45,452			69,233
Property and equipment, net		5,418			4,757
Operating lease right-of-use-assets		2,919			—
Other non-current assets		213			45
TOTAL ASSETS	$	54,002		$	74,035
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Accounts payable	$	1,004		$	1,125
Accrued expenses		4,386			2,809
Current portion of deferred revenue		1,917			1,723
Current portion of equipment financing		366			293
Current portion of operating lease liabilities		309			—
Total current liabilities		7,982			5,950
Deferred revenue		1,161			767
Equipment financing		417			557
Operating lease liabilities		2,701			—
Other liabilities		—			56
Total liabilities		12,261			7,330
Commitments and contingencies (Note 11)
Stockholders’ Equity
Preferred stock, $0.0001 par value, 10,000,000 authorized at September 30, 2019 and December 31, 2018, respectively; none issued		—			—
Common stock, $0.0001 par value, 300,000,000 shares authorized; 13,407,995 and 12,689,251 issued and outstanding at September 30, 2019 and December 31, 2018, respectively		1			1
Additional paid-in capital		149,116			126,925
Accumulated deficit		(107,414	)		(60,221	)
Accumulated other comprehensive income		38			—
Total stockholders’ equity		41,741			66,705
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	54,002		$	74,035

	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Net revenue
Product sales	$	1,078		$	1,248		$	3,256		$	1,958
Service and other		830			816			2,553			2,311
Total net revenue		1,908			2,064			5,809			4,269
Cost of revenue
Product sales		1,518			886			4,848			1,875
Service and other		907			394			2,252			1,131
Total cost of revenue		2,425			1,280			7,100			3,006
Gross (loss) profit		(517	)		784			(1,291	)		1,263
Operating expenses
Selling, general and administrative		15,889			5,366			42,907			15,621
Research and development		1,182			224			3,692			1,532
Total operating expenses		17,071			5,590			46,599			17,153
Operating loss		(17,588	)		(4,806	)		(47,890	)		(15,890	)
Other income (expense), net
Interest income	245				—		870				—
Interest expense		(72	)		(1	)		(186	)		(2	)
Total other income (expense), net		173			(1	)		684			(2	)
Loss before income tax expense		(17,415	)		(4,807	)		(47,206	)		(15,892	)
Income tax expense		3			—			8			3
Net loss		(17,418	)		(4,807	)		(47,214	)		(15,895	)
Basic and diluted net loss per share	$	(1.30	)	$	(0.59	)	$	(3.63	)	$	(1.97	)
Basic and diluted weighted average common shares outstanding		13,370			8,204			13,023			8,081

	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Net loss	$	(17,418	)	$	(4,807	)	$	(47,214	)	$	(15,895	)
Other comprehensive income (loss):
Unrealized gains (losses) related to short-term investments		(13	)		—			38			—
Total other comprehensive loss	$	(13	)	$	—		$	38		$	—
Comprehensive loss	$	(17,431	)	$	(4,807	)	$	(47,176	)	$	(15,895	)

	Nine Months Ended September 30,
	2019			2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(47,214	)	$	(15,895	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		1,046			388
Operating lease right-of-use-assets amortization		245			—
Provision for doubtful accounts		266			—
Stock-based compensation		22,154			6,714
Changes in operating assets and liabilities:
Accounts receivable		(242	)		(829	)
Inventories		(1,774	)		(1,699	)
Prepaid expenses and other assets		438			(122	)
Accounts payable		(121	)		695
Accrued expenses		1,577			636
Deferred revenue		234			30
Other liabilities		(210	)		(27	)
Net cash used in operating activities		(23,601	)		(10,109	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available-for-sale securities		(36,461	)		—
Proceeds from maturities of available-for-sale securities		10,697
Purchases of property and equipment		(220	)		(424	)
Net cash used in investing activities		(25,984	)		(424	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock		37			7,901
Payments on equipment financing		(255	)		(33	)
Initial public offering costs		—			(657	)
Net cash (used in) provided by financing activities		(218	)		7,211
NET CHANGE IN CASH AND CASH EQUIVALENTS		(49,803	)		(3,322	)
CASH AND CASH EQUIVALENTS, beginning of period		64,315			8,237
CASH AND CASH EQUIVALENTS, end of period	$	14,512		$	4,915
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Settlement of stock-based compensation liability	$	—		$	18,243
Forfeitures of liability-classified awards	$	—		$	1,313
Deferred initial public offering costs in accounts payable and accrued expenses	$	—		$	2,899
Unpaid property and equipment included in equipment financing	$	156		$	—
Transfer from inventories to property and equipment for demonstration lasers and lasers placed with customers	$	1,299		$	1,614
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash payments for interest	$	39		$	1
Cash payments for taxes	$	24		$	—

	Common Stock Shares		Common Stock Amount		Additional Paid- in- Capital		Accumulated Other Comprehensive Income (Loss)			Accumulated Deficit			Total Stockholders’ Equity
Balances at December 31, 2018		12,689	$	1	$	126,925	$	—		$	(60,221	)	$	66,705
Adoption of accounting standard (See Note 2)		—		—		—		—			21			21
Balances at January 1, 2019		12,689		1		126,925		—			(60,200	)		66,726
Common stock issued		148		—		—		—			—			—
Stock-based compensation		—		—		7,745		—			—			7,745
Net loss		—		—		—		—			(14,674	)		(14,674	)
Balances at March 31, 2019		12,837		1		134,670		—			(74,874	)		59,797
Common stock issued		384		—		37		—			—			37
Stock-based compensation		—		—		7,132		—			—			7,132
Other comprehensive income		—		—		—		51			—			51
Net loss		—		—		—		—			(15,122	)		(15,122	)
Balances at June 30, 2019		13,221	$	1	$	141,839	$	51		$	(89,996	)	$	51,895
Common stock issued		187		—		—		—			—			—
Stock-based compensation				—		7,277		—			—			7,277
Other comprehensive loss		—		—		—		(13	)		—			(13	)
Net loss		—		—		—		—			(17,418	)		(17,418	)
Balances at September 30, 2019		13,408	$	1	$	149,116	$	38		$	(107,414	)	$	41,741

	Common Stock Shares		Common Stock Amount		Additional Paid- in- Capital		Accumulated Other Comprehensive Income		Accumulated Deficit			Total Stockholders’ Equity
Balances at December 31, 2017		7,888	$	1	$	21,773	$	—	$	(29,389	)	$	(7,615	)
Common stock issued		56		—		1,401		—		—			1,401
Net loss		—		—		—		—		(2,693	)		(2,693	)
Balances at March 31, 2018		7,944		1		23,174		—		(32,082	)		(8,907	)
Common stock issued		260		—		6,500		—		—			6,500
Settlement of stock-based compensation liability		—		—		18,243		—		—			18,243
Forfeitures of liability-classified awards		—		—		1,313		—		—			1,313
Stock-based compensation		—		—		1,024		—		—			1,024
Net loss		—		—		—		—		(8,395	)		(8,395	)
Balances at June 30, 2018		8,204	$	1	$	50,254	$	—	$	(40,477	)	$	9,778
Stock-based compensation		—		—		1,510		—		—			1,510
Net loss		—		—		—		—		(4,807	)		(4,807	)
Balances at September 30, 2018		8,204	$	1	$	51,764	$	—	$	(45,284	)	$	6,481

Ra Medical Systems, Inc. (the “Company”) was formed in September 4, 2002, in the state of California and reincorporated in Delaware on July 14, 2018. The Company is a medical device company that develops, manufactures and markets advanced excimer lasers for use in the treatment of vascular and dermatological diseases. The Company’s product development centers around proprietary applications of its advanced excimer laser technology for use as a tool in the treatment of peripheral artery disease (“PAD”) and psoriasis, vitiligo, atopic dermatitis and leukoderma.

Reincorporation—In July 2018, the Company reincorporated in Delaware, the par value of each share of common stock was established to be $0.0001 and the number of authorized shares of common stock was increased from 10,000,000 to 25,000,000. In connection with the reincorporation, common stock and additional paid-in capital amounts in these financial statements have been adjusted to reflect the par value of common stock. All share information included in these financial statements has been adjusted to reflect this reincorporation.

Initial Public Offering—On October 1, 2018, the Company closed its initial public offering ("IPO") of 4,485,000 shares of common stock at an offering price to the public of $17.00 per share, resulting in gross proceeds of approximately $76.2 million. These amounts include the exercise in full by the underwriters of their option to purchase 585,000 additional shares of common stock at the same price to the public to cover over-allotments. The aggregate net proceeds to the Company from its IPO were $67.3 million after deducting the underwriters discount and offering costs of $5.3 million and $3.6 million, respectively. The Company’s registration statement on Form S-1 relating to its IPO was declared effective by the Securities and Exchange Commission on September 26, 2018.

In connection with the IPO, the Company filed an Amended and Restated Certificate of Incorporation which authorizes the issuance of 300,000,000 shares of common stock with a par value of $0.0001 and 10,000,000 shares of preferred stock with a par value of $0.0001.

Liquidity — The Company believes that its cash and cash equivalents and short-term investments as of the date of these financial statements will be sufficient to fund its operations for at least the next 12 months. The Company continuously monitors and reevaluates its liquidity needs. Certain future events may occur that are outside the Company’s control which could negatively impact the Company’s cash position. These events may cause the Company to undertake additional cost savings measures or seek additional sources of financing.

Interim condensed financial information—The unaudited interim condensed financial statements have been prepared on the same basis as the annual financial statements and reflect all adjustments of a normal and recurring nature that are necessary for the fair presentation of the Company’s condensed balance sheets, results of operations, cash flows and statement of stockholders’ equity for the periods presented. The results of operations for the three and nine months ended September 30, 2019 are not necessarily indicative of the results to be expected for the year ending December 31, 2019 or for any other future annual or interim period. The balance sheet as of December 31, 2018 included herein was derived from the audited financial statements as of that date. These unaudited condensed financial statements should be read in conjunction with the Company’s audited financial statements included in the Company’s Annual Report on Form 10-K filed with the SEC on March 15, 2019.

Use of estimates—The financial statements of the Company have been prepared by management in accordance with accounting principles generally accepted in the United States of America. The preparation of the financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and reported disclosures of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates. The Company’s financial statements are based upon a number of estimates, including but not limited to, allowance for doubtful accounts, reserves for warranty costs including product recalls, evaluation of probable loss contingencies, fair value of stock option awards granted and revenue recognition for multiple performance obligations.

Short-term Investments—Investments with original maturities of greater than three months are classified as short-term investments. Debt investments are classified as available-for-sale and realized gains and losses are recorded using the specific identification method. Changes in fair value, excluding other-than-temporary impairments, are recorded in other comprehensive income (“OCI”). Debt investments are impaired when a decline in fair value is judged to be other-than-temporary. Fair value is calculated based on publicly available market information or other estimates determined by management. The Company employs a systematic methodology on a quarterly basis that considers available quantitative and qualitative evidence in

evaluating potential impairment of our investments. If the cost of an investment exceeds its fair value, the Company evaluates, among other factors, general market conditions, credit quality of debt instrument issuers, and the duration and extent to which the fair value is less than cost. The Company also evaluates whether it has plans to sell the security or it is more likely than not that the Company will be required to sell the security before recovery. In addition, the Company considers specific adverse conditions related to the financial health of and business outlook for the investee, including industry and sector performance, changes in technology, and operational and financing cash flow factors. Once a decline in fair value is determined to be other-than-temporary, an impairment charge is recorded in other income (expense), net and a new cost basis in the investment is established.

Fair value measurements—Fair value represents the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants and is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. A three-tier value hierarchy is used to identify inputs used in measuring fair value as follows:

Level 1—Observable inputs that reflect quoted market prices (unadjusted) for identical assets or liabilities in active markets.

Level 2—Inputs other than the quoted prices in active markets that are observable either directly or indirectly in the marketplace for identical or similar assets and liabilities; and

Level 3—Unobservable inputs that are supported by little or no market data, which require the Company to develop its own assumptions.

The hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value.

The Company measures its cash equivalents and short-term investments at fair value.

Inventories—Inventories are stated at the lower of cost (first-in, first-out method) or net realizable value. Cost includes materials, labor and manufacturing overhead related to the purchase and production of inventories. The Company reduces the carrying value of inventories for those items that are potentially excess, obsolete or slow-moving based on changes in customer demand, technological developments or other economic factors.

Catheters are manufactured in-house and each catheter is tested at various stages of the manufacturing process for adherence to quality standards. Catheters that do not meet functionality specification at each test point are destroyed and immediately written off, with the expense recorded in cost of revenue in the statement of operations. Once manufactured, completed catheters that pass quality assurance, are sent to a third-party for sterilization and sealed in a sterile container. Upon return from the third-party sterilizer, a sample of catheters from each batch are re-tested. If the sample tests are successful, the batch is accepted into finished goods inventory and if the sample tests are unsuccessful, the entire batch is written off, with the expense recorded in cost of revenue in the statement of operations.

Revenue— The Company adopted ASC Topic 606 (Topic 606), Revenue from Contracts with Customers, on January 1, 2019 using the modified retrospective method to all contract agreements not completed as of January 1, 2019. Results for reporting periods beginning after January 1, 2019 are presented under Topic 606 while, as permitted by Topic 606, prior period amounts are not adjusted and continue to be reported under the accounting standards in effect for the prior period. The Company recorded a cumulative catch up adjustment to beginning accumulated deficit to reflect the impact of adopting Topic 606. The adoption of Topic 606 did not have a material effect on our results of operations for the three and nine month periods ended September 30, 2019.

The Company generates revenue from the sale of products and services. Product sales consist of the sale of DABRA and Pharos laser systems, the sale of catheters for use with the DABRA laser, and the sale of consumables and replacement parts. The Company’s sales agreements generally do not include right-of-return provisions for any form of consideration including partial refund or credit against amounts owed to the Company. Services and other revenue primarily consist of sales of extended warranty and billable services, including repair activity and income from rental of lasers.

The Company accounts for a contract with a customer when it has a legally enforceable contract with the customer, the arrangement identifies the rights of the parties, the contract has commercial substance, and the Company determines it is probable that it will collect the contract consideration. The Company recognizes revenue when control of the promised goods or services transfers to customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. Taxes collected from customers relating to goods or services and remitted to governmental authorities are excluded from revenue.

The Company enters into a DABRA laser commercial usage agreement or DABRA laser placement acknowledgement with each customer that is supplied a DABRA laser, collectively the “usage agreement”. The usage agreement provides for specific terms of continued use of DABRA laser, including a nominal periodic fee. The terms of a usage agreement typically allow the Company to place a DABRA laser at a customer’s specified location without a specified contract term. Under the usage agreement terms, the Company retains all ownership rights to the DABRA laser and is allowed to request the return of the equipment within 10 business days of notification. While the laser periodic fees are nominal, the laser usage agreements provide the Company the exclusive rights to supply related single-use catheters to the customer which aggregate the majority of the vascular segment revenue. There are no specified minimum purchase commitments for the catheters.

The Company recognizes revenue associated with the usage agreement and catheter supply arrangements in accordance with Topic 606 as the contract primarily includes variable payments, the catheters are priced at their standalone selling price and the equipment is insignificant in the context of the contract. Revenue is recognized when the performance obligation is satisfied, which is generally upon shipment of the catheter.

Laser sales consist of sales of DABRA and Pharos laser systems and are included in product sales in the statement of operations. The Company recognizes revenue on laser sales at the point in time that control transfers to the customer. Control of the product typically transfers upon shipment.

The Company typically provides a 12-month warranty with the purchase of its laser systems. Customers can extend the warranty period through the purchase of extended warranty service contracts. Extended warranty service contracts are sold with contract terms ranging from 12 to 60 months and cover periods after the end of the initial 12-month warranty period. The warranty provides the customer with maintenance services in addition to the assurance that the laser product complies with agreed-upon specifications. Therefore, the warranty service is treated as a separate performance obligation from the laser system. Warranty services are a stand-ready obligation, and the Company recognizes revenue on a straight-line basis over the service contract term. Warranty service revenue is included in service and other revenue in the Statement of operations. Deferred revenue after adoption of Topic 606 on January 1, 2019 was $2.8 million. Revenue recognized in the three and nine months ended September 30, 2019 relating to amounts previously included in deferred revenue was $0.4 million and $1.6 million, respectively. The deferred revenue greater than one year will be recognized during the remaining service period through June 2024.

In certain markets outside the U.S., the Company sells products and provides services to customers through distributors that specialize in medical device products. The terms of sales transactions through distributors are generally consistent with the terms of direct sales to customers. The Company accounts for these transactions in accordance with the Company’s revenue recognition policy described herein.

Certain of the Company’s contracts with customers contain multiple performance obligations. For these contracts, the Company accounts for individual products and services as separate performance obligations if they are distinct, which is if (i) a product or service is separately identifiable from other items in the arrangement and (ii) the customer can benefit from the product or service on its own or with other readily available resources. The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. The Company determines standalone selling prices based on observable prices of products or services sold separately in comparable circumstances to similar customers.

For multi-year warranty service contracts in which there is a difference between the cash selling price and the consideration in the contract and a significant amount of time between the payment, which is due up-front, and delivery of the services (greater than one year), the Company records an adjustment for significant financing to reflect the time value of money. The Company recognizes revenue associated with the cash selling price and interest expense using the effective interest method as the Company satisfies its performance obligation(s). The amount of interest expense the Company recognizes over the contract term is based on the contract liability balance, which increases for the accrual of interest and decreases as services are provided.

For services contracts that have an original duration of one year or less, the Company uses the practical expedient applicable to such contracts and does not adjust the transaction price for the time value of money.

As part of the Company’s adoption of Topic 606, the Company elected to use the following practical expedients:

The Company capitalizes costs to obtain contracts that are considered incremental and recoverable, such as sales commissions. The capitalized costs are amortized to selling, general and administrative expense over the estimated period of benefit of the asset, which is the contract term. The Company elected to use the practical expedient to expense the costs to obtain a contract when the amortization period is less than one year. The Company has contract costs of $0.4 million capitalized at January 1, 2019 and September 30, 2019.

The Company also adopted ASC Topic 842, Leases, on January 1, 2019 using the optional transitional method. There was no adjustment to accumulated deficit at January 1, 2019.

The Company also derives income pursuant to product lease agreements for its Pharos laser systems, as operating leases. Consequently, the Company retains title to the equipment and the equipment remains on Company’s balance sheet within property and equipment. Depreciation expense on these leased lasers is recorded to cost of revenues on a straight-line basis. The costs to maintain these leased lasers are charged to cost of revenues as incurred.

These lease arrangements contain one lease component (the laser) and one nonlease component (warranty service) for which the Company elected the practical expedient to not separate the nonlease component from the lease component. The Company accounts for the combined lease component as an operating lease and recognizes lease income on a straight-line basis over the lease term. Rental income from lease arrangements for the three and nine months ended September 30, 2019 was $0.2 million and $0.5 million, respectively. Rental income from lease arrangements for the three and nine months ended September 30, 2018 was $0.1 million and $0.3 million, respectively.

Product warranty—The Company records estimated product warranty costs at the time of sale. Products are warrantied against defects in material and workmanship when properly used for their intended purpose and appropriately maintained. Accordingly, the Company generally replaces catheters that kink or fail to calibrate. The product warranty liability is determined based on historical information such as past experience, product failure rates or number of units repaired, estimated cost of material and labor. The product warranty liability also includes the estimated costs of a product recall. In September 2019, the Company initiated a voluntary recall of its DABRA laser system single-use catheters due to a change in product labeling.

Product warranties are included for the first year after the sale for laser sales. For lasers, the customer may purchase an extended service contract, which is either negotiated in the contract or sold as a separate component for which revenue is recognized over the term of the agreement.

The warranty accrual is included in accrued expenses in the accompanying balance sheets. Warranty expenses are included in cost of revenue in the accompanying statements of operations. Changes in estimates to previously established warranty accruals result from current period updates to assumptions regarding repair and product recall costs and are included in current period warranty expense.

Recently Issued Accounting Pronouncements— In June 2018, the FASB issued ASU 2018-07, Improvements to Nonemployee Share-Based Payment Accounting. ASU 2018-07 expands the scope of Topic 718, Compensation—Stock Compensation, to include share-based payments issued to nonemployees for goods or services. Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned. ASU 2018-07 supersedes Subtopic 505-50, Equity—Equity-Based Payments to Non-Employees. The amendments are effective for fiscal years beginning after December 15, 2019. Early adoption is permitted, but no earlier than a company’s adoption date of Topic 606, Revenue from Contracts with Customers. The Company is evaluating the effect that this guidance will have on the financial statements and related disclosures.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820) - Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, which is designed to improve the effectiveness of disclosures by removing, modifying and adding disclosures related to fair value measurements. ASU No. 2018-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, and the ASU allows for early adoption in any interim period after issuance of the update. The adoption of this ASU is not expected to have a significant impact on the Company’s financial statements.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326), to require the measurement of expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable forecasts and applies to all financial assets, including trade receivables. The main objective of this ASU is to provide 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. ASU No. 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is currently assessing the impact this ASU will have on its financial statements and related disclosures.

Recently Adopted Accounting Pronouncements—On April 5, 2012, President Obama signed the Jump-Start Our Business Startups Act (the “JOBS Act”) into law. The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for an emerging growth company. As an emerging growth company, the Company may elect to adopt new or revised accounting standards when they become effective for non-public companies, which typically is later than public companies must adopt the standards. The Company has elected to take advantage of the extended transition period afforded by the JOBS Act and, as a result, will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-public companies, which are the dates included below.

In May 2014, FASB issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606), and issued subsequent amendments to the initial guidance in August 2015, March 2016, April 2016 and May 2016 within ASU 2015-14, ASU 2016-08, ASU 2016-10 and ASU 2016-12, respectively. ASU 2014-09 supersedes nearly all existing revenue recognition guidance under generally accepted accounting principles in the United States (“US GAAP”). The core principle of ASU 2014-09 is to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration that the Company expects to receive for those goods or services. The Company adopted this accounting standard in the first quarter of fiscal year 2019 using the modified retrospective method. The Company recorded an adjustment to accumulated deficit in the first quarter of 2019 for the following items; (i) differences in the amount of revenue recognized for the Company’s revenue streams as a result of allocating revenue based on standalone selling prices to the Company’s various performance obligations, (ii) capitalization of incremental contract acquisition costs, such as sales commissions paid in connection with product sales with multi-year service contracts, which will be amortized over the contract service period and (iii) recognized a significant financing component for multi-year service contracts for customers who pay more than one year in advance of receiving the service. The Company recognized the significant financing component over the contract service period. The Company recorded a $21,000 reduction to accumulated deficit as a result of the adoption of Topic 606.

In February 2016, FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”). This update requires lessees to recognize, on the balance sheet, a lease liability and a lease asset for all leases with a term greater than 12 months, including operating leases. The update also expands the required quantitative and qualitative disclosures surrounding leases. Under the new standard, the Company will have to recognize, on the balance sheet, a liability representing its lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. ASU 2016-02 is effective for the Company beginning January 1, 2020, with early adoption permitted. Lessor accounting under ASU 2016-02 is similar to the current model but updated to align with certain changes to the lessee model. Lessors will continue to classify leases as operating, direct financing or sales-type leases. In addition, the new standard requires that lease and nonlease components of a contract be bifurcated, with nonlease components subject to the new revenue recognition standard effective upon adoption of the new leasing standard. Lessors are allowed to elect to account for the lease and nonlease components as a single combined lease component if (i) the timing and pattern of the revenue recognition is the same, and (ii) the combined lease component would continue to be classified as an operating lease.

The Company adopted the standard using the optional transition method provided by ASC Update No. 2018-11, Leases (Topic 842): Targeted Improvements. Under this method, the Company applied the new leasing rules on January 1, 2019. As part of the adoption, the Company elected the package of practical expedients permitted under the new lease standard, which among other things, allowed the Company to carry forward the historical lease classification. The Company also elected the practical expedient to combine lease and non-lease components. The Company recognized right-of-use assets and lease liabilities of $3.2 million upon adoption of ASU 2016-02. The new lease standard did not change the Company’s accounting for leases in which the Company is the lessor.

A summary of debt securities by major security type is as follows as of September 30, 2019:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Debt Securities - available-for-sale:
U.S. T-bills	$	4,999	$	3	$	(2	)	$	5,000
U.S. agency securities		1,000		2		(2	)		1,000
U.S. government securities		19,927		46		(9	)		19,964
Total debt securities	$	25,926	$	51	$	(13	)	$	25,964

The following table presents the hierarchy for assets measured at fair value on a recurring basis as of September 30, 2019 and December 31, 2018 (in thousands):

	Total Fair Value		Quoted Market Prices for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Observable Inputs (Level 3)
As of September 30, 2019
Money market funds	$	9,081	$	9,081	$	—	$	—
U.S. T-bills	$	5,000	$	5,000	$	—	$	—
U.S. government securities	$	19,964	$	19,964	$	—	$	—
U.S. agency securities	$	1,000	$	—	$	1,000	$	—
As of December 31, 2018
Money market funds	$	61,134	$	61,134	$	—	$	—

Delaware		38-3661826
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

2070 Las Palmas Drive Carlsbad, California		92011
(Address of principal executive offices)		(Zip Code)

PART I. FINANCIAL INFORMATION		Page
	Explanatory Note	3
Item 1.	Financial Statements:	4
	Condensed Balance Sheets (unaudited)	4
	Condensed Statements of Operations (unaudited)	5
	Condensed Statements of Comprehensive Loss (unaudited)	6
	Condensed Statements of Cash Flows (unaudited)	7
	Condensed Statements of Stockholders’ Equity (unaudited)	8
	Notes to Condensed Financial Statements (unaudited)	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	33
Item 4.	Controls and Procedures	34
PART II. OTHER INFORMATION		36
Item 1.	Legal Proceedings	36
Item 1A.	Risk Factors	37
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	79
Item 3.	Defaults Upon Senior Securities	79
Item 4.	Mine Safety Disclosures	79
Item 5.	Other Information	79
Item 6.	Exhibits	80
SIGNATURES		81

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
		Emerging growth company	☒

	September 30, 2019		December 31, 2018
Raw materials	$	2,336	$	1,333
Work in process		68		88
Finished goods		168		676
Inventories	$	2,572	$	2,097