UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒ Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the year ended December 31, 2016
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
(State or other jurisdiction of
incorporation or organization)
56-2568057
(I.R.S. Employer
Identification No.)
1800 Bridge Parkway
Redwood City, California 94065
(Address of principal executive offices and zip code)
(650) 251-0005
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, par value $0.001 per share
Name of exchange on which registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act
of 1934 (the “Exchange Act”). Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange
Act 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 and posted on its corporate website, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for
such shorter period that the Registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will
not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of
the Exchange Act.
Large accelerated filer ☒
☐
Non-accelerated filer
Accelerated filer
Smaller reporting company
☐
☐
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 June 30, 2016, the last business day of the Registrant’s most recently completed second fiscal quarter, the aggregate market
value of the common stock held by non-affiliates of the registrant was approximately $1,652 million based on the closing sale price for
the registrant’s common stock on The New York Stock Exchange on that date of $73.76 per share.
As of February 14, 2017, there were 29,183,202 shares of the registrant’s Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Proxy Statement for the registrant’s 2017 Annual Meeting of Stockholders are incorporated by
reference into Part III of this Form 10-K to the extent stated herein. The Proxy Statement will be filed within 120 days of the registrant’s
fiscal year ended December 31, 2016.
NEVRO CORP.
TABLE OF CONTENTS
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
PART I
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Item 6. Selected Financial Data
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants On Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accountant Fees and Services
Item 15. Exhibits and Financial Statement Schedules
Item 16. Form 10-K Summary
Signatures
PART IV
Page No.
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ITEM 1. BUSINESS
Overview
PART I
We are a global medical device company focused on providing innovative products that improve the quality of
life of patients suffering from chronic pain. We have developed and commercialized the Senza spinal cord
stimulation (SCS) system, an evidence-based neuromodulation platform for the treatment of chronic pain. Our
proprietary paresthesia-free HF10 therapy, delivered by our Senza system, was demonstrated in our SENZA-RCT
study to be superior to traditional SCS therapy with it being nearly twice as successful in treating back pain and 1.5
times as successful in treating leg pain when compared to traditional SCS therapy. Comparatively, traditional SCS
therapy has limited efficacy in treating back pain and is used primarily for treating leg pain, limiting its market
adoption. Our SENZA-RCT study, along with our European studies, represents what we believe is the most robust
body of clinical evidence for any SCS therapy. We believe the superiority of HF10 therapy over traditional SCS
therapies will allow us to capitalize on and expand the approximately $1.6 to $1.8 billion existing global SCS
market by treating back pain in addition to leg and pain without paresthesia.
We launched Senza commercially in the United States in May 2015, after receiving a label from the U.S. Food
and Drug Administration (FDA) which supports the superiority of our HF10 therapy over traditional SCS. The
Senza system has been commercially available in certain European markets since November 2010 and in Australia
since August 2011. We have experienced consistent significant revenue growth in the United States since
commercial launch and, effective January 1, 2016, received transitional pass-through payment under the Medicare
hospital outpatient prospective payment system. In addition, on the basis of our strong clinical evidence, Senza is
currently reimbursed by each of the top 10 national insurance providers. In early 2017, we commenced a controlled
commercial launch of our surgical lead, marketed as the SurpassTM surgical lead, which we believe will provide us
access to an additional approximately 30% of the U.S. SCS market. The tables below sets forth our revenue from
U.S. and international sales the past two years on a quarterly basis and total revenue for each of the past three years.
Q1 2015 Q2 2015
Q3 2015
Q4 2015
Q1 2016
Q2 2016 Q3 2016
Q4 2016
(in millions)
Revenue from U.S. sales
Revenue from international sales
$
Total sales revenue
4.5 $ 19.8 $ 29.5 $ 40.6 $ 47.2 $ 56.0
N/A $
9.7
14.5
9.7 $ 11.4 $ 15.4 $ 33.1 $ 41.7 $ 55.4 $ 60.9 $ 70.5
0.1 $
11.3
14.8 13.7
13.3
12.2
10.9
Total revenue
$
32.6 $
69.6 $
228.5
2014
2015
(in millions)
2016
With a primary focus on treating leg pain, the global market for SCS therapy was estimated to be
approximately $1.6 to $1.8 billion in 2016 and is expected to grow to approximately $2.5 billion per year by 2020.
The United States represents approximately 80% of this global market due in part to governmental reimbursement
restraints in international markets. We believe that due to factors such as an aging population and an increasing
number of failed back surgeries, there is an opportunity for an SCS therapy that effectively treats back pain to create
an incremental opportunity approximately the size of the existing SCS market over time.
We believe our HF10 therapy will continue to both take share of and expand the SCS therapy market due to
HF10 therapy being a paresthesia-free therapy and having superior efficacy when compared to traditional SCS
therapies. Traditional SCS therapy generates paresthesia, a sensation typically experienced as tingling, numbness
and buzzing, which overlaps the pain area. Paresthesia is often considered unpleasant or uncomfortable, sometimes
causes a shocking or jolting sensation with changes in posture and is a continuous reminder of the patient’s chronic
condition. Compared to traditional SCS therapy which typically operates at 50 Hz to 60 Hz, HF10 therapy delivers
spinal cord stimulation at a lower amplitude and a higher frequency waveform of 10,000 Hz. In addition, HF10
therapy relies on consistent anatomical placement of the stimulation leads across patients, thus reducing procedure
variability relative to traditional SCS therapy which requires individualized lead placement to properly map
1
paresthesia coverage. We believe the ability of HF10 therapy to deliver pain relief without paresthesia provides a
substantial benefit over traditional SCS therapy to patients and physicians.
We believe the clinical results from our SENZA-RCT study, along with our European studies, position us with
superior and compelling efficacy data. The following charts provide a comparison of HF10 therapy in both pain
reduction and responder rates against the other prospective Level 1 studies conducted.
1.
2.
3.
4.
Al-Kaisy A, et. al. Sustained effectiveness of 10 kHz high-frequency spinal cord stimulation for patients with chronic, low back pain: 24-month results of a prospective multicenter
study. Pain Med. 2014;15:347-354. Internal data on file.
Kapural, Leonardo et. al. Novel 10-kHz High-frequency Therapy (HF10 Therapy) Is Superior to Traditional Low-frequency Spinal Cord Stimulation for the Treatment of Chronic
Back and Leg Pain: The SENZA-RCT Randomized Controlled Trial. Anesthesiology Vol. 123 No 4. October 2015.
Kumar K et al., Spinal cord stimulation versus conventional medical management for neuropathic pain: A multicentre randomised controlled trial in patients with failed back
surgery syndrome, Pain (2007), doi:10.1016/j.pain.2007.07.028. 6-month data shown.
St. Jude Medical Proclaim™ Implantable Pulse Generator Clinician's Manual, Models 3660, 3662, 3665, 3667. Published on www.sjm.com October 2016.
1.
2.
3.
4.
Al-Kaisy A, et. al. Sustained effectiveness of 10 kHz high-frequency spinal cord stimulation for patients with chronic, low back pain: 24-month results of a prospective multicenter
study. Pain Med. 2014;15:347-354. Internal data on file.
Kapural, Leonardo et. al. Novel 10-kHz High-frequency Therapy (HF10 Therapy) Is Superior to Traditional Low-frequency Spinal Cord Stimulation for the Treatment of Chronic
Back and Leg Pain: The SENZA-RCT Randomized Controlled Trial. Anesthesiology Vol. 123 No 4. October 2015.
Kumar K et al., Spinal cord stimulation versus conventional medical management for neuropathic pain: A multicentre randomised controlled trial in patients with failed back
surgery syndrome, Pain (2007), doi:10.1016/j.pain.2007.07.028. 6-month data shown.
St. Jude Medical Proclaim™ Implantable Pulse Generator Clinician's Manual, Models 3660, 3662, 3665, 3667. Published on www.sjm.com October 2016.
2
In November 2016, we filed a lawsuit for patent infringement against Boston Scientific Corporation and
Boston Scientific Neuromodulation Corporation (collectively, “Boston Scientific”) asserting that Boston Scientific
is infringing our patents covering inventions related to our HF10 therapy and the Senza system. Following our
lawsuit, in December 2016, Boston Scientific countered with a patent infringement lawsuit against us, alleging that
we infringed Boston Scientific’s patents covering SCS technology related to stimulation leads, rechargeable
batteries and telemetry. Each of the lawsuits seek preliminary and permanent injunctive relief against further
infringement as well as damages and attorney fees.
We believe we have built competitive advantages through our proprietary technology, clinical evidence base,
strong track record of execution with over 15,000 patients implanted with Senza, extensive intellectual property and
a proven management team with substantial neuromodulation experience. With the well-demonstrated superior
efficacy of our HF10 therapy, we aim to continue to drive adoption and penetration in the U.S. market, which
represents the largest opportunity in SCS, and expand patient access to HF10 therapy by investing in the
development of evidence for new indications such as chronic upper limb and neck pain, painful neuropathies and
non-surgical refractory back pain.
Market Overview
Existing Treatments for Chronic Pain and Limitations
Chronic pain has been defined as pain that lasts longer than the time required for tissues to heal, which is often
considered to be three months. Patients who present with chronic pain are typically placed on a treatment
progression plan. Initial medical management typically includes behavioral modification, exercise, physical therapy
and over-the-counter analgesics and non-steroidal anti-inflammatory drugs. When early stage medical management
is not sufficient for the treatment of chronic leg and back pain, patients may progress to interventional techniques
including steroid injections or nerve blocks. Patients who do not respond to these more conservative treatments are
considered candidates for more advanced therapies. These more advanced therapies include spine surgery,
treatment with oral opioids and SCS. Spine surgery, while a common invasive procedure, can result in
complications such as Failed Back Surgery Syndrome, or FBSS, a condition where pain persists despite the
procedure, and spinal surgery often fails to treat certain types of chronic pain such as severe neuropathic back pain.
Oral opioids, while reducing the patient’s perception of pain, lack clinical evidence to support long-term usage and
can cause multiple complications and side-effects including nausea, vomiting and dizziness. Further, opioids
present a high risk of addiction and abuse.
Traditional Spinal Cord Stimulation and Limitations
SCS is a type of neuromodulation technology that utilizes an implantable, pacemaker-like device to deliver
electrical impulses to the spinal cord to treat chronic pain. Traditional SCS therapy is designed to induce
paresthesia, a sensation typically experienced as tingling, numbness and buzzing, which overlaps the area of pain
with the intent of masking pain perception. The electrical pulses are delivered by small electrodes on leads that are
placed near the spinal cord and are connected to a battery-powered generator implanted under the skin. Traditional
SCS therapy is currently indicated as a treatment for chronic pain of the trunk and limbs in patients who failed
conventional medical management. Traditional SCS therapy is considered to be a minimally invasive and reversible
therapy that may provide greater long-term benefits over more invasive surgical approaches or opioids. The most
common use for traditional SCS therapy is for neuropathic pain conditions such as FBSS.
Traditional SCS therapy generally consists of two phases, an evaluation period, also called the trial period,
which typically lasts several days, followed by a permanent implant for those patients who experience a successful
trial period. The trial period involves a percutaneously placed insulated wire, called a lead, which a physician
implants near the spinal cord using a needle. During the trial period, a temporary external system is used by patients
and physicians for evaluating whether traditional SCS therapy is effective. If the trial period is successful, a
permanent system is implanted in the patient. The success criterion is typically an approximate 50% reduction in
pain during the evaluation period. For those patients that proceed to the permanent implant procedure, we believe
that approximately 30% of U.S. procedures are completed using surgical leads and the remaining are completed
using percutaneous leads.
3
A key part of the permanent system is the implantable pulse generator, or IPG, which is a miniaturized version
of the external stimulator. The IPG should provide the patient with multiple years of use and can be either
rechargeable or non-rechargeable. Primary cell IPGs, or non-rechargeable IPGs, are used in cases where the patient
requires a lower level of stimulation and such systems have a limited life. Rechargeable IPGs, a more recent
innovation, can be more expensive but allow for higher levels of stimulation and may last 10 years or more. Due to
payor constraints in certain European countries, the transition from primary cell IPGs to rechargeable IPGs has been
slow in those markets. In the United States and Australia, most IPGs implanted are rechargeable.
Traditional SCS products have required paresthesia to provide pain relief, and consequently, paresthesia
coverage has been used as a surrogate metric for successful pain relief. Paresthesia is often considered unpleasant or
uncomfortable and is sometimes made worse by a shocking or jolting sensation with changes in posture. Unpleasant
sensations can be caused by lead movement closer to the spinal cord or away from it as the patient moves, resulting
in variation in paresthesia intensity. Paresthesia is also a constant reminder of the patient’s chronic condition. Due to
the distraction of paresthesia, patients with traditional SCS devices are instructed not to drive or operate machinery
when the device is active. Medtronic plc, or Medtronic, the current leader in neuromodulation, has released a survey
showing that 71% of patients find paresthesia uncomfortable at times. As such, innovation in the SCS market has
historically focused on technologies that optimize traditional SCS therapy’s ability to create more precise
paresthesia fields. Even with successful paresthesia coverage, patients still may not receive pain relief or often lose
pain relief after a period of time.
Traditional SCS procedures also require physicians to perform the complex and often time-consuming process
of paresthesia mapping. This mapping process requires a patient to be sedated for the lead placement, then awakened
and repeatedly questioned in order for the physician to assess paresthesia coverage over the patient’s area of pain
and reposition and reprogram the leads to redirect the paresthesia. This process creates variability in the procedure
and a complicated anesthesia management process, impacting the physician’s schedule and patient comfort. The
primary objective of traditional SCS therapy is to create a stimulation program that covers the areas of pain without
creating paresthesia beyond the pain areas, given that this can be uncomfortable and difficult to tolerate.
Our Solution for Chronic Pain
HF10 Therapy
Our HF10 therapy is designed to deliver innovative neuromodulation solutions for treating chronic pain based
on what we believe to be the best clinical evidence available. By overcoming many of the limitations of traditional
SCS therapy, our HF10 therapy offers superior efficacy for patients and provides significant advantages to
physicians and hospitals. We believe the advantages of our proprietary HF10 therapy over traditional SCS include:
Demonstrated superior efficacy data for both leg and back pain: In our SENZA-RCT pivotal study,
HF10 therapy was demonstrated to provide significant and sustained back pain relief in addition to leg
pain relief. HF10 therapy was shown in both number of patients that respond and in treatment efficacy
to be superior to traditional SCS therapy as it is nearly twice as successful in treating back pain and 1.5
times as successful in treating leg pain. Our SENZA-RCT study, along with the previously completed
European studies, represent what we believe is the most robust body of clinical evidence for any SCS
therapy. We believe that the superior efficacy results and robust data provided in our pivotal clinical
trials will drive increased adoption of our HF10 therapy among patients, payors and providers and may
enable us to gain significant market share in the approximately $1.6 to $1.8 billion existing global SCS
market, which is primarily based on treating leg pain. In addition, we believe our efficacy data in back
pain will allow us to expand the SCS market under current reimbursement regimes by meeting demand
from back pain patients who are largely untreated by traditional SCS therapies.
Paresthesia free pain relief for patients: HF10 therapy offers the notable benefit to patients of
achieving significant and sustained pain relief without paresthesia, thus enabling our patients to avoid
the uncomfortable shocking or jolting sensations commonly associated with paresthesia, and removing a
major barrier for many patients who may otherwise benefit from SCS therapy.
Anatomical lead placement for physicians. Since HF10 therapy relies on consistent anatomical lead
placement, it removes the cumbersome process of paresthesia mapping that is required by traditional
4
SCS therapy, reducing variability in the operating procedure and offering a significant benefit to both
physicians and hospitals by reducing variability of procedures.
Ability to treat a broader group of chronic pain patients: Our HF10 therapy is a platform technology
that we believe can provide treatment benefits for a broader group of chronic pain indications. We are
currently investigating the use of HF10 therapy to address additional indications such as chronic upper
limb and neck pain, painful neuropathies and non-surgical refractory back pain. Based on analysis from
our SENZA-RCT and European studies, we believe HF10 therapy may be an attractive treatment option
for some non-surgical refractory back pain patients due to its cost, reversibility and initial trial period.
Due to the removal of paresthesia, HF10 may also be an effective therapy for patients with chronic
upper limb and neck pain as it will not create the intense discomfort that traditional SCS generates for
patients with chronic upper limb and neck pain when leads are placed in the cervical spine.
Our Growth Strategy
Our mission is to be the neuromodulation leader in the treatment of chronic pain by developing innovative,
evidence-based solutions. To accomplish this objective we intend to:
Drive adoption of HF10 therapy through a world-class sales and marketing organization: We will
continue to build our worldwide sales organization consisting of direct sales representatives and, in
some international markets, a network of distributors and sales agents. In particular, we are continuing
to make significant investments in building our U.S. commercial infrastructure and sales force. This is a
lengthy process that requires significant investment to recruit and train qualified sales representatives.
Following initial training for Senza, our sales representatives typically require lead time in the field to
grow their network of accounts and produce sales results. Successfully recruiting and training a
sufficient number of productive sales representatives is required to achieve our expected growth rate. As
of December 31, 2016, we have 194 hired and trained sales representatives in the field in the United
States. Our sales representatives target physician specialties involved in SCS treatment decisions,
including neurosurgeons, physiatrists, interventional pain specialists and orthopedic spine surgeons.
Further, we expect that our direct sales force will target the approximately 2,400 hospitals and
outpatient surgery centers, at which we believe an estimated 90% of SCS procedures in the United
States are performed. To complement our sales representatives, we intend for our marketing and
reimbursement teams to drive HF10 therapy adoption through creating awareness and demand among
additional stakeholders involved in the SCS treatment decision, including third-party payors, hospital
administrators, and patients and their families. Internationally, we plan to increase coverage in certain of
our existing markets by continuing the expansion of our direct sales force.
Expand the existing SCS market by treating back pain: We believe we are expanding the existing
SCS market by delivering a system that provides meaningful treatment for chronic back pain, which we
believe represents a significant opportunity in the global SCS market. With traditional SCS therapy,
patients who experience predominant back pain are associated with lower levels of treatment success.
Consequently, patients with back pain are typically not recommended for treatment with traditional SCS
therapy due to the difficulty of achieving and maintaining pain coverage. In contrast to traditional SCS
therapy, we believe HF10 therapy is positioned to expand the existing SCS market by effectively
treating back pain in addition to leg pain.
Communicate the clinically demonstrated, superior efficacy of HF10 therapy to patients,
physicians and payors globally: Given our robust clinical evidence that demonstrates the superior
efficacy of our HF10 therapy, we believe we will be able to position our therapy with patients, providers
and payors in a differentiated way. Given that our SENZA-RCT pivotal study has demonstrated
superiority for both back and leg pain in a head-to-head comparison with traditional SCS, we are able to
differentiate HF10 therapy by communicating its superior clinical benefits and advantages to patients,
physicians and payors.
Invest in research and development to drive innovation: We are extending our novel and proprietary
technologies into a series of product enhancements with the goal of improving the treatment of chronic
pain. Product enhancements in development include a next-generation IPG and enhanced MRI
capability. Further, we have recently commenced a controlled commercial launch of our new surgical
5
leads, marketed as the Surpass surgical lead, which we believe will give access to approximately 30% of
the U.S. SCS market that we previously did not address without the surgical lead. We believe product
enhancements if and when completed will drive continued adoption of our technology platform and
further validate the advantages and benefits of our HF10 therapy.
Scale our business to achieve cost and production efficiencies: We plan to improve the efficiency of
our third-party manufacturing processes, which we believe will lower our per unit manufacturing cost.
We expect to continue to scale our manufacturing operations as we expand Senza sales volumes in the
United States.
Growth Opportunities in Other Chronic Pain Indications
We plan to use our platform technology to develop HF10 therapy for use in other chronic pain indications
with significant unmet medical need, including chronic upper limb and neck pain, non-surgical back pain and
painful neuropathies. There can be no assurance that we will be successful in developing HF10 therapy for use in
other indications or in receiving required regulatory approvals and reimbursement coverage to market Senza and
HF10 therapy for use in other indications. Below are three areas where preliminary results have been promising:
Chronic Upper Limb and Neck Pain
Chronic neck pain with or without upper limb pain is prevalent in 48% of women and 38% of men in the general
adult population, with persistent complaints in 22% of women and 16% of men. Multiple treatments currently exist in
the market today, such as epidural injections, but there is a lack of clinically efficacious treatments for some patients. In
addition, there has been a very small body of evidence published on the application of SCS in chronic neck pain and
upper limb pain by placing the leads in the cervical spine. The evidence has suggested limited therapeutic response
when traditional SCS therapy is used, where the paresthesia in the cervical spine associated with traditional SCS
therapy can create intolerable discomfort, limiting its viability. We believe Senza can overcome this barrier due to its
ability to deliver pain relief without paresthesia, combined with its demonstrated superior efficacy relative to the
traditional SCS for back and leg pain. Early results from our SENZA Upper Limb and Neck study, which were
presented at the North America Neuromodulation Society (NANS) conference in January 2017, demonstrated a 75%
overall responder rate for 20 patients at three months. Further, average neck pain scores (as measured on the Visual
Analog Scale (VAS)) declined from 7.5 (n=38) at baseline to 2.5 (n=20) at three months. For upper limb pain, average
VAS scores declined from 7.0 (n=19) at baseline to 1.9 (n=12) at three months.
Non-Surgical Back Pain (Pre-Spinal Surgery)
One of the most common uses for SCS is for neuropathic pain conditions such as FBSS. The incidence of
patients that will develop FBSS following lumbar spinal surgery is estimated to be within the range of 10% to 40%.
With the increasing number of spinal surgeries in the United States, FBSS is also increasing. While there is a clear
need for spinal surgery in many patients, given the high rate of FBSS there is a potential for SCS to move up the
treatment progression ahead of spinal surgery for some patients without mechanical instability. HF10 therapy could
provide an attractive treatment option for these patients due to its cost, reversibility and initial trial period. In subset
analysis of pre-spinal surgery patients from our SENZA-RCT and European studies, respectively, we found a
decrease in back pain VAS scores from 7.2 to 2.5 (12 months, n=11) and 8.1 to 3.4 (24 months, n=14), respectively,
as well as a decrease in leg pain VAS scores from 7.1 to 2.3 (12 months, n=11) and 5.9 to 2.8 (24 months, n=14),
respectively. More recent results in patients treated with HF10 therapy with no history of spinal surgery from a study
led by Adnan Al-Kaisy demonstrated similar promising results. In this study, patients experienced reduced back pain
VAS and Oswestry Disability Index (ODI) scores from baseline of 73% and 48% respectively at 12 months (n=20).
In addition to pain reduction and reduced disability, a reduction in opioid use of 64% was also observed in this
study.
Painful Neuropathies
The American Chronic Pain Association estimates that more than 15 million people in the United States and
Europe have some degree of neuropathic pain. More than two out of every 100 people are estimated to have
peripheral neuropathy, with the incidence rate increasing to eight in every 100 for people aged 55 or older. The
6
diminished quality of life and increased disability associated with peripheral neuropathy results in significant
workforce and healthcare costs. Various treatments currently exist, but have limited efficacy. As such, we have
initiated an initial study to determine if HF10 therapy could help this patient group. Preliminary results of a
prospective, multicenter feasibility study treating chronic intractable pain of the limbs from peripheral
polyneuropathy using HF10 therapy demonstrated a decrease in mean VAS pain score from 7.6 cm at baseline
(N=26) to 2.1 cm at one month post-implant (N=16), with 81% of subjects deemed responders (abstract presented at
NANS in January 2017).
Clinical Data
To support development of our proprietary HF10 therapy, the technology was evaluated in preclinical studies
and further studied in prospective clinical trials, all of which have now been published. Key highlights of our
SENZA-RCT pivotal study are as follows:
Our SENZA-RCT study results demonstrated the superiority of HF10 therapy to traditional SCS therapy
on all primary and secondary endpoints through 24 months.
HF10 therapy was nearly twice as successful in treating back pain as traditional SCS therapy, with
84.3% of patients receiving HF10 therapy reporting 50% or more pain relief at three months, as
compared to 43.8% of patients receiving traditional SCS therapy. The superiority of HF10 therapy for
treating back pain was maintained through the 24-month follow-up period of the study.
HF10 therapy was 1.5 times as successful in treating leg pain as traditional SCS therapy, with 83.1% of
patients receiving HF10 therapy, as compared to 55.5% of patients receiving traditional SCS therapy,
reporting 50% or more pain relief at three months, results that were superior. The superiority of HF10
therapy for treating leg pain was maintained through the 24-month follow-up period of the study.
HF10 therapy provided a 69.2% reduction in back pain as measured by the Visual Analog Scale, or
VAS, versus 44.2% for traditional SCS therapy, at three months, results that were superior. The
superiority of HF10 therapy for reducing back pain was maintained through the 24-month follow-up
period of the study. HF10 therapy provided a 72.8% reduction in leg pain as measured by VAS, versus
51.5% for traditional SCS therapy, at three months, results that were superior. The superiority of HF10
therapy for reducing leg pain was maintained through the 24-month follow-up period of the study.
Superiority of HF10 therapy to traditional SCS therapy demonstrated for both back and leg pain at each
designated study endpoint throughout 24 months.
Patients receiving HF10 therapy did not report paresthesia or uncomfortable stimulation at three months.
In comparison, 46.5% of patients receiving traditional SCS therapy reported uncomfortable stimulation
at three months.
Two-thirds of HF10 therapy patients had a VAS pain score of less than or equal to 2.5 on a scale of 0 to
10 for back pain at three months (which we define as achieving remitter status), twice the number of
traditional SCS therapy patients, results that were statistically superior. The superiority of HF10 therapy
for achieving remitter status for back pain was maintained through the 24-month follow-up period of the
study.
Three-fourths of HF10 therapy patients had a VAS pain score of less than or equal to 2.5 on a scale of 0
to 10 for leg pain at three months, twice the number of traditional SCS therapy patients, results that were
statistically superior. The superiority of HF10 therapy for achieving remitter status for leg pain was
maintained through the 24-month follow-up period of the study.
Safety outcomes were consistent across the control and test groups.
The results from the clinical studies have been consistent across studies and across outcome measures. Our
prospective multicenter European clinical study (EU) further supported the findings of our prospective, comparative,
randomized, controlled U.S. pivotal study (SENZA-RCT). In the two-year follow up of the EU study, average back
pain VAS was reduced from 8.4 at baseline to 2.8 at 12 months to 3.3 at 24 months. Average leg pain was reduced
from 5.4 VAS pain level at baseline to 2.0 at 12 months to 2.3 at 24 months. Additionally, for responder rates, 60%
of the implanted patients had at least 50% back pain relief and 71% had at least 50% leg pain relief. Disability as
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measured by ODI improved by an average of 15 points at 24 months, a clinically and statistically significant
improvement. The following table summarizes key outcomes for implanted subjects in our EU and SENZA-RCT
studies.
Back pain responders
HF10 therapy (%)
Traditional SCS (%)
Superiority p-value
Leg pain responders
HF10 therapy (%)
Traditional SCS (%)
Superiority p-value
Back pain reduction from Baseline
HF10 therapy (%)
Traditional SCS (%)
Superiority p-value
Leg pain reduction from Baseline
HF10 therapy (%)
Traditional SCS (%)
Superiority p-value
Month 3
Month 6
Month 12
Month 24
EU
RCT
EU
RCT
EU
RCT
EU
RCT
82.9
82.9
71.3
75.3
84.3
43.8
<0.001
83.1
55.0
<0.001
69.2
44.2
<0.001
72.8
51.5
<0.001
73.6
86.0
67.7
73.4
76.4
52.5
0.001
80.9
55.0
<0.001
62.4
44.3
<0.001
66.9
49.9
0.002
70.1
65.0
64.9
61.6
78.7
51.3
<0.001
80.9
50
<0.001
66.4
44.7
<0.001
69.5
48.0
<0.001
60.0
76.5
71.1
72.9
59.6
66.9
61.6
65.1
Our SENZA-RCT pivotal study was a prospective, randomized, multi-center study, conducted across 11 U.S.
clinical trial sites, comparing the safety and effectiveness of Senza delivering HF10 therapy, which we refer to as the
test to Boston Scientific’s FDA-approved Precision Plus system, delivering traditional SCS therapy, which we refer
to as the control. Each included patient was required to have a leg and back pain VAS score of at least 5. Among the
198 chronic pain patients who were randomized for treatments, 171 had a successful therapy evaluation phase, or
trial phase, and were implanted with an SCS system. The study was designed as a non-inferiority trial and met its
primary and secondary endpoints. Statistical analysis also demonstrates the superior efficacy of HF10 therapy over
traditional SCS therapy for all primary and secondary endpoints.
The 12-month outcomes for HF10 therapy in our SENZA-RCT pivotal study were published in
Anesthesiology and are consistent with the outcomes from our European clinical study, the two year results of which
have been published in the Pain Medicine journal of the American Academy of Pain Medicine. The 24-month
SENZA-RCT results were presented in December 2015 at the annual meeting of the North American
Neuromodulation Society, showing sustained superiority of HF10 therapy compared with traditional SCS in treating
both back and leg pain over the 24-month follow-up period. The 24-month outcomes in our SENZA-RCT pivotal
study were published in Neurosurgery.
Patients with chronic pain are generally classified by physicians based on the location of their pain, for
example whether their worst pain is predominant back, predominant leg, mixed back and leg, upper limb, neck or
other. The adoption of SCS to date has been driven primarily by the treatment of patients whose worst pain is in
their legs and for whom other treatment approaches have failed. We believe that broader utilization of traditional
SCS therapy has been restrained by the lack of prospective randomized clinical evidence supporting SCS broadly
and, in particular, demonstrating an ability to treat back pain.
Safety Data (EU and RCT Studies)
Safety results of our SENZA-RCT pivotal study were consistent between the test and control groups. Study-
related serious adverse events, or SAEs, occurred in 4.0% of HF10 therapy subjects (n=4) compared with 7.2% of
traditional SCS therapy subjects (n=7; p = 0.37). In addition to the SAEs described above, there were two deaths,
one of which was study-related and resulted from a myocardial infarction of a subject randomized to traditional SCS
therapy that occurred during the implant procedure. The other death occurred outside the study period in the test
group and resulted from a malignant hepatic neoplasm. The most common study-related AEs were implant site pain
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(in 11.9% of HF10 therapy and 10.3% of traditional SCS therapy subjects) and uncomfortable paresthesia (in 11.3%
of traditional SCS therapy participants). Lead migration leading to revision occurred in 3.0% of HF10 therapy and
5.2% of traditional SCS therapy participants. Importantly, neurological assessment revealed no stimulation-related
neurological deficits in either treatment group. Also, there were no stimulation-related SAEs in either arm.
Safety results of our EU study demonstrated no evidence of neurologic deficit or dysfunction attributable to
prolonged delivery of HF10 therapy. Further, investigators reported that adverse events were similar in nature and
frequency to those seen with traditional SCS therapy. The most common adverse events in both arms of the study
were implant site pain, infection and lead migration.
Our Senza System
The Senza system is approved to create electrical impulses from 2 Hz to 10,000 Hz, including our proprietary
HF10 therapy, which allows for pain relief without paresthesia. HF10 therapy delivers proprietary waveforms at
10,000 Hz pulse rate with a statistically driven and clinically verified programming algorithm.
Senza, similar to other commercially available SCS systems, consists of leads, a trial stimulator, an IPG,
surgical tools, a clinician laptop programmer, a patient remote control and a mobile charger. These components
enable physicians to implant the leads and the IPG, and patients to operate the system.
Implantable Pulse Generator (IPG): The IPG contains a rechargeable battery and electronics that deliver
electrical pulses to the lead. It can connect to one or two leads, and up to 16 electrodes. It is a programmable device
and can deliver the required customized programs for each patient. The IPG is rechargeable and is placed surgically
under the skin, usually above the buttock or the abdomen. The Senza SCS system is CE Marked and FDA-approved
with labeling for “at least 10 year battery life”.
Percutaneous Leads: The percutaneous leads vary in length and are thin, insulated medical wires in a
cylindrical, flexible and steerable shape that conduct electrical pulses from the IPG to near the spinal cord. The
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insertion of the percutaneous leads can also be minimally invasive as they can be inserted in the epidural space
through a needle.
Surpass Surgical Leads: The Surpass surgical leads are similar to our percutaneous leads but in a larger
paddle-shaped format that provides a larger surface area that broadens exposure of the lead along the vertebrae. Our
Surpass surgical leads received initial approval from the FDA in late 2016 with a further approval received in
January 2017 and we commenced a controlled commercial launch in early 2017. We believe the availability of
Surpass leads will give access to up to approximately 30% of the U.S. SCS market that we previously did not
address without a surgical lead.
Trial Stimulator: The trial stimulator contains electronics that deliver electrical pulses to the lead. It is an
external device that is worn around the waist during the evaluation period that typically lasts several days. It is
powered by batteries.
Surgical Tools: Surgical tools include percutaneous insertion needles that are used to introduce the lead into
the epidural space, a variety of stylets that give physicians the ability to steer and deliver the lead to the desired
location, anchors to secure the leads and tunneling tools that provide access from the lead insertion site to the
location of the IPG.
Programmer: The clinician laptop programmer contains proprietary software that allows the customized per
patient programming of the IPG. It can non-invasively interrogate the IPG and transmit programming information
and download diagnostic information.
Patient Remote Control: The patient remote control is a handheld device that allows patients to turn their
stimulation on and off and change programs uploaded to their IPG.
Charger: The charger recharges the IPG from outside the body. To charge, the charging coil of the charger is
placed over the location of the IPG and then initiated by pushing a button on the charger. The charger is mobile and
can be worn around the waist using a belt when charging is needed, so that the patient can perform various tasks
10
while charging. Charging sessions are usually performed daily and are expected to average approximately 45
minutes a day.
Third-Party Coverage and Reimbursement
In the United States, the primary purchasers of Senza are hospitals and outpatient surgery centers. These
purchasers bill various third-party payors, such as Medicare, Medicaid and private health insurance plans for the
healthcare services associated with the SCS procedure. Government agencies and private payors determine whether
to provide coverage for specific procedures. In the United States, the Centers for Medicare & Medicaid Services, or
CMS, administers the Medicare and Medicaid programs (the latter, along with applicable state governments). As the
single largest payor, this program has a significant impact on other payors’ payment systems.
Generally, reimbursement for services performed at a hospital or outpatient surgery center are reported using
billing codes issued by the American Medical Association (AMA) known as Current Procedural Terminology, or
CPT, codes. Physician reimbursement under Medicare generally is based on a fee schedule and determined by the
relative values of the professional service rendered. Hospital outpatient services, reported by CPT codes, are
assigned to clinically relevant Ambulatory Payment Classifications (APCs) used to determine the Medicare payment
amount for services provided. In addition, CMS and the National Center for Health Statistics (NCHS) are jointly
responsible for overseeing changes and modifications to billing codes used by hospitals to report inpatient
procedures, known as ICD-10-PCS codes on and after October 1, 2015. In the United States, CMS has approved a
transitional pass-through payment for High-Frequency Stimulation under the Medicare hospital outpatient
prospective payment system effective beginning January 1, 2016 and expiring December 31, 2017 unless renewed
for an additional year, assigning a new Healthcare Common Procedure Coding System (HCPCS) Level II billing
code to describe High-Frequency Stimulation. This pass-through payment for HF10 therapy is in addition to the
established reimbursement for spinal cord stimulation implant procedures and devices. CMS determined that the
Senza SCS System delivering HF10 therapy met the criteria for a new transitional pass-through device category
based on evidence submitted from our SENZA-RCT study. We believe that SCS procedures using Senza are
adequately described by existing CPT, HCPCS II, and ICD-10-PCS codes for the implantation of spinal cord
stimulators and related leads performed in various sites of care.
Medicare reimbursement rates for the same or similar procedures vary due to geographic location, nature of
the facility in which the procedure is performed (i.e., hospital outpatient department or outpatient surgery centers)
and other factors. Although private payors’ coverage policies and reimbursement rates can differ significantly from
payor to payor, the Medicare program is frequently used as a model for how private payors and other governmental
payors develop their coverage and reimbursement policies for healthcare items and services, including SCS
procedures. For example, certain regional Blue Cross Blue Shield plans have denied coverage for Senza on the basis
that high-frequency neuromodulation is investigational and/or experimental. We continue to engage in efforts to
convince such payors of the advantages of HF10 therapy, however, there can be no assurances that we are successful
in overturning negative coverage decisions by private health insurance plans. In addition, payors continually review
new technologies for possible coverage and can, without notice, deny coverage for these new products and
procedures. As a result, the coverage determination process is often a time-consuming and costly process that will
require us to provide scientific and clinical support for the use of our products to each payor separately, with no
assurance that coverage and adequate reimbursement will be obtained, or maintained if obtained.
Outside the United States, reimbursement levels vary significantly by country, and by region within some
countries. Reimbursement is obtained from a variety of sources, including government-sponsored and private health
insurance plans, and combinations of both. Some countries will require us to gather additional clinical data before
granting broader coverage and reimbursement for our products. It is our intent to complete the requisite clinical
studies and obtain coverage and reimbursement approval beyond what we have today in countries where it makes
economic sense to do so.
Product Development and Research Development
Our objective is to continue to improve patient outcomes and further expand patient access to HF10 therapy
through enhancements to Senza and the development of new indications. Research and development, or R&D,
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expenses were $19.8 million, $21.4 million and $33.7 million, for the years ended December 31, 2014, 2015 and
2016, respectively.
Since the launch of the initial Senza system, we have introduced a number of product enhancements. These
include a short-tip version of the lead, new lengths of the lead, an active anchor with improved performance over
silicon anchors, a second generation active anchor with smaller volume, lead adaptors that allow use of competitor
leads already implanted in patients, second generation clinician programmer software, a second generation IPG with
improved shape and compatibility for scans of the head and extremities with both 1.5 and 3 Tesla (T) MRI machines
and our Surpass surgical lead to complement our percutaneous lead. We also expect to continue developing
enhancements to Senza to further increase performance and introduce new benefits including next generation IPGs
and enhanced MRI capabilities. There can be no assurance that we will be successful in these efforts or in receiving
any required regulatory approvals.
Sales and Marketing
United States
As of December 31, 2016, we had 194 hired and trained sales representatives in the field in the United States.
Our sales representatives target physician specialties involved in SCS treatment decisions, including neurosurgeons,
physiatrists, interventional pain specialists and orthopedic spine surgeons. We intend for sales representatives to
reach target sales in the United States of $1.3 million to $1.5 million over a period of 12 to 15 months from initial
field deployment. In addition, our commercial team plans to continue to create demand for Senza among additional
stakeholders involved in the SCS treatment decision, including third-party payors, hospitals administrators and SCS
patients and their families. We have also developed a clinical support team in order to provide ongoing support to
physicians and patients for the use of Senza.
International
We sell Senza in Europe and Australia through a combination of our direct sales force and a network of sales
agents and independent distributors. We began our direct sales operations in the United Kingdom in late 2010 and to
date have expanded our direct sales operations to Austria, Australia, Belgium, Germany, Luxembourg, Norway,
Sweden and Switzerland. We utilize sales agents and independent distributors to sell in an additional seven
countries.
Competition
We compete in the SCS market for chronic pain. We also compete with spine surgeries, in particular re-
operations. Currently, our major competitors are Medtronic, Boston Scientific and Abbott Laboratories through its
acquisition of St. Jude Medical, who have obtained regulatory approval for SCS systems. We believe that the
primary competitive factors in the market are:
Sales force experience and access.
Published clinical efficacy data.
Product support and service.
Effective marketing and education.
Company brand recognition.
Clinical research leadership.
Technological innovation, product enhancements and speed of innovation.
Pricing and reimbursement.
Product reliability, safety and durability.
Ease of use.
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Physician advocacy and support.
Many of our competitors have greater capital resources, more established operations, longer commercial
histories and more extensive relationships with physicians. They also have wider product offerings within
neuromodulation and in other product categories, providing them with greater supplier power and with more
opportunities to interact with stakeholders involved in purchasing decisions. We also face competition to recruit and
retain qualified sales and other personnel.
We expect our competitors to launch new products and release additional clinical evidence within the next few
years. For example, Abbott Laboratories, by virtue of its recent acquisition of St. Jude Medical, Inc., recently
received FDA approval for a SCS system that offers an alternate low frequency waveform called BurstDR, and in
February 2016, the company gained approval for a neuromodulation system that stimulates the dorsal root ganglion
for treatment of focal pain and complex regional pain syndrome, in each case, using pivotal clinical studies for each
therapy to support the FDA approval process. Medtronic is performing studies to collect data on existing SCS
products for back pain and also testing their high density programming approach. Additionally, Boston Scientific
has commenced a randomized clinical trial of a high-frequency SCS therapy in their Accelerate study and of a sub-
threshold therapy through their Whisper study. Additionally, there are a number of emerging competitors at various
stages of development. Stimwave has developed and is starting to commercialize a minimally invasive stimulation
system that employs an externally worn power source and radio frequency transmitter. Saluda is developing and
testing a low frequency closed loop system for the treatment of chronic pain. In November 2015, Nuvectra, a
company that was spun-off from Greatbatch, received FDA approval for its SCS system, which is similar to many of
the other traditional SCS systems currently on the market.
Intellectual Property
We actively seek to protect the intellectual property and proprietary technology that we believe is important to
our business, which includes seeking and maintaining patents covering our technology and products, proprietary
processes and any other inventions that are commercially or strategically important to the development of our
business. We also rely upon trademarks to build and maintain the integrity of our brand, and we seek to protect the
confidentiality of trade secrets that may be important to the development of our business. For more information,
please see “Risk Factors—Risks Related to Intellectual Property.”
Patents, Trademarks and Proprietary Technology
As of December 31, 2016, we owned 132 issued patents globally, of which 83 were issued U.S. utility patents,
2 were issued U.S. design patents, 23 were issued Australian utility patents, one was an Australian design patent, 9
were issued European utility patents, one was a European design patent, 5 were issued German Utility Models, 3
were issued Japanese patents, one was an issued Korean utility patent, one was an issued Korean design patent, two
were issued Chinese utility patents and one was an issued Chinese design patent. In general, our patents cover SCS
systems that are configured to generate non-paresthesia producing therapy signals at frequencies between 1,500 Hz
to 100,000 Hz, as well as additional aspects, algorithms and components of the Senza system and HF10 therapy. As
of December 31, 2016, we held 101 patent applications pending globally, of which 53 were patent applications
pending in the United States, and 48 were patent applications pending across Europe, Australia, Canada, Japan,
China and Korea. We also have an exclusive license from the Mayo Foundation to two U.S. issued patents and two
U.S. pending patent applications. All of our current issued patents are projected to expire between 2028 and 2035.
As of December 31, 2016, our trademark portfolio contained 16 trademark registrations, of which there were 4
U.S. trademark registrations, 4 Australian trademark registrations, 4 European trademark registrations, 2 Japanese
trademark registrations, one Swiss trademark registration and one Turkish trademark registration. Our trademark
portfolio also contained 3 pending U.S. trademark applications and 6 pending foreign trademark applications.
The term of individual patents depends on the legal term for patents in the countries in which they are granted.
In most countries, including the United States, the patent term is generally 20 years from the earliest claimed filing
date of a non-provisional patent application in the applicable country. We cannot assure that patents will be issued
from any of our pending applications or that, if patents are issued, they will be of sufficient scope or strength to
13
provide meaningful protection for our technology. Notwithstanding the scope of the patent protection available to
us, a competitor could develop treatment methods or devices that are not covered by our patents. Furthermore,
numerous U.S. and foreign issued patents and patent applications owned by third parties exist in the fields in which
we are developing products. Because patent applications can take many years to issue, there may be applications
unknown to us, which applications may later result in issued patents that our existing or future products or
proprietary technologies may be alleged to infringe.
There has been substantial litigation regarding patent and other intellectual property rights in the medical
device industry. In the future, we may need to engage in litigation to enforce patents issued or licensed to us, to
protect our trade secrets or know-how, to defend against claims of infringement of the rights of others or to
determine the scope and validity of the proprietary rights of others. Litigation could be costly and could divert our
attention from other functions and responsibilities. Adverse determinations in litigation could subject us to
significant liabilities to third parties, could require us to seek licenses from third parties and could prevent us from
manufacturing, selling or using Senza, any of which could severely harm our business.
We also rely upon trade secrets, know-how and continuing technological innovation, and may rely upon
licensing opportunities in the future, to develop and maintain our competitive position. We seek to protect our
proprietary rights through a variety of methods, including confidentiality agreements and proprietary information
agreements with suppliers, employees, consultants and others who may have access to proprietary information,
under which they are bound to assign to us inventions made during the term of their employment.
The Mayo License
In October 2006, we entered into a license agreement, or the Mayo License, with the Venturi Group, LLC, or
VGL, and the Mayo Foundation for Medical Education and Research, or the Mayo Foundation, pursuant to which
the Mayo Foundation committed to confer with us exclusively to develop products for the treatment of autonomic
and peripheral nervous system disorders, including pain, using devices to modulate nerve signaling, and non-
exclusively to test such devices, and VGL committed to confer with us non-exclusively to develop such devices, and
exclusively to test such devices. These commitments to confer expired in January 2011. We were granted a
worldwide license to make, use, sell, offer for sale, and import products incorporating or using the know-how
developed for and provided to us by the Mayo Foundation or VGL in the course of such development and testing
activities, exclusively for product development and non-exclusively for product testing. Pursuant to the Mayo
License, we are obligated to pay royalties in the low single digits to the Mayo Foundation, on a country-by-country
and product-by-product basis, based on a percentage of net sales of licensed products, subject to reduction under
certain circumstances. We are also required under the Mayo License to use commercially reasonable efforts to
research, develop and commercialize licensed products.
The Mayo License terminates upon the expiration of (1) the last to expire of the licensed patents or (2) our
obligation to pay royalties, whichever is later. We, the Mayo Foundation or VGL may terminate the Mayo License
upon 60 days’ notice of a party’s material breach if such breach remains uncured after such 60-day period.
Manufacturing and Supply
We rely upon third-party suppliers for the manufacture and assembly of our Senza SCS system and its
components, some of which are single- or sole-sources of the relevant product component. We have not yet
identified and qualified second-source replacements for several of our critical single-source suppliers. Thus, in the
event that our relationship with any of our single- or sole-source suppliers terminates in the future, we may have
difficulty maintaining sufficient production of our products at the standards we require. Where practicable, we seek
out and validate second-source manufacturers for our single-source components. We believe that existing third-party
facilities will be adequate to meet our current and anticipated manufacturing needs. We do not currently plan to
manufacture the Senza SCS system components ourselves.
We believe our manufacturing operations, and those of our suppliers, are in compliance with regulations
mandated by the FDA. Manufacturing facilities that produce medical devices or their component parts intended for
distribution world-wide are subject to regulation and periodic unannounced inspection by the FDA and other
domestic and international regulatory agencies. In the United States, we are required to manufacture any products
14
that we sell in compliance with the FDA’s Quality System Regulation, or QSR, which covers the methods used in,
and the facilities used for, the design, testing, control, manufacturing, labeling, quality assurance, packaging, storage
and shipping of our products. In international markets, we are required to obtain and maintain various quality
assurance and quality management certifications. We have obtained the following international certifications:
Quality Management System ISO13485, Full Quality Assurance Certification for the design and manufacture of
spinal cord stimulator systems and accessories and a Design Examination certificate for Implantable Pulse Generator
and Accessories. We are required to demonstrate continuing compliance with applicable regulatory requirements to
maintain these certifications and will continue to be periodically inspected by international regulatory authorities for
certification purposes.
Our material supply contracts are as follows:
Pro-Tech Design and Manufacturing
In July 2014, we entered into a new supply agreement with Pro-Tech Design and Manufacturing, Inc., or Pro-
Tech, pursuant to which Pro-Tech, as a single-source supplier, conducts the inspection, labeling, packaging and
sterilization of our Senza SCS system. Our supply agreement is scheduled to expire in July 2019, unless terminated
earlier. We may terminate the agreement without cause upon six months’ prior written notice, and Pro-Tech may
terminate without cause upon 18 months’ prior written notice. In addition, we and Pro-Tech have the right to
terminate the agreement upon 30 days’ prior written notice in the event of the other party’s material breach that
remains uncured at the end of such 30-day period.
Stellar Technologies
On July 1, 2009, we entered into a manufacturing agreement with Stellar Technologies, Inc., or Stellar, our
single-source supplier of our percutaneous leads, percutaneous lead extenders and surgical leads for our neurological
stimulator products. On June 30, 2014, the agreement’s initial term expired, and the agreement automatically
renewed for the first time. On July 1, 2014, we entered into a first amendment to the manufacturing agreement with
Stellar, which provides for an additional five year term commencing from the date of the amendment, after which
the agreement automatically renews for successive one-year terms unless either party provides written notice of
intent not to renew at least 30 days before the expiration of the then-current term. On January 28, 2016, we entered
into a second amendment to this agreement, which provides for the purchase of certain supplementary products
pursuant to the agreement. We refer to the manufacturing agreement as amended by the first and second
amendments as the Stellar Agreement.
Either we or Stellar may terminate the Stellar Agreement at will upon one year’s advance notice, subject to
certain remaining rights and payment obligations, including an early cancellation fee payable by us to Stellar. We
may also terminate the Stellar Agreement if Stellar is unable to perform its obligations under the Stellar Agreement
for 60 days or more, or if Stellar is unwilling to perform its obligations under the Stellar Agreement and does not
cure such defect within 60 days’ of our providing written notice to cure. Stellar may terminate the Stellar Agreement
in the event of our default of certain specified obligations, including our payment obligations, material violation of a
warranty or law, our material breach, and our insolvency.
CCC Supply Agreement
We rely upon C.C.C. Del Uruguay S.A., or CCC, a subsidiary of Greatbatch Ltd., as one of our manufacturers
of our IPGs. In April 2012, we entered into our original supply agreement with CCC, which we later amended in
March 2013, June 2014 and November 2016. On November 15, 2016, we entered into a new multi-year supply
agreement with CCC, pursuant to which CCC agreed to a revised arrangement with regard to the manufacture and
supply of our IPGs. The agreement is effective as of November 11, 2016 and, pursuant to its terms, terminated our
existing supply agreement with CCC entered into on March 13, 2015.
Pursuant to the terms of the agreement, CCC agreed to manufacture and supply our IPGs during the term of
the agreement. For the first three years of the term of the agreement, we are obligated to purchase from CCC
specified minimum purchase quantities of Model 1500 IPGs. At such time as we and the FDA approves the Model
2000 IPG and related manufacturing processes and facility, we will become obligated to purchase from CCC
15
specified minimum purchase quantities of Model 2000 IPGs. The foregoing specified minimum purchase
obligations are subject to certain exceptions and reductions in the event of supply failures, shortages and product
defects.
The agreement continues for ten years unless terminated earlier. The term of the agreement automatically
renews for additional two-year terms unless one party provides the other party with written notice of termination at
least one year prior to the end of the initial term or the applicable renewal period. In the event of a change of control
of CCC, the agreement may be terminated by us upon three years’ written notice to CCC, provided that such notice
period shall be one year in the event CCC is acquired by certain competitors to us. In addition, the agreement may
be terminated by mutual agreement of the parties, or by either party, with written notice, upon the other party’s
cessation of business or other termination of its business operations, uncured material breach or insolvency of the
other party. Upon termination of the agreement, CCC shall, subject to certain exceptions and unless otherwise
agreed to by the parties, fulfill all purchase orders placed by us and accepted by CCC prior to the effective date of
termination.
The agreement contains, among other provisions, customary representations and warranties by the parties,
ordering and payment and shipping terms, customary provisions with respect to the ownership of any intellectual
property created during the term of the agreement, certain indemnification rights in favor of both parties, limitations
of liability and customary confidentiality provisions.
EaglePicher Medical Power Supply Agreement
In April 2009, we entered into a product supply and development agreement with EaglePicher Medical
Power LLC, or EaglePicher, our single-source supplier of the batteries and related products for our IPG. Pursuant to
the agreement, EaglePicher must use its best efforts to supply these batteries and related products in sufficient
quantity to meet our demand. The agreement also provides that, upon our written request, EaglePicher will conduct
development of a modified version of these products to our specifications, if we so desire. The initial term of our
supply agreement with EaglePicher expired in November 2010, and the term had been automatically renewing for
successive one-year periods.
In March 2015, we entered into a first amendment to the product supply and development agreement with
EaglePicher. The amendment commits us to specified minimum purchase amounts over the course of the term of the
agreement and adjusts EaglePicher’s production capacity and facilities commitments under the agreement as well as
certain pricing, purchasing, delivery and cancellation terms. The amendment also extends the term of the agreement
to December 31, 2019, with an additional two-year automatic renewal period unless we or EaglePicher provides
notice of its intent not to renew prior to the commencement of such renewal term. We have also agreed, subject to
certain conditions, to purchase minimum quantities of product. The amendment further provides us with the right to
place a final order with EaglePicher following termination of the agreement, as amended and modifies certain
warranty and assignment terms and the parties’ limitations of liability.
In November 2015, we entered into a second amendment to the agreement, which increased our pre-existing
specified minimum purchase amounts and increased EaglePicher’s production capacity commitments under the
agreement, as well as specifying certain purchasing and purchase order protocols. The amendment obligated
EaglePicher to establish and qualify an additional battery production operation and commits us to fund
approximately $1.0 million of such production operation paid in three milestone installments. The amendment also
establishes EaglePicher as our exclusive battery supplier through the initial five-year term of the agreement, ending
December 31, 2019.
Vention Supply Agreement
In December 2015, we entered into a Manufacturing and Supply Agreement with Vention Medical Design and
Development, Inc., or Vention, pursuant to which Vention agreed to manufacture and supply our IPGs. We are
obligated to purchase from Vention specified minimum purchase quantities of IPGs for the duration of the Vention
agreement.
16
The agreement continues for five years unless terminated earlier. The term of the agreement automatically
renews for additional one-year terms unless one party provides the other party with written notice of termination at
least one year prior to the end of the applicable renewal period. The agreement may be terminated by us for any
reason upon 180 days’ written notice to Vention. In addition, the agreement may be terminated by mutual agreement
of the parties, or by either party, with written notice, upon uncured material breach or insolvency of the other party.
Upon termination of the agreement, Vention shall, upon our request, manufacture an additional 24 months of
continuous supply of IPGs based on the preceding forecast average or such other amount as agreed upon by the
parties.
Other Suppliers
We also have other suppliers, including some sole-source suppliers, for certain of our components, with whom
we do not have agreements.
Product Liability and Insurance
The manufacture and sale of our products subjects us to the risk of financial exposure to product liability
claims. Our products are used in situations in which there is a risk of serious injury or death. We carry insurance
policies which we believe to be customary for similar companies in our industry. We cannot assure you that these
policies will be sufficient to cover all or substantially all losses that we experience.
We endeavor to maintain executive and organization liability insurance in a form and with aggregate coverage
limits that we believe are adequate for our business purposes, but our coverage limits may prove not to be adequate
in some circumstances.
Government Regulations
United States
Our products and operations are subject to extensive and rigorous regulation by the FDA under the Federal
Food, Drug, and Cosmetic Act, or FFDCA, and its implementing regulations, guidances, and standards. The FDA
regulates the research, testing, manufacturing, safety, labeling, storage, recordkeeping, promotion, distribution, and
production of medical devices in the United States to ensure that medical products distributed domestically are safe
and effective for their intended uses. The FDA also regulates the export of medical devices manufactured in the
United States to international markets. Any violations of these laws and regulations could result in a material
adverse effect on our business, financial condition and results of operations. In addition, if there is a change in law,
regulation or judicial interpretation, we may be required to change our business practices, which could have a
material adverse effect on our business, financial condition and results of operations.
Under the FFDCA, medical devices are classified into one of three classes—Class I, Class II or Class III—
depending on the degree of risk associated with each medical device and the extent of control needed to ensure
safety and effectiveness.
Class I devices are those for which safety and effectiveness can be assured by adherence to FDA’s “general
controls” for medical devices, which include compliance with the applicable portions of the QSR facility registration
and product listing, reporting of adverse medical events, and appropriate, truthful and non-misleading labeling,
advertising, and promotional materials. Some Class I devices also require premarket clearance by the FDA through
the 510(k) premarket notification process described below.
Class II devices are subject to FDA’s general controls, and any other “special controls” deemed necessary by
FDA to ensure the safety and effectiveness of the device. Premarket review and clearance by the FDA for Class II
devices is accomplished through the 510(k) premarket notification procedure, though certain Class II devices are
exempt from this premarket review process. When a 510(k) is required, the manufacturer must submit to the FDA a
premarket notification submission demonstrating that the device is “substantially equivalent” to a legally marketed
device, which in some cases may require submission of clinical data. A legally marketed device is defined by statute
to mean a device that was legally marketed prior to May 28, 1976, the date upon which the Medical Device
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Amendments of 1976 were enacted, or another commercially available, similar device that was cleared through the
510(k) process. Unless a specific exemption applies, 510(k) premarket notification submissions are subject to user
fees. If the FDA determines that the device, or its intended use, is not substantially equivalent to a legally marketed
device, the FDA will place the device, or the particular use of the device, into Class III, and the device sponsor must
then fulfill much more rigorous premarketing requirements in the form of a premarket approval, or PMA.
A Class III device includes devices deemed by the FDA to pose the greatest risk such as life-supporting or
life-sustaining devices, or implantable devices, in addition to a device that has a new intended use or utilizes
advanced technology that is not substantially equivalent to that of a legally marketed device. The safety and
effectiveness of Class III devices cannot be assured solely by general and special controls. These devices almost
always require formal clinical studies to demonstrate safety and effectiveness.
Submission and FDA approval of a PMA application is required before marketing of a Class III device can
proceed.
PMA Approval
The Senza SCS system is a Class III device subject to review and approval through the PMA pathway. PMA
applications must be supported by, among other things, valid scientific evidence, which typically requires extensive
data, including technical, preclinical, clinical and manufacturing data, to demonstrate to the FDA’s satisfaction the
safety and effectiveness of the device. A PMA application must also include, among other things, a complete
description of the device and its components, a detailed description of the methods, facilities and controls used to
manufacture the device and proposed labeling. As with 510(k) submissions, unless subject to an exemption, PMA
submissions are subject to user fees.
The FDA has 45 days from its receipt of a PMA to determine whether the application will be accepted for
filing based on the agency’s threshold determination that it is sufficiently complete to permit substantive review.
Once the submission is accepted for filing, the FDA begins an in-depth review. The FDA, by statute and by
regulation, has 180-days to review an “accepted” PMA application, although the review of an application more often
occurs over a significantly longer period of time, and can take up to several years. During this review period, the
FDA may request additional information or clarification of information already provided. In addition, the FDA will
conduct a pre-approval inspection of the applicant and/or its third-party manufacturers’ or suppliers’ manufacturing
facility or facilities to ensure compliance with the QSR, which requires manufacturers to follow design, testing,
control, documentation and other quality assurance procedures.
The timing of FDA review of an initial PMA application can vary substantially and, in some cases, require
several years to complete. The FDA can delay, limit, or deny approval of a PMA application for many reasons,
including:
it is not demonstrated that there is reasonable assurance that the device is safe or effective under the
conditions of use prescribed, recommended or suggested in the proposed labeling;
the data from preclinical studies and clinical trials may be insufficient; and
the manufacturing process, methods, controls or facilities used for the manufacture, processing, packing
or installation of the device do not meet applicable requirements.
If the FDA evaluations of both the PMA application and the manufacturing facilities are favorable, the FDA
will either issue an approval letter or an approvable letter, which usually contains a number of conditions that must
be met in order to secure final approval of the PMA. If the FDA’s evaluation of the PMA or manufacturing facilities
is not favorable, the FDA will deny approval of the PMA or issue a not approvable letter. A not approvable letter
will outline the deficiencies in the application and, where practical, will identify what is necessary to make the PMA
approvable. The FDA may also determine that additional clinical trials are necessary, in which case the PMA
approval may be delayed for several months or years while the trials are conducted and the data is then submitted in
an amendment to the PMA. Once granted, PMA approval may be withdrawn by the FDA if compliance with post
approval requirements, conditions of approval or other regulatory standards is not maintained or problems are
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identified following initial marketing. In May 2015, we received approval for our PMA application for the Senza
SCS system.
Approval by the FDA of new PMA applications or PMA supplements may be required for modifications to
the manufacturing process, labeling, device specifications, materials or design of a device that is approved through
the PMA process. PMA supplements often require submission of the same type of information as an initial PMA
application, except that the supplement is limited to information needed to support any changes from the device
covered by the original PMA application and may not require as extensive clinical data. For example, if we seek
approval to expand the label of Senza to include additional pain indications, we anticipate that we will be required to
submit and receive approval for a PMA supplement.
Clinical Studies
In the United States, human clinical trials intended to support medical device clearance or approval require
compliance with the FDA’s investigational device exemption, or IDE, regulations. For a device that presents a
“significant risk” to human health, the device sponsor is required to file an IDE application with the FDA and obtain
IDE approval prior to commencing the human clinical trial, as well as obtain approval of an Institutional Review
Board, or IRB, at each institution where the study will be conducted. If the device is considered a “non-significant
risk,” IDE approval from FDA is not required. Instead, only approval from the IRB overseeing the investigation at
each clinical trial site is required, though the sponsor must still comply with abbreviated IDE requirements, such as
protection of human subjects and informed consent. Human clinical studies are generally required in connection
with approval of Class III devices and may be required for Class I and II devices. The FDA or the IRB at each
institution at which a clinical trial is being performed may suspend a clinical trial at any time for various reasons,
including a belief that the subjects are being exposed to an unacceptable health risk.
Continuing Regulation
After the FDA permits a device to enter commercial distribution, numerous regulatory requirements apply.
These include: compliance with the QSR, which requires manufacturers to follow elaborate design, testing, control,
documentation and other quality assurance procedures during the manufacturing process; labeling regulations; the
FDA’s general prohibition against promoting products for unapproved or “off-label” uses; the reports of Corrections
and Removals regulation, which requires manufacturers to report recalls and field actions to the FDA if initiated to
reduce a risk of health posed by the device or to remedy a violation of the Federal Food, Drug and Cosmetic Act;
and the Medical Device Reporting regulation, which requires that manufacturers report to the FDA if their device
may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or
contribute to a death or serious injury if it were to reoccur. Manufacturers are also required to register and list their
devices with the FDA, based on which the FDA will conduct inspections to ensure continued compliance with
applicable regulatory requirements.
The FDA has broad post-market and regulatory and enforcement powers. Failure to comply with the
applicable U.S. medical device regulatory requirements could result in, among other things, warning letters; fines;
injunctions; consent decrees; civil penalties; repairs, replacements or refunds; recalls, corrections or seizures of
products; total or partial suspension of production; the FDA’s refusal to grant future premarket clearances or
approvals; withdrawals or suspensions of current product applications; and criminal prosecution. If any of these
events were to occur, they could have a material adverse effect on our business, financial condition and results of
operations.
International
Our international sales are subject to regulatory requirements in the countries in which our products are sold.
The regulatory review process varies from country to country and may in some cases require the submission of
clinical data. In addition, the FDA must be notified of, or approve the export to certain countries of devices that
require a PMA, and not yet approved in the United States.
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In the European Economic Area, or EEA (which is comprised of the 28 Member States of the EU plus
Norway, Liechtenstein and Iceland), we need to comply with the requirements of the EU Active Implantable
Medical Devices Directive, or AIMDD, and appropriately affix the CE Mark on our products to attest to such
compliance. To achieve compliance, our products must meet the “Essential Requirements” laid down in Annex I of
the AIMDD relating to safety and performance. To demonstrate compliance with the Essential Requirements and
obtain the right to affix the CE mark we must undergo a conformity assessment procedure, which varies according
to the type of medical device and its classification. Except for low risk medical devices (Class I with no measuring
function and which are not sterile), where the manufacturer can issue an EC Declaration of Conformity based on a
self-assessment of the conformity of its products with the Essential Requirements, a conformity assessment
procedure requires the intervention of a Notified Body, which is an organization designated by a competent
authority of an EEA country to conduct conformity assessments. Depending on the relevant conformity assessment
procedure, the Notified Body would audit and examine the Technical File and the quality system for the
manufacture, design and final inspection of our devices. The Notified Body issues a CE Certificate of Conformity
following successful completion of a conformity assessment procedure conducted in relation to the medical device
and its manufacturer and their conformity with the Essential Requirements. This Certificate entitles the manufacturer
to affix the CE mark to its medical devices after having prepared and signed a related EC Declaration of
Conformity. The assessment of the conformity of Senza has been certified by our Notified Body (the British
Standards Institution, or BSI).
As a general rule, demonstration of conformity of medical devices and their manufacturers with the Essential
Requirements must be based, among other things, on the evaluation of clinical data supporting the safety and
performance of the products during normal conditions of use. Specifically, a manufacturer must demonstrate that the
device achieves its intended performance during normal conditions of use and that the known and foreseeable risks,
and that any adverse events, are minimized and acceptable when weighed against the benefits of its intended
performance, and that any claims made about the performance and safety of the device (e.g., product labeling and
instructions for use) are supported by suitable evidence. This assessment must be based on clinical data, which can
be obtained from (1) clinical studies conducted on the devices being assessed, (2) scientific literature from similar
devices whose equivalence with the assessed device can be demonstrated or (3) both clinical studies and scientific
literature. With respect to active implantable medical devices or Class III devices, the manufacturer must conduct
clinical studies to obtain the required clinical data, unless reliance on existing clinical data from equivalent devices
can be justified. The conduct of clinical studies in the EEA is governed by detailed regulatory obligations. These
may include the requirement of prior authorization by the competent authorities of the country in which the study
takes place and the requirement to obtain a positive opinion from a competent Ethics Committee. This process can
be expensive and time-consuming. Additionally, Senza must continue to comply with the requirements of certain
EU Directives.
We are subject to continued surveillance by our Notified Body and will be required to report any serious
adverse incidents to the appropriate authorities. We also must comply with additional requirements of individual
countries in which our products are marketed.
The assessment of the conformity of Senza with the AIMDD and the Radio and Telecommunications
Terminal (R&TTE) Directive has been certified by the BSI.
In September 2012, the European Commission published proposals for the revision of the EU regulatory
framework for medical devices. The proposal would replace the Medical Devices Directive and the Active
Implantable Medical Devices Directive with two new regulations; the Medical Devices Regulation and the In-Vitro
Diagnostic Medical Devices Regulation. Unlike the directives, which must be implemented into the national laws of
the EEA member States, the regulations would be directly applicable, i.e., without the need for adoption of EEA
member State laws implementing them, in all EEA Member States and are intended to eliminate current differences
in the regulation of medical devices among EEA member States.
The European Parliament adopted its position on the European Commission’s proposals in first reading in
April 2014 and the European Council agreed on its general approach in October 2015. Interinstitutional negotiations
between the European Council, Parliament and Commission concluded with an agreement on a revised version of
the proposals in May 2016. Both proposals are now undergoing legal-linguistic revision. The formal first reading of
the Council is expected early this year, followed by a plenary vote in Parliament at second reading, which would
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lead to the final adoption of the two regulations in the first quarter of 2017. The Medical Devices Regulation will
however only become applicable three years after publication while the In-Vitro Diagnostic Medical Devices
Regulation will only become applicable five years after publication. Once applicable, the new regulations will
among other things:
strengthen the rules on placing devices on the market and reinforce surveillance once they are available;
establish explicit provisions on manufacturers' responsibilities for the follow-up of the quality,
performance and safety of devices placed on the market;
improve the traceability of medical devices throughout the supply chain to the end-user or patient
through a unique identification number;
set up a central database to provide patients, healthcare professionals and the public with comprehensive
information on products available in the EU;
strengthened rules for the assessment of certain high-risk devices, such as implants, which may have to
undergo an additional check by experts before they are placed on the market.
Other Regulations
We are also subject to healthcare fraud and abuse regulation in the jurisdictions in which we will conduct our
business. These laws include, without limitation, applicable anti-kickback, false claims, physician sunshine and
patient privacy and security laws and regulations.
Anti-Kickback Statute: The federal Anti-Kickback Statute prohibits, among other things, persons or entities
from knowingly and willfully soliciting, offering, receiving or paying any remuneration, directly or indirectly,
overtly or covertly, in cash or in kind, in exchange for or to induce either the referral of an individual for, or the
purchase, lease, order or recommendation of, any good, facility, item or service for which payment may be made, in
whole or in part, under federal healthcare programs such as Medicare and Medicaid. The federal Anti-Kickback
Statute is broad and prohibits many arrangements and practices that are lawful in businesses outside of the
healthcare industry. The term “remuneration” includes kickbacks, bribes, or rebates and also has been broadly
interpreted to include anything of value, including for example, gifts, discounts, the furnishing of supplies or
equipment, credit arrangements, payments of cash, waivers of payments, ownership interests and providing anything
at less than its fair market value. There are a number of statutory exceptions and regulatory safe harbors protecting
certain business arrangements from prosecution under the federal Anti-Kickback Statute. These statutory exceptions
and safe harbors set forth provisions that, if all their applicable requirements are met, will assure healthcare
providers and other parties that they may not be prosecuted under the federal Anti-Kickback Statute. The failure of a
transaction or arrangement to fit precisely within one or more applicable statutory exceptions or safe harbors does
not necessarily mean that it is illegal or that prosecution will be pursued. However, conduct and business
arrangements that do not fully satisfy all requirements of an applicable safe harbor may result in increased scrutiny
by government enforcement authorities and will be evaluated on a case-by-case basis based on a cumulative review
of all of its facts and circumstances. Further, a person or entity does not need to have actual knowledge of the statute
or specific intent to violate it. In addition, the government may assert that a claim including items or services
resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of
the federal civil False Claims Act which is discussed below. Penalties for violations of the Anti-Kickback Statute
include, but are not limited to, criminal, civil and/or administrative penalties, damages, fines, disgorgement,
individual imprisonment, possible exclusion from Medicare, Medicaid and other federal healthcare programs, and
the curtailment or restructuring of operations.
Federal Civil False Claims Act: The federal civil False Claims Act prohibits, among other things, persons or
entities from knowingly presenting or causing to be presented a false or fraudulent claim to, or the knowing use of
false statements to obtain payment from or approval by, the federal government. In addition, private individuals
have the ability to bring actions under the civil False Claims Act in the name of the government alleging false and
fraudulent claims presented to or paid by the government (or other violations of the statutes) and to share in any
amounts paid by the entity to the government in fines or settlement. Such suits, known as qui tam actions, have
increased significantly in the healthcare industry in recent years. Manufacturers can be held liable under these laws
if they are deemed to “cause” the submission of false or fraudulent claims by, for example, providing inaccurate
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billing or coding information to customers or promoting a product off-label. Penalties for a federal civil False
Claims Act violation include three times the actual damages sustained by the government, plus mandatory civil
penalties that range, as of August 1, 2016, from approximately $10,781 to $21,563 for each separate false claim, the
potential for exclusion from participation in federal healthcare programs and criminal liability.
Health Insurance Portability and Accountability Act of 1996: The federal Health Insurance Portability and
Accountability Act, or HIPAA, created several new federal crimes, including healthcare fraud and false statements
relating to healthcare matters. The healthcare fraud statute prohibits knowingly and willfully executing, or
attempting to execute, a scheme to defraud any healthcare benefit program, including private third-party payors. The
false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or
making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for
healthcare benefits, items or services.
In addition, HIPAA and its implementing regulations established uniform standards for certain covered
entities, which are healthcare providers, health plans and healthcare clearinghouses, as well as their business
associates, governing the conduct of specified electronic healthcare transactions and protecting the security and
privacy of protected health information. HIPAA, as amended by the Health Information Technology for Economic
and Clinical Health Act, created four new tiers of civil monetary penalties and gave state attorneys general new
authority to file civil actions for damages or injunctions in federal courts to enforce the federal HIPAA laws and
seek attorneys’ fees and costs associated with pursuing federal civil actions.
EU Data Protection Laws: We are subject to laws and regulations in non-U.S. countries covering data privacy
and the protection of health-related and other personal information. EU member states and other jurisdictions have
adopted data protection laws and regulations, which impose significant compliance obligations. Laws and
regulations in these jurisdictions apply broadly to the collection, use, storage, disclosure and security of personal
information that identifies or may be used to identify an individual, such as names, contact information and sensitive
personal data such as health data. These laws and regulations are subject to frequent revisions and differing
interpretations, and have generally become more stringent over time.
For example, the EU Data Protection Directive, as implemented into national laws by the EU member states,
imposes strict obligations and restrictions on the processing of personal data. The new EU-wide General Data
Protection Regulation, or GDPR, entered into force in May 2016 and will become applicable on May 25, 2018,
replacing the current data protection laws of each EU member state. The GDPR will implement more stringent
operational requirements for processors and controllers of personal data, including, for example, expanded
disclosures about how personal information is to be used, limitations on retention of information, increased
requirements pertaining to health data and pseudonymised (i.e., key-coded) data, mandatory data breach notification
requirements and higher standards for data controllers to demonstrate that they have obtained valid consent for
certain data processing activities. The GDPR provides that EU member states may make their own further laws and
regulations limiting the processing of genetic, biometric or health data, which could limit our ability to use and share
personal data or could cause our costs could increase, and harm our business and financial condition.
We are also subject to evolving EU laws on data export, as we may transfer personal data from the EU to
other jurisdictions. For example, in 2015, the Court of Justice of the European Union invalidated the U.S.-EU Safe
Harbor framework regarding the transfer of personal data from the EU to the U.S. EU and U.S. negotiators agreed in
February 2016 to a new framework, the Privacy Shield, which would replace the Safe Harbor framework. However,
there is currently litigation against this framework as well as litigation challenging other EU mechanisms for
adequate data transfers (e.g. the standard contractual clauses), and it is uncertain whether the Privacy Shield
framework and/or the standard contractual clauses will be similarly invalidated by the EU courts. We rely on a
mixture of mechanisms to transfer data to from our EU business to the U.S., and could be impacted by changes in
law as a result of the current challenges to these mechanisms in the European courts.
In recent years, U.S. and European lawmakers and regulators have expressed concern over electronic
marketing and the use of third-party cookies, web beacons and similar technology for online behavioral advertising.
In the EU, informed consent is required for the placement of a cookie on a user’s device. The current EU laws that
cover the use of cookies and similar technology and marketing online or by electronic means are under reform. A
draft of the new ePrivacy Regulation was announced on January 10, 2017 and is targeted to become applicable on
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May 25, 2018 (alongside the GDPR). Unlike the current ePrivacy Directive, this will be directly implemented into
the laws of each of the EU member States, without the need for further enactment. When implemented, the ePrivacy
Regulation is expected to alter rules on third-party cookies, web beacons and similar technology for online
behavioral advertising and to impose stricter requirements on companies using these tools. The draft also extends
the strict opt-in marketing rules with limited exceptions to business to business communications, and significantly
increases penalties.
Any failure or perceived failure by us to comply with privacy or security laws, policies, legal obligations or
industry standards or any security incident that results in the unauthorized release or transfer of personally
identifiable information may result in governmental enforcement actions and investigations including by European
Data Protection Authorities, fines and penalties (for example, of up to 20,000,000 Euros or up to 4% of the total
worldwide annual turnover of the preceding financial year (whichever is higher) under the GDPR and draft ePrivacy
Regulation), litigation and/or adverse publicity, including by consumer advocacy groups, and could cause our
customers to lose trust in us, which could have an adverse effect on our reputation and business. Such failures could
have a material adverse effect on our financial condition and operations. If the third parties we work with violate
applicable laws, contractual obligations or suffer a security breach, such violations may also put us in breach of our
obligations under privacy laws and regulations and/or could in turn have a material adverse effect on our business.
The Federal Physician Payments Sunshine Act: The federal Physician Payments Sunshine Act requires certain
manufacturers of drugs, devices, biologics and medical supplies for which payment is available under Medicare,
Medicaid or the Children’s Health Insurance Program, with certain exceptions, to report annually to CMS
information related to “payments or other transfers of value” made to physicians (defined to include doctors,
dentists, optometrists, podiatrists and chiropractors) and teaching hospitals, and to report annually to CMS certain
ownership and investment interests held by physicians and their immediate family members.
Analogous State and Foreign Law Equivalents: We may be subject to state and foreign law equivalents of
each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or services
reimbursed by any third-party payor, including commercial insurers; state laws that require device companies to
comply with the industry’s voluntary compliance guidelines and the applicable compliance guidance promulgated
by the federal government or otherwise restrict payments that may be made to healthcare providers and other
potential referral sources; state laws that require device manufacturers to report information related to payments and
other “transfers of value” to physicians and other healthcare providers or marketing expenditures; and state laws
governing the privacy and security of health information in certain circumstances, many of which differ from each
other in significant ways and may not have the same effect, thus complicating compliance efforts.
Healthcare Reform: In March 2010 the Affordable Care Act, or the ACA, was signed into law, which has the
potential to substantially change healthcare financing and delivery by both governmental and private insurers, and
significantly impact the medical device industry. The Affordable Care Act impacted existing government healthcare
programs and resulted in the development of new programs. The Affordable Care Act’s provisions of importance
include, but are not limited to, a deductible 2.3% excise tax on any entity that manufactures or imports medical
devices offered for sale in the United States, with limited exceptions, effective January 1, 2013. In December 2015,
Former President Obama signed into law the Consolidated Appropriations Act, 2016, which included a two-year
moratorium on the medical device excise tax such that medical device sales in 2016 and 2017 are exempt from the
medical device excise tax. Unless there is further legislative action, the tax will be automatically reinstated for sales
of medical devices on or after January 1, 2018.
In addition, other legislative changes have been proposed and adopted since the ACA was enacted. These
changes included an aggregate reduction in Medicare payments to providers of up to 2% per fiscal year, which went
into effect on April 1, 2013 and will remain in effect through 2025 unless additional Congressional action is taken.
The Medicare Access and CHIP Reauthorization Act of 2015, enacted on April 16, 2015 (MACRA), repealed the
formula by which Medicare made annual payment adjustments to physicians and replaced the former formula with
fixed annual updates and a new system of incentive payments scheduled to begin in 2019 that are based on various
performance measures and physicians’ participation in alternative payment models such as accountable care
organizations.
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There have been judicial and congressional challenges to certain aspects of the ACA. In addition, Congress
could consider subsequent legislation to repeal or potentially replace certain elements of the ACA. Any regulatory or
legislative developments in domestic or foreign markets that eliminates or reduces reimbursement rates for
procedures performed with our products could harm our ability to sell our products or cause downward pressure on
the prices of our products, either of which would affect our ability to generate the revenues necessary to support our
business.
The Foreign Corrupt Practices Act: The Foreign Corrupt Practices Act, or FCPA, prohibits any U.S.
individual or business from paying, offering or authorizing payment or offering of anything of value, directly or
indirectly, to any foreign official, political party or candidate for the purpose of influencing any act or decision of
the foreign entity in order to assist the individual or business in obtaining or retaining business. The FCPA also
obligates companies whose securities are listed in the United States to comply with accounting provisions requiring
the company to maintain books and records that accurately and fairly reflect all transactions of the corporation,
including international subsidiaries, and to devise and maintain an adequate system of internal accounting controls
for international operations.
The UK Bribery Act. The UK Bribery Act prohibits giving, offering or promising bribes to any person,
including non-UK government officials and private persons, as well as requesting, agreeing to receive, or accepting
bribes from any person. In addition, under the UK Bribery Act, companies which carry on a business or part of a
business in the UK, as we do, may be held liable for bribes given, offered or promised to any person, including non-
UK government officials and private persons, by employees and persons associated with the company in order to
obtain or retain business or a business advantage for the company. Liability is strict, with no element of a corrupt
state of mind, but a defense of having in place adequate procedures designed to prevent bribery is available.
Furthermore, under the UK Bribery Act there is no exception for facilitation payments.
Employees
As of December 31, 2016, we had 518 employees globally. We believe the success of our business depends, in
part, on our ability to attract and retain qualified personnel. We are committed to developing our employees and
providing them with opportunities to contribute to our growth and success. Our employees are not subject to a
collective bargaining agreement, and we believe that we have good relations with our employees.
About Us
We were incorporated in Minnesota in March 2006 and reincorporated in Delaware in October 2006. We
completed the initial public offering of our common stock in November 2014. Our common stock is currently listed
on the New York Stock Exchange (NYSE) under the symbol “NVRO.” Our principal executive offices are located
at 1800 Bridge Parkway, Redwood City, California 94065. Our telephone number is (650) 251-0005. Our website
address is www.nevro.com. The information on, or that can be accessed through, our website is not incorporated by
reference into this Annual Report on Form 10-K, or Annual Report, or any other filings we make with the U.S.
Securities and Exchange Commission, or SEC.
Available Information
We make available on or through our website certain reports and amendments to those reports that we file
with, or furnish to, the SEC in accordance with the Securities Exchange Act of 1934, as amended, or the Exchange
Act. These include our Annual Reports on Form 10-K, our Quarterly Reports on Form 10-Q and our Current
Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Exchange Act. We make this information available on or through our website free of charge as soon as reasonably
practicable after we electronically file the information with, or furnish it to, the SEC. This information is also
available by writing to us at the address on the cover of this Annual Report. Copies of this information may be
obtained at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information on the
operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC
maintains a website that contains reports, proxy and information statements, and other information regarding our
filings, at www.sec.gov. The information on, or that can be accessed through, our website is not incorporated by
reference into this Annual Report or any other filings we make with the SEC.
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ITEM 1A. RISK FACTORS
Our business involves significant risks, some of which are described below. You should carefully consider these
risks, as well as the other information in this Annual Report, including our financial statements and the related
notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The
occurrence of any of the events or developments described below could harm our business, financial condition,
results of operations and growth prospects. Additional risks and uncertainties not presently known to us or that we
currently deem immaterial may also impair our business.
Risks Related to our Business
We have a history of significant losses. If we do not achieve and sustain profitability, our financial condition
could suffer.
We have experienced significant net losses, and have no assurance that we will achieve profitability. In May
2015, the FDA approved our PMA to market Senza in the United States and we commenced commercial sales in the
United States in mid-2015. We expect to continue to incur losses as we build our U.S. commercial sales force and
continue our commercial launch in the United States, as well as continue to investigate the use of our HF10 therapy
to treat other chronic pain conditions. We incurred net losses of $31.8 million, $67.4 million and $30.7 million for
the years ended December 31, 2016, 2015 and 2014, respectively. As of December 31, 2016 our accumulated deficit
was $221.2 million. Our prior losses have had, and will continue to have, an adverse effect on our stockholders’
equity and working capital. If our revenue grows more slowly than we anticipate, or if our operating expenses are
higher than we expect, we may not be able to achieve profitability and our financial condition could suffer. For
example, we have recently filed a complaint against Boston Scientific alleging patent infringement, and Boston
Scientific Corporation followed by filing a complaint against us alleging patent infringement. These lawsuits may
result in substantial legal expenses. Even if we achieve profitability in the future, we may not be able to sustain
profitability in subsequent periods.
We are substantially dependent on continued market acceptance in the United States for our HF10 therapy, and
the failure of our HF10 therapy to continue to gain market acceptance would negatively impact our business.
Since our inception, we have devoted substantially all of our efforts to the development and
commercialization of Senza and HF10 therapy for the treatment of chronic leg and back pain. Prior to mid-2015, our
revenue was derived nearly entirely from sales of Senza in Europe and Australia. Although we received approval of
our PMA in May 2015, we are still in the early stages of our commercialization efforts in the United States and have
a limited history of commercializing our product in the United States. We have incurred, and anticipate we will in
the future incur, significant costs, including costs to continue to build our sales force in order to sustain our
commercial sales in the United States. If we are unable to continue to achieve significant market acceptance in the
United States, our results of operations will be adversely affected as the United States is expected to be the principal
market for Senza. Because we do not have any other products currently in development, if we are unsuccessful in
our continuing efforts to commercialize Senza or are unable to market Senza as a result of a quality problem, failure
to maintain or obtain additional regulatory approvals, unexpected or serious complications or other unforeseen
negative effects related to our HF10 therapy or the other factors discussed in these risk factors, we would lose our
only source of revenue, and our business will be materially adversely affected.
We also have limited experience engaging in commercial activities and limited established relationships with
physicians and hospitals as well as third-party suppliers on whom we depend for the manufacture of our product. We
may be unable to gain broader market acceptance in the countries in which we have already begun to commercialize
Senza, including the United States, for a number of reasons, including:
established competitors with strong relationships with customers, including physicians, hospitals and
third-party suppliers;
limitations in our ability to demonstrate differentiation and advantages of our product compared to
competing products and the relative safety, efficacy and ease of use of our product;
the limited size of our sales force and the learning curve required to gain experience selling our product;
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the inability to obtain sufficient supply of the components for Senza or secure second-source suppliers if
our main suppliers are unable to fulfill our orders;
insufficient financial or other resources to support our commercialization efforts necessary to reach
profitability; and
the introduction and market acceptance of new, more effective or less expensive competing products
and technologies.
Moreover, physicians and hospitals may not perceive the benefits of our products and may be unwilling to
change from the SCS devices they are currently using. Communicating the benefits of Senza and HF10 therapy to
these physicians and hospitals requires a significant commitment by our marketing team and sales organization.
Physicians and hospitals may be slow to change their practices because of perceived risks arising from the use of
new products. Physicians may not recommend or use Senza until there is more long-term commercial experience to
convince them to alter their existing treatment methods, or until they receive additional recommendations from other
physicians that our product is effective. We cannot predict when, if ever, physicians and hospitals may adopt use of
our product. If we are unable to educate physicians and hospitals about the advantages of our HF10 therapy and
Senza, do not continue to gain market acceptance of our product, or fail to significantly grow our market share, we
will not be able to grow our revenue and our business and financial condition will be adversely affected.
We are currently, and may in the future become, involved in lawsuits to protect or enforce our intellectual
property, which could be expensive and time consuming, and ultimately unsuccessful, and could result in the
diversion of significant resources, thereby hindering our ability to effectively grow sales of our Senza system or
commercialize future products, if any. If we are unable to obtain, maintain, protect, and enforce our intellectual
property, our business will be negatively affected.
The market for medical devices is subject to rapid technological change and frequent litigation regarding
patent and other intellectual property rights. It is possible that our patents or licenses may not withstand challenges
made by others or protect our rights adequately.
Our success depends in large part on our ability to secure effective patent protection for our products and
processes in the United States and internationally. We have filed and intend to continue to file patent applications for
various aspects of our technology and trademark applications to protect our brand and business. We seek to obtain
and maintain patents and other intellectual property rights to restrict the ability of others to market products or
services that misappropriate our technology and/or infringe our intellectual property to compete with our products.
However, we face the risks that:
We may fail to secure necessary patents, potentially permitting competitors to market competing
products and make, use or sell products that are substantially the same as ours without incurring the
sizeable development costs that we have incurred, which would adversely affect our ability to compete.
Patents may not issue from any of our currently pending or future patent applications.
Our already-granted patents and any future patents may not survive legal challenges, including the
pending lawsuit filed by Boston Scientific to their scope, validity or enforceability, or provide
significant protection for us, and they may be re-examined or invalidated, and/or may be found to be
unenforceable or not cover competing products.
Even if our patents are determined by a court to be valid and enforceable, they may not be drafted or
interpreted broadly enough to prevent others from marketing products and services similar to ours.
Similarly, others may simply design around our patents. For example, third parties may be able to make
systems or devices that are similar to ours but that are not covered by the claims of our patents. Third
parties may assert that we or our licensors were not the first to make the inventions covered by our
issued patents or pending patent applications. The claims of our issued patents or patent applications
when issued may not cover our commercial technology or the future products and services that we
develop. We may not have freedom to operate unimpeded by the patent rights of others. Third parties
may have dominating, blocking or other patents relevant to our technology of which we are not aware.
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In addition, because patent applications in the United States and many foreign jurisdictions are typically
not published until 18 months after the filing of certain priority documents (or, in some cases, are not
published until they issue as patents) and because publications in the scientific literature often lag
behind actual discoveries, we cannot be certain that others have not filed patent applications for our
technology or our contemplated technology. Any such patent applications may have priority over our
patent applications or issued patents, which could further require us to obtain rights to issued patents
covering such technologies. If another party has filed a U.S. patent application on inventions similar to
ours, depending on when the timing of the filing date falls under certain patent laws, we may have to
participate in a priority contest (such as an interference proceeding) declared by the U.S. Patent and
Trademark Office (USPTO), to determine priority of invention in the United States. There may be prior
public disclosures that could invalidate our inventions or parts of our inventions of which we are not
aware. Further, we may not develop additional proprietary technologies and, even if we do, they may
not be patentable.
Patent law can be highly uncertain and involve complex legal and factual questions for which important
principles remain unresolved. In the United States and in many foreign jurisdictions, policies regarding
the breadth of claims allowed in patents can be inconsistent. The U.S. Supreme Court and the U.S.
Court of Appeals for the Federal Circuit have made, and will likely continue to make, changes in how
the patent laws of the United States are interpreted. Similarly, foreign courts have made, and will likely
continue to make, changes in how the patent laws in their respective jurisdictions are interpreted. We
cannot predict future changes in the interpretation of patent laws or changes to patent laws that might be
enacted into law by U.S. and foreign legislative bodies. Those changes may materially affect our patents
or patent applications, our ability to obtain patents or the patents and patent applications of our
licensors. Future protection for our proprietary rights is uncertain because legal means afford only
limited protection and may not adequately protect our rights or permit us to gain or keep our
competitive advantage, which could adversely affect our financial condition and results of operations.
Monitoring unauthorized uses of our intellectual property is difficult and costly. From time to time, we
seek to analyze our competitors’ products and services. For example, in November 2016, we filed a
complaint against Boston Scientific in order to enforce certain of our patents, and may in the future seek
to enforce our patents or other proprietary rights against other potential infringements. However, the
steps we have taken to protect our proprietary rights may not be adequate to prevent misappropriation of
our intellectual property. We may not be able to detect unauthorized use of, or take appropriate steps to
enforce, our intellectual property rights. Our competitors may also independently develop similar
technology. Any inability to meaningfully protect our intellectual property could result in competitors
offering products that incorporate our product features, which could reduce demand for our products. In
addition, we may need to defend our patents from third-party challenges, including interferences,
derivation proceedings, re-examination proceedings, post-grant review, inter partes review, third-party
submissions, oppositions, nullity actions, or other patent proceedings. We may also need to initiate
infringement claims or litigation. Adverse proceedings such as litigation or challenges to the validity of
our patents can be expensive, time consuming and may divert the efforts of our technical and
managerial personnel, which could in turn harm our business, whether or not we receive a determination
favorable to us. In addition, in an infringement or other adverse proceeding, a court may decide that the
patent we seek to enforce is invalid or unenforceable, or may refuse to stop the other party from using
the technology at issue on the grounds that the patent in question does not cover the technology in
question. An adverse result in any litigation or proceeding could place one or more of our patents at risk
of being invalidated, interpreted narrowly or found unenforceable. Some of our competitors may be able
to devote significantly more resources to intellectual property litigation, and may have significantly
broader patent portfolios to assert against us, if we assert our rights against them. Further, because of the
substantial discovery required in connection with intellectual property litigation, there is a risk that some
of our confidential information could be disclosed or otherwise compromised during litigation.
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We may not be able to accurately estimate or control our future operating expenses in relation to
obtaining, enforcing and/or defending intellectual property, which could lead to cash shortfalls. Our
operating expenses may fluctuate significantly in the future as a result of the costs of preparing, filing,
prosecuting, defending and enforcing patent claims and other patent related costs, including litigation
costs and the results of such litigation.
We may also be forced to enter into cross-license agreements with competitors in order to manufacture,
use, sell, import and/or export products or services that are covered by our competitors’ intellectual
property rights. If we need to use our intellectual property to enter such cross-license agreements, it may
compromise the value of our intellectual property due to the fact that our competitors may be able to
manufacture, use, sell, import and/or export our patented technology.
For additional information regarding risks related to our intellectual property, see “Risks Related to
Intellectual Property.”
We must continue to educate physicians and demonstrate to them the merits of our HF10 therapy compared to
those of our competitors.
Physicians play a significant role in determining the course of a patient’s treatment and the type of product
that will be used to treat a patient. An important part of our sales process includes the education of physicians on the
safe and effective use of our HF10 therapy and Senza, particularly because Senza and high-frequency
neuromodulation treatment is relatively new as compared to existing low-frequency traditional SCS systems. As a
result, our success depends, in large part, on effectively marketing our HF10 therapy to physicians, including the
results of our pivotal SENZA-RCT study. In order for us to sell Senza, we must successfully demonstrate to
physicians the merits of our HF10 therapy compared to our competitors’ SCS systems for use in treating patients
with chronic leg and back pain. Acceptance of our HF10 therapy depends on educating physicians as to the
distinctive characteristics, perceived benefits, safety, ease of use and cost-effectiveness of Senza as compared to our
competitors’ SCS systems, and communicating to physicians the proper application of our HF10 therapy. Physicians
typically need to perform several procedures to become comfortable using HF10 therapy and Senza. If a physician
experiences difficulties during an initial procedure or otherwise, that physician may be less likely to continue to use
our product or to recommend it to other physicians. It is critical to the success of our commercialization efforts that
we educate physicians on the proper use of Senza. If we are not successful in educating physicians and convincing
them of the merits of our HF10 therapy or educating them on the use of Senza, they may not use Senza and we may
be unable to increase our sales, sustain our growth or achieve profitability.
In addition, we believe support of our products by physicians is essential for market acceptance and adoption.
If we do not receive support from physicians or long-term data does not show the benefits of using our HF10
therapy, physicians may not use Senza. In such circumstances, our results of operations would be materially
adversely affected. It is also important for our growth that these physicians advocate for the benefits of our products
in the broader marketplace. If physicians misuse or ineffectively use our products, it could result in unsatisfactory
patient outcomes, patient injuries, negative publicity or lawsuits against us, any of which could have an adverse
effect on our business.
Our competitors are large, well-established companies with substantially greater resources than we have and
have a long history of competing in the SCS market.
Our current and potential competitors are publicly traded, or are divisions of publicly traded, major medical
device companies that have substantially greater financial, technical, sales and marketing resources than we have.
We estimate the existing global SCS market to be approximately $1.6 to $1.8 billion, with the United States
comprising approximately 80% of the market. Given the size of the existing and potential market in the United
States, we expect that as we work to increase our market position and penetration in the United States our
competitors will take aggressive action to protect their current market position. For example, in May 2015, a unit of
Boston Scientific, one of our principal competitors, filed with the USPTO two petitions for inter partes review
challenging the validity of our U.S. Patent No. 8,359,102 (the ‘102 patent), which the Patent Trial and Appeals
Board (PTAB) at the USPTO denied in November 2015, and, in December 2016, filed another lawsuit against us in
the U.S. District Court for the District of Delaware alleging that we infringed their patents covering technology
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related to stimulation leads, batteries and telemetry units. We will face significant competition in establishing our
market share in the United States and may encounter unforeseen obstacles and competitive challenges in the United
States.
In addition, we face a particular challenge overcoming the long-standing practices by some physicians of
using the neuromodulation products of our larger, more established competitors. Physicians who have completed
many successful implants using the neuromodulation products made by these competitors may be reluctant to try
new products from a source with which they are less familiar. If these physicians do not try and subsequently adopt
our product, then our revenue growth will slow or decline.
Further, a number of our competitors are currently conducting, or we anticipate will be conducting, clinical
trials to demonstrate the results of their SCS systems. The results of these trials may be equivalent to, or potentially
better than, the results of our pivotal U.S. trial.
If our competitors are better able to develop and market neuromodulation products that are safer, more effective,
less costly, easier to use or otherwise more attractive than Senza, our business will be adversely impacted.
The medical device industry is highly competitive and subject to technological change. Our success depends,
in part, upon our ability to establish a competitive position in the neuromodulation market by securing broad market
acceptance of our HF10 therapy and Senza for the treatment of chronic pain conditions. Any product we develop
that achieves regulatory clearance or approval, including Senza, will have to compete for market acceptance and
market share. We believe that the primary competitive factors in the neuromodulation market are demonstrated
clinical effectiveness, product safety, reliability and durability, ease of use, product support and service, minimal
side effects and salesforce experience and relationships. We face significant competition in the United States and
internationally, which we believe will continue to intensify as we grow our presence in the U.S. market. For
example, our major competitors, Medtronic, Boston Scientific and Abbott Laboratories, which recently acquired
St. Jude Medical, each has approved neuromodulation systems in at least the United States, Europe, and Australia
and have been established for several years. In addition, in October 2016, St. Jude Medical (now a part of Abbott
Laboratories) obtained FDA approval for a SCS system that offers an alternate low frequency waveform called
BurstDR, and in February 2016, the company gained approval for a neuromodulation system that stimulates the
dorsal root ganglion for treatment of focal pain and complex regional pain syndrome. Additionally, we believe that
Boston Scientific is in the later stages of a randomized clinical trial of high-frequency SCS therapy. In addition to
these major competitors, we may also face competition from smaller companies such as Nuvectra, Saluda and
Stimwave. Additionally, there are other emerging competitors with active neuromodulation system development
programs that may emerge in the future. Many of the companies developing or marketing competing products enjoy
several advantages over us, including:
more experienced sales forces;
greater name recognition;
more established sales and marketing programs and distribution networks;
earlier regulatory approval;
long established relationships with physicians and hospitals;
significant patent portfolios, including issued U.S. and foreign patents and pending patent applications,
as well as the resources to enforce patents against us or any of our third-party suppliers and distributors;
the ability to acquire and integrate our competitors and/or their technology;
demonstrated ability to develop product enhancements and new product offerings;
established history of product reliability, safety and durability;
the ability to offer rebates or bundle multiple product offerings to offer greater discounts or incentives;
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greater financial and human resources for product development, sales, and marketing; and
greater experience in and resources for conducting R&D, clinical studies, manufacturing, preparing
regulatory submissions, obtaining regulatory clearance or approval for products and marketing approved
products.
Our competitors may develop and patent processes or products earlier than we do, obtain patents that may
apply to us at any time, obtain regulatory clearance or approvals for competing products more rapidly than we do or
develop more effective or less expensive products or technologies that render our technology or products obsolete or
less competitive. We also face fierce competition in recruiting and retaining qualified sales, scientific, and
management personnel, establishing clinical trial sites and enrolling patients in clinical studies. If our competitors
are more successful than we are in these matters, our business may be harmed.
Our success depends on physicians’ use of our HF10 therapy to treat chronic back pain.
Our success is dependent on physicians’ acceptance and use of our HF10 therapy to treat chronic back pain.
We believe a significant limitation of current neuromodulation systems is the limited evidence supporting efficacy
of traditional SCS for treating chronic back pain. Senza utilizes high-frequency stimulation technology capable of
delivering waveform of up to 10,000 Hz for spinal cord stimulation that has been shown to be effective in the
treatment of both leg and back pain. However, we may face challenges convincing physicians, many of whom have
extensive experience with competitors’ SCS products and established relationships with other companies, to
appreciate the benefits of HF10 therapy and, in particular, its ability to treat back pain as well as leg pain, and adopt
it for treatment of their patients. If Senza is unable to gain acceptance by physicians for the treatment of back pain,
our potential to expand the existing neuromodulation market will be significantly limited and our revenue potential
will be negatively impacted.
If third-party payors do not provide adequate coverage and reimbursement for the use of Senza, our revenue will
be negatively impacted.
Our success in marketing Senza depends and will depend in large part on whether U.S. and international
government health administrative authorities, private health insurers and other organizations adequately cover and
reimburse customers for the cost of our products.
In the United States, we expect to derive nearly all our sales from sales of Senza to hospitals and outpatient
surgery centers who typically bill various third-party payors, including Medicare, Medicaid, private commercial
insurance companies, health maintenance organizations and other healthcare-related organizations, to cover all or a
portion of the costs and fees associated with Senza and bill patients for any applicable deductibles or co-payments.
Access to adequate coverage and reimbursement for SCS procedures using Senza (and our other products in
development) by third-party payors is essential to the acceptance of our products by our customers.
We believe that SCS procedures using Senza are adequately described by existing CPT, HCPCS II and ICD-
10-CM codes for the implantation of spinal cord stimulators and related leads performed in various sites of care,
although such codes generally do not specifically describe procedures using either low-frequency or high-frequency
stimulation. In the United States, CMS has approved a transitional pass-through payment for High-Frequency
Stimulation under the Medicare hospital outpatient prospective payment system effective as of January 1,
2016. This pass-through payment for HF10 therapy is in addition to the established reimbursement for spinal cord
stimulation devices; however, this pass-through payment is scheduled to expire on December 31, 2017.
We believe that some of our target customers may be unwilling to adopt Senza over more established or
lower-cost therapeutic alternatives already available or subsequently become available. Further, any decline in the
amount payors are willing to reimburse our customers for SCS procedures using Senza could make it difficult for
new customers to adopt Senza and could create additional pricing pressure for us, which could adversely affect our
ability to invest in and grow our business.
Third-party payors, whether foreign or domestic, or governmental or commercial, are developing increasingly
sophisticated methods of controlling healthcare costs. In addition, in the United States, no uniform policy of
30
coverage and reimbursement for medical device products and services exists among third-party payors. Therefore,
coverage and reimbursement for medical device products and services can differ significantly from payor to payor.
For example, certain regional Blue Cross Blue Shield plans have denied coverage for Senza on the basis that high-
frequency neuromodulation is investigational and/or experimental. We continue to engage in efforts to convince
such payors of the advantages of HF10 therapy, and while we have overturned some investigational/experimental
designations, such as Blue Cross Blue Shield Highmark and Blue Cross Blue Shield of Alabama, there can be no
assurances that we are successful in overturning negative coverage decisions by private health insurance plans. In
addition, payors continually review new technologies for possible coverage and can, without notice, deny coverage
for these new products and procedures. As a result, the coverage determination process is often a time-consuming
and costly process that will require us to provide scientific and clinical support for the use of our products to each
payor separately, with no assurance that coverage and adequate reimbursement will be obtained, or maintained if
obtained.
Reimbursement systems in international markets vary significantly by country and by region within some
countries, and reimbursement approvals must be obtained on a country-by-country basis. In many international
markets, a product must be approved for reimbursement before it can be approved for sale in that country. Further,
many international markets have government-managed healthcare systems that control reimbursement for new
devices and procedures. For example, the governmental healthcare system in France has not yet approved
reimbursement of Senza. In most markets there are private insurance systems as well as government-managed
systems. If sufficient coverage and reimbursement is not available for our current or future products, in either the
United States or internationally, the demand for our products and our revenues will be adversely affected.
If we fail to develop and retain an effective direct sales force in the United States, our business could suffer.
As we continue our commercial launch and increase our marketing efforts, we will need to retain, develop and
grow the number of direct sales personnel that we employ. We intend to continue to make a significant investment in
recruiting and training sales representatives and clinical representatives as we continue our commercial launch in the
United States. There is significant competition for sales personnel experienced in relevant medical device sales. Once
hired, the training process is lengthy because it requires significant education for new sales representatives to achieve
the level of clinical competency with our products expected by physicians. Upon completion of the training, our sales
representatives typically require lead time in the field to grow their network of accounts and achieve the productivity
levels we expect them to reach in any individual territory. Furthermore, the use of our products often requires or
benefits from direct support from us. If we are unable to attract, motivate, develop and retain a sufficient number of
qualified sales personnel, or if our sales representatives do not achieve the productivity levels we expect them to reach,
our revenue will not grow at the rate we expect and our financial performance will suffer. Also, to the extent we hire
personnel from our competitors, our new sales representatives will usually be subject to restrictive covenants with their
former employers, including non-competition, non-solicitation and/or confidentiality provisions. As a result, we may
have to wait until applicable non-competition provisions have expired before deploying such personnel in restricted
territories or incur costs to relocate personnel outside of such territories. We and certain of our new sales
representatives have been, continue to be, and may in the future be, subject to allegations that these new hires have
violated the non-competition clauses, been improperly solicited or divulged to us proprietary or other confidential
information of their former employers. Any of these risks may adversely affect our business.
Our past results in the international markets in which we commercialize Senza should not be relied upon as an
indication of our future performance in those markets or in the United States.
Our revenue from international markets has increased from $18.2 million for the year ended December 31,
2012 to $55.2 million for the year ended December 31, 2016 on the basis of our sales of Senza in Europe and
Australia; however, we do not expect to continue this rate of revenue growth in these international markets. Due to
our current penetration in these markets, we expect our revenue to stay stable in these international markets and not
grow at rate it did historically. Furthermore, given our recent commercialization in the United States, we have not
developed an extended history of payment and therefore we may encounter difficulties in collecting receivables
related to our U.S. sales.
In addition, the characteristics of these markets differ significantly from the U.S. market, including as a result
of differences in payor systems, competitive dynamics, market size and patient treatment regimens. As a result of
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the differences in these markets, you should not compare our financial results in the international market to any
potential future results in the U.S. market nor should you rely on our past results as an indication of our future
performance.
If we fail to maintain U.S. Food and Drug Administration approval to market and sell Senza, or if such approval
is impacted in the future, we will be unable to commercially distribute and market Senza in the United States.
Further, we may not be able to obtain required regulatory approvals to expand the indications for which we may
market and sell Senza.
The FDA requires manufacturers of medical devices to maintain regulatory approval by filing timely reports
and complying with numerous regulations. While we have received FDA approval of our Senza PMA application,
there can be no assurance that approval will be maintained. For example:
we may not be able to maintain to the FDA’s satisfaction that our product is safe and effective for its
intended use;
we may fail to comply with the guidelines required by FDA and other agencies to maintain our PMA
approval; and
the manufacturing processes and facilities we and our vendors use may not meet applicable
requirements to maintain our PMA approval.
In addition, we may suffer from product liability or other issues that impact our ability to continue to market
the Senza system in the United States.
Failing to maintain FDA approval could result in unexpected and significant costs for us and consume
management’s time and other resources. The FDA could ask us to improve or augment manufacturing processes,
collect and provide data on the quality or safety of our product or issue us warning letters relating to matters that
may result in removal of our product from the market. Additionally, we will be required to obtain FDA approval
prior to making any modification to the device, and the FDA may revoke the approval or impose other restrictions if
post-market data demonstrates safety issues or lack of effectiveness. If we are unable to obtain and maintain the
necessary regulatory approvals, our financial condition may be adversely affected, and our ability to grow
domestically and internationally would likely be limited.
We are currently conducting clinical trials for Senza to explore the potential for HF10 therapy to treat other
chronic pain indications, including chronic upper limb and neck pain, painful neuropathies and non-surgical
refractory back pain. We will likely need to conduct additional clinical studies in the future to support approval for
these new indications. Senza may not be approved for these additional indications.
Traditional SCS has been available for almost 50 years, while Senza has only been commercially available since
2010 and, as a result, we have a limited track record compared to our competitors.
Traditional SCS has been commercialized since 1967, while we only began commercializing Senza
internationally in 2010 and in the United States since May 2015. Because we have a limited commercial track record
compared to our competitors and Senza has been implanted in patients for significantly less time than our
competitors’ products, physicians may be slower to adopt or recommend Senza. Further, while we believe our
international commercial experience and recent U.S. commercial experience, and our European two-year study and
U.S. pivotal study support the safety and effectiveness of our HF10 therapy, future studies or patient experience over
a longer period of time may indicate that treatment with our HF10 therapy does not achieve non-inferiority status as
compared to treatment with competitive products or that our HF10 therapy causes unexpected or serious
complications or other unforeseen negative effects. Such results would likely slow the adoption of Senza and
significantly reduce our sales, which would harm our business and adversely affect our results of operations.
Furthermore, if patients with traditional SCS implantations were to experience unexpected or serious
complications or other unforeseen effects, the market for Senza may be adversely affected, even if such effects are
not applicable to Senza.
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Our international operations subject us to certain operating risks, which could adversely impact our results of
operations and financial condition.
In 2010, we began selling Senza in Europe and, in August 2011, we began selling Senza in Australia. As of
December 31, 2016, we sell Senza directly in Austria, Switzerland, United Kingdom, Sweden, Australia, Belgium,
Luxembourg, Norway and Germany and through distributors and agents located in the Netherlands, Spain, Italy,
Slovakia, Turkey, Kuwait and Ireland. The sale and shipment of Senza across international borders, as well as the
purchase of components from international sources, subject us to United States and foreign governmental trade,
import and export and customs regulations and laws.
Compliance with these regulations and laws is costly and exposes us to penalties for non-compliance. Other
laws and regulations that can significantly impact us include various anti-bribery laws, including the U.S. Foreign
Corrupt Practices Act, as well as export controls laws. Any failure to comply with applicable legal and regulatory
obligations could impact us in a variety of ways that include, but are not limited to, significant criminal, civil and
administrative penalties, including imprisonment of individuals, fines and penalties, denial of export privileges,
seizure of shipments, restrictions on certain business activities and exclusion or debarment from government
contracting.
Our international operations expose us and our distributors to risks inherent in operating in foreign
jurisdictions. These risks include:
difficulties in enforcing our intellectual property rights and in defending against third-party threats and
intellectual property enforcement actions against us, our distributors, or any of our third-party suppliers;
reduced or varied protection for intellectual property rights in some countries;
pricing pressure that we may experience internationally;
foreign currency exchange rate fluctuations;
a shortage of high-quality sales people and distributors;
third-party reimbursement policies that may require some of the patients who receive our products to
directly absorb medical costs or that may necessitate the reduction of the selling prices of Senza;
relative disadvantages compared to competitors with established business and customer relationships;
the imposition of additional U.S. and foreign governmental controls or regulations;
economic instability;
changes in duties and tariffs, license obligations and other non-tariff barriers to international trade;
the imposition of restrictions on the activities of foreign agents, representatives and distributors;
scrutiny of foreign tax authorities that could result in significant fines, penalties and additional taxes
being imposed on us;
laws and business practices favoring local companies;
longer payment cycles;
difficulties in maintaining consistency with our internal guidelines;
difficulties in enforcing agreements and collecting receivables through certain foreign legal systems;
the imposition of costly and lengthy new export licensing requirements;
the imposition of U.S. or international sanctions against a country, company, person or entity with
whom we do business that would restrict or prohibit continued business with the sanctioned country,
company, person or entity; and
the imposition of new trade restrictions.
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If we experience any of these risks, our sales in non-U.S. jurisdictions may be harmed and our results of
operations would suffer.
Changes in tax law and other developments resulting from the new presidential administration in the United
States may have a material adverse effect on our business, financial condition and results of operations.
Changes in laws and policy relating to taxes or trade may have an adverse effect on our business, financial
condition and results of operations. Potential tax reforms in the United States may result in significant changes to
current U.S. tax rules and regulations. These potential changes may trigger an adverse effect on our business,
financial conditions and results of operations.
Although we are unable to predict what, if any, changes in tax law will occur, the 2016 U.S. presidential
election introduced a great deal of uncertainty regarding current tax and trade policies, tariffs and government
regulations, which if altered could have the potential to create a significant adverse effect on trade between the U.S.
and other countries. Overall, changes in international trade relations and changes to U.S. tax or other laws (including
new or changes in regulations promulgated by the U.S. Internal Revenue Service and the U.S. Department of the
Treasury), such as the imposition of or increase in tariffs or other trade barriers, could materially and adversely
impact our effective tax rate, increase our costs and reduce the competitiveness of our products.
We are dependent upon third-party manufacturers and suppliers, in some cases sole- or single-source suppliers,
making us vulnerable to supply shortages and problems and price fluctuations, which could harm our business.
We rely on a limited number of suppliers who manufacture and assemble certain components of Senza.
Our suppliers may encounter problems during manufacturing for a variety of reasons, including, for example,
failure to follow specific protocols and procedures, failure to comply with applicable legal and regulatory
requirements, equipment malfunction and environmental factors, failure to properly conduct their own business
affairs and infringement of third-party intellectual property rights, any of which could delay or impede their ability
to meet our requirements. Our reliance on these third-party suppliers also subjects us to other risks that could harm
our business, including:
third parties may threaten or enforce their intellectual property rights against our suppliers, which may
cause disruptions or delays in shipment, or may force our suppliers to cease conducting business with
us;
we may not be able to obtain adequate supplies from one or more vendors in a timely manner or on
commercially reasonable terms;
we are not a major customer of many of our suppliers, and these suppliers may therefore give other
customers’ needs higher priority than ours;
our suppliers, especially new suppliers, may make errors in manufacturing that could negatively affect
the efficacy or safety of Senza, impacting our ability to maintain our PMA approval, or cause delays in
shipment, impacting our ability to meet demand in the United States or international markets;
we may have difficulty locating and qualifying alternative suppliers;
switching components or suppliers may require product redesign and possibly submission to FDA, EEA
Notified Bodies or other foreign regulatory bodies, which could significantly impede or delay our
commercial activities;
one or more of our sole- or single-source suppliers may be unwilling or unable to supply components of
Senza, or may supply products that do not meet our product requirements;
other customers may use fair or unfair negotiation tactics and/or pressures to impede our use of the
supplier;
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the occurrence of a fire, natural disaster or other catastrophe impacting one or more of our suppliers may
affect their ability to deliver products to us in a timely manner; and
our suppliers may encounter financial or other business hardships unrelated to our demand, which could
inhibit their ability to fulfill our orders and meet our requirements.
We may not be able to quickly establish additional or alternative suppliers for commercialization in the United
States if necessary, in part because we may need to undertake additional activities to qualify such suppliers as
required by the regulatory approval process. Any interruption or delay in obtaining products from our third-party
suppliers, or our inability to obtain products from qualified alternate sources at acceptable prices in a timely manner,
could impair our ability to meet the demand of our customers and cause them to switch to competing products.
Given our reliance on certain single-source suppliers, we are especially susceptible to supply shortages because we
do not have alternate suppliers currently available.
We rely upon third-party, single-source, and in certain cases sole-source, suppliers for many of the components
and materials used in Senza, and for critical manufacturing and packaging services, and the loss of any of these
suppliers could harm our business.
A number of the critical components used in Senza are supplied to us from single-source, or in certain cases
sole-source, suppliers, including leads, lead extenders, surgical leads, neurostimulator components and telemetry
modules. Our ability to supply Senza commercially depends, in part, on our ability to obtain a supply of these
components that has been manufactured in accordance with regulatory requirements and in sufficient quantities for
commercialization and clinical testing. We have not entered into manufacturing, supply or quality agreements with
some of our single-source and sole-source suppliers, some of which supply components critical to our products. We
are not certain that our single-source or sole-source suppliers will be able to meet our demand for their products and
services, either because of the nature of our agreements with those suppliers, or our limited experience with those
suppliers, or due to our relative importance as a customer to those suppliers or otherwise. It may be difficult for us to
assess their ability to timely meet our demand in the future based on past performance. While our suppliers have
generally met our demand for their products on a timely basis in the past, they may subordinate our needs in the
future to the needs of their other customers.
Establishing additional or replacement suppliers for the components or processes used in Senza, if required,
may not be accomplished quickly. If we are able to find a replacement supplier, such replacement supplier would
need to be qualified and may require additional regulatory authority approval, which could result in further delay.
While we seek to maintain adequate inventory of the single-source or sole-source components and materials used in
our products, any interruption or delay in the supply of components or materials, or our inability to obtain
components or materials from alternate sources at acceptable prices in a timely manner, could impair our ability to
meet the demand of our customers and cause them to cancel orders. In addition, from time to time, certain of our
suppliers experience interruptions and variances in their manufacturing processes, including suppliers of our leads
and batteries. Because we are reliant on these single source suppliers, we are particularly susceptible to supply
shortages and, if one of our suppliers were to experience an ongoing or continued manufacturing problem, and, in
particular, our leads and battery suppliers, our ability to meet our forecasted commercial demand could be materially
and negatively impacted.
If our third-party suppliers fail to deliver the required commercial quantities of materials, or the level of
services we require, on a timely basis and at commercially reasonable prices, and we are unable to find one or more
replacement suppliers capable of production at a substantially equivalent cost in substantially equivalent volumes
and quality, and on a timely basis, the continued commercialization of Senza would be impeded, delayed, limited or
prevented, which could harm our business, results of operations, financial condition and prospects.
We may not be able to establish or strengthen our brand.
We believe that establishing and strengthening the Nevro and Senza brands is critical to achieving widespread
acceptance of HF10 therapy, particularly because of the highly competitive nature of the market for SCS products.
Promoting and positioning our brand will depend largely on the success of our marketing efforts and our ability to
provide physicians with a reliable product for successful treatment of chronic leg and back pain. Additionally, we
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believe the quality and reliability of our product is critical to building physician support of this new therapy in the
United States and any negative publicity regarding the quality or reliability of Senza could significantly damage our
reputation in the market. Further, given the established nature of our competitors, and our recent commercial launch
in the United States, it is likely that our future marketing efforts will require us to incur significant additional
expenses. These brand promotion activities may not yield increased sales and, even if they do, any sales increases
may not offset the expenses we incur to promote our brand. If we fail to successfully promote and maintain our
brand, or if we incur substantial expenses in an unsuccessful attempt to promote and maintain our brand, our HF10
therapy may not be accepted by physicians, which would adversely affect our business, results of operations and
financial condition.
Our ability to achieve profitability will depend, in part, on our ability to reduce the per unit manufacturing cost of
Senza.
Currently, the gross profit generated from the sale of Senza is not sufficient to cover our operating expenses.
To achieve our operating and strategic goals, we will, among other things, need to reduce the per-unit manufacturing
cost of Senza. This cannot be achieved without increasing the volume of components that we purchase in order to
take advantage of volume-based pricing discounts, improving manufacturing efficiency or increasing our volume to
leverage manufacturing overhead costs. If we are unable to improve manufacturing efficiency and reduce
manufacturing overhead costs per unit, our ability to achieve profitability will be severely constrained. Any increase
in manufacturing volumes is dependent upon a corresponding increase in sales. The occurrence of one or more
factors that negatively impact the manufacturing or sales of Senza or reduce our manufacturing efficiency may
prevent us from achieving our desired reduction in manufacturing costs, which would negatively affect our
operating results and may prevent us from attaining profitability.
If we fail to properly manage our anticipated growth, our business could suffer.
We have been growing rapidly in recent periods and have a relatively short history of operating as a
commercial company. As an organization, we have only recently commercially launched our product in the United
States and commenced a sales representative training program. A commercial launch and training program of this
size is a significant undertaking that requires substantial financial and managerial resources. We intend to continue
to grow and may experience periods of rapid growth and expansion, which could place a significant additional strain
on our limited personnel, information technology systems and other resources. In particular, the hiring of our direct
sales force in the United States requires significant management, financial and other supporting resources. Any
failure by us to manage our growth effectively could have an adverse effect on our ability to achieve our
development and commercialization goals.
To achieve our revenue goals, we must successfully increase manufacturing output to meet expected customer
demand. In the future, we may experience difficulties with manufacturing yields, quality control, component supply
and shortages of qualified personnel, among other problems. These problems could result in delays in product
availability and increases in expenses. Any such delay or increased expense could adversely affect our ability to
generate revenue.
Future growth will also impose significant added responsibilities on management, including the need to
identify, recruit, train and integrate additional employees. In addition, rapid and significant growth will place a strain
on our administrative and operational infrastructure.
In order to manage our operations and growth we will need to continue to improve our operational and
management controls, reporting and information technology systems and financial internal control procedures. If we
are unable to manage our growth effectively, it may be difficult for us to execute our business strategy and our
operating results and business could suffer.
If we fail to receive access to hospital facilities, our sales may decrease.
In the United States, in order for physicians to use Senza, the hospital facilities where these physicians treat
patients typically require us to enter into purchasing contracts. The process of securing a satisfactory contract can be
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lengthy and time-consuming and require extensive negotiations and management time. In the EU, from time to time,
certain institutions require us to engage in a contract bidding process in the event that such institutions are
considering making purchase commitments that exceed specified cost thresholds, which vary by jurisdiction. These
processes are only open at certain periods of time, and we may not be successful in the bidding process. If we do not
receive access to hospital facilities via these contracting processes or otherwise, or if we are unable to secure
contracts or tender successful bids, our sales may stagnate or decrease and our operating results may be harmed.
Furthermore, we may expend significant effort in these time-consuming processes and still may not obtain a
purchase contract from such hospitals.
We rely in part on a small group of third-party distributors to effectively distribute our products in outside the
United States.
We depend in part on medical device distributors for the marketing and sales of our products in certain
territories in Europe. We depend on these distributors’ efforts to market our products, yet we are unable to control
their efforts completely. These distributors typically sell a variety of other, non-competing products that may limit
the resources they dedicate to selling Senza. In addition, we are unable to ensure that our distributors comply with
all applicable laws regarding the sale of our products. If our distributors fail to effectively market and sell Senza in
full compliance with applicable laws, our operating results and business may suffer. Recruiting and retaining
qualified third-party distributors and training them in our technology and product offering requires significant time
and resources. To develop and expand our distribution, we must continue to scale and improve our processes and
procedures that support our distributors. Further, if our relationship with a successful distributor terminates, we may
be unable to replace that distributor without disruption to our business. If we fail to maintain positive relationships
with our distributors, fail to develop new relationships with other distributors, including in new markets, fail to
manage, train or incentivize existing distributors effectively, or fail to provide distributors with competitive products
on attractive terms, or if these distributors are not successful in their sales efforts, our revenue may decrease and our
operating results, reputation and business may be harmed.
We may face product liability claims that could result in costly litigation and significant liabilities.
Manufacturing and marketing Senza, and clinical testing of our HF10 therapy, may expose us to product
liability and other tort claims. Although we have, and intend to maintain, liability insurance, the coverage limits of
our insurance policies may not be adequate and one or more successful claims brought against us may have a
material adverse effect on our business and results of operations. For example, the U.S. Supreme Court recently
declined to hear an appeal where the U.S. Court of Appeals for the Ninth Circuit ruled that the Medical Device
Amendments of 1976 to the FFDCA did not preempt state laws in a product liability case involving a medical device
company. If other courts in the United States adopt similar rulings, we may be subject to increased litigation risk in
connection with our products. Product liability claims could negatively affect our reputation, continued product
sales, and our ability to obtain and maintain regulatory approval for our products.
If clinical studies for future indications do not produce results necessary to support regulatory clearance or
approval in the United States or elsewhere, we will be unable to commercialize Senza for these indications.
We are currently conducting clinical trials for Senza to explore the potential for HF10 therapy to treat other
chronic pain indications, including chronic upper limb and neck pain, painful neuropathies and non-surgical
refractory back pain. We will likely need to conduct additional clinical studies in the future to support regulatory
approval for the use of Senza to treat these new indications. Clinical testing can take many years, is expensive and
carries uncertain outcomes. The initiation and completion of any of these studies may be prevented, delayed, or
halted for numerous reasons, including, but not limited to, the following:
the FDA, IRBs, Ethics Committees, EU Competent Authorities or other regulatory authorities do not
approve a clinical study protocol, force us to modify a previously approved protocol, or place a clinical
study on hold;
patients do not enroll in, or enroll at a lower rate than we expect, or do not complete a clinical study;
patients or investigators do not comply with study protocols;
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patients do not return for post-treatment follow-up at the expected rate;
patients experience serious or unexpected adverse side effects for a variety of reasons that may or may
not be related to our products such as the advanced stage of co-morbidities that may exist at the time of
treatment, causing a clinical study to be put on hold;
sites participating in an ongoing clinical study withdraw, requiring us to engage new sites;
difficulties or delays associated with establishing additional clinical sites;
third-party clinical investigators decline to participate in our clinical studies, do not perform the clinical
studies on the anticipated schedule, or perform in a manner inconsistent with the investigator agreement,
clinical study protocol, good clinical practices, other FDA, IRB or Ethics Committee requirements, and
EEA Member State or other foreign regulations governing clinical trials;
third-party organizations do not perform data collection and analysis in a timely or accurate manner;
regulatory inspections of our clinical studies or manufacturing facilities require us to undertake
corrective action or suspend or terminate our clinical studies;
changes in federal, state, or foreign governmental statutes, regulations or policies;
interim results are inconclusive or unfavorable as to immediate and long-term safety or efficacy;
the study design is inadequate to demonstrate safety and efficacy; or
the statistical endpoints are not met.
Clinical failure can occur at any stage of the testing. Our clinical studies may produce negative or inconclusive
results, and we may decide, or regulators may require us, to conduct additional clinical or non-clinical studies in
addition to those we have planned. Our failure to adequately demonstrate the safety and effectiveness of any of our
devices would prevent receipt of regulatory clearance or approval and, ultimately, the commercialization of that
device or indication for use.
We could also encounter delays if the FDA concludes that our financial relationships with investigators results
in a perceived or actual conflict of interest that may have affected the interpretation of a study, the integrity of the
data generated at the applicable clinical trial site or the utility of the clinical trial itself. Principal investigators for
our clinical trials may serve as scientific advisors or consultants to us from time to time and receive cash
compensation and/or equity-based awards in connection with such services. If these relationships and any related
compensation to or ownership interest by the clinical investigator carrying out the study result in perceived or actual
conflicts of interest, or if the FDA concludes that the financial relationship may have affected interpretation of the
study, the integrity of the data generated at the applicable clinical trial site may be questioned and the utility of the
clinical trial itself may be jeopardized, which could result in the FDA refusing to accept the data as support for our
future applications. Any such delay or rejection could prevent us from commercializing any of our products
currently in development.
Even if our products are approved in the United States, Australia and the EEA, comparable regulatory
authorities of additional foreign countries must also approve the manufacturing and marketing of our products in
those countries. Approval procedures vary among jurisdictions and can involve requirements and administrative
review periods different from, and greater than, those in the United States, Australia or the EEA, including
additional preclinical studies or clinical trials. Any of these occurrences may harm our business, financial condition
and prospects significantly.
If we fail to retain our key executives or recruit and hire new employees, our operations and financial results may
be adversely effected while we attract other highly qualified personnel.
Our future success depends, in part, on our ability to continue to retain our executive officers and other key
employees, and recruit and hire new employees. All of our executive officers and other employees are at-will
employees, and therefore may terminate employment with us at any time with no advance notice. The replacement
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of any of our key personnel likely would involve significant time and costs, may significantly delay or prevent the
achievement of our business objectives and may harm our business.
In addition, many of our employees have become, or will soon become, vested in a substantial amount of
Company stock or be able to exercise a substantial number of stock options. Our employees may be more likely to
leave us if the shares they own or the shares underlying their vested options have significantly appreciated in value
relative to the original purchase prices of the shares or the exercise prices of the options, or if the exercise prices of
the options that they hold are significantly below the market price of our common stock. Further, our employees’
ability to exercise those options and sell their stock in a public market may result in a higher than normal turnover
rate.
Our future success also depends on our ability to retain executive officers and other key employees and attract
new key employees. Many executive officers and other employees in the neuromodulation and medical device
industry are subject to strict non-competition, non-solicitation and/or confidentiality agreements with their
employers, including our main competitors Medtronic plc, Boston Scientific and Abbott Laboratories (which
recently acquired St. Jude Medical). Our competitors may allege breaches of, and seek to enforce, such non-
competition, non-solicitation and/or confidentiality agreements or initiate litigation based on such agreements,
particularly now that we have entered the U.S. market. Such litigation, whether or not meritorious, may impede our
ability to attract, hire or utilize executive officers and other key employees who have been or are currently employed
by our competitors.
Failure to protect our information technology infrastructure against cyber-based attacks, network security
breaches, service interruptions, or data corruption could significantly disrupt our operations and adversely affect
our business and operating results.
We rely on information technology and telephone networks and systems, including the Internet, to process and
transmit sensitive electronic information and to manage or support a variety of business processes and activities,
including sales, billing, marketing, procurement and supply chain, manufacturing and distribution. We use enterprise
information technology systems to record, process and summarize financial information and results of operations for
internal reporting purposes and to comply with regulatory, financial reporting, legal and tax requirements. Our
information technology systems, some of which are managed by third-parties, may be susceptible to damage,
disruptions or shutdowns due to computer viruses, attacks by computer hackers, failures during the process of
upgrading or replacing software, databases or components thereof, power outages, hardware failures,
telecommunication failures, user errors or catastrophic events. Despite the precautionary measures we have taken to
prevent breakdowns in our information technology and telephone systems, if our systems suffer severe damage,
disruption or shutdown and we are unable to effectively resolve the issues in a timely manner, our business and
operating results may suffer.
Risks Related to Intellectual Property
We currently are, and may in the future become, involved in lawsuits to defend ourselves against intellectual
property disputes, which could be expensive and time consuming, and ultimately unsuccessful, and could result
in the diversion of significant resources, and hinder our ability to commercialize our existing or future products.
Our success depends in part on not infringing the patents or violating the other proprietary rights of others.
Intellectual property disputes can be costly to defend and may cause our business, operating results and financial
condition to suffer. Significant litigation regarding patent rights occurs in the medical industry. Whether merited or
not, it is possible that U.S. and foreign patents and pending patent applications controlled by third parties may be
alleged to cover our products. For example, on December 9, 2016, Boston Scientific filed a patent infringement
lawsuit alleging our manufacture, use and sale of the Senza system infringes certain of Boston Scientific’s patents
covering technology related to stimulation leads, batteries and telemetry units. We may also face allegations that our
employees have misappropriated the intellectual property rights of their former employers or other third parties. Our
competitors in both the United States and abroad, many of which have substantially greater resources and have made
substantial investments in patent portfolios and competing technologies, may have applied for or obtained or may in
the future apply for and obtain, patents that will prevent, limit, or otherwise interfere with our ability to make, use,
sell, and/or export our products. For example, our major competitors, Medtronic, Boston Scientific and Abbott
39
Laboratories (which recently acquired St. Jude Medical), each have significant patent portfolios covering systems,
sub-systems, methods, and manufacturing processes. These competitors may have one or more patents for which
they can threaten and/or initiate patent infringement actions against us and/or any of our third-party suppliers. Our
ability to defend ourselves and/or our third-party suppliers may be limited by our financial and human resources, the
availability of reasonable defenses, and the ultimate acceptance of our defenses by the courts or juries. Further, if
such patents are successfully asserted against us, this may result in an adverse impact on our business, including
injunctions, damages and/or attorneys’ fees. From time to time and in the ordinary course of business, we may
develop non-infringement and/or invalidity positions with respect to third-party patents, which may or not be
ultimately adjudicated as successful by a judge or jury if such patents were asserted against us.
We may receive in the future, particularly as a public company, communications from patent holders,
including non-practicing entities, alleging infringement of patents or other intellectual property rights or
misappropriation of trade secrets, or offering licenses to such intellectual property. Any claims that we assert against
perceived infringers could also provoke these parties to assert counterclaims against us alleging that we infringe
their intellectual property rights. At any given time, we may be involved as either a plaintiff or a defendant in a
number of patent infringement actions, the outcomes of which may not be known for prolonged periods of time. We
may also become involved in disputes with others regarding the ownership of intellectual property rights. For
example, we jointly develop intellectual property with certain parties, and disagreements may therefore arise as to
the ownership of the intellectual property developed pursuant to these relationships. If we are unable to resolve these
disputes, we could lose valuable intellectual property rights.
The large number of patents, the rapid rate of new patent applications and issuances, the complexities of the
technologies involved and the uncertainty of litigation significantly increase the risks related to any patent litigation.
Any potential intellectual property litigation also could force us to do one or more of the following:
stop selling, making, using, or exporting products that use the disputed intellectual property;
obtain a license from the intellectual property owner to continue selling, making, exporting, or using
products, which license may require substantial royalty payments and may not be available on
reasonable terms, or at all;
incur significant legal expenses;
pay substantial damages or royalties to the party whose intellectual property rights we may be found to
be infringing, potentially including treble damages if the court finds that the infringement was willful;
if a license is available from a third-party, we may have to pay substantial royalties, upfront fees or
grant cross-licenses to intellectual property rights for our products and services;
pay the attorney fees and costs of litigation to the party whose intellectual property rights we may be
found to be infringing;
find non-infringing substitute products, which could be costly and create significant delay due to the
need for FDA regulatory clearance;
find alternative supplies for infringing products or processes, which could be costly and create
significant delay due to the need for FDA regulatory clearance; and/or
redesign those products or processes that infringe any third-party intellectual property, which could be
costly, disruptive, and/or infeasible.
From time to time, we may be subject to legal proceedings and claims in the ordinary course of business with
respect to intellectual property. In particular, on November 28, 2016, we filed a lawsuit for patent infringement
against units of Boston Scientific asserting that Boston Scientific is infringing our patents covering inventions
relating to our Senza system and HF10 therapy. For more information, see the section titled “Legal Proceedings”
included under Part I, Item 3 of this Annual Report. Even if resolved in our favor, litigation or other legal
proceedings relating to intellectual property claims may cause us to incur significant expenses, and could distract our
technical and management personnel from their normal responsibilities. In addition, there could be public
announcements of the results of hearings, motions or other interim proceedings or developments, and if securities
40
analysts or investors perceive these results to be negative, it could have a material adverse effect on the price of our
common stock and the value of the 1.75% convertible senior notes due 2021 (the 2021 Notes). Finally, any
uncertainties resulting from the initiation and continuation of any litigation could have a material adverse effect on
our ability to raise the funds necessary to continue our operations.
If any of the foregoing occurs, we may have to withdraw existing products from the market or may be unable
to commercialize one or more of our products, all of which could have a material adverse effect on our business,
results of operations and financial condition. Any litigation or claim against us, even those without merit, may cause
us to incur substantial costs, and could place a significant strain on our financial resources, divert the attention of
management from our core business and harm our reputation. Further, as the number of participants in the
neuromodulation industry grows, the possibility of intellectual property infringement claims against us increases.
In addition, we may indemnify our customers, suppliers and international distributors against claims relating
to the infringement of the intellectual property rights of third parties relating to our products, methods, and/or
manufacturing processes. Third parties may assert infringement claims against our customers, suppliers, or
distributors. These claims may require us to initiate or defend protracted and costly litigation on behalf of our
customers, suppliers or distributors, regardless of the merits of these claims. If any of these claims succeed, we may
be forced to pay damages on behalf of our customers, suppliers, or distributors or may be required to obtain licenses
for the products they use. If we cannot obtain all necessary licenses on commercially reasonable terms, our
customers may be forced to stop using our products, or our suppliers may be forced to stop providing us with
products.
Similarly, interference or derivation proceedings provoked by third parties or brought by the USPTO or any
foreign patent authority may be necessary to determine the priority of inventions or other matters of inventorship
with respect to our patents or patent applications. An unfavorable outcome in these or any other such proceedings
could require us to cease using the related technology or to attempt to license rights to it from the prevailing party.
Our business could be harmed if the prevailing party does not offer us a license on commercially reasonable terms,
if any license is offered at all.
We may also become involved in other proceedings, such as re-examination or opposition proceedings, before
the USPTO or its foreign counterparts relating to our intellectual property or the intellectual property rights of
others. For example, two of our competitors, Boston Scientific and Medtronic, have filed oppositions in the
European Union with respect to certain of our patents. Defending our position in proceedings such as these will
require management’s time and attention, as well as financial costs. Given the competitive environment in which we
operate, we expect additional challenges to our intellectual property portfolio as we continue commercialization of
Senza in the United States. An unfavorable outcome in these or any other such proceedings could cause us to lose
valuable intellectual property rights and/or be unable to enforce our intellectual property rights, which could invite
increased competition thereby materially harming our business.
Changes in patent law could diminish the value of patents in general, thereby impairing our ability to protect our
existing and future products.
Patent reform legislation could increase the uncertainties and costs surrounding the prosecution of our patent
applications and the enforcement or defense of our issued patents. On September 16, 2011, the Leahy-Smith
America Invents Act, or the Leahy-Smith Act, was signed into law. The Leahy-Smith Act includes a number of
significant changes to U.S. patent law. These include provisions that affect the way patent applications are
prosecuted, redefine prior art and may affect patent litigation. The changes also switched the United States patent
system from a “first-to-invent” system to a “first-to-file” system. Under a “first-to-file” system, assuming the other
requirements for patentability are met, the first inventor to file a patent application generally will be entitled to the
patent on an invention regardless of whether another inventor had made the invention earlier. The USPTO recently
developed new regulations and procedures to govern administration of the Leahy- Smith Act, and many of the
substantive changes to patent law associated with the Leahy-Smith Act, in particular, the first-to-file provisions,
only became effective on March 16, 2013. Accordingly, it is not clear what, if any, impact the Leahy-Smith Act will
have on the operation of our business. The Leahy-Smith Act and its implementation could increase the uncertainties
and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued
patents, all of which could have a material adverse effect on our business and financial condition.
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In addition, patent reform legislation may pass in the future that could lead to additional uncertainties and
increased costs surrounding the prosecution, enforcement and defense of our patents and applications. Furthermore,
the U.S. Supreme Court and the U.S. Court of Appeals for the Federal Circuit have made, and will likely continue to
make, changes in how the patent laws of the United States are interpreted. Similarly, foreign courts have made, and
will likely continue to make, changes in how the patent laws in their respective jurisdictions are interpreted. We
cannot predict future changes in the interpretation of patent laws or changes to patent laws that might be enacted into
law by United States and foreign legislative bodies. Those changes may materially affect our patents or patent
applications and our ability to obtain additional patent protection in the future.
Obtaining and maintaining patent protection depends on compliance with various procedural, document
submission, fee payment and other requirements imposed by governmental patent agencies, and our patent
protection could be reduced or eliminated for non-compliance with these requirements.
The USPTO and various foreign governmental patent agencies require compliance with a number of
procedural, documentary, fee payment and other similar provisions during the patent application process. In
addition, periodic maintenance fees on issued patents often must be paid to the USPTO and foreign patent agencies
over the lifetime of the patent. While an unintentional lapse can in many cases be cured by payment of a late fee or
by other means in accordance with the applicable rules, there are situations in which noncompliance can result in
abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the
relevant jurisdiction. Non-compliance events that could result in abandonment or lapse of a patent or patent
application include, but are not limited to, failure to respond to official actions within prescribed time limits, non-
payment of fees and failure to properly legalize and submit formal documents. If we fail to maintain the patents and
patent applications covering our products or procedures, we may not be able to stop a competitor from marketing
products that are the same as or similar to our own, which would have a material adverse effect on our business.
We may not be able to adequately protect our intellectual property rights throughout the world.
Filing, prosecuting and defending patents on our products in all countries throughout the world would be
prohibitively expensive. The requirements for patentability may differ in certain countries, particularly developing
countries, and the breadth of patent claims allowed can be inconsistent. In addition, the laws of some foreign
countries may not protect our intellectual property rights to the same extent as laws in the United States.
Consequently, we may not be able to prevent third parties from practicing our inventions in all countries outside the
United States. Competitors may use our technologies in jurisdictions where we have not obtained patent protection
to develop their own products and, further, may export otherwise infringing products to territories in which we have
patent protection that may not be sufficient to terminate infringing activities.
We do not have patent rights in certain foreign countries in which a market may exist. Moreover, in foreign
jurisdictions where we do have patent rights, proceedings to enforce such rights could result in substantial costs and
divert our efforts and attention from other aspects of our business, could put our patents at risk of being invalidated
or interpreted narrowly, and our patent applications at risk of not issuing. Additionally, such proceedings could
provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate, and if we do
prevail, the damages or other remedies awarded, if any, may not be commercially meaningful. Thus, we may not be
able to stop a competitor from marketing and selling in foreign countries products that are the same as or similar to
our products, and our competitive position in the international market would be harmed.
We may be subject to damages resulting from claims that we or our employees have wrongfully used or disclosed
alleged trade secrets of our competitors or are in breach of non-competition or non-solicitation agreements with
our competitors.
We could in the future be subject to claims that we or our employees have inadvertently or otherwise used or
disclosed alleged trade secrets or other proprietary information of former employers or competitors. In addition,
many of our executive officers and key employees, as well as our Chairman of the Board, have worked for our
major competitors (or companies acquired by these competitors), which include Boston Scientific, Medtronic and
Abbott Laboratories (which recently acquired St. Jude Medical). Although we have procedures in place that seek to
prevent our employees and consultants from using the intellectual property, proprietary information, know-how or
trade secrets of others in their work for us, we may in the future be subject to claims that we caused an employee to
42
breach the terms of his or her non-competition or non-solicitation agreement, or that we or these individuals have,
inadvertently or otherwise, used or disclosed the alleged trade secrets or other proprietary information of a former
employer or competitor. Litigation may be necessary to defend against these claims. Even if we are successful in
defending against these claims, litigation could result in substantial costs and could be a distraction to management.
If our defense to those claims fails, in addition to paying monetary damages, a court could prohibit us from using
technologies or features that are essential to our products, if such technologies or features are found to incorporate or
be derived from the trade secrets or other proprietary information of the former employers. An inability to
incorporate technologies or features that are important or essential to our products would have a material adverse
effect on our business, and may prevent us from selling our products or from practicing our processes. In addition,
we may lose valuable intellectual property rights or personnel. Moreover, any such litigation or the threat thereof
may adversely affect our ability to hire employees or contract with independent sales representatives. A loss of key
personnel or their work product could hamper or prevent our ability to commercialize our products, which could
have an adverse effect on our business, results of operations and financial condition.
If our trademarks and trade names are not adequately protected, then we may not be able to build name
recognition in our markets of interest and our business may be adversely affected.
Our registered or unregistered trademarks or trade names may be challenged, infringed, circumvented,
declared generic or determined to be infringing on other marks. We may not be able to protect our rights in these
trademarks and trade names, which we need in order to build name recognition with potential partners or customers
in our markets of interest. In addition, third parties have registered trademarks similar and identical to our
trademarks in foreign jurisdictions, and may in the future file for registration of such trademarks. If they succeed in
registering or developing common law rights in such trademarks, and if we were not successful in challenging such
third-party rights, we may not be able to use these trademarks to market our products in those countries. In any case,
if we are unable to establish name recognition based on our trademarks and trade names, then we may not be able to
compete effectively and our business may be adversely affected.
If we are unable to protect the confidentiality of our trade secrets, our business and competitive position may be
harmed.
In addition to patent and trademark protection, we also rely on trade secrets, including unpatented know-how,
technology and other proprietary information, to maintain our competitive position. We seek to protect our trade
secrets, in part, by entering into non-disclosure and confidentiality agreements with parties who have access to them,
such as our consultants and vendors, or our former or current employees. We also enter into confidentiality and
invention or patent assignment agreements with our employees and consultants. Despite these efforts, however, any
of these parties may breach the agreements and disclose our trade secrets and other unpatented or unregistered
proprietary information, and once disclosed, we are likely to lose trade secret protection. Monitoring unauthorized
uses and disclosures of our intellectual property is difficult, and we do not know whether the steps we have taken to
protect our intellectual property will be effective. In addition, we may not be able to obtain adequate remedies for
any such breaches. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult,
expensive and time-consuming, and the outcome is unpredictable. In addition, some courts inside and outside the
United States are less willing or unwilling to enforce trade secret protection.
Further, our competitors may independently develop knowledge, methods and know-how similar, equivalent,
or superior to our proprietary technology. Competitors could purchase our products and attempt to replicate some or
all of the competitive advantages we derive from our development efforts, willfully infringe our intellectual property
rights, design around our protected technology or develop their own competitive technologies that fall outside of our
intellectual property rights. In addition, our key employees, consultants, suppliers or other individuals with access to
our proprietary technology and know-how may incorporate that technology and know-how into projects and
inventions developed independently or with third parties. As a result, disputes may arise regarding the ownership of
the proprietary rights to such technology or know-how, and any such dispute may not be resolved in our favor. If
any of our trade secrets were to be lawfully obtained or independently developed by a competitor, we would have no
right to prevent them, or those to whom they communicate it, from using that technology or information to compete
with us and our competitive position could be adversely affected. If our intellectual property is not adequately
protected so as to protect our market against competitors’ products and methods, our competitive position could be
adversely affected, as could our business.
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Risks Related to our Financial and Operating Results
We may choose, or need, to obtain additional funds in the future, and these funds may not be available on
acceptable terms or at all.
Our operations have consumed substantial amounts of cash since inception, and we anticipate our expenses
will increase as we continue to build a commercial sales force in the United States, investigate the use of our HF10
therapy for the treatment of other chronic pain conditions, continue to otherwise grow our business and continue to
operate as a public company. In particular, we believe that we will continue to expend substantial resources for the
foreseeable future on the commercialization of Senza in the United States, as well as the growth of our sales and
marketing efforts and sales representative training, seeking additional foreign regulatory approvals, the preparation
and submission of regulatory filings and the clinical development of any other product candidates or indications we
may choose to pursue. These expenditures will also include costs associated with manufacturing and supply as well
as marketing and selling Senza in the United States and elsewhere, and any other future products approved for sale,
R&D, conducting preclinical studies and clinical trials and obtaining regulatory approvals.
We believe that our growth will depend, in part, on our ability to fund our commercialization efforts,
particularly in the United States, and our efforts to develop Senza and our HF10 therapy for the treatment of
additional chronic pain indications and develop technology complementary to our current product. In order to
further enhance our R&D efforts, pursue product expansion opportunities or acquire a new business or products that
are complementary to our business, we may choose to seek additional funds. If we are unable to raise funds on
favorable terms, or at all, the long-term growth of our business may be negatively impacted. As a result, we may be
unable to compete effectively. Our cash requirements in the future may be significantly different from our current
estimates and depend on many factors, including:
the costs of commercializing Senza in the United States and elsewhere, including costs associated with
product sales, marketing, manufacturing and distribution;
the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property
rights, including, in particular, the costs of enforcing our patent rights in the action we filed against
Boston Scientific and in defending against Boston Scientific’s action against us;
the R&D activities we intend to undertake in order to expand the chronic pain indications and product
enhancements that we intend to pursue;
whether or not we pursue acquisitions or investments in businesses, products or technologies that are
complementary to our current business;
the degree and rate of market acceptance of Senza in the United States and elsewhere;
changes or fluctuations in our inventory supply needs and forecasts of our supply needs;
our need to implement additional infrastructure and internal systems;
our ability to hire additional personnel to support our operations as a public company; and
the emergence of competing technologies or other adverse market developments.
To finance these activities, we may seek funds through borrowings or through additional rounds of financing,
including private or public equity or debt offerings and collaborative arrangements with corporate partners. We may
be unable to raise funds on favorable terms, or at all.
The sale of additional equity or convertible debt securities could result in additional dilution to our
stockholders. If we borrow additional funds or issue debt securities, these securities could have rights superior to
holders of our common stock and the 2021 Notes and could contain covenants that will restrict our operations. We
might have to obtain funds through arrangements with collaborative partners or others that may require us to
relinquish rights to our technologies, product candidates, or products that we otherwise would not relinquish. If we
do not obtain additional resources, our ability to capitalize on business opportunities will be limited, we may be
unable to compete effectively and the growth of our business will be harmed.
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Our operating results may vary significantly from quarter to quarter, which may negatively impact our stock
price in the future.
Our quarterly revenue and results of operations may fluctuate from quarter to quarter due to, among others, the
following reasons:
physician and payor acceptance of Senza and our HF10 therapy;
the timing, expense and results of our commercialization efforts in the United States and elsewhere,
R&D activities, clinical trials and regulatory approvals;
fluctuations in our expenses associated with inventory buildup or write-downs from analyzing our
inventory for obsolesce or conformity with our product requirements;
difficulties in collecting receivables related to our sales in the United States;
fluctuations in the expenses related to pursuing and defending our ongoing lawsuits with Boston
Scientific;
fluctuations in expenses as a result of expanding our commercial operations and operating as a public
company;
the introduction of new products and technologies by our competitors;
the productivity of our sales representatives;
supplier, manufacturing or quality problems with our products;
the timing of stocking orders from our distributors;
changes in our pricing policies or in the pricing policies of our competitors or suppliers; and
changes in coverage amounts or government and third-party payors’ reimbursement policies.
Because of these and other factors, it is likely that in some future period our operating results will not meet
investor expectations or those of public market analysts.
Any unanticipated change in revenues or operating results is likely to cause our stock price to fluctuate. New
information may cause investors and analysts to revalue our business, which could cause a decline in our stock
price.
We are required to maintain high levels of inventory, which could consume a significant amount of our
resources, reduce our cash flows and lead to inventory impairment charges.
As a result of the need to maintain substantial levels of inventory, we are subject to the risk of inventory
obsolescence and expiration, which may lead to inventory impairment charges. Our products consist of a substantial
number of individual components. In order to market and sell Senza effectively, we often must maintain high levels
of inventory. In particular, as we continue our commercial launch of Senza in the United States, we intend to
substantially increase our levels of inventory in order to meet our estimated demand and, as a result, incur
significant expenditures associated with such increases in our inventory. The manufacturing process requires lengthy
lead times, during which components of our products may become obsolete, and we may over- or under-estimate the
amount needed of a given component, in which case we may expend extra resources or be constrained in the amount
of end product that we can produce. As compared to direct manufacturers, our dependence on third-party
manufacturers exposes us to greater lead times increasing our risk of inventory obsolescence comparatively.
Furthermore, our products have a limited shelf life due to sterilization requirements, and part or all of a given
product or component may expire and its value would become impaired and we would be required to record an
impairment charge. In addition, we have also experienced inventory write-downs as a result of inventory that did not
meet our product requirements. If our estimates of required inventory are too high, we may be exposed to further
inventory obsolescence risk. In the event that a substantial portion of our inventory becomes obsolete or expires, or
in the event we experience a supply chain imbalance as described above, it could have a material adverse effect on
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our earnings and cash flows due to the resulting costs associated with the inventory impairment charges and costs
required to replace such inventory.
The seasonality of our business creates variance in our quarterly revenue, which makes it difficult to compare or
forecast our financial results.
Our revenue fluctuates on a seasonal basis, which affects the comparability of our results between periods. For
example, in certain years we have historically experienced lower sales in the summer months and around the
holidays, primarily due to the buying patterns and implant volumes of our distributors, hospitals and clinics. These
seasonal variations are difficult to predict accurately, may vary amongst different markets, and at times may be
entirely unpredictable, which introduce additional risk into our business as we rely upon forecasts of customer
demand to build inventory in advance of anticipated sales. In addition, we believe our limited history
commercializing our products has, in part, made our seasonal patterns more difficult to discern, making it more
difficult to predict future seasonal patterns.
We are subject to risks associated with currency fluctuations, and changes in foreign currency exchange rates
could impact our results of operations.
A portion of our business is located outside the United States and, as a result, we generate revenue and incur
expenses denominated in currencies other than the U.S. dollar, a majority of which is denominated in Euros and
Australian Dollars. In the first half of 2015, and all of 2014 and 2013, nearly all of our total revenue was
denominated in foreign currencies. As a result, changes in the exchange rates between such foreign currencies and
the U.S. dollar could materially impact our reported results of operations and distort period to period comparisons.
Fluctuations in foreign currency exchange rates also impact the reporting of our receivables and payables in non-
U.S. currencies. As a result of such foreign currency fluctuations, it could be more difficult to detect underlying
trends in our business and results of operations. In addition, to the extent that fluctuations in currency exchange rates
cause our results of operations to differ from our expectations or the expectations of our investors, the trading price
of our common stock and the value of the 2021 Notes could be adversely affected.
In the future, we may engage in exchange rate hedging activities in an effort to mitigate the impact of
exchange rate fluctuations. If our hedging activities are not effective, changes in currency exchange rates may have a
more significant impact on our results of operations.
Our ability to use our net operating losses and tax credits to offset future taxable income and taxes may be
subject to certain limitations.
In general, under Section 382 of the U.S. Internal Revenue Code of 1986, as amended, a corporation that
undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change net operating loss
(NOL) carryforwards and other tax attributes, such as research and development tax credits to offset future taxable
income and taxes.
As a result of our June 2015 underwritten public offering, we have experienced a Section 382 “ownership
change.” We currently believe that this “ownership change” will not inhibit our ability to utilize our NOLs.
However, as a result of any potential future “ownership changes,” or if we do not generate sufficient taxable income
in the future, we may not be able to utilize a material portion of our NOLs and tax credits, even if we achieve
profitability. If we are limited in our ability to use our NOLs and tax credits in future years in which we have taxable
income, we will pay more taxes than if we were able to fully utilize our NOLs and tax credits. This could materially
and adversely affect our results of operations. As of December 31, 2016, we had federal and state NOLs of $224.7
million and $77.3 million, respectively, available to offset future taxable income due to prior period losses, which if
not utilized will begin to expire in 2026 for federal purposes and begin to expire in 2017 for state purposes.
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Risks Related to Regulation of our Industry
Senza is subject to extensive governmental regulation, and our failure to comply with applicable requirements
could cause our business to suffer.
The medical device industry is regulated extensively by governmental authorities, principally the FDA and
corresponding state and foreign regulatory agencies and authorities, such as the EU legislative bodies and the EEA
Member State Competent Authorities. The FDA and other U.S., EEA and foreign governmental agencies and
authorities regulate and oversee, among other things, with respect to medical devices:
design, development and manufacturing;
testing, labeling, content and language of instructions for use and storage;
clinical trials;
product safety;
marketing, sales and distribution;
pre-market regulatory clearance and approval;
conformity assessment procedures;
record-keeping procedures;
advertising and promotion;
recalls and other field safety corrective actions;
post-market surveillance, including reporting of deaths or serious injuries and malfunctions that, if they
were to recur, could lead to death or serious injury;
post-market studies; and
product import and export.
The laws and regulations to which we are subject are complex and have tended to become more stringent over
time. Legislative or regulatory changes could result in restrictions on our ability to carry on or expand our
operations, higher than anticipated costs or lower than anticipated sales.
Our failure to comply with U.S. federal and state regulations or EEA or other foreign regulations applicable in
the countries where we operate could lead to the issuance of warning letters or untitled letters, the imposition of
injunctions, suspensions or loss of regulatory clearance or approvals, product recalls, termination of distribution,
product seizures or civil penalties. In the most extreme cases, criminal sanctions or closure of our manufacturing
facilities are possible. If any of these risks materialize, our business would be adversely affected.
Our business is subject to extensive governmental regulation that could make it more expensive and time
consuming for us to expand the potential indications for which Senza is approved or introduce new or improved
products.
Our products must comply with regulatory requirements imposed by the FDA in the United States and similar
agencies in foreign jurisdictions. These requirements involve lengthy and detailed laboratory and clinical testing
procedures, sampling activities, extensive agency review processes, and other costly and time-consuming
procedures. It often takes several years to satisfy these requirements, depending on the complexity and novelty of
the product. We also are subject to numerous additional licensing and regulatory requirements relating to safe
working conditions, manufacturing practices, environmental protection, fire hazard control and disposal of
hazardous or potentially hazardous substances. Some of the most important requirements we must comply with
include:
FFDCA and the FDA’s implementing regulations (Title 21 CFR);
European Union CE mark requirements;
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Medical Device Quality Management System Requirements (ISO 13485:2003);
Occupational Safety and Health Administration requirements; and
California Department of Health Services requirements.
Government regulation may impede our ability to conduct clinical studies and to manufacture and sell our
existing and future products. Government regulation also could delay our marketing of new products for a
considerable period of time and impose costly procedures on our activities. Foreign regulatory agencies may not
approve Senza and any of our future products on a timely basis, if at all. Any delay in obtaining, or failure to obtain,
such approvals could negatively impact our marketing of any future products and reduce our product revenues.
Our products remain subject to strict regulatory controls on manufacturing, marketing and use. We may be
forced to modify or recall a product after release in response to regulatory action or unanticipated difficulties
encountered in general use. Any such action could have a material effect on the reputation of our products and on
our business and financial position.
Further, regulations may change, and any additional regulation could limit or restrict our ability to use any of
our technologies, which could harm our business. For example, in December 2016, the 21st Century Cures Act, or
Cures Act, was signed into law. The Cures Act, among other things, is intended to modernize the regulation of
medical devices and spur innovation, but its ultimate implementation remains unclear. We could also be subject to
new international, federal, state or local regulations that could affect our R&D programs and harm our business in
unforeseen ways. If this happens, we may have to incur significant costs to comply with such laws and regulations,
which will harm our results of operations.
We also cannot predict the likelihood, nature or extent of government regulation that may arise from future
legislation or administrative or executive action, either in the United States or abroad. For example, certain policies
of the Trump administration may impact our business and industry. Namely, the Trump administration has taken
several executive actions, including the issuance of a number of Executive Orders, that could impose significant
burdens on, or otherwise materially delay, the FDA’s ability to engage in routine regulatory and oversight activities
such as implementing statutes through rulemaking, issuance of guidance, and review and approval of marketing
applications. Notably, on January 23, 2017, President Trump ordered a hiring freeze for all executive departments
and agencies, including the FDA, which prohibits the FDA from filling employee vacancies or creating new
positions. Under the terms of the order, the freeze will remain in effect until implementation of a plan to be
recommended by the Director for the Office of Management and Budget, or OMB, in consultation with the Director
of the Office of Personnel Management, to reduce the size of the federal workforce through attrition. An under-
staffed FDA could result in delays in FDA’s responsiveness or in its ability to review submissions or applications,
issue regulations or guidance or implement or enforce regulatory requirements in a timely fashion or at all.
Moreover, on January 30, 2017, President Trump issued an Executive Order, applicable to all executive agencies,
including the FDA, that requires that for each notice of proposed rulemaking or final regulation to be issued in fiscal
year 2017, the agency shall identify at least two existing regulations to be repealed, unless prohibited by law. These
requirements are referred to as the “two-for-one” provisions. This Executive Order includes a budget neutrality
provision that requires the total incremental cost of all new regulations in the 2017 fiscal year, including repealed
regulations, to be no greater than zero, except in limited circumstances. For fiscal years 2018 and beyond, the
Executive Order requires agencies to identify regulations to offset any incremental cost of a new regulation and
approximate the total costs or savings associated with each new regulation or repealed regulation. In interim
guidance issued by the Office of Information and Regulatory Affairs within OMB on February 2, 2017, the
administration indicates that the “two-for-one” provisions may apply not only to agency regulations, but also to
significant agency guidance documents. It is difficult to predict how these requirement will be implemented, and the
extent to which they will impact the FDA’s ability to exercise its regulatory authority. If these executive actions
impose constraints on FDA’s ability to engage in oversight and implementation activities in the normal course, our
business may be negatively impacted.
In September 2012, the European Commission published proposals for the revision of the EU regulatory
framework for medical devices. The proposals would replace the Medical Devices Directive and the Active
Implantable Medical Devices Directive with two new regulations: the Medical Devices Regulation and the In-Vitro
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Diagnostic Medical Devices Regulation. Unlike directives, which must be implemented into the national laws of the
EEA member States, the regulations would be directly applicable, i.e., without the need for adoption of EEA
member State laws implementing them, in all EEA member States and are intended to eliminate current differences
in the regulation of medical devices among EEA member States.
The Medical Devices Regulation and the In-Vitro Diagnostic Medical Devices Regulation are expected to be
adopted in the first quarter of 2017. However, the Medical Devices Regulation, which is the regulation directly
applicable to our products, will only become applicable three years after publication in the Office Journal of the
European Union. Once in effect, the Medical Devices Regulation will, among other things:
strengthen the rules on placing devices on the market and reinforce surveillance once they are available;
establish explicit provisions on manufacturers' responsibilities for the follow-up of the quality,
performance and safety of devices placed on the market;
improve the traceability of medical devices throughout the supply chain to the end-user or patient
through a unique identification number;
set up a central database to provide patients, healthcare professionals and the public with comprehensive
information on products available in the EU;
strengthened rules for the assessment of certain high-risk devices, such as implants, which may have to
undergo an additional check by experts before they are placed on the market.
These modifications may have an impact on the way we conduct our business in the EEA.
Senza is subject to extensive governmental regulation in foreign jurisdictions, such as Europe, and our failure to
comply with applicable requirements could cause our business to suffer.
In the EEA, Senza must comply with the Essential Requirements laid down in Annex I to the EU Active
Implantable Medical Devices Directive. Compliance with these requirements is a prerequisite to be able to affix the
CE mark to Senza, without which Senza cannot be marketed or sold in the EEA. To demonstrate compliance with
the Essential Requirements and obtain the right to affix the CE Mark to Senza, we must undergo a conformity
assessment procedure, which varies according to the type of medical device and its classification. Except for low
risk medical devices (Class I with no measuring function and which are not sterile), where the manufacturer can
issue an EC Declaration of Conformity based on a self-assessment of the conformity of its products with the
Essential Requirements, a conformity assessment procedure requires the intervention of a Notified Body, which is
an organization designated by a competent authority of an EEA country to conduct conformity assessments.
Depending on the relevant conformity assessment procedure, the Notified Body would audit and examine the
Technical File and the quality system for the manufacture, design and final inspection of our devices. The Notified
Body issues a CE Certificate of Conformity following successful completion of a conformity assessment procedure
conducted in relation to the medical device and its manufacturer and their conformity with the Essential
Requirements. This Certificate entitles the manufacturer to affix the CE mark to its medical devices after having
prepared and signed a related EC Declaration of Conformity.
As a general rule, demonstration of conformity of medical devices and their manufacturers with the Essential
Requirements must be based, among other things, on the evaluation of clinical data supporting the safety and
performance of the products during normal conditions of use. Specifically, a manufacturer must demonstrate that the
device achieves its intended performance during normal conditions of use and that the known and foreseeable risks,
and any adverse events, are minimized and acceptable when weighed against the benefits of its intended
performance, and that any claims made about the performance and safety of the device (e.g., product labeling and
instructions for use) are supported by suitable evidence. This assessment must be based on clinical data, which can
be obtained from (1) clinical studies conducted on the devices being assessed, (2) scientific literature from similar
devices whose equivalence with the assessed device can be demonstrated or (3) both clinical studies and scientific
literature. With respect to active implantable medical devices or Class III devices, the manufacturer must conduct
clinical studies to obtain the required clinical data, unless reliance on existing clinical data from equivalent devices
can be justified. The conduct of clinical studies in the EEA is governed by detailed regulatory obligations. These
may include the requirement of prior authorization by the competent authorities of the country in which the study
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takes place and the requirement to obtain a positive opinion from a competent Ethics Committee. This process can
be expensive and time-consuming.
In order to continue to sell Senza in Europe, we must maintain our CE Mark and continue to comply with
certain EU Directives. Our failure to continue to comply with applicable foreign regulatory requirements, including
those administered by authorities of the EEA countries, could result in enforcement actions against us, including
refusal, suspension or withdrawal of our CE Certificates of Conformity by the BSI, which could impair our ability to
market products in the EEA in the future.
The misuse or off-label use of our product may harm our image in the marketplace, result in injuries that lead to
product liability suits, which could be costly to our business, or result in costly investigations and sanctions from
the FDA and other regulatory bodies if we are deemed to have engaged in off-label promotion.
Senza has been approved for marketing in the United States, CE Marked in the EEA and approved by the
TGA in Australia for specific treatments and anatomies. We may only promote or market the Senza SCS system for
its specifically approved indications as described on the approved label. We train our marketing and sales force
against promoting our products for uses outside of the approved indications for use, known as “off-label uses.” We
cannot, however, prevent a physician from using our product off-label, when in the physician’s independent
professional medical judgment he or she deems the use of the product in the non-approved indication as appropriate.
There may be increased risk of injury to patients if physicians attempt to use our product off-label. Furthermore, the
use of our product for indications other than those approved by the applicable regulatory body may not effectively
treat such conditions, which could harm our reputation in the marketplace among physicians and patients.
Physicians may also misuse our product or use improper techniques if they are not adequately trained,
potentially leading to injury and an increased risk of product liability. If our product is misused or used with
improper technique, we may become subject to costly litigation by our customers or their patients. Product liability
claims could divert management’s attention from our core business, be expensive to defend, and result in sizable
damage awards against us that may not be covered by insurance. In addition, if the FDA determines that our
promotional materials, training or physician support activities constitute promotion of an off-label use, it could
request that we modify our training, promotional materials or physician support activities or subject us to regulatory
or enforcement actions, including the issuance of an untitled letter, a warning letter, injunction, seizure, civil fine or
criminal penalties. It is also possible that other federal, state or foreign enforcement authorities might take action if
they consider our business activities to constitute promotion of an off-label use, which could result in significant
penalties, including, but not limited to, criminal, civil and/or administrative penalties, damages, fines, disgorgement,
exclusion from participation in government healthcare programs, and the curtailment of our operations. Further,
regulators or legislators may also enhance the enforcement of, and attempt to curtail, any off-label use by physicians
of medical devices in the future. Any of these events could significantly harm our business and results of operations
and cause our stock price to decline.
Further, the advertising and promotion of our products is subject to EEA Member States laws implementing
Directive 93/42/EEC concerning Medical Devices (the EU Medical Devices Directive), Directive 2006/114/EC
concerning misleading and comparative advertising, and Directive 2005/29/EC on unfair commercial practices, as
well as other EEA Member State legislation governing the advertising and promotion of medical devices. EEA
Member State legislation may also restrict or impose limitations on our ability to advertise our products directly to
the general public. In addition, voluntary EU and national Codes of Conduct provide guidelines on the advertising
and promotion of our products and may impose limitations on our promotional activities with healthcare
professionals.
Senza may in the future be subject to notifications, recalls, or voluntary market withdrawals that could harm our
reputation, business and financial results.
The FDA, EEA Competent Authorities and similar foreign governmental authorities have the authority to
require the recall of commercialized products in the event of material deficiencies or defects in design or
manufacture that could affect patient safety. In the case of the FDA, the authority to require a recall must be based
on an FDA finding that there is a reasonable probability that the device would cause serious adverse health
consequences or death. Manufacturers may, under their own initiative, conduct a product notification or recall to
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inform physicians of changes to instructions for use, or if a deficiency in a device is found or suspected. A
government-mandated recall or voluntary recall by us or one of our distributors could occur as a result of component
failures, manufacturing errors, design or labeling defects or other issues. Recalls, which include certain notifications
and corrections as well as removals, of Senza could divert managerial and financial resources and could have an
adverse effect on our financial condition, harm our reputation with customers, and reduce our ability to achieve
expected revenue.
In addition, the manufacturing of our products is subject to extensive post-market regulation by the FDA and
foreign regulatory authorities, and any failure by us or our contract manufacturers or suppliers to comply with
regulatory requirements could result in recalls, facility closures, and other penalties. We and our suppliers and
contract manufacturers are subject to the QSR, and comparable foreign regulations which govern the methods used
in, and the facilities and controls used for, the design, manufacture, quality assurance, labeling, packaging,
sterilization, storage, shipping, and servicing of medical devices. These regulations are enforced through periodic
inspections of manufacturing facilities. Any manufacturing issues at our or our suppliers’ or contract manufacturers’
facilities, including failure to comply with regulatory requirements, may result in warning or untitled letters,
manufacturing restrictions, voluntary or mandatory recalls or corrections, fines, withdrawals of regulatory clearances
or approvals, product seizures, injunctions, or the imposition of civil or criminal penalties, which would adversely
affect our business results and prospects.
We are required to report certain malfunctions, deaths, and serious injuries associated with our products, which
can result in voluntary corrective actions or agency enforcement actions.
Under the FDA medical device reporting regulations, medical device manufacturers are required to submit
information to the FDA when they receive a report or become aware that a device has or may have caused or
contributed to a death or serious injury or has or may have a malfunction that would likely cause or contribute to
death or serious injury if the malfunction were to recur. All manufacturers placing medical devices on the market in
the EEA are legally bound to report incidents involving devices they produce or sell to the regulatory agency, or
competent authority, in whose jurisdiction the incident occurred. Under the EU Medical Devices Directive
(Directive 93/42/EEC), an incident is defined as any malfunction or deterioration in the characteristics and/or
performance of a device, as well as any inadequacy in the labeling or the instructions for use which, directly or
indirectly, might lead to or might have led to the death of a patient, or user or of other persons or to a serious
deterioration in their state of health.
Malfunction of our products could result in future voluntary corrective actions, such as recalls, including
corrections, or customer notifications, or agency action, such as inspection or enforcement actions. If malfunctions
do occur, we may be unable to correct the malfunctions adequately or prevent further malfunctions, in which case
we may need to cease manufacture and distribution of the affected products, initiate voluntary recalls, and redesign
the products. Regulatory authorities may also take actions against us, such as ordering recalls, imposing fines, or
seizing the affected products. Any corrective action, whether voluntary or involuntary, will require the dedication of
our time and capital, distract management from operating our business, and may harm our reputation and financial
results.
A recall of our products, either voluntarily or at the direction of the FDA, an EEA Competent Authority or
another governmental authority, or the discovery of serious safety issues with our products, could have a
significant adverse impact on us.
The FDA and similar foreign governmental authorities such as the Competent Authorities of the EEA
countries have the authority to require the recall of commercialized products in the event of material deficiencies or
defects in design or manufacture or in the event that a product poses an unacceptable risk to health. Manufacturers
may, under their own initiative, recall a product if any material deficiency in a device is found. A government-
mandated or voluntary recall by us or one of our distributors could occur as a result of an unacceptable risk to
health, component failures, manufacturing errors, design or labeling defects or other deficiencies and issues. Recalls
of any of our products would divert managerial and financial resources and have an adverse effect on our reputation,
results of operations and financial condition, which could impair our ability to produce our products in a cost-
effective and timely manner in order to meet our customers’ demands. We may also be required to bear other costs
or take other actions that may have a negative impact on our future sales and our ability to generate profits.
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We may be subject to federal, state and foreign healthcare laws and regulations, and a finding of failure to
comply with such laws and regulations could have a material adverse effect on our business.
We are subject to healthcare fraud and abuse regulation and enforcement by federal, state and foreign
governments, which could significantly impact our business. In the United States, the laws that may affect our
ability to operate include, but are not limited to:
the federal Anti-Kickback Statute, which prohibits, among other things, persons and entities from
knowingly and willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, in
cash or in kind, in exchange for or to induce either the referral of an individual for, or the purchase,
lease, order or recommendation of, any good, facility, item or service for which payment may be made,
in whole or in part, under federal healthcare programs such as Medicare and Medicaid. A person or
entity does not need to have actual knowledge of this statute or specific intent to violate it;
federal civil and criminal false claims laws and civil monetary penalty laws, including civil
whistleblower or qui tam actions, that prohibit, among other things, knowingly presenting, or causing to
be presented, claims for payment or approval to the federal government that are false or fraudulent,
knowingly making a false statement material to an obligation to pay or transmit money or property to
the federal government or knowingly concealing or knowingly and improperly avoiding or decreasing
an obligation to pay or transmit money or property to the federal government;
HIPAA, which created federal criminal laws that prohibit executing a scheme to defraud any healthcare
benefit program or making false statements relating to healthcare matters. A person or entity does not
need to have actual knowledge of these statutes or specific intent to violate them;
HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of
2009, and their respective implementing regulations, which impose requirements on certain covered
healthcare providers, health plans and healthcare clearinghouses as well as their business associates that
perform services for them that involve individually identifiable health information, relating to the
privacy, security and transmission of individually identifiable health information without appropriate
authorization, including mandatory contractual terms as well as directly applicable privacy and security
standards and requirements;
the federal physician sunshine requirements under the Patient Protection and Affordable Care Act, as
amended by the Health Care and Education Reconciliation Act, collectively, the ACA, which require
certain manufacturers of drugs, devices, biologics, and medical supplies to report annually to the U.S.
Department of Health and Human Services information related to payments and other transfers of value
to physicians (defined to include doctors, dentists, optometrists, podiatrists and chiropractors) and
teaching hospitals, and ownership and investment interests held by physicians and their immediate
family members;
state and foreign law equivalents of each of the above federal laws, such as state anti-kickback and false
claims laws that may apply to items or services reimbursed by any third-party payor, including
commercial insurers; state laws that require device companies to comply with the industry’s voluntary
compliance guidelines and the relevant compliance guidance promulgated by the federal government, or
otherwise restrict payments that may be made to healthcare providers and other potential referral
sources; state laws that require device manufacturers to report information related to payments and other
transfers of value to physicians and other healthcare providers or marketing expenditures; and state and
foreign laws governing the privacy and security of health information in certain circumstances, many of
which differ from each other in significant ways and often are not preempted by HIPAA.
The scope and enforcement of each of these laws is uncertain and subject to rapid change in the current
environment of healthcare reform, especially in light of the lack of applicable precedent and regulations. Federal and
state enforcement bodies have recently increased their scrutiny of interactions between healthcare companies and
healthcare providers, which has led to a number of investigations, prosecutions, convictions and settlements in the
healthcare industry. Responding to investigations can be time-and resource-consuming and can divert management’s
attention from the business. Additionally, as a result of these investigations, healthcare providers and entities may
have to agree to additional onerous compliance and reporting requirements as part of a consent decree or corporate
52
integrity agreement. Any such investigation or settlement could increase our costs or otherwise have an adverse
effect on our business.
If our operations are found to be in violation of any of the laws described above or any other governmental
regulations that apply to us now or in the future, we may be subject to penalties, including civil and criminal
penalties, damages, fines, disgorgement, exclusion from governmental health care programs, and the curtailment or
restructuring of our operations, any of which could adversely affect our ability to operate our business and our
financial results.
Healthcare legislative reform measures may have a material adverse effect on us.
In March 2010, the ACA was signed into law, which included, among other things, a deductible 2.3% excise
tax on any entity that manufactures or imports medical devices offered for sale in the United States, with limited
exceptions, effective January 1, 2013. Subsequently, a two-year moratorium was implemented effective January 1,
2016, such that medical device sales in 2016 and 2017 are exempt from the medical device excise tax. Unless there
is further legislative action, the tax will be automatically reinstated for sales of medical devices on or after January
1, 2018. If it were to be reinstated, this excise tax would result in a significant increase in the tax burden on our
industry, and if any efforts we undertake to offset the excise tax are unsuccessful as we begin to sell the product in
the United States, the increased tax burden could have an adverse effect on our results of operations and cash flows.
Other elements of the ACA, including comparative effectiveness research, an independent payment advisory board
and payment system reforms, including shared savings pilots and other provisions, may significantly affect the
payment for, and the availability of, healthcare services and result in fundamental changes to federal healthcare
reimbursement programs, any of which may materially affect numerous aspects of our business.
In addition, other legislative changes have been proposed and adopted in the United States since the ACA was
enacted. These changes included an aggregate reduction in Medicare payments to providers of up to 2% per fiscal
year, which went into effect on April 1, 2013 and will remain in effect through 2025 unless additional Congressional
action is taken. On January 2, 2013, the American Taxpayer Relief Act of 2012, was signed into law which, among
other things, further reduced Medicare payments to certain providers, including hospitals. The Medicare Access and
CHIP Reauthorization Act of 2015, enacted on April 16, 2015 (MACRA), repealed the formula by which Medicare
made annual payment adjustments to physicians and replaced the former formula with fixed annual updates and a
new system of incentive payments scheduled to begin in 2019 that are based on various performance measures and
physicians’ participation in alternative payment models such as accountable care organizations.
There have been judicial and Congressional challenges to certain aspects of the ACA, and we expect there will
be additional challenges and amendments to the ACA in the future. For instance, on January 20, 2017, President
Trump signed an Executive Order stating it is his Administration’s policy to seek prompt repeal of the ACA and
directing federal agencies with authorities and responsibilities under the ACA to waive, defer, grant exemptions
from, or delay the implementation of any provision of the ACA that would impose a fiscal or regulatory burden on
states, individuals, healthcare providers, health insurers, or manufacturers of pharmaceuticals or medical devices.
Congress also could consider subsequent legislation to replace elements of the ACA that may be repealed. At this
time, the full effect that the ACA, the Executive Order and any subsequent legislation would have on our business
remains unclear. Any new limitations on, changes to, or uncertainty with respect to the ability of individuals to
enroll in governmental reimbursement programs or other third-party payor insurance plans could impact demand for
our product.
We expect that additional state and federal healthcare reform measures will be adopted in the future, any of
which could limit the amounts that federal and state governments will pay for healthcare products and services,
which could result in reduced demand for our products or additional pricing pressures.
Our future success depends on our ability to develop, receive regulatory clearance or approval for, additional
chronic pain indications for Senza and introduce new products or product enhancements that will be accepted by
the market in a timely manner.
It is important to our business that we build a pipeline of product offerings for treatment of chronic pain. As
such, our success will depend in part on our ability to expand the chronic pain indications for which Senza may be
53
used and/or develop and introduce new products. However, we may not be able to successfully develop and obtain
regulatory clearance or approval for expanded indications or product enhancements, or new products, or these
products may not be accepted by physicians or the payors who financially support many of the procedures
performed with our products.
The success of any new product offering or enhancement to an existing product will depend on a number of
factors, including our ability to:
identify and anticipate physician and patient needs properly;
develop and introduce new products or product enhancements in a timely manner;
avoid infringing upon the intellectual property rights of third parties;
demonstrate, if required, the safety and efficacy of new products with data from preclinical and clinical
studies;
obtain the necessary regulatory clearances or approvals for new products or product enhancements;
comply fully with FDA and foreign regulations on marketing of new devices or modified products;
provide adequate training to potential users of our products; and
receive adequate coverage and reimbursement for procedures performed with our products.
If we do not develop new products or product enhancements in time to meet market demand or if there is
insufficient demand for these products or enhancements, or if our competitors introduce new products with
functionalities that are superior to ours, our results of operations will suffer.
Risks Related to Our Securities
Our stock price may be volatile and as a result our stockholders may not be able to resell shares of our common
stock at or above the price they paid and such volatility may also adversely impact the value of the 2021 Notes.
The trading price of our common stock could be highly volatile and could be subject to wide fluctuations in
response to various factors, some of which are beyond our control. These factors include those discussed in this
“Risk Factors” section of this Annual Report and others such as:
delays or setbacks in the commercialization of Senza or the expansion of indications for which Senza is
approved;
announcements of new products by us or our competitors;
achievement of expected product sales and profitability;
manufacture, supply or distribution shortages;
fluctuations in our expenses associated with inventory buildup or write-downs from analyzing our
inventory for obsolesce or conformity with our product requirements;
adverse actions taken by regulatory agencies with respect to our clinical trials, manufacturing supply
chain or sales and marketing activities;
our operating results;
results from, or any delays in, clinical trial programs relating to our product candidates;
changes or developments in laws or regulations applicable to our products;
any adverse changes in our relationship with any manufacturers or suppliers;
the success of our efforts to acquire or develop additional products;
54
any intellectual property infringement actions in which we may become involved, including our pending
lawsuits with Boston Scientific;
announcements concerning our competitors or the medical device industry in general;
actual or anticipated fluctuations in our operating results;
FDA or other U.S. or foreign regulatory actions affecting us or our industry or other healthcare reform
measures in the United States;
changes in financial estimates or recommendations by securities analysts;
trading volume of our common stock;
trading activity in our common stock by the option counterparties to our convertible note hedge
transactions to unwind or modify their hedge positions;
sales of our common stock by us, our executive officers and directors or our stockholders in the future;
general economic and market conditions and overall fluctuations in the United States equity markets;
and
the loss of any of our key scientific or management personnel.
Because the 2021 Notes are convertible into shares of common stock, volatility or depressed market prices of
our common stock could have a similar effect on the value of the 2021 Notes. Holders who receive shares of our
common stock upon conversion of the 2021 Notes will also be subject to the risk of volatility and depressed market
prices of our common stock. Similarly, the liquidity of the trading market in the 2021 Notes and the market price
quoted for the 2021 Notes, may be adversely affected by changes in the overall market for this type of security and
by changes in our financial performance or prospects or in the prospects for companies in our industry generally.
In addition, the stock markets in general, and the markets for medical device stocks in particular, have
experienced volatility that may have been unrelated to the operating performance of the issuer. These broad market
fluctuations may adversely affect the trading price or liquidity of our common stock and the value of the 2021
Notes. In the past, when the market price of a stock has been volatile, holders of that stock have sometimes instituted
securities class action litigation against the issuer. If any of our stockholders were to bring such a lawsuit against us,
we could incur substantial costs defending the lawsuit and the attention of our management would be diverted from
the operation of our business, which could seriously harm our financial position. Any adverse determination in
litigation could also subject us to significant liabilities.
Servicing our debt requires a significant amount of cash, and we may not have sufficient cash flow from our
business to pay our substantial debt.
Our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness,
including the 2021 Notes, depends on our future performance, which is subject to economic, financial, competitive
and other factors beyond our control. Our business may not continue to generate cash flow from operations in the
future sufficient to service our debt and make necessary capital expenditures. If we are unable to generate such cash
flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining
additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance our indebtedness
will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of
these activities or engage in these activities on desirable terms, which could result in a default on our debt
obligations.
Recent and future regulatory actions and other events may adversely affect the value and liquidity of the 2021
Notes.
We expect that many investors in, and potential purchasers of, the 2021 Notes will employ, or seek to employ,
a convertible arbitrage strategy with respect to the 2021 Notes. Investors would typically implement such a strategy
by selling short the common stock underlying the 2021 Notes and dynamically adjusting their short position while
55
continuing to hold the 2021 Notes. Investors may also implement this type of strategy by entering into swaps on our
common stock in lieu of or in addition to short selling the common stock.
The SEC and other regulatory and self-regulatory authorities have implemented various rules and taken
certain actions, and may in the future adopt additional rules and take other actions, that may impact those engaging
in short selling activity involving equity securities (including our common stock). Such rules and actions include
Rule 201 of SEC Regulation SHO, the adoption by the Financial Industry Regulatory Authority, Inc. and the
national securities exchanges of a “Limit Up-Limit Down” program, the imposition of market-wide circuit breakers
that halt trading of securities for certain periods following specific market declines, and the implementation of
certain regulatory reforms required by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
(the Dodd-Frank Act). Any governmental or regulatory action that restricts the ability of investors in, or potential
purchasers of, the 2021 Notes to effect short sales of our common stock, borrow our common stock or enter into
swaps on our common stock could adversely affect the value and the liquidity of the 2021 Notes.
If securities or industry analysts issue an adverse or misleading opinion regarding our stock, our stock price and
trading volume could decline.
The trading market for our common stock is influenced by the research and reports that industry or securities
analysts publish about us or our business. If any of the analysts who cover us issues an adverse or misleading
opinion regarding us, our business model, our intellectual property or our stock performance, or if our clinical trials
and operating results fail to meet the expectations of analysts, our stock price would likely decline. If one or more of
these analysts cease coverage of us or fail to publish reports on us regularly, we could lose visibility in the financial
markets, which in turn could cause our stock price or trading volume to decline.
We incur significantly increased costs and devote substantial management time as a result of operating as a
public company.
As a public company, we incur significant legal, accounting and other expenses that we did not incur as a
private company. For example, we are subject to the reporting requirements of the Exchange Act, and are required to
comply with the applicable requirements of the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley Act), and the Dodd-
Frank Act, as well as rules and regulations subsequently implemented by the SEC and the NYSE, including the
establishment and maintenance of effective disclosure and financial controls and changes in corporate governance
practices. We expect that compliance with these requirements will increase our legal and financial compliance costs
and will make some activities more time consuming and costly.
In addition, our management and other personnel divert attention from operational and other business matters
to devote substantial time to these public company requirements. In particular, we incur significant expenses and
devote substantial management effort toward ensuring compliance with the requirements of Section 404 of the
Sarbanes-Oxley Act, which has increased now that we are no longer an emerging growth company under the
Jumpstart Our Business Startups Act of 2012 (the JOBS Act). We continue to hire additional accounting and
financial staff with appropriate public company experience and technical accounting knowledge. We cannot predict
or estimate the amount of additional costs we will incur in order to remain compliant with our public company
reporting requirements or the timing of such costs. Additional compensation costs and any future equity awards will
increase our compensation expense, which would increase our general and administrative expense and could
adversely affect our profitability.
If we are unable to maintain effective internal control over financial reporting in the future, investors may lose
confidence in the accuracy and completeness of our financial reports and the market price of our common stock
and the value of the 2021 Notes could be adversely affected.
As a public company, we are required to maintain internal control over financial reporting and to report any
material weaknesses in such internal control. Section 404 of the Sarbanes-Oxley Act requires that we evaluate and
determine the effectiveness of our internal control over financial reporting and provide a management report on
internal control over financial reporting. The Sarbanes-Oxley Act also requires that our internal control over
financial reporting be attested to by our independent registered public accounting firm, now that we are no longer an
“emerging growth company,” as defined by the JOBS Act.
56
If we have a material weakness in our internal control over financial reporting, we may not detect errors on a
timely basis and our financial statements may be materially misstated. The process of designing and implementing
the internal control over financial reporting required to comply with this obligation is time consuming, costly and
complicated. If we identify material weaknesses in our internal control over financial reporting, if we are unable to
comply with the requirements of Section 404 in a timely manner, if we are unable to assert that our internal control
over financial reporting are effective, or if our independent registered public accounting firm is unable to express an
opinion as to the effectiveness of our internal control over financial reporting, investors may lose confidence in the
accuracy and completeness of our financial reports and the market price of our common stock and the value of the
2021 Notes could be adversely affected, and we could become subject to investigations by the stock exchange on
which our securities are listed, the SEC, or other regulatory authorities, which could require additional financial and
management resources.
The accounting method for convertible debt securities that may be settled in cash, such as the 2021 Notes, could
have a material effect on our reported financial results.
In May 2008, the Financial Accounting Standards Board (FASB) issued FASB Staff Position No. APB 14-1,
Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial
Cash Settlement), which has subsequently been codified as Accounting Standards Codification 470-20, Debt with
Conversion and Other Options (ASC 470-20). Under ASC 470-20, an entity must separately account for the liability
and equity components of the convertible debt instruments (such as the 2021 Notes) that may be settled entirely or
partially in cash upon conversion in a manner that reflects the issuer’s economic interest cost. The effect of ASC
470-20 on the accounting for the 2021 Notes is that the equity component is required to be included in the additional
paid-in capital section of stockholders’ equity on our consolidated balance sheet, and the value of the equity
component would be treated as debt discount for purposes of accounting for the debt component of the 2021 Notes.
As a result, we are required to record a greater amount of non-cash interest expense in current periods presented as a
result of the amortization of the discounted carrying value of the 2021 Notes to their face amount over the term of
the 2021 Notes. We will report lower net income in our financial results because ASC 470-20 will require interest to
include both the current period’s amortization of the debt discount and the instrument’s non-convertible interest rate,
which could adversely affect our reported or future financial results, the trading price of our common stock and the
value of the 2021 Notes.
In addition, under certain circumstances, convertible debt instruments (such as the 2021 Notes) that may be
settled entirely or partly in cash are currently accounted for utilizing the treasury stock method, the effect of which is
that the shares issuable upon conversion of the 2021 Notes are not included in the calculation of diluted earnings per
share except to the extent that the conversion value of the 2021 Notes exceeds their principal amount. Under the
treasury stock method, for diluted earnings per share purposes, the transaction is accounted for as if the number of
shares of common stock that would be necessary to settle such excess, if we elected to settle such excess in shares,
are issued. We cannot be sure that the accounting standards in the future will continue to permit the use of the
treasury stock method. If we are unable to use the treasury stock method in accounting for the shares issuable upon
conversion of the 2021 Notes, then our diluted earnings per share would be adversely affected.
If we sell shares of our common stock in future financings, stockholders may experience immediate dilution and,
as a result, our stock price and the value of the 2021 Notes may decline.
We may from time to time issue additional shares of common stock at a discount from the current trading
price of our common stock. As a result, our stockholders would experience immediate dilution upon the purchase of
any shares of our common stock sold at such discount. In addition, as opportunities present themselves, we may
enter into financing or similar arrangements in the future, including the issuance of debt securities, preferred stock or
common stock. If we issue common stock or securities convertible into common stock, our common stockholders
would experience additional dilution and, as a result, our stock price and the value of the 2021 Notes may decline.
Sales of a substantial number of shares of our common stock in the public market could cause our stock price
and the value of the 2021 Notes to fall.
If our existing stockholders sell, or indicate an intention to sell, substantial amounts of our common stock in
the public market after the lapse of legal restrictions on resale, the trading price of our common stock and the value
57
of the 2021 Notes could decline. As of December 31, 2016, we had outstanding a total of approximately 28.9 million
shares of common stock and approximately 6.0 million shares of common stock that are either subject to outstanding
options or reserved for future issuance under our equity incentive plans will become eligible for sale in the public
market to the extent permitted by the provisions of various vesting schedules, and Rule 144 and Rule 701 under the
Securities Act. If these additional shares of common stock are sold, or if it is perceived that they will be sold, in the
public market, the trading price of our common stock and the value of the 2021 Notes could decline.
The holders of up to approximately 1.4 million shares of our outstanding common stock as of December 31,
2016 were entitled to rights with respect to the registration of their shares under the Securities Act. Registration of
these shares under the Securities Act would result in the shares becoming freely tradable without restriction under
the Securities Act, except for shares purchased by affiliates. Any sales of securities by these stockholders could have
a material adverse effect on the trading price of our common stock and could cause the value of the 2021 Notes to
decline.
Our principal stockholders and management own a significant percentage of our stock and will be able to exert
significant control over matters subject to stockholder approval.
As of December 31, 2016 our executive officers, directors, holders of 5% or more of our capital stock and
their respective affiliates held approximately 29% of our outstanding voting stock. These stockholders will have the
ability to influence us through this ownership position, and may be able to determine all matters requiring
stockholder approval. For example, these stockholders may be able to control elections of directors, amendments of
our organizational documents, or approval of any merger, sale of assets, or other major corporate transaction. This
may prevent or discourage unsolicited acquisition proposals or offers for our common stock that our stockholders
may feel are in their best interest.
Provisions in our charter documents and under Delaware law could discourage a takeover that stockholders may
consider favorable and may lead to entrenchment of management.
Our amended and restated certificate of incorporation and amended and restated bylaws contain provisions
that could significantly reduce the value of our shares to a potential acquirer or delay or prevent changes in control
or changes in our management without the consent of our board of directors. The provisions in our charter
documents include the following:
a classified board of directors with three-year staggered terms, which may delay the ability of
stockholders to change the membership of a majority of our board of directors;
no cumulative voting in the election of directors, which limits the ability of minority stockholders to
elect director candidates;
the exclusive right of our board of directors to elect a director to fill a vacancy created by the expansion
of the board of directors or the resignation, death or removal of a director, which prevents stockholders
from being able to fill vacancies on our board of directors;
the required approval of at least 66 2/3% of the shares entitled to vote to remove a director for cause,
and the prohibition on removal of directors without cause;
the ability of our board of directors to authorize the issuance of shares of preferred stock and to
determine the price and other terms of those shares, including preferences and voting rights, without
stockholder approval, which could be used to significantly dilute the ownership of a hostile acquiror;
the ability of our board of directors to alter our bylaws without obtaining stockholder approval;
the required approval of at least 66 2/3% of the shares entitled to vote at an election of directors to
adopt, amend or repeal our bylaws or repeal the provisions of our amended and restated certificate of
incorporation regarding the election and removal of directors;
a prohibition on stockholder action by written consent, which forces stockholder action to be taken at an
annual or special meeting of our stockholders;
58
the requirement that a special meeting of stockholders may be called only by the board of directors,
which may delay the ability of our stockholders to force consideration of a proposal or to take action,
including the removal of directors; and
advance notice procedures that stockholders must comply with in order to nominate candidates to our
board of directors or to propose matters to be acted upon at a stockholders’ meeting, which may
discourage or deter a potential acquiror from conducting a solicitation of proxies to elect the acquiror’s
own slate of directors or otherwise attempting to obtain control of us.
In addition, these provisions would apply even if we were to receive an offer that some stockholders may
consider beneficial.
We are also subject to the anti-takeover provisions contained in Section 203 of the Delaware General
Corporation Law. Under Section 203, a corporation may not, in general, engage in a business combination with any
holder of 15% or more of its capital stock unless the holder has held the stock for three years or, among other
exceptions, the board of directors has approved the transaction. The repurchase right under the 2021 Notes in
connection with a fundamental change and any increase in the conversion rate in connection with a make-whole
fundamental change could also discourage a potential acquirer.
Claims for indemnification by our directors and officers may reduce our available funds to satisfy successful
third-party claims against us and may reduce the amount of money available to us.
Our amended and restated certificate of incorporation and amended and restated bylaws provide that we will
indemnify our directors and officers to the fullest extent permitted by Delaware law.
In addition, as permitted by Section 145 of the Delaware General Corporation Law, our amended and restated
bylaws and our indemnification agreements that we have entered into with our directors and officers provide that:
we will indemnify our directors and officers for serving us in those capacities or for serving other
business enterprises at our request, to the fullest extent permitted by Delaware law. Delaware law
provides that a corporation may indemnify such person if such person acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best interests of the registrant
and, with respect to any criminal proceeding, had no reasonable cause to believe such person’s conduct
was unlawful;
we may, in our discretion, indemnify employees and agents in those circumstances where
indemnification is permitted by applicable law;
we are required to advance expenses, as incurred, to our directors and officers in connection with
defending a proceeding, except that such directors or officers shall undertake to repay such advances if
it is ultimately determined that such person is not entitled to indemnification;
we will not be obligated pursuant to our amended and restated bylaws to indemnify a person with
respect to proceedings initiated by that person against us or our other indemnitees, except with respect
to proceedings authorized by our board of directors or brought to enforce a right to indemnification;
the rights conferred in our amended and restated bylaws are not exclusive, and we are authorized to
enter into indemnification agreements with our directors, officers, employees and agents and to obtain
insurance to indemnify such persons; and
we may not retroactively amend our amended and restated bylaw provisions to reduce our
indemnification obligations to directors, officers, employees and agents.
We do not currently intend to pay dividends on our common stock, and, consequently, our stockholders’ ability to
achieve a return on their investment will depend on appreciation in the price of our common stock.
We do not currently intend to pay any cash dividends on our common stock for the foreseeable future. We
currently intend to invest our future earnings, if any, to fund our growth. Therefore, our stockholders are not likely
59
to receive any dividends on our common stock for the foreseeable future. Since we do not intend to pay dividends,
our stockholders’ ability to receive a return on their investment will depend on any future appreciation in the market
value of our common stock. There is no guarantee that our common stock will appreciate or even maintain the price
at which our stockholders have purchased it.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our corporate headquarters and R&D facilities are located in Redwood City, California, where we lease and
currently occupy approximately 50,740 square feet of office and laboratory space. In December 2016, we amended
the original lease for our corporate headquarters in order to increase the space we occupy by approximately 49,980
square feet of office space adjacent to our corporate headquarters. Our obligations under the amended lease for the
new space will commence upon the earlier of the landlord completing certain improvements or when we commence
business operations in the new space. The term of the lease for our corporate headquarters and the new adjacent
space lasts for a period of 84 months following the commencement of the term for the additional adjacent space.
We believe our current headquarters, together with our additional adjacent space, is sufficient for our current and
foreseeable business needs. We also lease office space in Switzerland and a small warehouse space in Menlo Park,
California.
For additional information, see Note 5. Commitments and Contingencies of Notes to Consolidated Financial
Statements in Part II, Item 8 of this Annual Report.
ITEM 3. LEGAL PROCEEDINGS
On November 28, 2016, we filed a lawsuit for patent infringement against Boston Scientific Corporation and
Boston Scientific Neuromodulation Corporation (collectively, “Boston Scientific”). The lawsuit, filed in the United
States District Court for the Northern District of California, asserts that Boston Scientific is infringing our patents
covering inventions relating to our Senza system and HF10 therapy. The lawsuit seeks preliminary and permanent
injunctive relief against further infringement as well as damages and attorney’s fees.
On December 9, 2016, Boston Scientific filed a patent infringement lawsuit alleging our manufacture, use and
sale of the Senza system infringes certain of Boston Scientific’s patents covering SCS technology related to
stimulation leads, rechargeable batteries and telemetry. The lawsuit, filed in the United States District Court for the
District of Delaware, seeks unspecified damages and attorney’s fees, as well as preliminary and permanent
injunctive relief against further infringement.
We are and may from time to time continue to be involved in various legal proceedings of a character
normally incident to the ordinary course of our business, including several pending European patent oppositions at
the European Patent Office initiated by our competitors Medtronic and Boston Scientific, which we do not deem to
be material to our business and consolidated financial statements at this stage.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable
60
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Price Range of Common Stock
Our common stock has been publicly traded on the NYSE under the symbol “NVRO” since the initial public
offering, or IPO, of our common stock on November 6, 2014. Prior to that time, there was no public market for our
common stock. The following table sets forth on a per share basis, for the periods indicated, the low and high sale
prices of our common stock as reported by the NYSE.
Year Ended December 31, 2014
Quarter ended December 31, 2014 (beginning
November 6th)
Year Ended December 31, 2015
Quarter ended March 31, 2015
Quarter ended June 30, 2015
Quarter ended September 30, 2015
Quarter ended December 31, 2015
Year Ended December 31, 2016
Quarter ended March 31, 2016
Quarter ended June 30, 2016
Quarter ended September 30, 2016
Quarter ended December 31, 2016
High
Low
$
39.37 $
25.00
$
$
$
$
$
$
$
$
52.03 $
56.14 $
53.83 $
68.34 $
71.02 $
76.71 $
104.94 $
101.92 $
36.26
45.02
40.75
37.09
48.34
59.77
75.78
70.41
Holders of Record
At February 14, 2017, there were approximately 23 stockholders of record of our common stock, and the
closing price per share of our common stock was $93.29. Since many of our shares of common stock are held by
brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders
represented by these record holders.
Dividends
We have never declared or paid cash dividends on our common stock. Because we currently intend to retain
all future earnings to finance future growth, we do not anticipate paying any cash dividends in the near future.
61
Stock Performance Graph
The following graph illustrates a comparison of the total cumulative stockholder return on our common stock
since November 6, 2014, which is the date our common stock first began trading on the NYSE, to two indices: the
S&P 500 Composite Index and the S&P Healthcare Equipment Index. The stockholder return shown in the graph
below is not necessarily indicative of future performance, and we do not make or endorse any predictions as to
future stockholder returns. This graph shall not be deemed “soliciting material” or be deemed “filed” for purposes of
Section 18 of the Exchange Act, or otherwise subject to the liabilities under that Section, and shall not be deemed to
be incorporated by reference into any of our filings under the Securities Act, whether made before or after the date
hereof and irrespective of any general incorporation language in any such filing.
November 6, 2014 December 31, 2015 December 31, 2016
$100 investment in stock or index
288.45
$
Nevro Corp. (NVRO)
110.22
S&P 500 (GSPC)
$
130.81
S&P Healthcare Equipment (SPSIHE) $
268.00 $
100.63 $
116.37 $
100.00 $
100.00 $
100.00 $
Recent Sales of Unregistered Securities
None.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None.
62
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data is qualified in its entirety by, and should be read in
conjunction with the consolidated financial statements and the notes thereto included in Part II, Item 8 and
Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Part II, Item 7
of this Annual Report. The selected consolidated statements of operations data for each of the five years in the
period ended December 31, 2016, and the consolidated balance sheet data as of December 31, 2016, 2015, 2014,
2013 and 2012 have been derived from our audited consolidated financial statements.
(in thousands, except per share data)
Selected Consolidated Statements of Operations
Data:
Revenue
Cost of revenue
Gross profit
Operating expenses:
Research and development
Sales, general and administrative
Total operating expenses
Loss from operations
Interest and other income (expense), net
Loss on extinguishment of debt
Loss before income taxes
Provision for income taxes
Net loss
Net loss per share attributable to common
stockholders, basic and diluted
Shares used in computing basic and diluted net loss
per common share
2016
2015
2014
2013
2012
Years Ended December 31,
$
228,504 $
75,433
153,071
69,606 $
28,120
41,486
32,573 $ 23,500 $ 18,150
7,527
11,278
9,473
10,623
21,295 14,027
33,729
142,423
176,152
(23,081)
(5,806)
(1,268)
(30,155)
1,623
(31,778) $
21,382
82,471
103,853
(62,367)
(3,898)
—
(66,265)
1,166
15,659
14,094
29,753
(19,130)
325
—
(18,805)
162
(67,431) $ (30,680 ) $ (26,014 ) $ (18,967)
19,824 20,345
29,777 18,833
49,601 39,178
(28,306 ) (25,151 )
(501 )
—
(30,202 ) (25,652 )
362
(1,896 )
—
478
(1.12) $
(2.54) $
(6.94 ) $
(29.84 ) $ (38.59)
$
$
28,485,003 26,581,890 4,440,663 876,932 494,066
2016
Years Ended December 31,
2014
2013
2015
2012
(in thousands, except per share data)
Selected Consolidated Balance Sheet Data:
Cash and cash equivalents
Short-term investments
Working capital
Total assets
Long-term debt
Total stockholders' equity (deficit)
$ 41,406 $ 87,036 $ 25,287 $ 12,409 $
5,618
$ 234,951 $ 106,634 $ 151,521 $ 44,123 $ 24,997
$ 378,093 $ 246,242 $ 190,327 $ 66,870 $ 43,572
$ 430,583 $ 291,183 $ 202,496 $ 75,411 $ 49,111
$ 138,140 $ 19,740 $ 19,511 $
—
$ 249,034 $ 234,592 $ 172,070 $ (85,790 ) $ (61,794)
— $
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Annual Report includes “forward-looking statements” within the meaning of the federal securities laws,
particularly statements referencing our expectations relating to the productivity of our sales force, revenues, deferred
revenues, cost of revenues, operating expenses, stock-based compensation and provision for income taxes; the
growth of our customer base and customer demand for our products; the sufficiency of our cash balances and cash
flows; the impact of recent changes in accounting standards; market risk sensitive instruments; contractual
obligations; and assumptions underlying any of the foregoing. In some cases, forward-looking statements can be
identified by the use of terminology such as “may,” “will,” “expects,” “intends,” “plans,” “anticipates,” “estimates,”
“potential,” or “continue,” or the negative thereof, or other comparable terminology. Although we believe that the
expectations reflected in the forward-looking statements contained herein are reasonable, these expectations or any
63
of the forward-looking statements could prove to be incorrect, and actual results could differ materially from those
projected or assumed in the forward-looking statements. Our future financial condition and results of operations, as
well as any forward-looking statements, are subject to risks and uncertainties, including but not limited to the factors
set forth in this Annual Report under Part I, Item 1A. Risk Factors. All forward-looking statements and reasons why
results may differ included in this Annual Report are made as of the date of the filing of this Annual Report, and we
assume no obligation to update any such forward-looking statements or reasons why actual results may differ.
The following discussion should be read in conjunction with our consolidated financial statements and notes
thereto appearing in Part II, Item 8 of this Annual Report.
Overview
We are a global medical device company focused on providing innovative products that improve the quality of
life of patients suffering from chronic pain. We have developed and commercialized the Senza spinal cord
stimulation (SCS) system, an evidence-based neuromodulation platform for the treatment of chronic pain. Our
proprietary paresthesia-free HF10 therapy, delivered by our Senza system, was demonstrated in our SENZA-RCT
study to be superior to traditional SCS therapy with Senza being nearly twice as successful in treating back pain and
1.5 times as successful in treating leg pain when compared to traditional SCS therapy. Comparatively, traditional
SCS therapy has limited efficacy in treating back pain and is used primarily for treating leg pain, limiting its market
adoption. Our SENZA-RCT study, along with our European studies, represents what we believe is the most robust
body of clinical evidence for any SCS therapy. We believe the superiority of HF10 therapy over traditional SCS
therapies will allow us to capitalize on and expand the approximately $1.6 to $1.8 billion existing global SCS
market by treating back pain in addition to leg and pain without paresthesia.
We launched Senza commercially in the United States in May 2015, after receiving a label from the FDA
supporting the superiority of our HF10 therapy over traditional SCS. The Senza system has been commercially
available in certain European markets since November 2010 and in Australia since August 2011. We have
experienced consistent significant revenue growth in the United States since commercial launch and, effective
January 1, 2016, receive transitional pass-through payment under the Medicare hospital outpatient prospective
payment system. In addition, on the basis of our strong clinical evidence, Senza is covered by each of the top 10
national insurance providers. In early 2017, we commenced a controlled commercial launch of our surgical lead,
marketed as the Surpass surgical lead, which we believe will provide us access to an additional approximately 30%
of the U.S. SCS market that we previously did not address. The tables below sets forth our revenue from U.S. and
international sales the past two years on a quarterly basis and total revenue for each of the past three years.
Q1 2015 Q2 2015
Q3 2015
Q4 2015
Q1 2016
Q2 2016 Q3 2016
Q4 2016
(in millions)
Revenue from U.S. sales
Revenue from international sales
$
Total sales revenue
4.5 $ 19.8 $ 29.5 $ 40.6 $ 47.2 $ 56.0
N/A $
9.7
14.5
9.7 $ 11.4 $ 15.4 $ 33.1 $ 41.7 $ 55.4 $ 60.9 $ 70.5
0.1 $
11.3
14.8 13.7
13.3
12.2
10.9
Total revenue
$
32.6 $
69.6 $
228.5
2014
2015
(in millions)
2016
Since inception, we have financed our operations primarily through equity and debt financings and borrowings
under a debt facility. Our accumulated deficit as of December 31, 2016 was $221.2 million. A significant amount of
our capital resources has been used to support the development of Senza and our HF10 therapy and we have also
made a significant investment building our U.S. commercial infrastructure and sales force to support our
commercialization efforts in the United States. We intend to continue to make significant investments in our U.S.
commercial infrastructure, as well as in R&D to develop Senza to treat other chronic pain indications, including
conducting clinical trials to support our future regulatory submissions. In order to further enhance our R&D efforts,
pursue product expansion opportunities or acquire a new business or products that are complementary to our
business, we may choose to raise additional funds, which may include future equity and debt financings.
64
We rely on third-party suppliers for all of the components of Senza and for the assembly of the system. Many
of these suppliers are currently single-source suppliers. During 2015 and 2016, we entered into and/or amended
several supply agreements in an effort to reinforce our supply chain. We are also required to maintain high levels of
inventory, and, as a result, we are subject to the risk of inventory obsolescence and expiration, which may lead to
inventory impairment charges. In particular, we have substantially increased our levels of inventory in order to meet
our estimated demand in the United States and, as a result, incur significant expenditures associated with such
increases in our inventory. Additionally, as compared to direct manufacturers, our dependence on third-party
manufacturers exposes us to greater lead times increasing our risk of inventory obsolesce.
Our IPO closed in November 2014 at which time we received cash proceeds of approximately $131.6 million,
net of underwriting discounts and commissions and offering costs paid by us. In June 2015, we completed an
underwritten public offering of our common stock and we received cash proceeds of approximately $118.4 million,
net of underwriting discounts and commissions and offering costs paid by us. In June 2016, we issued $172.5
million aggregate principal amount of 1.75% convertible senior notes due 2021, or the 2021 Notes, in a registered
underwritten public offering for total net proceeds, after deducting transaction costs, of approximately $166.2
million.
In November 2016, we filed a lawsuit for patent infringement against Boston Scientific, asserting that Boston
Scientific is infringing our patents covering inventions related to our HF10 therapy and the Senza system. In
December 2016, Boston Scientific, filed its own lawsuit alleging that we infringed Boston Scientific’s patents
covering technology related to stimulation leads, batteries and telemetry units. Each of the lawsuits seek
preliminary and permanent injunctive relief against further infringement as well as damages and attorney fees. We
believe pursuing our lawsuit and defending ourselves against Boston Scientific’s lawsuit will require significant
cash resources over the immediate and near long term.
Important Factors Affecting our Results of Operations
We believe that the following factors have impacted and we expect will continue to impact our results of
operations.
Importance of Physician Awareness and Acceptance of Senza
We continue to invest in programs to educate physicians who treat chronic pain about the advantages of
Senza. This requires significant commitment by our marketing team and sales organization, and can vary depending
upon the physician’s practice specialization, personal preferences and geographic location. Further, we are
competing with well-established companies in our industry that have strong existing relationships with many of
these physicians. Educating physicians about the advantages of Senza, and influencing these physicians to use Senza
to treat chronic pain, is required to grow our revenue.
Reimbursement and Coverage Decisions by Third-Party Payors
Healthcare providers in the United States generally rely on third-party payors, principally federal Medicare,
state Medicaid and private health insurance plans, to cover and reimburse all or part of the cost of Senza and the
related implant procedure for patients. The revenue we are able to generate from sales of Senza depends in large part
on the availability of reimbursement from such payors. While we currently have a favorable reimbursement decision
from federal Medicare, decisions of coverage and reimbursement for Senza and the related implant procedure from
private health insurance providers can vary. In general, these decisions require that such payors perform analyses to
determine if the procedure is medically necessary and if our technology is covered under their existing coverage
policy. These payors may deny reimbursement if they determine that the device or procedure was not used in
accordance with the payor’s coverage policy, is subject to individual plan benefit limitations or is investigational
and/or experimental. A significant component of our commercial efforts include working with private payors to
ensure positive coverage and reimbursement decisions for Senza. While favorable reimbursement decisions from
federal Medicare and certain commercial payors, such as Aetna, Cigna, Humana and Kaiser, have facilitated our
increase in revenue to date, certain regional Blue Cross Blue Shield plans, have denied coverage for Senza on the
basis that high-frequency neuromodulation is investigational and/or experimental. We continue to engage in efforts
to convince such payors of the advantages of HF10 therapy and while we have overturned some
65
investigational/experimental designations, such as Cigna, Blue Cross Blue Shield Highmark and Blue Cross Blue
Shield of Alabama, there can be no assurances that we are successful in overturning negative coverage decisions by
private health insurance plans. A significant number of negative coverage and reimbursement decisions by private
insurers may impair our ability or delay our ability to grow our revenue.
Inventory Buildup and Supply Chain Management
Our Senza product consists of a substantial number of individual components and, in order to market and sell
Senza effectively, we must maintain high levels of inventory. In particular, as we continue with our commercial
launch of Senza in the United States and continue to add additional suppliers to fortify our supply chain, we are
substantially increasing our levels of inventory. As a result, we are incurring significant uses of cash associated with
the increases in our inventory, which will include satisfying certain minimum purchase obligations, as demand for
Senza in the United States is developing. There may also be times in which we determine that our inventory does not
meet our product requirements, as was the case for the years ended December 31, 2016 and 2015, wherein we
recorded a write down of inventory of $3.7 million and $2.1 million, respectively. Further, the manufacturing
process for Senza requires lengthy lead times, during which components may become obsolete. We may also over-
or under-estimate the amount needed of a given component, in which case we may expend extra resources or be
constrained in the amount of end product that we can produce. These factors subject us to the risk of inventory
obsolescence and expiration, which may lead to inventory impairment charges.
Investment in Research and Clinical Trials
We intend to continue investing in R&D to expand into new indications and chronic pain conditions for
Senza, as well as develop product enhancements to improve outcomes and enhance the physician and patient
experience. For example, we recently commenced a controlled commercial launch of Surpass, our surgical lead
product, and we are currently investing in product improvements to Senza, including enhanced MRI capabilities and
a next generation IPG. While R&D and clinical testing are time consuming and costly, we believe expanding into
new indications, implementing product improvements and continuing to demonstrate HF10 efficacy, safety and cost
effectiveness through clinical data, each are critical to increasing the adoption of HF10 therapy.
Significant Investment in U.S. Sales Organization
We are continuing to make significant investments in building our U.S. commercial infrastructure and
recruiting and training our U.S. sales force. This is a lengthy process that requires recruiting appropriate sales
representatives, establishing a commercial infrastructure in the United States and training our sales representatives,
and will require significant investment. Following initial training for Senza, our sales representatives typically
require lead time in the field to grow their network of accounts and produce sales results. Successfully recruiting and
training a sufficient number of productive sales representatives is required to achieve growth at the rate we expect.
As we gain U.S. market share, we expect that growth rates will moderate.
Access to Hospital Facilities
In the United States, in order for physicians to use Senza, the hospital facilities where these physicians treat
patients typically will require us to enter into purchasing contracts. This process can be lengthy and time-consuming
and requires extensive negotiations and management time. In Europe, we may be required to engage in a contract
bidding process in order to sell Senza, which processes are only open at certain periods of time, and we may not be
successful in the bidding process.
We Do Not Expect Our Revenue Growth Rate in International Markets to Continue at Historic Rates
Our revenue from international markets has increased from $18.2 million for the year ended December 31,
2012 to $55.2 million for the year ended December 31, 2016. Revenue increased as a result of our sales of Senza in
Europe and Australia, however, we do not expect to continue this rate of revenue growth in these international
markets given our existing penetration in these markets. Despite our growth in international markets, international
revenue was negatively impacted by the appreciation of the U.S. dollar. Due to governmental reimbursements
66
constraints in the European SCS market limiting the number of annual SCS implants and our current penetration in
these markets, we expect to grow less rapidly in the future than we have in the past in this market.
Critical Accounting Policies, Significant Judgments and Use of Estimates
Our management’s discussion and analysis of financial condition and results of operations are based upon our
consolidated financial statements, which have been prepared in accordance with accounting principles generally
accepted in the United States of America, or U.S. GAAP. The preparation of these consolidated financial statements
requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and
expenses. On an ongoing basis, we evaluate our critical accounting policies and estimates. We base our estimates on
historical experience and on various other assumptions that we believe to be reasonable in the circumstances, the
results of which form the basis for making judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these estimates under different assumptions and
conditions. We believe that the estimates, judgments and assumptions involved in the accounting for revenue
recognition, inventory, stock-based compensation, income taxes and allowance for doubtful accounts have the
greatest potential impact on our consolidated financial statements, so we consider these to be our critical accounting
policies. We discuss below the critical accounting estimates associated with these policies. Historically, our
estimates, judgments, and assumptions relative to our critical accounting policies have not differed materially from
actual results. Our significant accounting policies are more fully described in Note 2, Summary of Significant
Accounting Policies, of Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report.
Revenue
We recognize revenue when all of the following criteria are met:
persuasive evidence of an arrangement exists;
the sales price is fixed or determinable;
collection of the relevant receivable is reasonably assured at the time of sale; and
delivery has occurred or services have been rendered.
For a majority of sales, where our sales representative delivers our product at the point of implantation at
hospitals or medical facilities, we recognize revenue upon completion of the procedure and authorization, which
represents satisfaction of the required revenue recognition criteria. For the remaining sales, which are sent from our
distribution centers directly to hospitals and medical facilities, as well as distributor sales where product is ordered
in advance of an implantation procedure and a valid purchase order has been received, we recognize revenue at the
time of shipment of the product, which represents the point in time when the customer has taken ownership and
assumed the risk of loss and the required revenue recognition criteria are satisfied. Such customers are obligated to
pay within specified terms regardless of when or if they ever sell or use the products. We do not offer rights of
return or price protection and we have no post-delivery obligations. We periodically provide incentive offers to
customers. Product revenue is recorded net of such incentive offers.
Warranty Obligations
We have a limited one- to five-year warranty to most customers and we warrant that our products will operate
substantially in conformity with product specifications. We record 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. We regularly assess the adequacy of our
recorded warranty liabilities and adjusts the amounts as necessary.
Inventory Valuation
We contract with third parties for the manufacturing and packaging of all of the components of Senza. We
plan the manufacture of our systems based on estimates of market demand. The nature of our business requires that
we maintain sufficient inventory on hand to meet the requirements of our customers. Inventories are stated at the
67
lower of cost or market value. Cost is determined using actual cost on a first-in, first-out basis. Market value is
determined as the lower of replacement cost or net realizable value.
We regularly review 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. Inventory write
downs are recorded for excess and obsolete inventory. We periodically assesses the recoverability of all inventories
to determine whether write downs for impairment are required. We evaluate projected future demand as compared to
remaining shelf life and other obsolescence and excess criteria in assessing the recoverability of our inventory. In
determining the adequacy of reserves, we analyze the following, among other things:
Current inventory quantities on hand;
Product acceptance in the marketplace;
Customer demand;
Historical sales;
Forecast sales;
Product obsolescence;
Technological innovations; and
Character of the inventory as a distributed item, finished manufactured item or system components.
Any inventory write-downs are recorded in cost of goods sold within the statements of operations during the
period in which such write-downs are determined necessary by management.
Stock-Based Compensation
Stock-based compensation costs related to stock options granted to employees are measured at the date of
grant based on the estimated fair value of the award, net of estimated forfeitures. We estimate the grant date fair
value, and the resulting stock-based compensation expense, using the Black-Scholes option-pricing model. The fair
value is recognized on a straight-line basis over the requisite service period of the stock option award, which is
generally the vesting term of four years, with the exception of performance based stock option awards, whose fair
value is recognized as expenses when it is determined that achieving the performance metrics are probable.
The Black-Scholes option-pricing model requires the use of highly subjective assumptions which determine
the fair value of stock-based awards. The assumptions used in our option-pricing model represent management’s
best estimates. These estimates are complex, involve a number of variables, uncertainties and assumptions and the
application of management’s judgment, so that they are inherently subjective. If factors change and different
assumptions are used, our stock-based compensation expense could be materially different in the future. These
assumptions are estimated as follows:
Risk-Free Interest Rate. We base the risk-free interest rate used in the Black-Scholes valuation model on the
implied yield available on U.S. Treasury zero-coupon issues with an equivalent remaining term of the options for
each option group.
Expected Term. The expected term represents the period that our stock-based awards are expected to be
outstanding. Because of the limitations on the sale or transfer or our common stock as a privately held company, we
do not believe our historical exercise pattern is indicative of the pattern we will experience as a publicly traded
company. We have consequently used the Staff Accounting Bulletin, or SAB, 110, simplified method to calculate
the expected term, which is the average of the contractual term and vesting period. Starting in late 2016, we have
started to utilize our historical data for the calculation of expected term.
Volatility. We determine the price volatility factor based on the historical volatilities of our peer group as we
did not have a sufficient trading history for our common stock. Industry peers consist of several public companies in
the medical device technology industry with comparable characteristics including enterprise value, risk profiles and
68
position within the industry. We intend to continue to consistently apply this process using the same or similar
public companies until a sufficient amount of historical information regarding the volatility of our own common
stock share price becomes available, or unless circumstances change such that the identified companies are no
longer similar to us, in which case, more suitable companies whose share prices are publicly available would be
utilized in the calculation. Starting in late 2016, we have started to incorporate our historical stock trading volatility
with those of our peer group for the calculation of volatility.
Dividend Yield. The expected dividend assumption is based on our current expectations about our anticipated
dividend policy. We currently do not expect to issue any dividends.
In addition to assumptions used in the Black-Scholes option-pricing model, we must also estimate a forfeiture
rate to calculate the stock-based compensation for our awards. We will continue to use judgment in evaluating the
assumptions related to our stock-based compensation on a prospective basis. As we continue to accumulate
additional data, we may have refinements to our estimates, which could materially impact our future stock-based
compensation expense.
In 2015, we began issuing restricted stock units, or RSUs. We account for stock-based compensation for the
RSUs at their fair value, based on the closing market price of our 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, with the exception of performance based RSUs, which are recognized as expenses when it is determined that
achieving the performance metrics are probable.
We estimate the fair value of the rights to purchase shares by employees under our Employee Stock Purchase
Plan using the Black-Scholes option pricing formula. Our Employee Stock Purchase Plan provides for consecutive
six-month offering periods and we use our own historical volatility data in the valuation.
Income Tax
We recognize deferred income taxes for temporary differences between the basis of assets and liabilities for
financial statement and income tax purposes. We periodically evaluate the positive and negative evidence bearing
upon realizability of our deferred tax assets. Based upon the weight of available evidence, which includes our
historical operating performance, reported cumulative net losses since inception and difficulty in accurately
forecasting our future results, we maintained a full valuation allowance on the net deferred tax assets as of
December 31, 2016 and 2015. We intend to maintain a full valuation allowance on the federal, state and foreign
deferred tax assets until sufficient positive evidence exists to support reversal of the valuation allowance.
As of December 31, 2016, we had federal and state net operating loss (NOL) carryforwards of $224.7 million
and $77.3 million, respectively, available to offset future taxable income, due to prior period losses, which if not
utilized will begin to expire in 2026 for federal purposes and will begin to expire in 2017 for state purposes. We also
have federal research tax credit carryforwards that will begin to expire in 2026. Realization of these NOL and
research tax credit carryforwards depends on future income, and there is a risk that our existing carryforwards could
expire unused and be unavailable to reduce future income tax liabilities, which could materially and adversely affect
our results of operations.
In addition, under Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, our ability to
utilize NOL carryforwards or other tax attributes such as research tax credits, in any taxable year may be limited if
we experience, or have experienced, an “ownership change.” A Section 382 “ownership change” generally occurs if
one or more stockholders or groups of stockholders, who own at least 5% of our stock, increase their ownership by
more than 50 percentage points over their lowest ownership percentage within a rolling three-year period. Similar
rules may apply under state tax laws.
No deferred tax assets have been recognized on our balance sheet related to our NOLs and tax credits, as they
are fully reserved by a valuation allowance. As a result of our June 2015 underwritten public offering, we have
experienced a Section 382 “ownership change.” We currently estimate this “ownership change” will not inhibit our
ability to utilize our NOLs. We may in the future experience another Section 382 “ownership change.” If so, or if
69
we do not generate sufficient taxable income, we may not be able to utilize a material portion of our NOLs and tax
credits even if we achieve profitability. If we are limited in our ability to use our NOLs and tax credits in future
years in which we have taxable income, we will pay more taxes than if we were able to fully utilize our NOLs and
tax credits. This could materially and adversely affect our results of operations.
We record unrecognized tax benefits as liabilities and adjust these liabilities when our judgment changes as a
result of the evaluation of new information not previously available. Because of the complexity of some of these
uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of
the unrecognized tax benefit liabilities. These differences will be reflected as increases or decreases to income tax
expense in the period in which new information is available. Our 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 in 2016 and 2015.
Allowance for Doubtful Accounts
We must make estimates of the collectability of accounts receivable. In doing so, we analyze 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. Our accounts receivable balance was $52.8 million,
net of allowance of $1.0 million, as of December 31, 2016 and $22.5 million, net of allowance of $0.1 million, as of
December 31, 2015.
Components of Results of Operations
Revenue
Our revenue is generated from sales to two types of customers: hospitals and outpatient medical facilities
served through a direct sales force and third-party distributors. Sales to hospitals and medical facilities represent the
majority of our revenue. Product sales to hospitals and medical facilities are billed to, and paid by, the hospitals as
part of their normal payment processes, with payment received by us in the form of an electronic transfer, check or
credit card payment. Product sales to distributors are billed to and paid by the distributors as part of their normal
payment processes, with payment received by us in the form of an electronic transfer.
Revenue from sales of Senza fluctuate based on the selling price of the system, as the sales price of a system
varies geographically, and based on the mix of sales by geography. In addition, our revenue may fluctuate based on
the ratio of trials to permanent implants. Our revenue from international sales can also be significantly impacted by
fluctuations in foreign currency exchange rates, as our sales are denominated in the local currency in the countries in
which we sell our products.
We expect our revenue to fluctuate from quarter to quarter due to a variety of factors, including seasonality, as
we have historically experienced lower sales in the summer months and around holidays, and the impact of the
buying patterns and implant volumes of our hospitals and medical facilities, and third-party distributors. In addition,
in the second quarter of 2015, we commenced commercial sales of Senza in the United States and recorded revenue
of approximately $173.3 million and $24.4 million for the years ended December 31, 2016 and 2015, respectively,
for sales in the United States. We anticipate that our total revenue will increase as we continue our
commercialization in the United States.
Cost of Revenue
We utilize contract manufactures for the production of Senza. Cost of revenue consists primarily of
acquisition costs of the components of Senza, allocated manufacturing overhead, royalty payments, scrap and
inventory obsolescence, as well as distribution-related expenses, such as logistics and shipping costs, net of costs
charged to customers.
We calculate gross margin as revenue less cost of revenue divided by revenue. Our gross margin has been and
will continue to be affected by a variety of factors, primarily by our costs to have our products manufactured for us,
the ratio of trials to permanent implants, the period of time between a trial and the related permanent implant and, to
70
a lesser extent, the percentage of products we sell to distributors as compared to those sold directly to hospitals and
medical facilities as our gross margin is typically higher on products we sell directly as compared to products we sell
through distributors. While costs are primarily incurred in U.S. dollars, international revenue may be impacted by
the appreciation or depreciation of the U.S. dollar, which may impact our overall gross margin. We expect our gross
margin to be positively affected over time to the extent we are successful in reducing manufacturing costs as our
sales volume increases. However, our gross margin may fluctuate from period to period.
Operating Expenses
Our operating expenses consist of R&D expense and sales, general and administrative, or SG&A, expense.
Personnel costs are the most significant component of operating expenses and consist of salaries, bonus incentives,
benefits, stock-based compensation and sales commissions. We expect operating expenses to increase in absolute
dollars, as we continue to invest to grow our business.
Research and Development (R&D). R&D costs are expensed as incurred. R&D expense consists primarily of
personnel costs, including salary, employee benefits and stock-based compensation expenses for our R&D
employees. R&D expense also includes costs associated with product design efforts, development prototypes,
testing, clinical trial programs and regulatory activities, contractors and consultants, equipment and software to
support our development, facilities and information technology. We expect R&D expense to increase in absolute
dollars as we continue to develop product enhancements to Senza and develop our HF10 therapy to treat other
chronic pain indications, including conducting additional clinical studies. Our R&D expenses may fluctuate from
period to period due to the timing and extent of our R&D and clinical trial expenses.
Sales, General and Administrative. SG&A expense consists primarily of personnel costs, including salary,
employee benefits and stock-based compensation expenses for our sales and marketing personnel, including sales
commissions, and for administrative personnel that support our general operations, such as information technology,
executive management, financial accounting, customer services and human resources personnel. We expense
commissions at the time of the sale. SG&A expense also includes costs attributable to marketing, as well as travel,
intellectual property and other legal fees, financial audit fees, insurance, fees for other consulting services,
depreciation and facilities.
In the last two years, we significantly increased the size of our sales presence internationally and increased
marketing spending to generate sales opportunities. Additionally, we have made substantial investments in our U.S.
commercial infrastructure to support our commercialization efforts in the United States. We expect SG&A expenses
to continue to significantly increase as we build up our sales and marketing personnel to support commercialization
of Senza in the United States, continue to increase the size of our sales and marketing organizations and increase our
international presence and develop and assist our channel partners.
For the year ended December 31, 2016, our administrative expenses increased compared to the same period in
the prior year. We expect our administrative expenses will continue to increase as we increase our headcount and
expand our facility and information technology to support our growing operations. Additionally, we anticipate
increased expenses related to audit, legal, regulatory and tax-related services associated with maintaining
compliance with exchange listing and U.S. Securities and Exchange Commission requirements, including
compliance under the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, as a large accelerated filer, director
and officer insurance premiums and investor relations costs associated with being a growing public company. Our
SG&A expense may fluctuate from period to period due to the seasonality of our revenue and the timing and extent
of our SG&A expense.
Interest Income and Interest Expense
Interest income consists primarily of interest income earned on our investments and interest expense consists
of interest paid on our outstanding debt and the amortization of debt discount and debt issuance costs.
71
Other Income (Expense), Net
Other income (expense), net consists primarily of foreign currency transaction gains and losses and the gains
and losses from the remeasurement of foreign-denominated balances to the U.S. dollar.
Provision for Income Taxes
The provision for income taxes consists primarily of income taxes in foreign jurisdictions in which we
conduct business as well as states where we have determined we have state nexus. We maintain a full valuation
allowance for our deferred tax assets including NOL carryforwards and R&D credits and other tax credits.
Allowance for Doubtful Accounts
We make estimates as to the overall collectability of accounts receivable and provide an allowance for
accounts receivable considered uncollectible. We specifically analyze accounts receivable based on historical bad
debt experience, customer concentrations, customer credit-worthiness, the age of the receivable, current economic
trends, and changes in customer payment terms when evaluating the adequacy of the allowance for doubtful
accounts. We record the adjustment in general and administrative expense.
Recent Accounting Pronouncements
For recent accounting pronouncements, see Note 2, Summary of Significant Accounting Policies, of Notes to
Consolidated Financial Statements in Part II, Item 8 of this Annual Report.
Comparison of the Years Ended December 31, 2016 and 2015
Revenue, Cost of Revenue, Gross Profit and Gross Margin
(in thousands)
Revenue
Cost of revenue
Gross profit
Gross margin
Years Ended December 31,
2016
2015
Change
$ 228,504 $
75,433
$ 153,071 $
67%
69,606 $ 158,898
28,120
47,313
41,486 $ 111,585
60%
7%
Revenue. Revenue increased to $228.5 million in 2016 from $69.6 million in 2015, an increase of
$158.9 million, or 228%, due to increased sales of the Senza system in the United States, which began in May 2015
upon receiving FDA approval of our PMA for Senza, and continued adoption of the Senza system in international
markets where it had historically been sold. Further, the increase in sales of the Senza system was driven in part by
our expanded sales force in the United States in 2016.
Cost of Revenue, Gross Profit and Gross Margin. Cost of revenue increased to $75.4 million in 2016 from
$28.1 million in 2015, an increase of $47.3 million, or 168%. This increase was primarily due to a $40.0 million
increase in the costs of manufactured product components as sales volumes increased, as well as a $1.3 million
increase in inventory-related charges. Gross profit increased to $153.1 million in 2016 from $41.5 million in 2015,
an increase of $111.6 million, or 269%. Gross profit as a percentage of revenue, or gross margin, increased to 67%
in 2016 compared to 60% in 2015. The increase was partly attributed to lower manufacturing costs as a percentage
of sales. Additionally, while costs were primarily incurred in U.S. dollars, international revenue was negatively
impacted by the appreciation of the U.S. dollar, which negatively impacted the overall gross margin for the period.
72
Operating Expenses
(in thousands)
Operating expenses:
Years Ended December 31,
2016
2015
Amount
% of
Total
Revenue
Amount
% of
Total
Revenue
Change
Amount
Research and development
Sales, general and administrative
Total operating expenses
$ 33,729
142,423
$ 176,152
15%
62%
77%
$ 21,382 31%
$ 12,347
59,952
$ 103,853 149% $ 72,299
82,471 118%
Research and Development (R&D) Expenses. R&D expenses increased to $33.7 million in 2016 from $21.4
million in 2015, an increase of $12.3 million, or 58%. The increase was primarily due to an increase in clinical and
development expenses of $5.8 million, headcount and related personnel and consulting costs of $4.5 million and
other healthcare professional related expenses of $1.3 million.
Sales, General and Administrative (SG&A) Expenses. SG&A expenses increased to $142.4 million in 2016
from $82.5 million in 2015, an increase of $60.0 million, or 73%. This increase was primarily due to an increase in
personnel costs of $47.9 million in relation to an increase in headcount for SG&A personnel in support of our
continued U.S. commercial launch, increased legal and other professional services costs of $3.2 million, including
an increase of $1.3 million related to legal expenses incurred in connection with the Boston Scientific litigations,
increased travel, training and associated supply costs of $2.8 million, increased marketing expenses of $1.8 million,
additional facilities-related costs of $1.7 million and increased computer hardware and software expenses of $1.0
million.
Interest Income, Interest Expense, Other Income (Expense), Net and Provision for Income Taxes
(in thousands)
Interest income
Interest expense
Other income (expense), net
Loss on extinguishment of debt
Provision for income taxes
Years Ended December 31,
2016
2015
Change
$
1,685 $
(6,394)
(1,097)
(1,268)
1,623
575 $
(2,732 )
(1,741 )
—
1,166
1,110
(3,662 )
644
(1,268 )
457
Interest Income. Interest income increased to $1.7 million in 2016 from $0.6 million in 2015, primarily as a
result of the increase in average investment balances.
Interest Expense. Interest expense increased to $6.4 million from $2.7 million in 2015, primarily as a result of
the amortization of debt discount and debt issuance costs related to the issuance of the 2021 Notes.
Other Income (Expense), Net. Other income (expense), net was primarily comprised of foreign currency
transaction gains and losses and the gains and losses from the remeasurement of foreign-denominated balances.
Related to these two items, in 2016, we recorded a net loss of $0.9 million, compared to 2015 when we recorded a
net loss of $1.6 million. Our remeasurement gains and losses are affected by changes in the foreign currency
translation rates of the countries in which we conduct business.
Loss on Extinguishment of Debt. We paid in full the outstanding obligation under our credit facility in June
2016. The difference between the total payment to the lenders under the credit facility and the net carrying amount
of the obligation recorded on our balance sheet was recorded as a loss on extinguishment of debt.
73
Income Tax Expense. Income tax expense was $1.6 million in 2016 and $1.2 million in 2015. Our income tax
expense is associated primarily with foreign and state income taxes. We continue to generate tax losses for U.S.
federal and state tax purposes and have NOL carryforwards creating a deferred tax asset. We have a full valuation
allowance for our deferred tax assets. The change in income tax expense was primarily due to changes in foreign
income taxes on profits realized by our foreign subsidiaries.
Comparison of the Years Ended December 31, 2015 and 2014
Revenue, Cost of Revenue, Gross Profit and Gross Margin
(in thousands)
Revenue
Cost of revenue
Gross profit
Gross margin
Years Ended December 31,
2015
2014
Change
$
$
69,606 $
28,120
41,486 $
60%
32,573 $
11,278
21,295 $
65%
37,033
16,842
20,191
(5)%
Revenue. Revenue increased to $69.6 million in 2015 from $32.6 million in 2014, an increase of
$37.0 million, or 114%, due to sales of the Senza system in the United States, which began in May 2015 upon
receiving FDA approval of our PMA for Senza, and continued adoption of the Senza system in international markets
where it had historically been sold. We expanded our sales force in the United States in 2015 to support our
anticipated revenue growth.
Cost of Revenue, Gross Profit and Gross Margin. Cost of revenue increased to $28.1 million in 2015 from
$11.3 million in 2014, an increase of $16.8 million, or 149%. This increase was primarily due to a $12.7 million
increase in the acquisition costs of manufactured product components as sales volumes increased, as well as a $2.0
million increase in inventory-related charges. Gross profit increased to $41.5 million in 2015 from $21.3 million in
2014, an increase of $20.2 million, or 95%. Gross profit as a percentage of revenue, or gross margin, decreased to
60% in 2015 compared to 65% in 2014. The decrease was partly attributed to the costs incurred in association with
ramping our operational infrastructure in response to the product launch in the United States, as well as the $2.0
million increase in the write down of inventory in 2015. Additionally, while costs were primarily incurred in U.S.
dollars, international revenue was negatively impacted by the appreciation of the U.S. dollar, which negatively
impacted the overall gross margin for the period.
Operating Expenses
(in thousands)
Operating expenses:
Research and development
Sales, general and administrative
Total operating expenses
Years Ended December 31,
2015
2014
Amount
% of
Total
Revenue
Amount
% of
Total
Revenue
Change
Amount
31%
$ 21,382
1,558
52,694
$ 103,853 149% $ 49,601 152% $ 54,252
$ 19,824 61%
29,777 91%
82,471 118%
$
Research and Development (R&D) Expenses. R&D expenses increased to $21.4 million in 2015 from $19.8
million in 2014, an increase of $1.6 million, or 8%. The increase was primarily due to an increase in headcount and
related personnel and consulting costs of $3.1 million, offset by a decrease in clinical and development expenses of
$1.4 million associated with our preclinical and regulatory costs in preparation for our June 2014 PMA submission,
as well as a decrease in costs related to the reduction of R&D participation in the manufacturing process
development of $0.8 million.
74
Sales, General and Administrative (SG&A) Expenses. SG&A expenses increased to $82.5 million in 2015
from $29.8 million in 2014, an increase of $52.7 million, or 177%. This increase was primarily due to an increase in
personnel costs of $35.6 million in relation to an increase in headcount for SG&A personnel in support of our U.S.
commercial launch, increased travel, training, marketing and associated supply costs of $9.5 million, increased legal
and other professional services costs associated with being a public company of $4.2 million, additional facilities-
related costs of $2.3 million and increased computer hardware and software expenses of $0.6 million.
Interest Income, Interest Expense, Other Income (Expense), Net and Provision for Income Taxes
(in thousands)
Interest income
Interest expense
Other income (expense), net
Provision for income taxes
Years Ended December 31,
2015
2014
Change
$
575 $
(2,732)
(1,741)
1,166
141 $
(157 )
(1,880 )
478
434
(2,575 )
139
688
Interest Income. Interest income increased to $0.6 million in 2015 from $0.1 million in 2014, primarily as a
result of the increase in average investment balances.
Interest Expense. Interest expense increased to $2.7 million in 2015 from $0.2 million in 2014, primarily as a
result of debt outstanding during 2015 as a result of borrowing under our credit facility in December 2014.
Other Income (Expense), Net. Other income (expense), net was primarily comprised of foreign currency
transaction gains and losses and the gains and losses from the remeasurement of foreign-denominated balances.
Related to these two items, in 2015, we recorded a net loss of $1.6 million, compared to the corresponding period in
prior year in which we recorded a net loss of $1.7 million. Our remeasurement gains and losses are affected by
changes in the foreign currency translation rates of the countries in which we conduct business.
Income Tax Expense. Income tax expense was $1.2 million in 2015 and $0.5 million in 2014. Our income tax
expense during these periods is associated primarily with foreign income taxes. We continue to generate tax losses
for U.S. federal and state tax purposes and have NOL carryforwards creating a deferred tax asset. We have a full
valuation allowance for our deferred tax assets. The change in income tax expense was due to changes in foreign
income taxes on profits realized by our foreign subsidiaries.
Liquidity, Capital Resources and Plan of Operations
Since our inception, we have financed our operations through private placements of preferred stock, the
issuance of common stock in our IPO in November 2014 and our underwritten public offering in June 2015,
borrowing under our credit facility, which we have subsequently repaid, and the issuance of convertible senior notes
due 2021 in June 2016. At December 31, 2016, we had cash, cash equivalents and short-term investments of $276.4
million. Based on our current operating plan, we expect that our cash and cash equivalents on hand, together with
the anticipated funds from the collection of our receivables, will be sufficient to fund our operations through at least
the next 12 months.
In June 2016, we paid the outstanding principal and repayment fees under our credit facility with Capital
Royalty Partners and certain of its affiliates and terminated the credit facility. As of December 31, 2016, we do not
have a credit facility in place.
We expect to incur substantial expenditures in the foreseeable future in connection with the expansion of our
U.S. commercial infrastructure and sales force in connection with commercializing Senza in the United States. In
addition, we intend to continue to make investments in the development of Senza and HF10 therapy for the
treatment of other chronic pain conditions, including ongoing R&D programs and conducting clinical trials. Further,
we expect to expand significant cash resources pursuing and defending our ongoing lawsuits with Boston Scientific.
75
In order to further enhance our R&D efforts, pursue product expansion opportunities or acquire a new business or
products that are complementary to our business, we may choose to raise additional funds.
We may continue to seek funds through equity or debt financings, or through other sources of financing.
Adequate additional funding may not be available to us on acceptable terms or at all. Our failure to raise capital in
the future could have a negative impact on our financial condition and our ability to pursue our business strategies.
Should we choose to raise additional capital, the requirements will depend on many factors, including:
the costs of commercialization activities related to commercializing Senza in the United States and
elsewhere, including product sales, marketing, manufacturing and distribution;
the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property
rights, including, in particular, the costs of enforcing our patent rights in the action we filed against
Boston Scientific and in defending against Boston Scientific’s action against us;
the R&D activities we intend to undertake in order to expand the chronic pain indications and product
enhancements that we intend to pursue;
whether or not we pursue acquisitions or investments in businesses, products or technologies that are
complementary to our current business;
the degree and rate of market acceptance of Senza in the United States and elsewhere;
changes or fluctuations in our inventory supply needs and forecasts of our supply needs;
our need to implement additional infrastructure and internal systems;
our ability to hire additional personnel to support our operations as a public company; and
the emergence of competing technologies or other adverse market developments.
Our success depends, in part, upon our ability to establish a competitive position in the neuromodulation
market by securing broad market acceptance of our HF10 therapy and Senza for the treatment of chronic pain
conditions. Any product we develop that achieves regulatory clearance or approval will have to compete for market
acceptance and market share. We face significant competition in the United States and internationally, which we
believe will intensify as we continue to commercialize in the United States. For example, our major competitors,
Medtronic, Boston Scientific and Abbott Laboratories (through its recent acquisition of St. Jude Medical), each have
approved neuromodulation systems in at least the United States, Europe and Australia and have been established for
several years. In addition to these major competitors, we may also face competition from other emerging
competitors and smaller companies with active neuromodulation system development programs that may emerge in
the future.
If we are unable to raise, or have access, to sufficient funds when needed, we may be required to delay,
reduce, or terminate some or all of our commercial development plans.
The following table sets forth the primary sources and uses of cash for each of the periods presented below:
(in thousands)
Net cash provided by (used in)
Years Ended December 31,
2015
2014
2016
Operating activities
Investing activities
Financing activities
Effect of exchange rate on cash flows
(604)
Net increase (decrease) in cash and cash equivalents $ (45,630) $
$ (58,503) $ (100,430 ) $ (31,148 )
39,658 (108,055 )
(131,687)
145,164 122,827 152,081
—
61,749 $ 12,878
(306 )
Cash Used in Operating Activities. Net cash used in operating activities was $58.5 million, $100.4 million and
$31.1 million for the years ended December 31, 2016, 2015 and 2014, respectively, primarily due to the net losses
76
during the periods of $31.8 million, $67.4 million and $30.7 million, respectively. The cash used in operating
activities for the year ended December 31, 2016 was affected by a net increase of $6.6 million in accounts payable
and accrued liabilities, as well as non-cash stock based compensation expense of $15.8 million, a write down of
inventories of $4.1 million and non-cash interest expense of $3.7 million. These changes are offset by increases in
our accounts receivable of $32.2 million and inventory balances of $27.0 million. The cash used in operating
activities for the year ended December 31, 2015 was affected by changes in operating assets and liabilities, including
an increase of $25.0 million in accounts payable and accrued liabilities, non-cash stock based compensation expense
of $7.3 million and a write down of inventories of $2.8 million, offset by increases in our inventory balances of
$49.4 million, accounts receivable of $16.2 million and prepaid expenses and other assets of $2.6 million. The cash
used in operating activities for the year ended December 31, 2014 was affected by changes in operating assets and
liabilities, including an increase of $3.0 million in accounts payable and accrued liabilities and non-cash stock based
compensation expense of $2.0 million, offset by an increase in our prepaid expenses and other current assets of
$1.3 million, and an increase in our inventory balances by $5.5 million.
Cash Used in Investing Activities. Investing activities consisted primarily of changes in investment balances,
including purchases and maturities of short-term investments, and purchases of property equipment. For the year
ended December 31, 2016, we had net purchases of investments of $128.4 million and purchases in property and
equipment of $3.4 million. For the year ended December 31, 2015, we had net proceeds from maturity of
investments of $45.3 million, offset by purchases in property and equipment of $5.0 million. For the year ended
December 31, 2014 we had net investment purchases of $107.4 million.
Cash Provided by Financing Activities. Cash provided by financing activities was $145.2 million for the year
ended December 31, 2016. The majority of this cash was provided by the issuance of $172.5 million in aggregate
principal amount of the 2021 Notes. Additionally, we received proceeds of $10.3 million from the issuance of
common stock to employees. The cash received from these activities was partially offset by a net expense of $12.0
million incurred in connection with the purchase of convertible note hedge and warrant transactions, which included
the $45.1 million purchase of convertible note hedges and proceeds of $33.1 million related to the sale of warrants.
The increase in cash provided by financing activities was partially offset by $6.2 million of issuance costs incurred
in connection with the 2021 Notes and $19.5 million used in relation to the repayment of the credit facility. Cash
provided by financing activities was $122.8 million for the year ended December 31, 2015, primarily due to the cash
received from the issuance of common stock in our underwritten public offering in June 2015 totaling $118.4
million and cash received from the issuance of common stock to employees of $4.4 million. Cash provided by
financing activities for the year ended December 31, 2014 was $152.1 million, primarily from the $131.6 million in
net proceeds received in the IPO, as well as borrowing under our note payable of $19.5 million, which consisted of
borrowings of $20.0 million, and closing fees of $0.5 million.
Contractual Obligations and Commitments
We have lease obligations consisting of operating leases for our principal offices, which expire as set forth
below, and for our warehouse space that expire in 2017, as well as for office space in Switzerland that expire in
2017.
In March 2015, we entered into a lease agreement for approximately 50,000 square feet of office space located
in Redwood City, California for a period beginning in June 2015 and ending in May 2022, with initial annual
payments of approximately $2.0 million, increasing to $2.4 million annually in the final year of the lease term. In
December 2016, we entered into an amendment for an additional approximately 50,000 square feet of office space
adjacent to the premises under the original lease, or 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
commences on the earlier of the following dates, or the Commencement Date: (i) the date we commence business
operations in the Expansion Premises or (ii) the date upon which the landlord for the Expansion Premises
substantially completes certain improvements to, and permitting for, the Expansion Premises. The amendment also
extends the lease term for the original premises to terminate on the same date as the amended lease, which is the last
day of the calendar month following the date that is 84 months after the Commencement Date. Under the
amendment, if we are unable to move into the Expansion Premises before the Scheduled Delivery Date, as defined
in the amendment, we may terminate the lease for the Expansion Premises. See Note 5, Commitments and
Contingencies, of Notes to Consolidated Financial Statements for additional information.
77
In March 2015, we extended our warehouse lease through February 2017 under which we are obligated to pay
approximately $0.3 million in lease payments over the remaining term of the lease.
We have entered into supply agreements with certain of our suppliers that required certain minimum annual
purchase agreements. As of December 31, 2016, we had minimum annual purchase commitments $25.0 million due
in 2017 and $5.5 million due in each of 2018, 2019, 2020 and 2021.
Our contractual obligations related to the 2021 Notes are payments of $3.0 million due each year from 2017
through 2020 and $174.0 million due in 2021. These amounts represent principal and interest cash payments over
the term of the 2021 Notes.
Excluding the terms under the amendment for the Expansion Premises, which is subject to certain cancellation
clauses, the following table summarizes our contractual obligations as of December 31, 2016 (in thousands):
Payment date by period
Total
Less than 1
year
1 to 3 years
(in thousands)
4 to 5 years
More than 5
years
Notes payable, including contractual interest $ 186,085 $
12,518
Lease obligations
47,175
Purchase obligations
$ 245,778 $
Total
3,019 $
2,167
25,013
30,199 $
6,038 $ 177,028 $
4,705
4,435
11,081
11,081
21,554 $ 192,814 $
—
1,211
—
1,211
Off-Balance Sheet Arrangements
Through December 31, 2016, we did not have any relationships with unconsolidated organizations or financial
partnerships, such as structured finance or special purpose entities that would have been established for the purpose
of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. For information
regarding indemnification obligations, refer to Note 5, Commitments and Contingencies, of Notes to the
Consolidated Financial Statements within Part II, Item 8 of this Annual Report.
Segment Information
We have one primary business activity and operate as one reportable segment.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
We are exposed to limited market risk related to fluctuations in interest rates and market prices. Our primary
exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest
rates. The primary objective of our investment activities is to preserve our capital to fund our operations.
We also seek to maximize income from our investments without assuming significant risk. To achieve our
objectives, we maintain a portfolio of cash equivalents and investments in a variety of securities of high credit
quality. As of December 31, 2016, we had cash and cash equivalents of $41.4 million, consisting of cash and money
market funds, and short-term investments of $235.0 million, consisting of commercial paper and corporate notes.
We maintained investments in money market funds that were not federally insured during the year ended
December 31, 2016 and held cash in foreign banks of approximately $3.3 million and $5.2 million at December 31,
2016 and 2015 that was not federally insured. A portion of our investments may be subject to interest rate risk and
could fall in value if market interest rates increase. However, because our investments are primarily short-term in
duration, we believe that our exposure to interest rate risk is not significant. We do not enter into investments for
trading or speculative purposes and have not used any derivative financial instruments to manage our interest rate
risk exposure. A hypothetical 1% change in interest rates during any of the periods presented would not have had a
material impact on our consolidated financial statements.
78
Foreign Currency Exchange Risk
To date, a portion of our revenue and operating expenses are incurred outside the United States and are
denominated in foreign currencies and are subject to fluctuations due to changes in foreign currency exchange rates,
particularly changes in the Australian dollar, the Euro and the United Kingdom pound sterling. Additionally,
fluctuations in foreign currency exchange rates may cause us to recognize transaction gains and losses in our
statement of operations. As a component of other income (expense), we recognized net foreign currency transaction
losses of $0.9 million, $1.6 million and $1.7 million for the years ended December 31, 2016, 2015 and 2014,
respectively. A hypothetical 10% favorable or unfavorable change in the weighted average foreign exchange rates
for the year ended December 31, 2016 would have affected the Company’s net loss by approximately 8%. To date,
we have not engaged in any foreign currency hedging transactions. As our international operations grow, we will
continue to reassess our approach to managing the risks relating to fluctuations in currency rates.
We do not believe that inflation and change in prices had a significant impact on our results of operations for
any periods presented in our consolidated financial statements.
See Note 2, Summary of Significant Accounting Policies, of Notes to Consolidated Financial Statements for
further information on foreign currency translation.
Market Risk and Market Interest Risk
In June 2016, we issued $172.5 million aggregate principal amount of 1.75% convertible senior notes due
2021. The fair value of our convertible senior notes is subject to interest rate risk, market risk and other factors due
to the convertible feature. The fair value of the convertible senior notes will generally increase as our common
stock price increases and will generally decrease as our common stock price declines in value. The interest and
market value changes affect the fiar value of our convertible senior notes but do not impact our financial position,
cash flows or results of operations due to the fixed nature of the debt obligation. Additionally, we carry the
convertible senior notes at face value less unamortized discount on our balance sheet, and we present the fair value
for required disclosure purposes only.
See Note 6, Long-term Debt, of Notes to Consolidated Financial Statements for further information.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements, and the related notes thereto, of Nevro Corp. and the Report
of the Company’s Independent Registered Public Accounting Firm are filed as a part of this Annual Report.
79
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Nevro Corp.
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations
and comprehensive loss, of convertible preferred stock, redeemable convertible preferred stock and stockholders’
equity (deficit) and of cash flows present fairly, in all material respects, the financial position of Nevro Corp. and its
subsidiaries at December 31, 2016 and December 31, 2015, and the results of their operations and their cash flows
for each of the three years in the period ended December 31, 2016 in conformity with accounting principles
generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established in
Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The Company's management is responsible for these financial statements, for
maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in Management’s Report on Internal Control Over Financial Reporting
appearing under Item 9A. Our responsibility is to express opinions on these financial statements and on the
Company's internal control over financial reporting based on our integrated audits. We conducted our audits in
accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement and whether effective internal control over financial reporting was
maintained in all material respects. Our audits of the financial statements included examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall financial statement presentation.
Our audit of internal control over financial reporting included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk. Our audits also included performing such
other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable
basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
/s/ PricewaterhouseCoopers LLP
San Jose, California
February 23, 2017
80
Nevro Corp.
Consolidated Balance Sheets
(in thousands, except share and per share data)
Assets
Current assets
Cash and cash equivalents
Short-term investments
Accounts receivable, net of allowance for doubtful accounts of $1,008
and $122 at December 31, 2016 and 2015, respectively
Inventories
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Other assets
Restricted cash
Total assets
Liabilities and stockholders’ equity
Current liabilities
Accounts payable
Accrued liabilities
Other current liabilities
Total current liabilities
Long-term debt
Other long-term liabilities
Total liabilities
Commitments and contingencies (Note 5)
Stockholders’ equity
Preferred stock, $0.001 par value, 10,000,000 shares authorized at
December 31, 2016 and 2015, respectively; zero shares issued and
outstanding at December 31, 2016 and 2015, respectively
Common stock, $0.001 par value, 290,000,000 shares authorized at
December 31, 2016 and 2015, respectively; 28,886,862 and 28,143,573
shares issued and outstanding at December 31, 2016 and 2015,
respectively
Additional paid-in capital
Accumulated other comprehensive loss
Accumulated deficit
Total stockholders’ equity
Total liabilities and stockholders’ equity
December 31,
2016
December 31,
2015
$
$
$
41,406 $
234,951
52,818
85,221
5,895
420,291
7,132
2,354
806
430,583 $
16,162 $
26,028
8
42,198
138,140
1,211
181,549
87,036
106,634
22,522
62,430
4,009
282,631
5,794
1,852
906
291,183
21,887
14,381
121
36,389
19,740
462
56,591
—
—
29
470,869
(678 )
(221,186 )
249,034
430,583 $
28
424,147
(175)
(189,408)
234,592
291,183
$
The accompanying notes are an integral part of these consolidated financial statements.
81
Nevro Corp.
Consolidated Statements of Operations and Comprehensive Loss
(in thousands, except share and per share data)
$
Revenue
Cost of revenue
Gross profit
Operating expenses
Research and development
Sales, general and administrative
Total operating expenses
Loss from operations
Interest income
Interest expense
Other income (expense), net
Loss on extinguishment of debt
Loss before income taxes
Provision for income taxes
Net loss
Years Ended December 31,
2015
2016
228,504 $
75,433
153,071
33,729
142,423
176,152
(23,081)
1,685
(6,394)
(1,097)
(1,268)
(30,155)
1,623
(31,778)
69,606 $
28,120
41,486
21,382
82,471
103,853
(62,367 )
575
(2,732 )
(1,741 )
—
(66,265 )
1,166
(67,431 )
2014
32,573
11,278
21,295
19,824
29,777
49,601
(28,306)
141
(157)
(1,880)
—
(30,202)
478
(30,680)
Accretion of redeemable convertible preferred stock to redemption
value
Net loss attributable to common stockholders
Other comprehensive loss:
Changes in foreign currency translation adjustment
Changes in unrealized losses on short-term investments, net
Net change in other comprehensive loss
Comprehensive Loss
Net loss per share, basic and diluted
Weighted average number of common shares used to
compute basic and diluted net loss per share
—
(31,778)
—
(67,431 )
(147)
(30,827)
(163)
(340)
(503)
(32,281) $
(1.12) $
(178 )
(74 )
(252 )
(67,683 ) $
(2.54 ) $
(147)
196
49
(30,778)
(6.94)
$
$
28,485,003 26,581,890
4,440,663
The accompanying notes are an integral part of these consolidated financial statements.
82
Nevro Corp.
Consolidated Statements of Convertible Preferred Stock, Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit)
(in thousands, except share data)
Balances at December 31, 2013
Accretion of redeemable convertible preferred stock
issuance costs
Conversion of preferred stock to common stock
Issuance of common stock upon initial public offering, net
of issuance costs
Issuance of common stock in connection with license
agreement
Exercise of common stock options
Vesting of early exercised stock options
Stock based compensation
Net loss
Other comprehensive income
Balances at December 31, 2014
Issuance of common stock upon underwritten public
offering, net of issuance costs
Exercise of common stock options
Issuance of common stock under employee stock purchase
plan
Vesting of early exercised stock options
Stock based compensation
Net loss
Other comprehensive loss
Balances at December 31, 2015
Conversion feature of convertible senior notes due 2021,
net of allocated costs
Purchase of bond hedges
Sales of warrants
Exercise of common stock options
Issuance of common stock upon release of restricted stock
units
Issuance of common stock under employee stock purchase
plan
Vesting of early exercised stock options
Stock based compensation
Tax benefit from stock option deductions
Net loss
Other comprehensive loss
Balances at December 31, 2016
Series A Convertible
Preferred Stock
Series B and C
Redeemable Convertible
Preferred Stock
Shares
Amount
5,437,826 $ 47,217 9,770,222 $ 106,018
Amount
Shares
Common Stock
Additional
Paid-In
Amount Capital
Shares
1,120,416 $
1 $
5,331 $
Accumulated
Accumulated Other Comprehensive Stockholders'
Equity (Deficit)
Income (Loss)
Deficit
(85,790)
(91,150) $
28 $
Total
—
(5,437,826)
—
—
(47,217) (9,770,222) (106,165 ) 15,208,048
—
147
—
—
15 153,367
(147)
—
—
—
(147)
153,382
—
—
—
—
8,050,000
8 131,609
—
—
131,617
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
20,833
—
466,194
—
—
—
—
—
—
—
—
—
— 24,865,491
523
—
963
1
154
—
1,998
—
—
—
—
—
25 293,945
—
—
—
—
(30,680)
—
(121,977 )
—
—
2,470,587
774,337
3 118,436
2,958
—
—
—
—
33,158
—
—
—
—
—
—
—
—
— 28,143,573
—
1,430
—
53
—
7,325
—
—
—
—
28 424,147
—
—
—
(67,431)
—
(189,408 )
—
—
—
—
—
—
—
—
669,337
—
—
—
1
31,767
(45,092)
33,120
6,807
1,384
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
72,568
—
—
—
—
—
—
—
—
—
—
—
— 28,886,862 $
3,499
—
47
—
15,760
—
814
—
—
—
—
—
29 $ 470,869 $
—
—
—
—
(31,778)
—
(221,186 ) $
—
—
—
—
—
49
77
—
—
—
—
—
—
(252)
(175)
—
—
—
—
—
—
—
—
—
—
(503)
(678) $
523
964
154
1,998
(30,680)
49
172,070
118,439
2,958
1,430
53
7,325
(67,431)
(252)
234,592
31,767
(45,092)
33,120
6,808
—
3,499
47
15,760
814
(31,778)
(503)
249,034
The accompanying notes are an integral part of these consolidated financial statements.
83
Nevro Corp.
Consolidated Statements of Cash Flows
(in thousands)
Cash flows from operating activities
Net loss
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization
Stock-based compensation expense
Accretion of discount on short-term investments
Non-cash research and development expense
Non-cash loss on extinguishment of debt
Payment of original issue discount
Provision for doubtful accounts
Write-down of inventory
Loss on disposal of equipment
Non-cash interest expense
Unrealized gains (losses) on foreign currency transactions
Changes in operating assets and liabilities
Accounts receivable
Inventories
Prepaid expenses and other current assets
Other assets
Accounts payable
Accrued liabilities
Other long-term liabilities
Net cash used in operating activities
Cash flows from investing activities
Purchases of short-term investments
Proceeds from maturity of short-term investments
Changes in restricted cash
Purchases of property and equipment
Net cash provided by (used in) investing activities
Cash flows from financing activities
Proceeds from issuance of notes payable
Proceeds from issuance of common stock in public offering, net
Proceeds from issuance of convertible notes
Convertible notes initial issuance discount and debt issuance costs
Proceeds from issuance of warrants
Purchase of convertible note hedges
Repayment of debt
Proceeds from issuance of common stock to employees
Net cash provided by financing activities
Effect of exchange rate changes on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental disclosures of cash flow information
Cash paid for income taxes
Cash paid for interest
Significant non-cash transactions
Purchases of property and equipment in accounts payable
Vesting of early-exercised stock options
Years Ended December 31,
2015
2014
2016
$
(31,778) $
(67,431 ) $
(30,680)
1,717
15,760
(231)
—
1,156
(1,500)
909
4,056
287
3,681
1,854
(32,181)
(27,031)
(1,997)
(505)
(5,586)
12,136
750
(58,503)
(372,309)
243,890
100
(3,368)
(131,687)
—
—
172,500
(6,171)
33,120
(45,092)
(19,500)
10,307
145,164
(604)
(45,630)
614
7,325
(458 )
—
—
—
90
2,767
—
231
(682 )
(16,233 )
(49,407 )
(1,197 )
(1,432 )
17,051
7,987
345
(100,430 )
(190,000 )
235,272
(606 )
(5,008 )
39,658
—
118,439
—
—
—
—
—
4,388
122,827
(306 )
61,749
96
1,998
82
523
—
—
(172)
754
—
11
—
167
(5,487)
(1,337)
(204)
1,283
1,763
55
(31,148)
(159,265)
51,835
—
(625)
(108,055)
19,500
131,617
—
—
—
—
—
964
152,081
—
12,878
$
$
$
$
$
87,036
41,406 $
25,287
87,036 $
12,409
25,287
492 $
2,469 $
670 $
2,332 $
725 $
47 $
752 $
53 $
243
—
—
154
The accompanying notes are an integral part of these consolidated financial statements.
84
Nevro Corp.
Notes to Consolidated Financial Statements
1. Formation and Business of the Company
We were 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, we were reincorporated in Delaware on October 4, 2006 and relocated to California.
Since inception, the Company has incurred net losses and negative cash flows from operations. During the
year ended December 31, 2016, the Company incurred a net loss of $31.8 million and used $58.5 million of cash in
operations. At December 31, 2016, the Company had an accumulated deficit of $221.2 million and does not expect
to experience positive cash flows in the immediate future. 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, and its June 2015 underwritten public offering, as well as its June 2016
underwritten public offering of convertible senior notes due in 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, if necessary, to meet its obligations as
they become due. 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.
Public Offerings
In November 2014, the Company completed its initial public offering (IPO) of shares of its common stock and
as a result, the following transactions were recorded in the Company’s consolidated financial statements during the
fourth quarter of 2014:
the sale of 8,050,000 shares of common stock, including 1,050,000 from the exercise by the
underwriters of their overallotment option, at an offering price of $18.00 per share, for net proceeds of
$131.6 million, after deducting the underwriters’ discounts, commissions and offering costs paid by us;
and
immediately prior to the completion of the IPO, all the outstanding shares of the Company’s redeemable
convertible preferred stock and convertible preferred stock were converted into 15,208,048 shares of
common stock.
In June 2015, the Company completed an underwritten public offering of its common stock, which included
shares of its common stock held by certain of its stockholders, and issued 2,470,587 shares of common stock,
including 705,882 shares issued pursuant to the exercise in full by the underwriters of their option to purchase
additional shares. The Company received cash proceeds of approximately $118.4 million, net of underwriting
discounts and commissions and offering costs paid by the Company.
In June 2016, the Company issued $150.0 million aggregate principal amount of 1.75% convertible senior
notes due 2021 in a registered underwritten public offering and an additional $22.5 million aggregate principal
amount of such notes pursuant to the exercise in full of the over-allotment options of the underwriters (the 2021
Notes). The interest rates are fixed at 1.75% per annum and are payable semi-annually in arrears on June 1 and
December 1 of each year, commencing on December 1, 2016. The total net proceeds from the debt offering, after
deducting transaction costs, were approximately $166.2 million.
2. Summary of Significant Accounting Policies
Basis of Presentation
These consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in the U.S. (U.S. GAAP). The consolidated financial statements include the Company’s accounts
and those of its four wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated.
85
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 only by information about
revenue by geographic region. 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.
The Company historically derived most of its revenue from sales to customers in Australia and Europe. In
May 2015, the U.S. Food and Drug Administration (FDA) approved the Company’s premarket approval (PMA)
application to market Senza in the United States and the Company launched sales in the United States in 2015.
Revenue by geography is based on the billing address of the customer. The following table sets forth revenue by
geographic area for countries with revenue accounting for 10% of more of the total revenue during the periods
presented:
Years Ended December 31,
2015
2016
2014
United States
Australia
United Kingdom
Germany
*
Represents less than 10%
76%
*
*
*
35 %
20 %
12 %
13 %
— %
35 %
18 %
17 %
Long-lived assets and operating income outside the U.S. 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) in 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. The Company recorded net unrealized foreign currency transaction losses
of $1.6 million during the year ended December 31, 2016, gains of $0.6 million during the year ended December 31,
2015 and losses of $1.1 million during the year ended December 31, 2014. Additionally, realized gains and losses
resulting from transactions denominated in currencies other than the local currency are recorded in other income
(expense), net. The Company recorded realized foreign currency transaction gains of $0.7 million during the year
ended December 31, 2016, and losses of $2.2 million and $0.6 million during the years ended December 31, 2015
and 2014, respectively.
As the Company’s international operations grow, the effect of 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 U.S. dollar 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.
86
Use of Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions that affect the amounts reported
in the consolidated financial statements and accompanying notes. Significant accounting estimates and management
judgments reflected in the consolidated financial statements include items such as allowances for doubtful accounts;
warranty obligations; stock-based compensation; depreciation and amortization lives; inventory valuation; valuation
of investments and deferred tax assets, including valuation allowances. 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 in excess of federally insured limits. The Company maintained investments in money market funds
that were not federally insured during the years ended December 31, 2016 and 2015, and held cash in foreign banks
of approximately $3.3 million and $5.2 million at December 31, 2016 and 2015, respectively, that was not federally
insured. The Company has not experienced any losses on its deposits of cash and cash equivalents.
Through December 31, 2014, all of the Company’s revenue had been derived from sales of its products in
international markets, principally Australia and Europe. In May 2015, the Company launched sales in the United
States upon receiving FDA approval to market and sell its products in the United States. In the international markets
in which the Company participates, the Company uses both a direct sales force and 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.
There were no customers that accounted for 10% or more of the Company’s revenue for each of the years
ended December 31, 2016, 2015 and 2014. There were no customers that accounted for 10% or more of the
Company’s accounts receivable balance as of December 31, 2016 and 2015.
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, uncertainty of market acceptance of products, and the need to obtain
additional financing. The Company is dependent on third party manufacturers and suppliers, in some cases sole- or
single-source suppliers.
There can be no assurance that the Company’s products or services will continue to be accepted in the
marketplace, 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 expects to incur substantial operating losses in the near term and may need to obtain additional
financing. 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
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.
87
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 $35.5 million and $36.6 million as of December 31, 2016 and 2015, respectively. At December 31, 2016
and 2015, the Company’s cash equivalents were held in institutions in the United State and include commercial
paper deposits in a money market fund which were unrestricted as to withdrawal or use.
Restricted Cash
Restricted cash as of December 31, 2016 and 2015 includes a letter of credit of $0.6 million representing
collateral for the Company’s Redwood City, CA 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, 2016 and $0.3
million as of December 31, 2015, collateralizing payment of charges related to the Company’s credit cards.
Investment Securities
The Company classifies its investment securities as available-for-sale. The Company classifies these
investment securities as short-term or long-term based on the nature of the investment, its maturity date and its
availability for use in current operations. 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 are also classified as short-term investments as
management considers them to be available for current operations if needed. The Company’s investment securities
are recorded at fair value based on the fair value hierarchy. Money market funds and treasury bonds are classified
within Level 1 of the fair value hierarchy and the commercial paper and corporate notes are classified within Level 2
of the fair value hierarchy. Unrealized gains and losses, deemed temporary in nature, are reported as a separate
component of accumulated other 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.
Inventories
Inventories are stated at the lower of cost to purchase or manufacture the inventory or the market value of such
inventory. Cost is determined using the standard cost method which approximates the first-in, first-out basis. Market
value is determined as the lower of replacement cost or net realizable value. 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’s policy is to write down inventory that has become obsolete, inventory that has a cost basis in
excess of its expected lower of cost or market value, and inventory 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 amount over demand using the same lower of cost or
market approach as that has been used to value the inventory. The Company also periodically evaluates inventory
quantities in consideration of actual loss experience. As a result of these evaluations, for the years ended
December 31, 2016, 2015 and 2014, the Company recognized total write downs of $4.1 million, $2.8 million and
$0.8 million for its inventories. The Company’s estimation of the future demand for a particular component of the
Company’s products may vary and may result in changes in estimates in any particular period.
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Shipping and Handling Costs
Shipping and handling costs are expensed as incurred and are included in cost of revenue.
Revenue Recognition
The Company recognizes revenue when all of the following criteria are met:
persuasive evidence of an arrangement exists;
the sales price is fixed or determinable;
collection of the relevant receivable is reasonably assured at the time of sale; and
delivery has occurred or services have been rendered.
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 satisfaction of the required revenue recognition criteria. 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 procedure and a valid purchase order has
been received, the Company recognizes revenue at the time of shipment of the product, which represents the point in
time when the customer has taken ownership and assumed the risk of loss and the required revenue recognition
criteria are satisfied. The Company’s 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 and it has no post-
delivery obligations. The Company periodically provides incentive offers to customers. Product revenue is recorded
net of such incentive offers.
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 has a limited one- to five-year warranty to most customers 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.
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 determined based either on discounted cash flows or appraised value, depending on the nature of
89
the asset. There were no impairment charges, or changes in estimated useful lives, recorded through December 31,
2016.
Income Taxes
The Company records income taxes using the asset and liability method, which requires the recognition of
deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the
Company’s consolidated financial statements or income tax returns. In estimating future tax consequences, expected
future events other than enactments or changes in the tax law or rates are considered. Valuation allowances are
provided when necessary to reduce deferred tax assets to the amount expected to be realized.
The Company operates in various tax jurisdictions and is subject to audit by various tax authorities. To date,
taxes paid have been predominantly due to income taxes in foreign jurisdictions in which we conduct business. The
Company provides for tax contingencies whenever it is deemed probable that a tax asset has been impaired or a tax
liability has been incurred for events such as tax claims or changes in tax laws. Tax contingencies are based upon
their technical merits, relative tax law, and the specific facts and circumstances as of each reporting period. Changes
in facts and circumstances could result in material changes to the amounts recorded for such tax contingencies.
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 in 2016 and 2015.
Other Comprehensive Income (Loss)
Other comprehensive income (loss) represents all changes in stockholders’ equity except those resulting from
distributions to stockholders. The Company’s unrealized gains on short-term 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 are presented in the consolidated statements of operations and
comprehensive loss.
Research and Development
Research and development expenses, 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,
allocated facilities and information services, clinical trial and related clinical manufacturing expenses, fees paid to
investigative sites, and other indirect costs.
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.
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.
90
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, with the exception of performance based stock options whose fair value is recorded as expenses
when performance metrics are achieved. 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 accounts for restricted stock units at their fair value, based on the closing market price of the
Company’s common stock on the grant date. The fair value is amortized on a straight-line basis over the requisite
service period of the awards, with the exception of performance based awards whose fair value is recorded as
expenses when performance metrics are achieved.
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 non-employee stock-based compensation expense was not material for all
periods presented.
Estimating the fair value of equity-settled awards as of the grant date using valuation models, such as the
Black-Scholes option pricing model, is affected by assumptions regarding a number of complex variables. Changes
in the assumptions can materially affect the fair value and ultimately how much stock-based compensation expense
is recognized. These inputs are subjective and generally require significant analysis and judgment to develop. For all
stock options granted to date, we included the volatility data based on a study of publicly traded industry peer
companies. For purposes of identifying these peer companies, we considered the industry, stage of development,
size and financial leverage of potential comparable companies. The risk-free interest rate is based on the yield
available on U.S. Treasury zero-coupon issues similar in duration to the expected term of the equity-settled award.
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 recognizes a benefit from stock-based compensation as additional paid-in capital if an
incremental tax benefit is realized by following the with-and-without approach.
Net Loss per Share of Common Stock
Basic net loss per common share is calculated by dividing the net loss attributable to common stockholders 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 the net loss attributable to common
stockholders 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, restricted stock units and common stock
options 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.
Recent Accounting Pronouncements
In July 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU)
No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory, which permits companies to
measure inventory at the lower of cost and realizable value. ASU 2015-11 applies to all business entities and is
effective for public business entities for annual periods, and interim periods within those annual periods, beginning
after December 15, 2016. Early adoption is permitted. Although the Company is currently evaluating the impact of
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this guidance, it does not believe that the guidance will have a material impact on its consolidated financial
statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606),
which supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. This ASU is based on
the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that
reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The
ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows
arising from customer contracts, including significant judgments and changes in judgments and assets recognized
from costs incurred to obtain or fulfill a contract. In August 2015, FASB issued ASU No. 2015-14, Revenue from
Contracts with Customers (Topic 606): Deferral of the Effective Date, which effectively delayed the adoption date
by one year, to an effective date for public entities for annual and interim periods beginning after December 15,
2017. In April 2016, FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606):
Identifying Performance Obligations and Licensing, which clarifies the aspects of Topic 606 that relates to
identifying performance obligations and licensing implementation guidance. In May 2016, the FASB issued ASU
No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical
Expedients, related to disclosures of remaining performance obligations, as well as other amendments to guidance
on collectability, non-cash consideration and the presentation of sales and other similar taxes collected from
customers. In December 2016, the FASB issued ASU 2016-20, Technical Corrections and Improvements to Topic
606, Revenue from Contracts and Customers, related to further clarifications issued in ASU 2014-09. The effective
dates of ASU 2016-10, ASU 2016-12 and ASU 2016-20 are the same as that of ASU 2014-09. The guidance is
required to be applied retrospectively to each prior reporting period presented, or retrospectively with the cumulative
effect of initially applying it recognized at the date of initial application. The Company is currently evaluating the
full impact of this guidance on its consolidated financial statements, including the selection of a transition method.
In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and
Financial Liabilities, which addresses certain aspects of recognition, measurement, presentation and disclosure of
financial instruments. ASU 2016-01 is effective for annual periods, and interim periods within those annual periods,
beginning after December 15, 2017. The Company has not determined the potential effects of this ASU on its
consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This update requires an entity to
recognize assets and liabilities for leases with lease terms of more than 12 months on the balance sheet. ASU 2016-
02 is effective for public entities for fiscal years beginning after December 15, 2018. Although the Company is
currently evaluating the impact of this guidance on its consolidated financial statements and related disclosures, the
Company expects that most of its operating lease commitments will be subject to the new standard and recognized
as operating lease liabilities and right-of-use assets upon adoption.
In March 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation (Topic 718):
Improvements to Employee Share-Based Payment Accounting. This update simplifies the accounting for employee
share-based payment transactions, including the accounting for income taxes, forfeitures and statutory tax
withholding requirements, as well as classification in the statement of cash flows. ASU 2016-09 is effective for
public entities for annual periods beginning after December 15, 2016. Although the Company is currently
evaluating the full impact of this guidance, the Company does not expect the adoption of this guidance to have a
material impact on its consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326):
Measurement of Credit Losses on Financial Instruments. This update changes the accounting for recognizing
impairments of financial assets, such that credit losses for certain types of financial instruments will be estimated
based on expected losses. The update also modifies the impairment models for available-for-sale debt securities and
for purchased financial assets with credit deterioration since their origination. ASU 2016-13 is effective for public
entities for annual periods beginning after December 15, 2019. Early adoption is permitted after December 15, 2018.
The Company has not determined the potential effects of this ASU on its consolidated financial statements.
In August, 2016, the FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash
Payments (a consensus of the Emerging Issues Task Force). The update clarifies the classification of certain cash
92
receipts and cash payments in the statement of cash flows, including debt prepayment or extinguishment costs,
settlement of contingent consideration arising from a business combination, insurance settlement proceeds and
distributions from certain equity method investees. ASU 2016-15 is effective for fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2017. Early adoption is permitted. The Company has not
determined the potential effects of the guidance on its consolidated financial statements.
In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of
Assets Other than Inventory. This update is intended to reduce the complexity and diversity in practice related to the
tax consequences of certain types of intra-entity asset transfers. Under this ASU, a selling entity is required to
recognize a current tax expense or benefit upon the transfer of the asset. Similarly, the purchasing entity is required
to recognize a deferred tax asset or liability, as well as the related deferred tax benefit or expense, upon receipt of the
asset. This ASU does not apply to intra-entity transfers of inventory, where the income tax consequences from the
sale of inventory from one member of a consolidated entity to another will continue to be deferred until the
inventory is sold to a third party. ASU 2016-16 is effective for public entities for annual periods beginning after
December 15, 2017, and interim periods within those annual periods. Early adoption is permitted. The Company
has not determined the potential effects of the guidance on its consolidated financial statements.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted
Cash, a consensus of the FASB Emerging Issues Task Force. The update requires that the statement of cash flows
explain the change during the period in the total of cash, cash equivalents, and amounts generally described as
restricted cash or restricted cash equivalents. ASU 2016-18 is effective for public entities for annual periods
beginning after December 15, 2017, and interim periods within those annual periods. The Company has not
determined the potential effects of the guidance on its consolidated financial statements.
3. 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.
93
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. To value its money market funds, the Company values the funds at $1 stable net
asset value, which is the quoted price in active markets for identical assets that the Company has the ability to
access. The Company’s short-term investments are comprised of commercial paper, corporate notes and U.S.
government agency obligations. 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 any 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 December 31, 2016
Assets:
Money market funds (i)
Commercial paper (iii)
Corporate notes (iii)
Total assets
Balance as of December 31, 2015
Assets:
Money market funds (i)
Commercial paper (ii)
Treasury bonds (iii)
Total assets
Level 1
Level 2
Level 3
Total
$
$
35,510 $
— $
— 160,582
74,369
—
35,510 $ 234,951 $
— $ 35,510
— 160,582
—
74,369
— $ 270,461
Level 1
Level 2
Level 3
Total
$
$
36,559 $
— $
— 129,206
—
10,617
47,176 $ 129,206 $
— $ 36,559
— 129,206
10,617
—
— $ 176,382
(i)
Included in cash and cash equivalents on the consolidated balance sheets.
(ii)
Included in either cash and cash equivalents or short-term investments on the consolidated balance sheets.
(iii)
Included in short-term investments on the consolidated balance sheets.
Convertible Senior Notes
As of December 31, 2016, the fair value of the 1.75% convertible senior notes due 2021 was $183.8 million.
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.
94
4. 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 (in thousands):
Investment Securities
Commercial paper
Corporate notes
Total securities
Investment Securities
Commercial paper (i)
Treasury bonds
Total securities
December 31, 2016
Gross
Unrealized
Holding
Losses
Gross
Unrealized
Holding
Gains
Amortized
Cost
Aggregate
Fair Value
$ 160,729 $
74,430
$ 235,159 $
6 $
3
9 $
(153 ) $ 160,582
74,369
(64 )
(217 ) $ 234,951
December 31, 2015
Gross
Unrealized
Holding
Losses
Gross
Unrealized
Holding
Gains
Amortized
Cost
Aggregate
Fair Value
$ 129,075 $
10,616
$ 139,691 $
131 $
1
132 $
— $ 129,206
—
10,617
— $ 139,823
(i)
Includes $33.2 million of commercial paper that is classified as cash and cash equivalents on the consolidated
balance sheet.
Realized gains or losses from the sale of investments 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 was
determined based on the specific identification method. The Company has not recorded any realized gains, realized
losses or impairment on its investments during the periods presented.
The amortized costs and estimated fair values of the Company’s available-for-sale securities by contractual
maturities as of December 31, 2016 were as follows (in thousands):
Amounts maturing within one year
Amounts after one year through five years
Total investment securities
Inventories, Net (in thousands)
Raw materials
Finished goods
Total inventories
Amortized
Cost
Fair Value
$ 233,163 $ 232,955
1,996
$ 235,159 $ 234,951
1,996
December 31,
2016
44,862 $
40,359
85,221 $
2015
37,096
25,334
62,430
$
$
95
Property and Equipment, Net (in thousands)
Laboratory equipment
Computer equipment and software
Furniture and fixtures
Leasehold improvements
Construction in process
Total
Less: Accumulated depreciation and amortization
Property and equipment, net
December 31,
2016
2015
$
$
1,567 $
2,388
2,051
1,214
2,274
9,494
(2,362)
7,132 $
921
1,836
1,752
1,188
799
6,496
(702 )
5,794
Depreciation and amortization expense for the years ended December 31, 2016, 2015 and 2014 was $1.7
million, $0.6 million and $96,000, respectively.
Accrued Liabilities (in thousands)
Accrued payroll and related expenses
Accrued professional fees
Accrued taxes
Accrued clinical and research expenses
Accrued interest
Accrued warranty
Accrued other
Total accrued liabilities
December 31,
2016
17,732 $
1,067
2,110
1,545
243
645
2,686
26,028 $
2015
9,857
583
2,044
405
—
394
1,098
14,381
$
$
5. 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 in June 2015 through 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 an amendment 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 commences on the earlier of (i) the date the Company commences business operations in the Expansion
Premises, or (ii) the date upon which the Landlord substantially completes certain improvements to, and permitting
for, the Expansion Premises (the Commencement Date). The amendment also extends the lease term for the original
premises to terminate on the same date as the amended lease. Under the amendment, if the Company is unable to
move into the Expansion Premises before the Scheduled Delivery Date, as defined in the amendment, the Company
may terminate the lease for the Expansion Premises.
The Company entered into a non-cancellable operating lease effective May 1, 2010 for facilities in Menlo
Park, CA as amended in 2012 to extend the period of the lease until May 31, 2015. In March 2015, the Company
extended the lease through September 30, 2015, at which time the lease terminated. In August 2014, the Company
entered into a new facility lease for warehouse space beginning on August 21, 2014 through May 31, 2015, under
which it is obligated to pay approximately $100,000 in lease payments over the term of the lease. In March 2015, the
Company extended the warehouse lease through February 2017 under which it is obligated to pay approximately
$0.3 million in lease payments over the remaining term of the lease.
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Rent expense for the years ended December 31, 2016, 2015 and 2014 was $2.4 million, $1.9 million and $0.7
million, respectively.
Excluding the terms under the amendment for the Expansion Premises, which is subject to certain cancellation
clauses, future minimum lease payments under operating leases as of December 31, 2016 are as follows (in
thousands):
Year ending December 31,
2017
2018
2019
2020
2021
Thereafter
Total
Operating Lease
$
$
2,167
2,185
2,250
2,318
2,387
1,211
12,518
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. The Company established a warranty liability in
June 2015. Prior to that time, replacements made under warranty were minimal and were recorded at the time that
the claims were incurred. Activities related to warranty obligations were as follows (in thousands):
Beginning Balance
Provision for warranty
Utilization
Ending Balance
December 31,
2016
2015
$
$
394 $
902
(651)
645 $
—
451
(57 )
394
Supply Agreements
The Company has entered into supply agreements with certain of the Company’s suppliers that required
certain minimum annual purchase agreements. As of December 31, 2016, the Company had minimum annual
purchase commitments $25.0 million due in 2017 and $5.5 million due in each of 2018, 2019, 2020 and 2021.
License Agreement
In March 2006, the Company entered into an amended and restated license agreement with the Mayo
Foundation for Medical Education and Research (Mayo) and Venturi Group LLC (VGL), which provides the
Company access to the certain know how and licensed patents owned by Mayo and VGL for treatment of central,
autonomic and peripheral nervous system disorders, including pain, using devices to modulate nerve signaling. The
licenses granted are exclusive and the Company has the right to sub-license. The agreement will terminate upon the
last to expire patent application, unless terminated earlier. The agreement can be terminated any time after three
years from March 2006 by Mayo or VGL.
Per terms of the license, the Company is required to pay royalties based on the greater of earned royalty or
minimum royalty. The earned royalty will be based on a percentage of net sales of licensed products either by the
Company or the sub-licensee. The minimum royalty payment will be based on royalty periods as defined in the
agreement.
In March 2011, the Company entered into a Phase II License Agreement with Mayo which provides the
Company access to the certain know how and licensed patents owned by Mayo. The licenses granted are exclusive
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and the Company has the right to sub-license. The agreement will terminate upon the last to expire patent
application, unless terminated earlier.
Per terms of the license, the Company is required to:
Pay a retainer fee of $40,000 per annum starting March 2011 and ending February 2013;
Pay royalties based on the greater of earned royalty or minimum royalty. The earned royalty will be
based on a percentage of net sales of licensed products either by the Company or the sub-licensee. The
minimum annual royalty payment is $200,000.
Royalties paid during the years ended December 31, 2016, 2015 and 2014 were $1.9 million, $0.6 million and
$0.3 million, respectively.
In November 2014, the Company issued Mayo 20,833 shares of common stock owed in connection with the
IPO pursuant to the terms of the license, and recorded noncash research and development expense of $0.5 million
for the fair value of the shares on the date of issuance.
Contingencies
From time to time, the Company may have certain contingent liabilities that arise in the ordinary course of
business activities. The Company accrues a liability for such matters when it is probable that future expenditures
will be made and such expenditures can be reasonably estimated. There have been no contingent liabilities requiring
accrual at December 31, 2016 and 2015.
Indemnification
The Company enters into standard indemnification arrangements in the ordinary course of business. Pursuant
to these arrangements, the Company indemnifies, holds harmless, and agrees to reimburse the indemnified parties
for losses suffered or incurred by the indemnified party, in connection with any trade secret, copyright, patent or
other intellectual property infringement claim by any third-party with respect to the Company’s technology. The
term of these indemnification agreements is generally perpetual. The maximum potential amount of future payments
the Company could be required to make under these agreements is not determinable because it involves claims that
may be made against the Company in the future, but have not yet been made.
The Company has entered into indemnification agreements with its directors and officers that may require the
Company to indemnify its directors and officers against liabilities that may arise by reason of their status or service
as directors or officers, other than liabilities arising from willful misconduct of the individual. The maximum
potential amount of future payments the Company could be required to make under these indemnification
agreements is unlimited; however, the Company has director and officer insurance coverage that reduces the
Company’s exposure and enables the Company to recover a portion of any future amounts paid. The Company
believes the estimated fair value of these indemnification agreements in excess of applicable insurance coverage is
minimal.
The Company has not incurred costs to defend lawsuits or settle claims related to these indemnification
agreements. No liability associated with such indemnifications has been recorded to date.
Legal Matters
On November 28, 2016, the Company filed a lawsuit for patent infringement against Boston Scientific
Corporation and Boston Scientific Neuromodulation Corporation (collectively, Boston Scientific). The lawsuit, filed
in the United States District Court for the Northern District of California, asserts that Boston Scientific is infringing
the Company’s patents covering inventions relating to the Senza system and HF10 therapy. The lawsuit seeks
preliminary and permanent injunctive relief against further infringement as well as damages and attorney’s fees.
98
On December 9, 2016, Boston Scientific filed a patent infringement lawsuit alleging the Company’s
manufacture, use and sale of the Senza system infringes certain of Boston Scientific’s patents covering SCS
technology related to stimulation leads, rechargeable batteries and telemetry. The lawsuit, filed in the United States
District Court for the District of Delaware, seeks unspecified damages and attorney’s fees, as well as preliminary
and permanent injunctive relief against further infringement. As of December 31, 2016, the Company did not record
a liability accrual, as an outcome or potential range of loss cannot be reasonably determined.
The Company is and may from time to time continue to be involved in various legal proceedings of a
character normally incident to the ordinary course of its business, including several pending European patent
oppositions at the European Patent Office (EPO) initiated by the Company’s competitors Medtronic and Boston
Scientific, which the Company does not deem to be material to its business and consolidated financial statements at
this stage.
6. Long-term Debt
1.75% Convertible Senior Notes and Convertible Note Hedge and Warrant Transactions
In June 2016, the Company issued $150.0 million aggregate principal amount of 1.75% convertible senior
notes due 2021 in a registered underwritten public offering and an additional $22.5 million aggregate principal
amount of such notes pursuant to the exercise in full of the over-allotment options of the underwriters (the 2021
Notes). The interest rates are fixed at 1.75% per annum and are payable semi-annually in arrears on June 1 and
December 1 of each year, commencing on December 1, 2016. The total net proceeds from the debt offering, after
deducting initial purchase discounts and debt issuance costs, were approximately $166.2 million.
Each $1,000 principal amount of the 2021 Notes will initially be convertible into 10.3770 shares of the
Company’s common stock, which is equivalent to an initial conversion price of approximately $96.37 per share,
subject to adjustment upon the occurrence of specified events. The 2021 Notes will be convertible at the option of
the holders at any time prior to the close of business on the business day immediately preceding December 1, 2020,
only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter
ending on September 30, 2016 (and only during such calendar quarter), if the last reported sale price of the
Company’s common stock for at least 20 trading days (whether or not consecutive) during a period of 30
consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than
or equal to 130% of the conversion price on each applicable trading day; (2) during the five business day period
after any ten consecutive trading day period (the measurement period) in which the trading price (as defined in the
indenture to the 2021 Notes) per $1,000 principal amount of notes for each trading day of the measurement period
was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion
rate on each such trading day; or (3) upon the occurrence of specified corporate events. On or after December 1,
2020 until the close of business on the second scheduled trading day immediately preceding the maturity date,
holders may convert their 2021 Notes at any time, regardless of the foregoing circumstances. Upon conversion, the
Company will pay or deliver, as the case may be, cash, shares of the Company’s common stock or a combination of
cash and shares of the Company’s common stock, at the Company’s election. If the Company undergoes a
fundamental change prior to the maturity date, holders of the notes may require the Company to repurchase for cash
all or any portion of their notes at a repurchase price equal to 100% of the principal amount of the notes to be
repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. In
addition, if specific corporate events occur prior to the applicable maturity date, the Company will increase the
conversion rate for a holder who elects to convert their notes in connection with such a corporate event in certain
circumstances. It is the Company’s current intent and policy to settle conversions through combination settlement
with a specified dollar amount per $1,000 principal amount of notes of $1,000. During the three months ended
December 31, 2016, the conditions allowing holders of the 2021 Notes to convert have not been met. The 2021
Notes are therefore not convertible during the three months ended March 31, 2017 and are classified as long-term
debt. Should the sale price condition be met in a future quarter, the 2021 Notes will be convertible at the holders’
option during the immediately following quarter. As of December 31, 2016, the if-converted value of the 2021
Notes did not exceed the principal value of those notes.
In accounting for the issuance of the convertible senior notes, the Company separated the 2021 Notes into
liability and equity components. The carrying amount of the liability component was calculated by measuring the
99
fair value of a similar debt instrument that does not have an associated convertible feature. The carrying amount of
the equity component representing the conversion option was $32.9 million and was determined by deducting the
fair value of the liability component from the par value of the 2021 Notes. The equity component is not remeasured
as long as it continues to meet the conditions for equity classification. The excess of the principal amount of the
liability component over its carrying amount ("debt discount") is amortized to interest expense over the term of the
2021 Notes expense at an effective interest rate of 6.29% over the contractual terms of the notes.
In accounting for the debt issuance costs of $6.2 million related to the 2021 Notes, the Company allocated the
total amount incurred to the liability and equity components of the 2021 Notes based on their relative values.
Issuance costs attributable to the liability component were $5.0 million and will be amortized to interest expense
using the effective interest method over the contractual terms of the 2021 Notes. Issuance costs attributable to the
equity component were netted with the equity component in stockholders’ equity.
The net carrying amount of the liability component of the 2021 Notes was as follows (in thousands):
Principal
Unamortized discount
Unamortized issuance cost
Net carrying amount
$
December 31,
2016
172,500
(29,783 )
(4,577 )
138,140
$
The net carrying amount of the equity component of the 2021 Notes was as follows (in thousands):
Debt discount related to value of conversion option
Debt issuance cost
Net carrying amount
December 31,
2016
$
$
32,945
(1,179 )
31,766
The following table sets forth the interest expense recognized related to the 2021 Notes (in thousands):
Year Ended
December 31,
2016
Contractual interest expense
Amortization of debt discount
Amortization of debt issuance costs
$
Total interest expense related to the 2021 Notes
$
1,652
3,162
416
5,230
In connection with the offering of the 2021 Notes, the Company entered into convertible note hedge
transactions with certain bank counterparties in which the Company has the option to purchase initially (subject to
adjustment for certain specified events) a total of approximately 1.8 million shares of the Company’s common stock
at a price of approximately $96.37 per share. The total cost of the convertible note hedge transactions was $45.1
million. In addition, the Company sold warrants to certain bank counterparties whereby the holders of the warrants
have the option to purchase initially (subject to adjustment for certain specified events) a total of approximately
1.8 million shares of the Company’s common stock at a price of $127.28 per share. The Company received $33.1
million in cash proceeds from the sale of these warrants. Taken together, the purchase of the convertible note
hedges and the sale of warrants are intended to offset any actual dilution from the conversion of these notes and to
effectively increase the overall conversion price from $96.37 to $127.28 per share. As these transactions meet
certain accounting criteria, the convertible note hedges and warrants are recorded in stockholders’ equity and are not
accounted for as derivatives. The net cost of $12.0 million incurred in connection with the convertible note hedge
and warrant transactions was recorded as a reduction to additional paid-in capital on the consolidated balance sheet.
100
Capital Royalty Term Loan
On October 24, 2014, the Company entered into a credit facility (the “credit facility”) with Capital Royalty
Partners and certain of its affiliates (the “lenders”) under which, subject to certain conditions, the Company could
enter into three term loan agreements totaling $50.0 million with the lenders on or before September 30, 2015. In
June 2016, the Company paid the outstanding principal and repayment fees totaling $21.0 million to the lenders, and
the credit facility terminated and is now no longer in effect. The difference between the total payment to the lenders
and the net carrying amount of the obligation recorded on the balance sheet was recorded as a loss on
extinguishment of debt.
7. Convertible Preferred Stock
Prior to the initial public offering, the Company had outstanding 15,208,048 shares of convertible preferred
stock. Each share of preferred stock was convertible to one share of common stock. Upon the closing of the
Company’s initial public offering on November 11, 2014, all shares of outstanding redeemable convertible preferred
stock were automatically converted to 15,208,048 shares of the Company’s common stock.
The Company recorded the Series B and C redeemable convertible preferred stock at fair value on the dates of
issuance. The Company classified the Series B and C redeemable convertible preferred stock outside of
stockholders’ deficit because the shares contain liquidation features that are not solely within the Company’s
control. The Series B and C redeemable convertible preferred shares were originally issued with a contingent
redemption feature, which allowed the holders to redeem their shares five years following the issuance date of the
Series B and C redeemable preferred shares. Accordingly, the Company accreted the Series B and C redeemable
convertible preferred stock for change in redemption value with a charge to accumulated deficit at the end of each
reporting period. The Company has accreted $0.1 million during the year ended December 31, 2014.
8. Stock-Based Compensation
Common stock reserved for future issuance as of December 31, 2016 was as follows:
Outstanding stock options and restricted stock units
Reserved for grants of future stock options and
restricted stock units
Reserved for employee stock purchase plan
Total common stock reserved for future issuance
December 31,
2016
3,166,782
2,202,239
621,029
5,990,050
Stock Plans
The Company’s Board of Directors, or Board, and stockholders previously approved the 2007 Stock Option
Plan (the “2007 Plan”). In October 2014, the Board adopted the 2014 Equity Incentive Award Plan (the “2014 Plan”
and, together with the 2007 Plan, the “Stock Plans”). As of the effective date of the 2014 Plan, the Company
suspended the 2007 Plan and no additional awards may be granted under the 2007 Plan. Any shares of common
stock covered by awards granted under the 2007 Plan that terminate after the effective date of the 2014 Plan by
expiration, forfeiture, cancellation or other means without the issuance of such shares, will be added to the 2014
Plan reserve.
Under the 2014 Plan, 1,854,166 shares of common stock were initially reserved for issuance, plus the number
of shares remaining available for future awards under the 2007 Plan, as of the pricing of the IPO. The number of
shares initially reserved for issuance under the 2014 Plan is subject to increase by (i) the number of shares
represented by awards outstanding under the 2007 Plan that are forfeited or lapse unexercised and which following
the pricing date are not issued under the 2007 Plan, and (ii) an annual increase on January 1 of each year.
Under the 2014 Plan, the Company may grant awards such as incentive stock options, nonstatutory stock
options, restricted stock units and stock appreciation rights. Incentive stock options (ISO) may be granted only to
101
Company employees (including directors who are also employees). Nonqualified stock options (NSO) may be
granted to Company employees, directors and consultants
Stock Options
Options under the 2014 Plan may be granted for periods of up to ten years and at prices no less than 100% of
the estimated fair market value of the shares on the date of grant as determined by the Board, provided, however,
that the exercise price of an ISO or an NSO granted to a 10% stockholder shall not be less than 110% of the
estimated fair market value of the shares on the date of grant. Upon the exercise of options, the Company issues new
common stock from its authorized shares. The vesting provisions of individual options vary but are generally over
four years, with the exception of performance based stock options.
Pursuant to the 2014 Plan, the Company granted performance based stock options to the Company’s CEO in
March 2016. This performance based stock option award is subject to the CEO’s continued service to the Company
through each applicable vesting date. If a performance metric is not met within the time limits specified in the award
agreements, the shares subject to vesting under the vesting tranche for that performance metric will be cancelled.
A summary of shares available for grant under the Stock Plans was as follows:
Balance at December 31, 2013
Additional shares reserved
Options granted
Options cancelled
Balance at December 31, 2014
Additional shares reserved
Options and restricted stock granted
Options and restricted stock cancelled
Balance at December 31, 2015
Additional shares reserved
Options and restricted stock granted
Options and restricted stock cancelled
Balance at December 31, 2016
Shares Available
for Grant
581,585
1,854,166
(753,102)
12,767
1,695,416
994,619
(975,688)
142,362
1,856,709
1,125,742
(856,043)
75,831
2,202,239
102
A summary of stock option activity under the Stock Plans was as follows:
Options Outstanding
Number of Weighted Average
Weighted Average
Remaining
Aggregate
Options
Exercise Price Contractual Term Intrinsic Value
(in thousands)
1,655
(in years)
8.0 $
2,731,962 $
Outstanding at December 31, 2013
753,102 $
Options granted
(498,565) $
Options exercised
(12,767) $
Options cancelled
2,973,732 $
Outstanding at December 31, 2014
970,238 $
Options granted
(751,610) $
Options exercised
(142,072) $
Options cancelled
3,050,288 $
Outstanding at December 31, 2015
498,564 $
Options granted
(667,494) $
Options exercised
(60,131) $
Options cancelled
2,821,227 $
Outstanding at December 31, 2016
Options exercisable as of December 31, 2016 1,506,297 $
Options vested, exercisable or expected to
vest as of December 31, 2016
2,739,732 $
2.88
13.50
2.26
3.60
5.77
50.16
3.87
19.08
19.74
66.74
10.19
40.89
29.85
14.69
$
2,488
7.9 $
97,832
$
36,603
7.8 $
145,721
$
46,529
7.4 $
6.4 $
123,425
87,358
29.11
7.3 $
121,743
The aggregate intrinsic value of options exercised is the difference between the estimated fair market value of
the Company’s common stock at the date of exercise and the exercise price for in-the-money options. The aggregate
intrinsic value of outstanding options is the difference between the closing price as of the date outstanding and the
exercise price of the underlying stock options. The weighted-average grant-date fair value of options granted during
the years ended December 31, 2016, 2015 and 2014 was $32.11, $25.06 and $11.33 per share, respectively. The
total fair value of options vested during the years ended December 31, 2016, 2015 and 2014 was approximately
$10.7 million, $5.2 million and $1.2 million, respectively, based on the grant date fair value.
The options outstanding and vested under the Stock Plans by exercise price, at December 31, 2016, were as
follows:
Options Outstanding
Weighted Average
Remaining
Options Vested
Exercise Price
$0.96 — $1.92
$3.60 — $3.60
$10.08 — $38.79
$41.83 — $54.50
$57.89 — $97.52
$0.96 — $97.52
Restricted Stock Units
Number
Outstanding
Contractual Term Weighted Average
Number
(in years)
Exercise Price
Exercisable
Weighted Average
Exercise Price
141,176
1,030,002
572,674
573,030
504,345
2,821,227
2.87 $
6.01 $
7.87 $
8.67 $
9.27 $
7.35 $
141,176 $
1.48
890,023 $
3.60
247,046 $
25.89
150,184 $
51.44
77,868 $
71.37
29.85 1,506,297 $
1.48
3.60
25.34
49.67
64.20
14.69
In 2015, the Company began granting restricted stock units (RSUs) under the 2014 Plan. Holders of RSUs do
not have stockholder rights. Upon the release of RSUs, the Company issues new common stock from its authorized
shares. RSUs generally vest four years from the date of grant.
Pursuant to the 2014 Plan, the Company granted performance based RSUs to the CEO in March 2016. The
performance based RSUs are subject to the CEO’s continued service to the Company through each applicable
103
vesting date. If a performance metric is not met within the time limits specified in the RSU agreement, the shares
subject to vesting under the vesting tranche for that performance metric will be canceled.
A summary of RSUs activity under the Stock Plans was as follows:
Outstanding at December 31, 2014
Restricted stock granted
Restricted stock cancelled
Outstanding at December 31, 2015
Restricted stock granted
Restricted stock released
Restricted stock cancelled
Outstanding at December 31, 2016
Restricted stock expected to vest as of
December 31, 2016
Number of Weighted Average Aggregate
Grant Date
Restricted
Fair Value
Stock Units
Intrinsic Value
(in thousands)
—
— $
5,450 $
(290) $
5,160 $
357,479 $
(1,384) $
(15,700) $
345,555 $
— $
56.47
63.23
56.09 $
70.31
56.65 $
65.15
70.39 $
348
115
25,108
314,061
$
22,820
The aggregate intrinsic value of RSUs released is calculated using the fair market value of the Company’s
common stock at the date of release. The aggregate intrinsic value of outstanding RSUs is calculated based on the
closing price of the Company’s common stock as of the date outstanding.
2014 Employee Stock Purchase Plan
In October 2014, the Board adopted the 2014 Employee Stock Purchase Plan (the ESPP). A total of 196,666
shares of common stock were initially available for future issuance under the 2014 Employee Stock Purchase Plan,
subject to an annual increase on January 1 of each year. The ESPP provides eligible employees with an opportunity
to purchase shares of the Company’s common stock through payroll deductions of up to 15% of their eligible
compensation, subject to plan limitations. Under the ESPP, the purchase price of the Company stock is equal to
85% of the lower of its fair market value at the start and end of a six-month purchase period.
A summary of ESPP activity was as follows:
2016
December 31,
2015
2014
Additional shares reserved
Shares issued
Shares available for future issuance
Employee contributions for shares issued (in thousands)
—
281,435 248,654
72,568 33,158
—
621,029 412,162 196,666
—
$
1,430 $
3,499 $
Early Exercises
Stock options previously granted under the 2007 Plan allowed the Board of Directors to grant awards to
provide employee option holders the right to elect to exercise unvested options in exchange for restricted common
stock. Unvested shares, which amounted to 1,836 at December 31, 2016, 14,863 at December 31, 2015 and 29,613
at December 31, 2014, were subject to a repurchase right held by the Company at the original issue price in the
event the optionees’ employment was terminated either voluntarily or involuntarily. For exercises of employee
options, this right lapses according to the vesting schedule designated on the associated option grant. The repurchase
terms are considered to be a forfeiture provision. The shares purchased by the employees pursuant to the early
exercise of stock options are not deemed to be issued or outstanding for accounting purposes until those shares vest,
though they are legally issued and outstanding. In addition, cash received from employees for exercise of unvested
options is treated as a refundable deposit shown as a liability on the consolidated balance sheets. As of
December 31, 2016 and 2015 cash received related to unvested shares totaled $7,000 and $54,000, respectively.
Amounts recorded are transferred into common stock and additional paid-in-capital as the shares vest.
104
Other
In March 2011, the Company issued 416,983 common shares under a restricted stock agreement to one of the
officers of the Company at a purchase price of $1.44 per share. Under the terms of the agreement, the holder was
entitled to purchase the shares in exchange for a promissory note. All the shares were purchased in March 2011 in
exchange for a promissory note aggregating to $0.6 million. The restricted stock agreement granted the Company
repurchase rights which lapsed upon attainment of full vesting by the stockholder. The restricted common shares
vested 33% one year from the vesting start date and monthly thereafter over the next two years. The note bore
interest at 0.54% per annum compounded annually. The principal amount of the note along with accrued interest
was discharged on a quarterly basis in arrears on a pro rata basis over a period of three years conditioned upon the
holder continuing to provide services to the Company. The Company accounted for the grant of the restricted
common stock as stock-based compensation based on the fair value of the shares on the original grant date, and
recognized expense over the three-year vesting period. The Company recorded stock-based compensation expenses
of $48,000 for the year ended December 31, 2014. At December 31, 2014, there were no shares of common stock
subject to repurchase by the Company.
Employee Stock-Based Compensation
The Company estimated the fair value of stock options granted to employees and shares purchased by
employees under the ESPP using the Black-Scholes option valuation model. The fair value is amortized on a
straight-line basis over the requisite service period of the awards, with the exception of performance based stock
options whose fair value is recorded as expenses when performance metrics are achieved. The following
assumptions were used in estimating the fair value:
2016
Years Ended December 31,
2015
2014
Stock Options:
Expected term (in years)
Expected volatility
Risk-free interest rate
Dividend Yield
ESPP:
Expected term (in years)
Expected volatility
Risk-free interest rate
Dividend Yield
5.3 — 6.1
5.3 — 6.1
47% — 49% 46% — 59% 57% — 63%
1.3% — 1.9% 1.4% — 1.8% 1.7% — 2.0%
0%
5.3 — 6.1
0%
0%
0.5
0.5
46% — 53% 42% — 64%
0.4% — 0.6% 0.1% — 0.3%
0%
0%
—
—
—
—
Expected Term. The expected term of stock-based awards represents the weighted-average period that the
stock-based awards are expected to remain outstanding. The Company has opted to use the “simplified method” for
estimating the expected term of the awards, whereby the expected term equals the arithmetic average of the vesting
term and the original contractual term of the awards. Starting in late 2016, the Company started to utilize its own
historical data for the calculation of expected term.
Expected Volatility. The Company determined the share price volatility for stock-based awards based on an
analysis of the historical volatilities of a peer group of publicly traded medical device companies. In evaluating
similarity, the Company considered factors such as industry, stage of life cycle and size. Starting in late 2016, the
Company has started to incorporate its own stock trading volatility with those of its peer group for the calculation of
volatility.
Risk-Free Interest Rate. The risk-free interest rate is based on the U.S. Treasury yield in effect at the time of
the grant for zero-coupon U.S. Treasury notes with remaining terms similar to the expected term of the stock-based
awards.
Dividend Rate. The expected dividend was assumed to be zero as the Company has never paid dividends and
has no current plans to do so.
105
Expected Forfeiture Rate. The Company is required to estimate forfeitures at the time of grant, and revise
those estimates in subsequent periods if actual forfeitures differ from those estimates. The Company uses historical
data to estimate pre-vesting option forfeitures and record stock-based compensation expense only for those awards
that are expected to vest. To the extent actual forfeitures differ from the estimates, the difference will be recorded as
a cumulative adjustment in the period that the estimates are revised.
The Company accounts for RSUs at their fair value, based on the closing market price of the Company’s
common stock on the grant date. The fair value is amortized on a straight-line basis over the requisite service period
of the awards, with the exception of performance based awards whose fair value is recorded as an expense when
performance metrics are achieved.
A summary of pre-tax stock-based compensation expense by line items in the consolidated statements of
operations was as follows (in thousands):
Years Ended December 31,
2015
2014
2016
Cost of revenue
Research and development
Sales, general and administrative
Total stock-based compensation expense
$
$
1,094 $
3,182
11,484
15,760 $
621 $
1,401
5,303
7,325 $
147
661
1,190
1,998
The effect of recording pre-tax stock-based compensation expense recognized were as follows (in thousands):
Stock options
Restricted stock units
Employee stock purchase plan
Total stock-based compensation expense
$
$
Years Ended December 31,
2015
2014
2016
10,832 $
3,548
1,380
15,760 $
6,679 $
9
637
7,325 $
1,998
—
—
1,998
As of December 31, 2016, total stock-based compensation expense not yet recognized, net of estimated
forfeitures, were as follows:
Stock options
Restricted stock units
Employee stock purchase plan
Unrecognized Weighted-Average
Compensation Amortization Period
(in thousands)
$
(in years)
25,602
18,253
757
2.5
3.3
0.4
9. Income Taxes
The components of the Company’s income (loss) before income taxes were as follows:
2016
Years Ended December 31,
2015
(in thousands)
$ (34,258) $ (68,919 ) $ (31,807 )
1,605
$ (30,155) $ (66,265 ) $ (30,202 )
2,654
4,103
2014
Domestic
Foreign
Total income (loss) before income taxes
106
The components of income tax expense are as follows (in thousands):
Years Ended December 31,
2015
2014
2016
Current:
Federal
State
Foreign
Total current
Deferred:
Federal
State
Foreign
Total deferred
$
— $
181
1,442
1,623
— $
34
1,132
1,166
—
—
—
—
—
—
—
—
—
2
476
478
—
—
—
—
Total income tax expense
$
1,623 $
1,166 $
478
Income tax expense differs from the amount computed by applying the statutory federal income tax rate as
follows:
Years Ended December 31,
2015
2014
2016
Tax at statutory federal rate
State tax, net of federal benefit
Other
Foreign rate differential
Tax credits
Change in valuation allowance
Total
34.0%
(0.4)%
(3.7)%
(0.2)%
3.2%
(38.4)%
(5.5)%
34.0%
0.0%
(3.5)%
(0.5)%
1.6%
(33.4)%
(1.8)%
34.0 %
0.0 %
(5.3 )%
0.2 %
2.0 %
(32.5 )%
(1.6 )%
The tax effects of temporary differences and carryforwards that give rise to significant portions of deferred tax
assets are as follows:
Net operating loss carryforwards
Tax credits
Depreciation
Stock-based compensation
Accruals and reserves
Other
Deferred tax assets
Other
Deferred tax liabilities
Valuation allowance
$
December 31,
2016
2015
(in thousands)
60,610 $
7,655
26
5,207
7,559
4,671
85,728
56,340
5,236
13
1,857
3,617
313
67,376
—
—
(345 )
(345 )
(85,728)
(67,031 )
Net deferred tax assets
$
— $
—
The Company has established a full valuation allowance against its deferred tax assets due to the uncertainty
surrounding realization of these assets.
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Realization of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which
are uncertain. Accordingly, the net deferred tax assets have been fully offset by a valuation allowance. The valuation
allowance increased by $18.7 million, $23.4 million and $9.4 million for the years ended December 31, 2016, 2015
and 2014, respectively.
As of December 31, 2016, the Company had net operating loss carryforwards (NOLs) for federal and state
income tax purposes of approximately $224.7 million and $77.3 million, respectively. These federal and state NOLs
include excess tax benefit related to stock-based compensation in the amount of $54.8 million and $23.7 million,
respectively. The excess tax benefit reflected in the Company’s net operating loss carryforwards will be accounted
for as a credit to stockholders’ equity, if and when realized, under current accounting. In determining if and when
excess tax benefits have been realized, the Company has elected to utilize the with-and-without approach with
respect to such excess tax benefits. The federal NOLs begin expiring in 2026, and the state NOLs begin expiring in
2017.
As of December 31, 2016, the Company had research and development credit carryforwards of approximately
$5.8 million and $5.1 million for federal and California state income tax purposes, respectively. The federal credit
carryforward begins expiring in 2026, and the state credits carry forward indefinitely.
Under Section 382 of the Internal Revenue Code of 1986, as amended, the Company’s ability to utilize NOLs
or other tax attributes such as research tax credits, in any taxable year may be limited if the Company experiences,
or has experienced, an “ownership change.” A Section 382 “ownership change” generally occurs if one or more
stockholders or groups of stockholders, who own at least 5% of the Company’s stock, increase their ownership by
more than 50 percentage points over their lowest ownership percentage within a rolling three-year period. Similar
rules may apply under state tax laws. As a result of the Company’s June 2015 underwritten public offering, the
Company experienced a Section 382 “ownership change.” The Company currently estimates that this “ownership
change” will not inhibit its ability to utilize its NOLs. The Company may, in the future, experience one or more
additional Section 382 “ownership changes.” If so, the Company may not be able to utilize a material portion of its
NOLs and tax credits, even if the Company achieves profitability.
The earnings of the Company's foreign subsidiaries are not considered indefinitely reinvested. As a result, the
Company has provided for residual U.S. tax on its foreign subsidiary unremitted earnings net of a foreign tax credit
deferred tax asset as of December 31, 2016. The net amount of deferred tax liability is considered
insignificant. The timing of the potential remittance of these earning is uncertain at December 31, 2016.
The Company had unrecognized tax benefits (UTBs) of approximately $3.4 million as of December 31, 2016.
All of the deferred tax assets associated with these UTBs are fully offset by a valuation allowance. The following
table summarizes the activity related to UTBs (in thousands):
Balance at December 31, 2013
Increases related to current year tax provisions
Increases related to prior year tax provisions
Balance at December 31, 2014
Increases related to current year tax provisions
Increases related to prior year tax provisions
Balance at December 31, 2015
Increases related to current year tax provisions
Decreases related to prior year tax provisions
Balance at December 31, 2016
$
$
1,065
220
677
1,962
813
1,069
3,844
1,059
(1,519 )
3,384
All of these UTBs, if recognized, would affect the effective tax rate before consideration of the valuation
allowance.
In accordance with ASC 740, Income Taxes, the Company is classifying interest and penalties as a component
of tax expense. There were no interest or penalties accrued at December 31, 2016, December 31, 2015, and
December 31, 2014.
108
The Company files U.S. federal and state income tax and foreign income tax returns with varying statues of
limitations. The Company’s tax years from inception in 2006 will remain open to examination due to the carryover
of the unused NOLs and tax credits. The Company does not have any tax audits or other proceedings pending.
The Company does not expect any material changes to the estimated amount of liability associated with its
uncertain tax positions within the next twelve months.
10. Net Loss Per Share Attributable to Common Stockholders
The following table summarizes the computation of basic and diluted net loss per share attributable to
common stockholders of the Company (in thousands, except share and per share data):
$
Net loss
Accretion of convertible preferred stock to
redemption value
Net loss attributable to common stockholders, basic
and diluted
Weighted average shares outstanding
Less: weighted average shares subject to repurchase
Weighted average shares used to compute basic and
diluted net loss per share
Net loss per share attributable to common
stockholders, basic and diluted
Years Ended December 31,
2015
(67,431 ) $
2016
(31,778) $
2014
(30,680 )
—
—
(147 )
(31,778) $
(67,431 ) $
$
(30,827 )
28,492,091 26,603,512 4,486,569
(45,906 )
(21,622 )
(7,088)
28,485,003 26,581,890 4,440,663
$
(1.12) $
(2.54 ) $
(6.94 )
Basic net loss per share attributable to common stockholders is computed by dividing the net loss attributable
to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted net
loss per share attributable to common stockholders is computed by dividing the net loss attributable to common
stockholders by the weighted-average number of common shares and potentially dilutive securities outstanding for
the period, determined using the treasury-stock method and the as-if converted method, for convertible securities, if
inclusion of these is dilutive. Because the Company has reported a net loss for all periods presented, diluted net loss
per common share is the same as basic net loss per common share for those periods.
The following potentially dilutive securities outstanding at the end of the periods presented have been
excluded from the computation of diluted shares outstanding:
Unreleased restricted stock
Options to purchase common stock
Total
December 31,
2015
2016
345,555
—
2,821,227 3,050,288 2,973,732
3,166,782 3,055,448 2,973,732
5,160
2014
Additionally, since the Company expects to settle the principal amount of its outstanding convertible senior
notes in cash, the Company uses the treasury stock method for calculating any potential dilutive effect of the
conversion spread on diluted net income per share, if applicable. The conversion spread will have a dilutive impact
on diluted net income per share of common stock when the average market price of the Company’s common stock
for a given period exceeds the conversion price of $96.37 per share for the 2021 Notes, which has not occurred as of
December 31, 2016.
11. Employee Benefit Plan.
In 2007, the Company adopted a 401(K) plan for its employees whereby eligible employees may contribute up
to the maximum amount permitted by the Internal Revenue Code of 1986, as amended. In June 2016, the Company
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adopted a policy to match a portion of employee contributions for all qualified employees participating in the 401(k)
plan. For the year ended December 31, 2016, the Company recorded expense of $1.3 million for matching
contributions.
12. Selected Quarterly Financial Information (Unaudited)
Three Months Ended
December 31, September 30,
2016
2016
June 30,
2016
March 31,
2016
Total revenue
Gross profit
Loss from operations
Net loss
Net loss attributable to common stockholders,
basic and diluted
Net loss per share attributable to common
stockholders, basic and diluted
Shares used in computing net loss per common
share, basic and diluted
Total revenue
Gross profit
Loss from operations
Net loss
Net loss attributable to common stockholders,
basic and diluted
Net loss per share attributable to common
stockholders, basic and diluted
Shares used in computing net loss per common
share, basic and diluted
(in thousands, except per share data)
55,400 $
36,558 $
(5,923 ) $
(8,779 ) $
60,922 $
41,687 $
(1,872) $
(3,886) $
70,531 $
48,839 $
(6,269) $
(9,825) $
41,651
25,987
(9,017)
(9,288)
(9,825) $
(3,886) $
(8,779 ) $
(9,288)
(0.34) $
(0.14) $
(0.31 ) $
(0.33)
$
$
$
$
$
$
28,817,333 28,542,760 28,381,253 28,194,457
Three Months Ended
December 31, September 30,
2015
2015
June 30,
2015
March 31,
2015
(in thousands, except per share data)
11,418 $
5,910 $
(19,175 ) $
(19,726 ) $
15,402 $
9,434 $
(17,709) $
(19,454) $
33,124 $
20,353 $
(13,144) $
(14,191) $
9,662
5,789
(12,339)
(14,060)
(14,191) $
(19,454) $
(19,726 ) $
(14,060)
(0.51) $
(0.70) $
(0.77 ) $
(0.57)
$
$
$
$
$
$
28,003,957 27,861,523 25,564,249 24,849,229
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the Exchange Act) refers to controls and procedures that are designed
to provide reasonable assurance that information required to be disclosed by a company in the reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified
in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by a company in the reports that it files or
submits under the Exchange Act is accumulated and communicated to the company’s management, including its
principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow
timely decisions regarding required disclosure. Our management recognizes that any controls and procedures, no
matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and our
management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and
procedures. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their
control objectives.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has
evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2016, the end of the period
covered by this Annual Report. Based upon such evaluation, our Chief Executive Officer and Chief Financial
Officer have concluded that our disclosure controls and procedures were effective at the reasonable assurance level
as of such date.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial
reporting. Internal control over financial reporting is a process designed by, or under the supervision of, our Chief
Executive Officer and Chief Financial Officer, and effected by our Board of Directors, management and other
personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles and includes
those policies and procedures that:
Pertain to the maintenance of records that accurately and fairly reflect in reasonable detail the
transactions and dispositions of the assets of our company;
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that our receipts
and expenditures are being made only in accordance with authorizations of our management and
directors; and
Provide reasonable assurances regarding prevention or timely detection of unauthorized acquisition, use
or disposition of our assets that could have a material adverse effect on our financial statements.
Our management assessed our internal control over financial reporting as of December 31, 2016, the end the
period covered by this Annual Report. Management based its assessment on criteria established in “Internal
Control—Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on management's assessment of our internal control over financial reporting, management
concluded that, as of December 31, 2016, our internal control over financial reporting was effective.
Internal control over financial reporting has inherent limitations. Internal control over financial reporting is a
process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns
resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or
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improper management override. Because of such limitations, there is a risk that material misstatements will not be
prevented or detected on a timely basis by internal control over financial reporting. However, these inherent
limitations are known features of the financial reporting process. Therefore, it is possible to design into the process
safeguards to reduce, though not eliminate, this risk.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2016 has
been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their
report which appears in Part II, Item 8 of this Annual Report.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting that occurred during the most recent fiscal
quarter covered by this Annual Report that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Executive Officers, Significant Employee and Non-Employee Directors of the Registrant
The following table sets forth information regarding our executive officers, significant employees and
directors, as of February 1, 2017:
Name
Executive Officers
Rami Elghandour
Andrew H. Galligan
Doug Alleavitch
Christopher Christoforou
Michael Enxing
Patrick Schmitz
Significant Employees
David Caraway, M.D., Ph.D.
Richard B. Carter
Bradford E. Gliner
Michael W. Hall
Neeraj Teotia
Non-Employee Directors
Michael DeMane
Ali Behbahani, M.D.(2)(3)
Lisa D. Earnhardt(1)(3)
Frank Fischer(3)
Wilfred E. Jaeger, M.D.(1)(2)
Shawn T McCormick(1)
Brad Vale, Ph.D., D.V.M.(2)
Age
Position(s)
38 President and Chief Executive Officer
60 Chief Financial Officer
56 Vice President, Quality and Operations
47 Vice President, Research and Development
50 Vice President of Sales
57 Vice President, Operations
60 Chief Medical Officer
46 Vice President of Finance, Corporate Controller
51 Vice President, Clinical & Regulatory Affairs
68 General Counsel
42 Vice President, Marketing
60 Chairman of the Board
40 Director
47 Director
75 Director
61 Director
52 Director
64 Director
(1) Member of the audit committee.
(2) Member of the compensation committee.
(3) Member of the nominating and corporate governance committee.
Executive Officers
Rami Elghandour joined us in October 2012, has served as our Chief Business Officer and currently serves
as our President and Chief Executive Officer. From September 2008 to October 2012, Mr. Elghandour managed
investments for Johnson & Johnson Development Corporation, or JJDC, where he led several investments and
served on the board of directors of a number of private companies, including our board of directors. Additionally, he
led strategic initiatives in the development and management of JJDC’s portfolio. From 2001 to 2006,
Mr. Elghandour worked for Advanced Neuromodulation Systems, Inc. (acquired by St. Jude Medical), a medical
device company, where he led firmware design and development on several implantable neurostimulators.
Mr. Elghandour received an M.B.A. from the Wharton School of the University of Pennsylvania and a B.S. in
Electrical and Computer Engineering from Rutgers University School of Engineering.
Andrew H. Galligan has served as our Chief Financial Officer since May 2010. From February 2009 to July
2010, Mr. Galligan served as Vice President of Finance and Chief Financial Officer at Ooma, a consumer
electronics manufacturer and VOIP service provider. From 2007 to 2008, Mr. Galligan served as Vice President of
Finance and CFO of Reliant Technologies, Inc. (later acquired by Solta Medical, Inc.), a medical device company.
Mr. Galligan has also held the top financial executive position at several other medical device companies and began
his career in various financial positions at KPMG and Raychem Corp. Mr. Galligan served on the board of directors
of DiaDexus, Inc., a public medical diagnostics company, until January 2015. Mr. Galligan received a degree in
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Business Studies from Trinity College in Dublin, Ireland and is also a Fellow of the Institute of Chartered
Accountants in Ireland.
Doug Alleavitch has served as our Vice President, Quality since April 2015. From October 2009 to April
2015, Mr. Alleavitch served as Vice President, Operations and Quality Assurance at AEGEA Medical, Inc., a
medical device company, where he oversaw manufacturing and quality assurance procedures. From August 2007 to
September 2009, Mr. Alleavitch served first as Senior Director, Manufacturing and later as Vice President,
Operations at AngioScore, Inc., a medical device company, where he oversaw AngioScore’s production, supply
chain management and manufacturing engineering. From February 2002 to July 2007, Mr. Alleavitch served first as
Director, Quality Assurance and later as Director, Operations at Boston Scientific, a medical device company. Mr.
Alleavitch received a BS in Chemical Engineering from Cornell University, an M.S. in Industrial Engineering, and
an M.B.A. from the University of Illinois, and an M.S. in Chemical Engineering from the Illinois Institute of
Technology.
Christofer Christoforou has served as our Vice President, Research and Development since July 2016. From
December 2014 to July 2016, Mr. Christoforou served as Vice President, Quality Engineering at Thoratec
Corporation, a medical device company where he oversaw the operational, design and supplier quality engineering
functions. From October 1999 to December 2014, Mr. Christoforou served in several leadership positions of
increasing levels of responsibility at Thoratec Corporation. From August 1993 to February 1999, Mr. Christoforou
served as a Manager of Engineering and various Engineering positions for United States Surgical Corporation, a
producer of tools for use in surgery. Mr. Christoforou received a B.S. in Biomedical Engineering from Boston
University and a MS in Biomedical Engineering from The Johns Hopkins University in Maryland.
Michael Enxing has served as our Vice President of Sales since December 2012. From 2009 to December
2012, Mr. Enxing served as Vice President of Vertos Medical Inc., a medical device company. From 1990 to 2009,
Mr. Enxing held various executive positions at Cardiovascular Systems, Inc. (f/k/a Cardio Vascular Solutions
(CSI)), a medical device company, Advanced Neuromodulation Systems, Inc. (acquired by St. Jude Medical), a
medical device company, Stryker Corporation, a medical technology company, and Tecnol Medical Products, Inc.
(acquired by Kimberly Clark), a medical device company. Mr. Enxing is a graduate of Iowa State University with a
B.S. in Communications and focus in business administration.
Patrick Schmitz has served as our Vice President, Operations since March 2016. From 2005 to October 2015,
Mr. Schmitz served as Vice President, Operations at Thoratec Corporation, a medical device company, where he
oversaw all domestic and international operations. From 2003 to 2005, Mr. Schmitz served as Vice President, North
American Operations at GN ReSound, a medical device company. Mr. Schmitz also held several leadership
positions in increasing levels of responsibility at St. Jude from 1993 to 2003. Mr. Schmitz holds a B.S. in Industrial
Technology from the University of Wisconsin – Stout.
Significant Employees
David Caraway, M.D., Ph.D. has served as our Chief Medical Officer since April 2014. Before joining
Nevro, from 2001 to May 2014, Dr. Caraway was the CEO of The Center for Pain Relief, Tri-State, L.L.C., in
partnership with St. Mary’s Regional Medical Center in Huntington, West Virginia. Dr. Caraway has maintained an
active medical practice for over 20 years and has held leadership positions in the North American Neuromodulation
and the American Society of Interventional Pain Physicians. As a nationally recognized expert in the treatment of
chronic pain, he has lectured regionally, nationally and internationally in the field of Interventional Pain Medicine
and authored numerous publications in this field. Dr. Caraway received a B.S. in chemical engineering from the
University of Virginia School of Engineering, an M.D. from the University of Virginia School of Medicine and a
Ph.D. in biophysics from the University of Virginia Graduate School of Arts and Sciences. He also received post-
graduate training in anesthesiology and pain management from the University of Virginia. Dr. Caraway is board
certified by the American Board of Anesthesiology.
Richard B. Carter has served as our Vice President of Finance, Corporate Controller since November 2015,
having held roles of increasing responsibility in finance and accounting since joining Nevro as Corporate Controller
in September 2014. From October 2013 to October 2014, Mr. Carter served as Corporate Controller at ClearEdge
Power, Inc., a privately held fuel cell manufacturing company. From December 2011 to October 2013, Mr. Carter
114
served as the Vice President of Finance and Corporate Controller at Kovio, Inc., a privately held electronic device
manufacturing company. From March 2007 to December 2011, Mr. Carter served as Vice President of Finance and
Corporate Controller at MiaSolé, a thin-film solar panel manufacturer. Previously, Mr. Carter served as the
Corporate Controller at PortalPlayer, Inc. and Transmeta Corporation, both publicly traded fabless semiconductor
companies. Mr. Carter received a B.S. in Business Administration from California State University, Chico. Mr.
Carter is a Certified Public Accountant (inactive license) and began his career as an auditor at Ernst & Young, LLP.
Bradford E. Gliner has served as our Vice President of Clinical and Regulatory Affairs since May 2011.
From 2008 to May 2011, Mr. Gliner was President and CEO at MitoGuard Neuroscience, Inc., a
photobiomodulation medical device company. From 1999 to 2008, Mr. Gliner was Vice President of Research at
Northstar Neuroscience, Inc., a medical device company, where he led research on numerous neuromodulation
applications. From 1992 to 1999, Mr. Gliner was also a co-founder of Heartstream, Inc. (acquired by Koninklijke
Philips Electronics NV), a medical device company that manufactures and markets automatic external defibrillators.
Mr. Gliner received a B.S. in Electrical Engineering from the University of Illinois and a M.S. in Biomedical
Engineering from Johns Hopkins University in Maryland.
Michael Hall has served as our General Counsel since January 2015. He was a partner at Latham & Watkins
from February 1999 to December 2014. Mr. Hall practiced for a number of years at Wilson, Sonsini, Goodrich &
Rosati and was a co-founder of Venture Law Group prior to joining Latham & Watkins. His practice was focused on
representation of life science companies primarily in the medical device industry. He also represented underwriters
and venture capital firms in both public and private financing transactions. He is a member of the board of San
Francisco RBI, a non-profit focused on sports and literacy for underprivileged children in San Francisco. Mr. Hall
received a B.A. from California University, Sonoma and a J.D. from the University of California at Berkley, School
of Law (Boalt Hall).
Neeraj Teotia has served as our Vice President of Marketing since May 2016, having held roles of increasing
responsibility in marketing since joining Nevro as Director, Marketing in April 2014. From July 2012 to April 2014
Mr. Teotia served as a Director, New Business Development in the Global Surgery Group at Johnson & Johnson
where he was responsible for assessing various licensing and acquisition opportunities. Prior to his role in New
Business Development, Mr. Teotia worked in various marketing, licensing & acquisitions and research &
development roles within the medical device group at Johnson & Johnson. Mr. Teotia received a MBA from the
Kellogg School of Management at Northwestern University and holds a B.S. in Electrical Engineering from the
University of Illinois at Urbana-Champaign.
Non-Employee Directors
Michael DeMane joined us in March 2011, has served as our Chief Executive Officer and as Executive
Chairman. Effective January 1, 2017, Mr. DeMane transitioned to non-executive Chairman of the Board.
Mr. DeMane has served on the board of directors of several private companies since 2009, as well as on the board of
directors of eReserach Technology, Inc., a public company specializing in contract research clinical services, from
July 2008 to April 2012. From March 2009 to June 2010, Mr. DeMane served as a Senior Advisor to Thomas,
McNerney & Partners, a healthcare venture firm. Mr. DeMane served as the Chief Operating Officer of
Medtronic, Inc. from August 2007 to April 2008. Prior to his COO role, Mr. DeMane served at Medtronic Inc. as
Senior Vice President from May 2007 to August 2007, Senior Vice President and President: Europe, Canada, Latin
America and Emerging Markets from August 2005 to May 2007, Senior Vice President and President: Spinal, ENT
and Navigation from February 2002 to August 2005, and President, Spinal from January 2000 to February 2002.
Prior to that, he was President at Interbody Technologies, a division of Medtronic Sofamor Danek, Inc., from June
1998 to December 1999. From April 1996 to June 1998, Mr. DeMane served at Smith & Nephew Pty. Ltd. as
Managing Director, Australia and New Zealand, after a series of research and development and general management
positions with Smith & Nephew Inc. Mr. DeMane earned a B.S. in Chemistry from St. Lawrence University and an
M.S. in Bioengineering from Clemson University. We believe that Mr. DeMane is qualified to serve on our board of
directors due to his investment experience, strategic leadership track record, service on other boards of directors of
companies in the healthcare industry and his service as our chief executive officer.
Ali Behbahani, M.D. has served on our board of directors since September 2014. Dr. Behbahani joined New
Enterprise Associates, Inc., or NEA, in 2007 and is a Partner on the healthcare team. Prior to joining NEA,
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Dr. Behbahani worked as a consultant in business development at The Medicines Company, a specialty
pharmaceutical company developing acute care cardiovascular products. Dr. Behbahani previously held positions as
a venture associate at Morgan Stanley Venture Partners and as a healthcare investment banking analyst at Lehman
Brothers. He conducted basic science research in the fields of viral fusion inhibition and structural proteomics at the
National Institutes of Health and at Duke University. Dr. Behbahani currently serves on the board of directors of
several private companies. Dr. Behbahani has also been a director of Adaptimmune Therapeutics plc, a public
biopharmaceutical company, since September 2014, and serves on the nominating and governance committee.
Dr. Behbahani holds an M.D. from The University of Pennsylvania School of Medicine, an M.B.A. from The
University of Pennsylvania Wharton School and a B.A. in Biomedical Engineering, Electrical Engineering and
Chemistry from Duke University. We believe that Dr. Behbahani is qualified to serve on our board of directors due
to his experience in the life science industry and his investment experience.
Lisa D. Earnhardt has served on our Board since June 2015. She has served as President and Chief
Executive Officer of Intersect ENT and as a member of its board of directors since March 2008. Prior to joining
Intersect ENT, Ms. Earnhardt served as President of Boston Scientific’s Cardiac Surgery division (formerly known
as Guidant Corporation, or Guidant) from June 2006 to January 2008 until its sale to Getinge Group. From August
1996 to April 2006, Ms. Earnhardt worked at Guidant in a variety of sales and marketing leadership positions. Ms.
Earnhardt served on the board of directors of Kensey Nash, a publicly traded company from 2011 until it was
acquired by Royal DSM NA in 2012, where she served on the board’s nominating and governance and audit
committees. Ms. Earnhardt holds an M.B.A. from Northwestern’s Kellogg School of Management and a B.S. in
Industrial Engineering from Stanford University. We believe that Ms. Earnhardt is qualified to serve on our board of
directors due to her experience in the medical device industry.
Frank Fischer has served on our board of directors since October 2012. Mr. Fischer joined NeuroPace, Inc., a
privately held developer of treatment devices for neurological disorders, in 2000 and currently serves as its President
and Chief Executive Officer. From May 1998 to September 1999, Mr. Fischer was President, Chief Executive
Officer and a director of Heartport, Inc., a formerly publicly traded cardiac surgery company (later acquired by
Johnson & Johnson in 2001). From 1987 to 1997, Mr. Fischer served as President and Chief Executive Officer of
Ventritex, Inc., a publicly traded designer, developer, manufacturer and marketer of implantable defibrillators and
related products for the treatment of ventricular tachycardia and ventricular fibrillation, which was acquired by
St. Jude Medical in 1997. Mr. Fischer currently serves on the board of directors of several privately held companies.
Mr. Fischer received a B.S. in Mechanical Engineering and a M.S. in Management from Rensselaer Polytechnic
Institute. We believe that Mr. Fischer is qualified to serve on our board of directors due to his operational experience
in the life science industry.
Wilfred E. Jaeger, M.D. has served on our board of directors since January 2012. Dr. Jaeger cofounded
Three Arch Partners in 1993 and has served as a Partner and Managing Member since that time. Prior to co-
founding Three Arch Partners, Dr. Jaeger was a general partner at Schroder Ventures. Dr. Jaeger currently serves on
the board of directors of Concert Pharmaceuticals, Inc., a public clinical stage biopharmaceutical company,
Threshold Pharmaceuticals, Inc., a public pharmaceutical company, as well as numerous private companies.
Dr. Jaeger received a B.S. in Biology from the University of British Columbia, an M.D. from the University of
British Columbia School of Medicine and an M.B.A from the Stanford Graduate School of Business. We believe
that Dr. Jaeger is qualified to serve on our board of directors due to his investment experience, strategic leadership
track record and service on other boards of directors of life sciences companies.
Shawn T McCormick has served on our board of directors since September 2014. Mr. McCormick served as
Chief Financial Officer of Tornier N.V., a public medical device company, from September 2012 to October 2015
when Tornier merged with Wright Medical Group. From April 2011 to February 2012, Mr. McCormick was Chief
Operating Officer of Lutonix, Inc., a medical device company acquired by C. R. Bard, Inc. in December 2011. From
January 2009 to July 2010, Mr. McCormick served as Senior Vice President and Chief Financial Officer of ev3 Inc.,
a public endovascular device company acquired by Covidien plc in July 2010. From May 2008 to January 2009,
Mr. McCormick served as Vice President, Corporate Development at Medtronic, Inc., a public medical device
company, where he was responsible for leading Medtronic’s worldwide business development activities. From 2007
to 2008, Mr. McCormick served as Vice President, Corporate Technology and New Ventures of Medtronic. From
2002 to 2007, Mr. McCormick was Vice President, Finance for Medtronic’s Spinal, Biologics and Navigation
business. Prior to that, Mr. McCormick held various other positions with Medtronic, including Corporate
116
Development Director, Principal Corporate Development Associate, Manager, Financial Analysis, Senior Financial
Analyst and Senior Auditor. Prior to joining Medtronic, he spent four years with the public accounting firm KPMG
Peat Marwick. He has been a director of Entellus Medical, Inc., a public medical device company, since November
2014, and serves as the chairman of the audit committee and as a member of the nominating and corporate
governance committee. Mr. McCormick has been a director of SurModics, Inc., a public medical device and in vitro
diagnostic technologies company, since December 2015 and serves on the audit committee and corporate
governance and nominating committee. Mr. McCormick earned his M.B.A. from the University of Minnesota’s
Carlson School of Management and his B.S. in Accounting from Arizona State University. He is a Certified Public
Accountant (inactive license). We believe that Mr. McCormick is qualified to serve on our board of directors due to
his financial expertise and operational experience in the medical device industry.
Brad Vale, Ph.D., D.V.M., has served on our board of directors since March 2015. Dr. Vale was Head of
Johnson & Johnson Development Company, or JJDC, from January 2012 to March 2015. Dr. Vale joined JJDC in
March 1992, and in April 2008, was appointed to the position of Vice President, Head of Venture Investments. From
September 1989 to March 1992, Dr. Vale supported Johnson & Johnson’s medical device businesses at the
Corporate Office of Science and Technology as an Executive Director. From 1982 to 1989, he was at Ethicon, Inc.,
a Johnson & Johnson subsidiary, working on preclinical studies, new business development, and a coronary artery
bypass graft internal venture. Dr. Vale currently serves or has served on the board of directors of several private
companies. Dr. Vale holds a Ph.D. from Iowa State University, a D.V.M. from Washington State University and a
B.S. in Chemistry and Biology from Beloit College. We believe that Dr. Vale is qualified to serve on our board of
directors due to his investment experience and strategic leadership in the life sciences industry.
The remaining information required by this Item 10 is hereby incorporated by reference from the information
under the captions “Corporate Governance” and “Section 16(a) Beneficial Ownership Reporting Compliance” that
will be contained in the Proxy Statement for our 2017 Annual Meeting of Stockholders (or the Proxy Statement).
We have adopted a written code of conduct and ethics that applies to our principal executive officer, principal
financial officer, principal accounting officer or controller, or persons serving similar functions. The text of our code
of business conduct and ethics has been posted on our website at http://www.nevro.com.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is incorporated by reference from the information under the captions
“Director Compensation,” “Executive Compensation” and “Corporate Governance” that will be contained in the
Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this Item 12 is incorporated by reference from the information under the captions
“Equity Compensation Plan Information” and “Security Ownership of Certain Beneficial Owners and Management”
that will be contained in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information required by this Item 13 is incorporated by reference from the information under the captions
“Certain Relationships and Related Transactions” and “Corporate Governance” that will be contained in the Proxy
Statement.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item 14 is incorporated by reference from the information under the caption
“Ratification of Appointment of Independent Registered Public Accounting Firm” that will be contained in the
Proxy Statement.
117
ITEM 15. EXHIBITS and FINANCIAL STATEMENT SCHEDULES
(a)The following documents are filed as part of this Annual Report:
PART IV
1.
Consolidated Financial Statements:
Reference is made to the Index to consolidated financial statements of Nevro Corp. under Item 8 of Part II hereof.
2.
Financial Statement Schedule:
All schedules are omitted because they are not applicable or the amounts are immaterial or the required information
is presented in the consolidated financial statements and notes thereto in Part II, Item 8 above.
3.
Exhibits
See Exhibit Index immediately following the signature page of this Form 10-K.
ITEM 16. FORM 10-K SUMMARY
None.
118
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
February 23, 2017:
NEVRO CORP.
By:
/s/ Rami Elghandour
Rami Elghandour
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and
appoints each of Rami Elghandour and Andrew H. Galligan his or her true and lawful attorney-in-fact and agent,
with full power of substitution, for him or her and in his or her name, place and stead, in any and all capacities, to
sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person,
hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitutes or substitute, may lawfully
do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, each of the undersigned has executed this Power of Attorney as of the date indicated
opposite his/her name.
Pursuant to the requirements of the Securities Act, this report has been signed by the following persons in the
capacities and on the dates indicated.
Signature
/s/ RAMI ELGHANDOUR
Rami Elghandour
/s/ ANDREW H. GALLIGAN
Andrew H. Galligan
/s/ MICHAEL DEMANE
Michael DeMane
/s/ ALI BEHBAHANI
Ali Behbahani, M.D.
/s/ LISA EARNHARDT
Lisa Earnhardt
/s/ FRANK FISCHER
Frank Fischer
/s/ WILFRED E. JAEGER
Wilfred E. Jaeger, M.D.
/s/ SHAWN T MCCORMICK
Shawn T McCormick
/s/ BRAD H. VALE
Brad H. Vale, Ph.D., D.V.M
Title
Chief Executive Officer
(Principal Executive Officer)
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Date
February 23, 2017
February 23, 2017
Chairman of the Board
February 23, 2017
Director
February 23, 2017
Director
February 23, 2017
Director
February 23, 2017
Director
February 23, 2017
Director
February 23, 2017
Director
February 23, 2017
119
Exhibit Index
Incorporated
by
Reference
Form
Exhibit Description
Date
Number
Filed Herewith
Amended and Restated Certificate of Incorporation
of Nevro Corp.
8-K
11/12/2014
3.1
Exhibit
Number
3.1
3.2
Amended and Restated Bylaws of Nevro Corp.
8-K
11/12/2014
3.1
4.1
Reference is made to exhibits 3.1 and 3.2.
4.2
Form of Common Stock Certificate.
S-1/A
10/27/2014
4.3
4.4
Indenture, dated as of June 13, 2016, by and
between the Company and Wilmington Trust,
National Association.
First Supplemental Indenture, dated as of June 13,
2016, by and between the Company and
Wilmington Trust, National Association.
8-K
6/13/2016
4.2
4.1
8-K
6/13/2016
4.2
4.5
Form of 1.75% Convertible Senior Note Due 2021.
8-K
6/13/2016
4.3
10.1†
Amended and Restated License Agreement, dated
October 2, 2006, by and among the Company and
Mayo Foundation for Medical Education and
Research, Venturi Group, LLC.
S-1/A
10/15/2014
10.1
10.2(a)† Stellar Manufacturing Agreement, dated as of
S-1/A
10/15/2014 10.2(a)
July 1, 2009, by and between the Company and
Stellar Technologies, Inc.
10.2(b)† First Amendment to Stellar Manufacturing
S-1/A
10/15/2014 10.2(b)
Agreement, dated as of July 1, 2014, by and
between the Company and Stellar
Technologies, Inc.
10.2(c)† Second Amendment to Stellar Manufacturing
10-K
2/29/2016
10.2(c)
Agreement, dated as of January 28, 2016, by and
between the Company and Stellar Technologies,
Inc.
10.3†
Supply Agreement, dated as of July 23, 2014 by and
between the Company and Pro-Tech Design and
Manufacturing, Inc.
S-1/A
10/15/2014
10.3
10.4(a)† Supply Agreement, dated April 1, 2012, by and
S-1/A
10/15/2014 10.4(a)
between the Company and CCC del Uruguay S.A.
10.4(b)† Amendment to Supply Agreement, dated as of
S-1/A
10/15/2014 10.4(b)
March 20, 2013, by and between the Company and
CCC del Uruguay S.A.
10.5(a)† Product Supply and Development Agreement, dated
as of April 15, 2009, by and between the Company
and EaglePicher Medical Power LLC.
S-1/A
10/15/2014
10.5
10.5(b)† First Amendment to the Product Supply and
10-K
3/18/2015
10.5(b)
Development Agreement, dated as of March 4,
2015, by and between the Company and
120
Exhibit
Number
Exhibit Description
EaglePicher Medical Power LLC.
Incorporated
by
Reference
Form
Date
Number
Filed Herewith
10.5(c)† Second Amendment to the Product Supply and
10-K
2/29/2016 10.5(c)
Development Agreement, dated as of October 23,
2015, by and between the Company and
EaglePicher Medical Power LLC.
10.6(a)
Amended and Restated Registration Rights
Agreement, dated February 8, 2013, by and among
the Company and the investors listed therein.
10.6(b)
10.6(c)
Amendment to Amended and Restated Registration
Rights Agreement, dated March 5, 2013, by and
among the Company and the investors listed
therein.
Second Amendment to Amended and Restated
Registration Rights Agreement, dated October 24,
2014, by and among the Company and the investors
listed therein.
10.7(a)
Multi-Tenant Space Lease, dated as of March 15,
2010, by and between Deerfield Campbell LLC and
the Company.
10.7(b)
First Amendment to Lease, dated as of October 18,
2012, by and between Deerfield Campbell LLC and
the Company.
10.7(c)
Second Amendment to Lease, dated as of
February 18, 2015, by and between Deerfield
Campbell LLC and the Company.
S-1
10/03/2014 10.6(a)
S-1
10/03/2014 10.6(b)
S-1/A
11/04/14
10.6(c)
S-1
10/03/2014 10.7(a)
S-1
10/03/2014 10.7(b)
10-K
3/18/2015
10.7(c)
10.8(a)# Nevro Corp. 2007 Stock Incentive Plan, as amended
S-1
10/03/2014 10.8(a)
as of March 5, 2013.
10.8(b)# Form of Incentive Stock Option Agreement (ISO)
under the 2007 Stock Incentive Plan, as amended.
S-1
10/03/2014 10.8(b)
10.8(c)# Form of Non-Incentive Stock Option Agreement
S-1
10/03/2014 10.8(c)
(NSO) under the 2007 Stock Incentive Plan, as
amended.
10.8(d)# Form of Stock Purchase Right Grant Notice and
Restricted Stock Purchase Agreement under the
2007 Stock Incentive Plan, as amended.
S-1
10/03/2014 10.8(d)
10.9(a)# Nevro Corp. 2014 Equity Incentive Award Plan.
S-8
11/12/2014 99.2(a)
10.9(b)# Form of Stock Option Grant Notice and Stock
S-1/A
10/10/2014 10.9(b)
Option Agreement under the 2014 Equity Incentive
Award Plan.
10.9(c)# Form of Restricted Stock Award Agreement and
Restricted Stock Award Grant Notice under the
2014 Equity Incentive Award Plan.
S-1/A
10/10/2014 10.9(c)
10.9(d)# Form of Restricted Stock Unit Award Agreement
S-1/A
10/10/2014 10.9(d)
121
Exhibit
Number
Exhibit Description
and Restricted Stock Unit Award Grant Notice
under the 2014 Equity Incentive Award Plan.
Incorporated
by
Reference
Form
Date
Number
Filed Herewith
10.10#
Nevro Corp. 2014 Employee Stock Purchase Plan.
S-8
11/12/2014
99.3
10.11#
Form of Indemnification Agreement for directors
and officers.
S-1/A
10/10/2014 10.11
10.12(a)# Offer Letter, dated as of March 8, 2011, by and
S-1/A
10/10/2014 10.12(a)
between Michael DeMane and the Company.
10.12(b)# Form of Employment Agreement by and between
Michael DeMane and the Company.
S-1/A
10/10/2014 10.12(b)
10.12(c)# Amendment to Employment Agreement, effective
10-Q
5/6/2016
10.2
as of June 1, 2016, by and between Michael
DeMane and the Company.
10.13#
Offer Letter, dated as of October 9, 2012, by and
between Rami Elghandour and the Company.
S-1
10/03/2014 10.13
10.13(b)# Employment Agreement, effective as of June 1,
2016, by and between Rami Elghandour and the
Company.
10.14#
Offer Letter, dated as of May 12, 2010, by and
between Andrew H. Galligan and the Company.
10-Q
5/6/2016
10.3
S-1
10/03/2014 10.14
10.15#
Offer Letter, dated as of November 1, 2012, by and
between Michael Enxing and the Company.
S-1/A
10/10/2014 10.15
10.16#
General Release and Separation and Transition
Agreement, effective as of August 3, 2016, by and
between Andre Walker and the Company.
10-Q
8/8/2016
10.13
10.18(a) Amended and Restated Stockholders’ Agreement,
S-1
10/03/2014 10.15(a)
dated February 8, 2013, by and among the
Company and the stockholders listed therein.
10.18(b) Amendment to Amended and Restated
S-1
10/03/2014 10.15(b)
Stockholders’ Agreement, dated March 5, 2013, by
and among the Company and the stockholders listed
therein.
10.18(c) Second Amendment to Amended and Restated
S-1/A
11/04/14
10.18(c)
Stockholders’ Agreement, dated October 24, 2014,
by and among the Company and the investors listed
therein.
10.19#
Nevro Corp. Non-Employee Director Compensation
Program.
S-1/A
10/10/2014 10.19
10.20(a)# Form of Amended and Restated Change in Control
Severance Agreement for certain executive officers.
10-Q
5/9/2016
10.4
10.20(b)# Amended and Restated Change in Control
10-Q
8/8/2016
10.14
Severance Agreement, dated as of May 5, 2016, by
and between Andrew Galligan and the Company.
122
Exhibit
Number
Exhibit Description
Incorporated
by
Reference
Form
Date
Number
Filed Herewith
10.20(c)# Amended and Restated Change in Control
10-Q
8/8/2016
10.15
Severance Agreement, dated as of May 5, 2016, by
and between Doug Alleavitch and the Company.
10.20(d)# Amended and Restated Change in Control
10-Q
8/8/2016
10.16
Severance Agreement, dated as of May 5, 2016, by
and between Andre Walker and the Company.
10.20(e)# Amended and Restated Change in Control
10-Q
11/7/2016
10.2
Severance Agreement, dated as of May 5, 2016, by
and between Michael Enxing and the Company.
10.21(a) Term Loan Agreement, dated October 24, 2014, by
S-1/A
10/27/2014 10.21
and between the Company and Capital Royalty
Partners II L.P.
10.21(b) First Amendment to Term Loan Agreement, dated
as of March 9, 2015, by and between the Company
and Capital Royalty Partners II L.P.
10.21(c) Second Amendment to Term Loan Agreement,
dated as of June 29, 2015, by and between the
Company and Capital Royalty Partners II L.P.
10.22(a)† Supply Agreement, dated March 13, 2015, by and
between the Company and Centro de Construccion
de Cardioestimuladores del Uruguay S.A.
10.22(b)* Supply Agreement, effective as of November 11,
2016, by and between the Company and Centro de
Construccion de Cardioestimuladores del Uruguay
S.A.
10.23(a) Lease Agreement, dated as of March 5, 2015, by
and between the Company and Westport Office
Park, LLC.
10.23(b) First Amendment to Lease, effective as of
December 9, 2016, by and between the Company
and Westport Office Park, LLC
10.24#
Offer Letter, dated as of March 30, 2015, by and
between the Company and Doug Alleavitch
10.25†* Manufacturing and Supply Agreement, dated as of
December 18, 2015, by and between the Company
and Vention Medical Design and Development, Inc.
10.26
10.27
Letter Agreement, dated June 7, 2016, between
Morgan Stanley & Co. International plc and the
Company, regarding the Base Warrants.
Letter Agreement, dated June 7, 2016, between
Bank of America, N.A. and the Company, regarding
the Base Warrants.
10-K
3/18/2015 10.21(b)
10-Q
8/6/2015
10.2
10-K/A
5/29/2015
10.22
10-K
3/18/2015
10.23
8-K
4/9/2015
10.1
10-K
2/29/2016 10.25
8-K
6/13/2016
10.1
8-K
6/13/2016
10.2
X
X
123
Exhibit
Number
10.28
10.29
10.30
10.31
10.32
10.33
10.34
10.35
10.36
10.37
Exhibit Description
Letter Agreement, dated June 7, 2016, between
Goldman, Sachs & Co. and the Company, regarding
the Base Warrants.
Letter Agreement, dated June 7, 2016, between
Morgan Stanley & Co. International plc and the
Company, regarding the Base Call Option
Transaction.
Letter Agreement, dated June 7, 2016, between
Bank of America, N.A. and the Company, regarding
the Base Call Option Transaction.
Letter Agreement, dated June 7, 2016, between
Goldman, Sachs & Co. and the Company, regarding
the Base Call Option Transaction.
Letter Agreement, dated June 8, 2016, between
Morgan Stanley & Co. International plc and the
Company, regarding the Additional Warrants.
Letter Agreement, dated June 8, 2016, between
Bank of America, N.A. and the Company, regarding
the Additional Warrants.
Letter Agreement, dated June 8, 2016, between
Goldman, Sachs & Co. and the Company, regarding
the Additional Warrants.
Letter Agreement, dated June 8, 2016, between
Morgan Stanley & Co. International plc and the
Company, regarding the Additional Call Option
Transaction.
Letter Agreement, dated June 8, 2016, between
Bank of America, N.A. and the Company, regarding
the Additional Call Option Transaction.
Letter Agreement, dated June 8, 2016, between
Goldman, Sachs & Co. and the Company, regarding
the Additional Call Option Transaction.
21.1
List of Subsidiaries.
23.1
24.1
31.1
31.2
Consent of Independent Registered Public
Accounting Firm.
Power of Attorney (included on signature page to
this Annual Report on Form 10-K).
Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**
Certification of Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S.C. Section
124
Incorporated
by
Reference
Form
Date
Number
Filed Herewith
8-K
6/13/2016
10.3
8-K
6/13/2016
10.4
8-K
6/13/2016
10.5
8-K
6/13/2016
10.6
8-K
6/13/2016
10.7
8-K
6/13/2016
10.8
8-K
6/13/2016
10.9
8-K
6/13/2016 10.10
8-K
6/13/2016 10.11
8-K
6/13/2016 10.12
X
X
X
X
X
X
Exhibit
Number
Exhibit Description
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
101.INS
XBRL Instance.
101.SCH XBRL Taxonomy Extension Schema.
101.CAL XBRL Taxonomy Extension Calculation Linkbase.
101.LAB XBRL Taxonomy Extension Label Linkbase.
101.PRE
XBRL Taxonomy Extension Presentation Linkbase.
101.DEF
XBRL Taxonomy Extension Definition Linkbase.
Incorporated
by
Reference
Form
Date
Number
Filed Herewith
X
X
X
X
X
X
†
#
*
Confidential treatment has been granted for certain information contained in this exhibit. Such information
has been omitted and filed separately with the Securities and Exchange Commission.
Indicates management contract or compensatory plan.
Portions of this exhibit (indicated by asterisks) have been omitted pursuant to a request for confidential
treatment and this exhibit has been filed separately with the Securities and Exchange Commission.
** The certification attached as Exhibit 32.1 that accompanies this Form 10-K is not deemed filed with the
Securities and Exchange Commission and is not to be incorporated by reference into any filing of Nevro Corp.
under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether
made before or after the date of this Form 10-K, irrespective of any general incorporation language contained
in such filing.
125
[***] Certain information has been omitted and filed separately with the Securities and Exchange
Commission. Confidential treatment has been requested with respect to the omitted portions.
Exhibit 10.22(b)
SUPPLY AGREEMENT
CONFIDENTIAL
by
This SUPPLY AGREEMENT (the “Agreement”) is effective as of November 11, 2016 (the
“Effective Date”),
between CENTRO DE CONSTRUCCION DE
CARDIOESTIMULADORES DEL URUGUAY S.A., a Uruguay corporation having its
principal place of business at General Paz 1371, Montevideo, Uruguay, CP 11400 (“CCC”), and
NEVRO CORP., a Delaware corporation having its principal place of business at 1800 Bridge
Parkway, Redwood, City, California 94065 (“Nevro”).
and
1.
DEFINITIONS
Defined terms used in this Agreement shall have the meanings as defined in the text of
the Agreement or as set forth in this Article 1:
1.1
“Affiliate” shall mean any other entity that directly or indirectly, through one or
more intermediaries, controls, is controlled by or is under common control with the first entity,
including, but not limited to, other entities which become Affiliates after the date of execution of
this Agreement. “Control” of an entity shall mean ownership of 50 percent or more of the total
voting securities or other voting interests of the entity.
1.2
“Applicable Law” shall mean all laws, statutes, ordinances, codes, rules, and
regulations that have been enacted by a Governmental Authority and are in force as of the
Effective Date or come into force during the Term, in each case to the extent applicable to the
performance by the parties of their respective obligations under this Agreement.
1.3
“Approved Manufacturer List” shall mean the approved list of vendors in the
Specifications for the supply of Components.
1.4
“Bill of Materials” shall mean the listing or reference for the Components
included in or required for the manufacture of each Product in accordance with the
Specifications, which Bill of Materials is set forth on Exhibit F (as such exhibit is updated in
accordance with Section 4.1).
1.5
“Change of Control” with respect to a Party means a transaction pursuant to
which an entity acquires all or substantially all of the assets of such Party related to this
Agreement or acquires “control” of such Party, where “control” means: (i) ownership, directly or
indirectly, of more than (a) fifty percent (50%) of the outstanding voting shares of such Party, or
(b) fifty percent (50%) of the of the total combined voting power entitled to elect or appoint
directors or persons performing similar functions for such Party, or (ii) the power to direct or
cause the direction of the management and policies of such Party by contract or otherwise.
1.6
“Components” shall mean the parts, materials and supplies included in or
required for each Product as stipulated in the Bill of Materials.
1.7
“Confidential Information” shall mean any and all confidential or proprietary
business, technical, scientific and other know-how and information, including, but not limited to,
1
CONFIDENTIAL
technology, means, methods, processes, practices, formulas,
trade secrets, knowledge,
instructions, skills, techniques, procedures, specifications, data, results and other material,
manufacturing procedures, test procedures, and any tangible embodiments of any of the
foregoing, and any scientific, manufacturing, marketing and business plans, any financial and
personnel matters relating to a party or its present or future products, sales, suppliers, customers,
employees, investors or business, that have been disclosed by or on behalf of such party to the
other party in connection with this Agreement. The terms of this Agreement shall be deemed the
Confidential Information of both parties.
1.8
“Consigned Components” shall mean any Components designated as
“Consigned Components” on the Bill of Materials.
1.9
“Contract Year” means each calendar year during the Term, except that Contract
Year 1 commences on the Effective Date and ends on December 31, 2016 and Contract Year 11
commences on January 1, 2026 and ends on the date that is ten (10) years after the Effective
Date.
1.10
“Defect” or “Defective” shall mean a defect caused by a breach of a warranty in
Section 10.3.
1.11 “Epidemic Failure” has the meaning specified in Section 8.5.
1.12 “Equipment” shall mean any and all equipment installed at the Manufacturing
Facility and used to manufacture the Products.
1.13
“FDA” means the United States Food and Drug Administration, or any successor
entity thereto.
1.14
“Forecast” has the meaning specified in Section 2.1.
1.15
“Good Manufacturing Practice” or “GMP” shall mean compliance with the
most recent version of ISO13485 and the Quality System Regulations 21 CFR Part 820.
1.16
“Governmental Authority” shall mean any supranational, national, regional,
state or local government, court, governmental agency, authority, board, bureau, instrumentality,
or regulatory body, including the FDA.
1.17
“CCC IP” shall mean the Intellectual Property Rights owned or otherwise
controlled by CCC necessary for the manufacture of Products for Nevro pursuant to this
Agreement.
1.18
“Intellectual Property Right” means any patent or patent application, including
with respect to patents rights granted upon any reissue, divisional, continuation or continuation-
in-part applications, utility models issued or pending, registered and unregistered design rights,
copyright (including the copyright on software in any code), trademark, trade dress, trade secret,
know-how, or any other intellectual property right or proprietary right, whether registered or
jurisdiction.
unregistered, and whether now known or hereafter recognized
in any
2
CONFIDENTIAL
1.19
“Inventory” shall mean WIP (i.e., Components contained in partly finished
Products that are in various stages of the manufacturing process), finished Products (including,
but not limited to, Safety Stock), Product-specific, non-returnable purchased Components and
non-cancelable purchase orders for Components outstanding with CCC’s suppliers, consistent
with Section 2.3(c).
1.20
“Last Time Buy” shall mean Nevro’s option to order any quantities of Products
totaling up to the quantities equal to [***] ([***]) times the volumes of such Products contained
in the last received [***] ([***]) month Forecast, subject to the requirements set forth in this
Agreement.
1.21
“Manufacturing Facility” shall mean the CCC facility located at General Paz
1371, 11400 Montevideo, Uruguay, and any other facility approved by Nevro in accordance with
Section 5.2(b) and that has been Qualified to manufacture the Products.
1.22
“NDS Components” shall mean all Components purchased by CCC from a
Nevro Dictated Subcontractor.
1.23
“Nevro Dictated Subcontractor” shall mean the Subcontractors identified in
Attachment 1 of the Quality Agreement as “Nevro Dictated Suppliers.”
1.24
“Nevro IP” shall mean the Intellectual Property Rights owned or otherwise
controlled by Nevro, solely to the extent necessary for the manufacture of Products for Nevro
pursuant to this Agreement.
1.25
“Nevro Property” shall mean (a) any tooling, equipment or software provided by
Nevro, and (b) tooling or equipment developed or procured by CCC at Nevro’s expense but, with
respect to tooling or equipment developed or procured by CCC at Nevro’s expense after the
Effective Date, only if it has been invoiced separately from the purchase price of the Products,
and (c) CCC’s Safety Stock upon Nevro’s payment of the applicable purchase price therefor.
1.26
“Nevro System” shall mean an implantable system intended to be completely
introduced to a living body by surgical intervention to apply electrical stimulation for treatment
of chronic pain.
1.27
“Products” shall mean the products that are listed in Exhibit A attached hereto, as
well as any follow-on, modified, or improved versions of such products, or additional products,
that the parties may mutually agree in writing to be subject to this Agreement.
1.28
“Purchase Order” shall mean a written purchase order issued by Nevro for
Products.
1.29
“Qualified” shall mean that the Manufacturing Facility and Equipment have been
fully qualified by CCC to supply Nevro with such Products meeting the Specifications and
requirements of the applicable Governmental Authorities.
To remain Qualified, the
Manufacturing Facility and Equipment must (i) be maintained as specified in the Quality
Agreement and to at least the same conditions as when initially Qualified; and (ii) continue to
[***] Certain information has been omitted and filed separately with the Securities and Exchange
Commission. Confidential treatment has been requested with respect to the omitted portions.
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comply with all applicable requirements of any Governmental Authorities; in each case without
any unapproved changes.
1.30
“Quality Agreement” shall mean the quality agreement executed by the parties
and dated July 13, 2016, and any amendments thereto executed by the parties.
1.31
“Safety Stock” shall mean the level of finished Products to be maintained by
CCC, in excess of the amount required to meet Nevro’s Purchase Orders, which level is specified
in Section 2.2 below.
1.32
“Shipment Date” shall mean the shipment date from the Facility as specified in a
Purchase Order that is consistent with the Volume Acceptance Range and the applicable lead
times for such Products as set forth on Exhibit A, or another date mutually agreed by the Parties
in writing.
1.33
“Specifications” shall mean Nevro’s written specifications for the Products,
including the current revision number, Approved Manufacturer List, Bills of Materials,
manufacturing procedures, schematics, testing procedures, drawings and documentation,
including the specifications referenced on Exhibit B.
1.34
“Subcontractor” shall mean any component supplier, material supplier, service
provider, consultant, contract laboratory, contractor, or other third party supplier who provides to
CCC any product(s) or services relating to, or that could otherwise reasonably be expected to
have any effect on, the Product, including any component or service related to the warehousing,
storage or preparation of the Product.
1.35
“Tested NDS Component” has the meaning specified in Section 3.6(d).
1.36
“Validation Documentation” means the collection of all documentation
demonstrating that Product equivalence and all applicable regulatory requirements, and any other
requirements agreed by the parties, have been achieved with respect to a proposed new
Manufacturing Facility,
including master validation plans, qualification documentation
(including operational qualification documentation), performance qualification documentation
(including protocols and reports), line validation/product performance qualification protocols and
reports, and process failure modes and effects analysis documentation. The Validation
Documentation is intended to be delivered as a package and considered for approval as such.
1.37 “Volume Acceptance Range” has the meaning specified in Section 2.5.
1.38
“Warranty Period” shall mean, for each Product, the period of eighteen (18)
months immediately following the date the Product is received by Nevro.
2.
PRODUCT PURCHASE
2.1
Forecasts. Following execution of this Agreement, and on a monthly basis
thereafter, Nevro will provide CCC with a [***] ([***]) month rolling forecast of Nevro’s
expected monthly order volume for each of the Products for the forthcoming [***] ([***]) month
[***] Certain information has been omitted and filed separately with the Securities and Exchange
Commission. Confidential treatment has been requested with respect to the omitted portions.
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period (each, a “Forecast”). Nevro agrees to update the Forecast monthly. The first [***]
([***]) months of the Forecast will be considered binding (provided for clarity that no forecast
with respect to the IPG 2000 shall be binding unless and until the IPG 2000 has been approved
by Nevro in accordance with Exhibit A), and the last [***] ([***]) months of the Forecast will be
considered non-binding. If Nevro’s Purchase Orders for the [***] ([***]) month period covered
by a binding Forecast are for a quantity less than the volume of Products specified in the
Forecast for such [***] ([***]) month period (the “Shortfall”), Nevro will revise such Purchase
Orders or submit additional Purchase Orders.
2.2
In-Stock Product Minimum. CCC agrees to carry at its own cost Safety Stock
levels of each Product to accommodate Product purchases by Nevro, as calculated based on the
applicable Forecast for the period and in an amount equal to [***] ([***]) [***] worth of
expected Product orders in the applicable Forecast. CCC agrees to fulfill Purchase Orders first
from such Safety Stock inventory, and to manufacture sufficient units of the Products to maintain
the forecasted levels in the Safety Stock inventory. The Safety Stock inventory will be available
to ship to Nevro within [***] ([***]) [***] of Nevro placing a Purchase Order. If the Safety
Stock inventory drops below the [***] ([***]) [***] level at any time, CCC will promptly
replenish it within [***] ([***]) [***]. Nevro is responsible in accordance with Section 11.4 for
such Inventory that was reasonably and customarily necessary to sustain Safety Stock levels.
The parties may agree from time to time to alter the number of Product units for each Product
that need to be maintained in the Safety Stock inventory.
2.3
Component Supply.
(a)
CCC shall maintain and manage adequate Component inventory in order
to meet Nevro’s Purchase Orders. CCC shall immediately notify Nevro in the event of any
potential material delays or shortages that may impact CCC’s delivery of Products in accordance
with the applicable Forecast or Purchase Orders.
(b)
CCC may order a reasonable volume of Components above the quantities
required to satisfy Purchase Orders in order to meet Component minimum order quantities
imposed by Component suppliers.
(c)
Subject to the remainder of this Section 2.3(c), Nevro shall be responsible
for the cost/price of finished Products and Safety Stock (as such prices are set forth on Exhibit
A) and the cost of other types of Inventory purchased or manufactured by CCC under the terms
of this Agreement which becomes obsolete due to reduction in demand (i.e., which were
reasonably ordered based on a Forecast including but not limited to the Product requirements
contained in the binding portion of the Forecast and the Components ordered that were ordered
consistent with the non-binding portion of the Forecast due to long Component lead times) or
due to Change Orders (if such finished Products, Safety Stock and other Inventory were
identified by either party as becoming obsolete in such mutually agreed Change Order), provided
that CCC has made a reasonable effort to return such Inventory or cancel the applicable orders
from Subcontractors (except that this obligation on CCC to return or cancel will not apply in the
case of finished Products, Safety Stock, and WIP). In the event of such obsolescence, CCC shall
notify Nevro in writing of the applicable Inventory, which notice shall explain the reason such
[***] Certain information has been omitted and filed separately with the Securities and Exchange
Commission. Confidential treatment has been requested with respect to the omitted portions.
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Inventory became obsolete and shall include invoices and other documentation that show the
cost to CCC of such Inventory.
(d)
If Nevro engages in a process pursuant to which Nevro accepts bids from
third parties to supply Components, Nevro shall (i) notify CCC in writing of Nevro’s intent to
engage a third party with respect to such Components within a reasonable period of time prior to
the scheduled commencement of such process, (ii) provide CCC with a general written
description of Nevro’s requirements with respect to such Components, and (iii) provide CCC
with an opportunity to submit a bid to provide such Components to Nevro. Nevro shall discuss
any such submitted bid with CCC in good faith. If Nevro does not accept CCC’s bid in any such
process, Nevro shall inform CCC in reasonable detail of the reasons for such non-acceptance.
2.4
Purchase Orders. During the Term of this Agreement, Nevro shall issue
Purchase Order(s) for the order volume of each of the Products specified in the binding [***]
([***]) month portion of each Forecast. Each Purchase Order shall include at least the following:
(a) Nevro’s Purchase Order number; (b) identification of the Products ordered by Nevro; (c) the
Shipment Date; and (d) any shipping instructions, including preferred carrier and shipping
destination. Nevro and CCC agree that a Purchase Order sent to CCC by confirmed facsimile or
electronic transmission shall constitute a writing for all legal purposes. In addition, the parties
may communicate regarding Purchase Orders via mutually agreeable electronic means, such as
confirmed electronic mail.
2.5
Purchase Order Acceptance. CCC will accept all Purchase Orders that have
Shipment Dates that conform to Section 2.4 and that order volumes of Products that are within
[***] percent ([***]%) and [***] percent ([***]%) of the Forecast for the applicable period (the
“Volume Acceptance Range”). CCC will, within five (5) business days after receipt of a
Purchase Order, notify Nevro of acceptance of such Purchase Order or will indicate the
Shipment Dates that do not comply with Section 2.4 or the order volumes that are not within the
Volume Acceptance Range. Nothing contained in any Nevro Purchase Order or CCC Purchase
Order acknowledgement shall modify the terms of purchase or add any additional or different
terms or conditions except as otherwise specifically agreed in writing by the parties and any pre-
printed or similar terms or conditions that may be incorporated in such Nevro Purchase Order or
CCC Purchase Order acknowledgement are hereby rejected.
2.6
Revision of Purchase Orders. In the event that Nevro cancels a Purchase Order
inside the standard lead time for a Product as set forth on Exhibit A, then Nevro will be
responsible for all finished Product, WIP, raw material, components and any non-cancelable
purchase orders outstanding with suppliers directly related to the cancelled Purchase Order. In
the event that Nevro cancels a Purchase Order outside of the standard lead time for a Product,
Nevro and CCC will negotiate the resulting costs. Nevro may change an accepted Purchase
Order only if agreed upon in writing by CCC, but CCC shall use its commercially reasonable
efforts to accommodate increases, decreases or reschedules of the quantities in a Purchase Order
requested by Nevro. Any additional costs of such change approved by Nevro prior to the
implementation of such change will be borne by Nevro.
[***] Certain information has been omitted and filed separately with the Securities and Exchange
Commission. Confidential treatment has been requested with respect to the omitted portions.
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2.7 Minimum Purchase Thresholds. During the Term, and subject to the terms and
conditions of this Agreement, Nevro will satisfy the minimum purchase thresholds as defined in
Exhibit A (such obligations, the “Minimum Purchase Thresholds”).
2.8
Reduction of Minimum Purchase Thresholds. If during the Term of this
Agreement with respect to any Product, for any reason: (a) CCC fails to supply non-Defective
Products in accordance with this Agreement with respect to at least [***] percent ([***]%) of the
amount of the Product scheduled on a Purchase Order accepted in accordance with Section 2.5 (a
“Purchase Order Failure”); or (b) [***] percent ([***]%) or more of a shipment of the Product
delivered by CCC does not meet the applicable Specifications (a “Defect Failure”); or (c) such
Product is subject to an Epidemic Failure; then (i) Nevro may require CCC to increase Safety
Stock inventory specified in Section 2.2 up to [***] ([***]) [***] worth of expected Product
orders, and (ii) the Minimum Purchase Thresholds for the year or years in which such events
occur will be [***] in connection with a Purchase Order Failure or the [***] affected by a Defect
Failure or Epidemic Failure. In addition, in the case of an extended interruption of supply of
sixty (60) consecutive days or more, CCC and Nevro agree to negotiate in good faith further
reductions in the Minimum Purchase Thresholds until such time as CCC is in a position to satisfy
future Purchase Orders.
3.
SUPPLY
3.1
Delivery. Delivery of all Products shall be made EXW (Incoterms 2010)
Manufacturing Facility. Title to and risk of loss for the Products shall pass to Nevro at the
delivery point. Nevro shall be responsible for paying freight, handling, shipping and insurance
charges that it approves in writing in advance for shipments to destinations requested by Nevro.
CCC shall deliver the Products to Nevro on or before the applicable Shipment Date and in
accordance with the shipping instructions in the applicable Purchase Order, including the ship-to
address, carrier and means of transportation or routing. Nevro may return any unauthorized
over-shipment or any portions thereof, at CCC’s expense and without charge to Nevro. If Nevro
fails to provide shipping instructions, CCC will make the selection of carrier on a commercially
reasonable basis.
3.2
Notification of Delay. Without limiting Nevro’s rights and remedies under this
Agreement, if circumstances arise that prevent CCC from making the Products available on the
Shipment Date, CCC shall (i) immediately notify Nevro of the nature of the problem, the
methods taken to overcome the problem and the estimated time of delay, and (ii) expedite
shipment of such Products when the problem is overcome.
3.3
Product Quality. CCC shall test and inspect all Products before shipment for
compliance with the Specifications, all Applicable Laws, and the Quality Agreement and shall
provide to Nevro written certification that each Product shipped was manufactured in compliance
with the foregoing. In addition, CCC shall comply with its obligations under the Quality
Agreement and Good Manufacturing Practice with respect to all Manufacturing Facilities and the
manufacture of the Products. Upon receipt of each shipment of Products, Nevro, or a third party
designated by Nevro, may test and inspect such Products for compliance with the foregoing.
[***] Certain information has been omitted and filed separately with the Securities and Exchange
Commission. Confidential treatment has been requested with respect to the omitted portions.
7
3.4
Rejection. Nevro must conduct any incoming inspection tests not later than 45
days from the date of its receipt of the Products. Products not rejected by Nevro by written notice
to CCC within such period will be deemed accepted, with the exception of Products with defects
that are not readily observable by Nevro. Any Defective Products may be returned to CCC in
accordance with Section 10.3(b). For clarity, nothing in this Section 3.4 modifies or otherwise
affects Nevro’s rights and remedies under Section 10 with respect to any Products.
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3.5
Consigned Components.
(a)
In the event that Nevro supplies certain Consigned Components to CCC,
such Consigned Components shall be delivered to CCC in sufficient time and in sufficient
quantities based on Purchase Orders and in accordance with this Agreement, including normal
yield levels, to allow CCC to meet scheduled Shipment Dates for the applicable Products. All
Consigned Components shall be in good condition and in good working order. Nevro assumes
complete liability for the quality of all Consigned Components and CCC shall not be responsible
for any Defects or deficiencies therein. CCC shall, upon receipt of the Consigned Components,
perform all necessary inspections of the Consigned Components, in accordance with its standard
procedures and shall notify Nevro in writing, not later than twenty (20) Days from the date of
receipt of the Consigned Components, of any Defects found or of any discrepancy in quantities.
CCC reserves the right, after receipt of the Consigned Components, to timely inform Nevro of
additional Defects which may be discovered or revealed by further inspection by or through the
manufacturing process that could not be discovered at incoming inspection by CCC.
(b)
CCC will provide Nevro with a written statement of the Consigned
Components used by CCC at the end of each calendar month.
3.6
Subcontractors.
(a)
Use of Subcontractors. CCC will not use any Affiliate or Subcontractor
for any supply of Components or services related to the Product without the prior written consent
of Nevro. If Nevro consents to the use of an Affiliate or Subcontractor, Nevro may specify
change control procedures applicable to the provision of services by such Affiliate or
Subcontractor in addition to the terms of Section 5.
(b)
Except
Verification of Subcontractors.
for Nevro Dictated
Subcontractors, CCC shall establish and maintain written requirements, including quality
requirements, for evaluating, selecting, and assessing any Subcontractors and shall ensure that
each Subcontractor is qualified and able to provide the product(s) or service(s) (including
Components) required to perform its required tasks or services in accordance with the
Specifications, all Applicable Laws, and this Agreement. CCC shall establish and maintain
appropriate quality requirements to ensure the performance of Subcontractors (other than Nevro
Dictated Subcontractors) in accordance with the terms and conditions of this Agreement,
Applicable Laws, CCC’s standard operating procedures, and, if any, Nevro’s written
instructions. CCC shall use commercially reasonable efforts to ensure Nevro has the right to
audit CCC’s Subcontractors to assure compliance with this Agreement and any regulatory
requirements, and CCC shall include such right for Nevro to conduct such audits (including the
right to access facilities and records) in any applicable contract CCC has with a Subcontractor.
8
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(c)
Liability for Subcontractors. CCC shall be responsible for keeping all
Subcontractors adequately informed and ensuring that the correct design, production, or process
controls are applied to Subcontractor as applicable to ensure that the Product, including any
Component therein, conforms to the Specifications. With the exception of Nevro Dictated
Subcontractors, CCC is responsible for the acts and omissions of any Subcontractor as if those
acts and omissions had been carried out by CCC.
(d)
Nevro Dictated Subcontractors. In the event that a Nevro Dictated
Subcontractor supplies NDS Components to CCC, CCC shall (i) conduct inspection and
acceptance testing on such NDS Components in accordance with section 7.16 and Attachment 2
of the Quality Agreement (“NDS Component Testing”), (ii) use in the manufacture of Products
only NDS Components that have passed the properly conducted NDS Component Testing (each,
a “Tested NDS Component”), (iii) notify Nevro of any NDS Components that fail the NDS
Component Testing within thirty (30) days after such failure, (iv) use commercially reasonable
efforts to cause such Nevro Dictated Subcontractor to deliver such NDS Components in
sufficient time and in sufficient quantities based on Purchase Orders and in accordance with this
Agreement to allow CCC to meet scheduled Shipment Dates for the applicable Products, and (v)
notify Nevro in writing within five (5) business days of any shipment delay, NDS Component
quality issue or other business or performance concern with respect to any Nevro Dictated
Subcontractor (each, an “NDS Component Subcontractor Issue”), which writing shall describe
in detail the NDS Component Subcontractor Issue and any actions CCC has taken with respect to
such issue. Subject to and without limiting CCC’s obligations set forth immediately above, (i)
Nevro will be responsible for qualifying, monitoring, and managing all Nevro Dictated
Subcontractors in accordance with Nevro’s internal procedures, (ii) except as set forth herein,
CCC shall not be responsible for the quality of NDS Components that have passed properly
conducted NDS Component Testing in accordance with the Quality Agreement and CCC shall
not be responsible for costs related to or arising from defects or deficiencies in any NDS
Components that have passed properly conducted NDS Component Testing in accordance with
the Quality Agreement, including, without limitation, costs and expenses related to the repair or
replacement (including shipping and handling expenses) of any Defective Products that are
Defective due to such defective or deficient NDS Components that have passed properly
conducted NDS Component Testing in accordance with the Quality Agreement, provided that in
each case that any such defect or deficiency could not have reasonably been discovered during
NDS Component Testing and was not caused by CCC in its handling of such NDS Component
or during the manufacturing process, (iii) without limiting CCC’s obligation to properly test
NDS Components, CCC reserves the right, after receipt of the NDS Components, to timely
inform Nevro of additional defects which may be discovered or revealed by further inspection by
or through the manufacturing process that could not be reasonably discovered during NDS
Component Testing, (iv) upon receipt of a notice of an NDS Component Subcontractor Issue,
Nevro will work with CCC and use reasonable efforts to cause such Nevro Dictated
Subcontractor to deliver non-defective NDS Components in sufficient time and in sufficient
quantities based on Purchase Orders and in accordance with this Agreement, including normal
yield levels, to allow CCC to meet scheduled Shipment Dates for the applicable Products and (v)
failure or delay of CCC to perform fully any of its obligations under this Agreement caused by
defects or deficiencies in any NDS Component that has passed properly conducted NDS
Component Testing (which defects or deficiencies could not have reasonably been discovered
during NDS Component Testing and were not caused by CCC in its handling of such NDS
9
Component or during the manufacturing process) or the non-performance or delay of a Nevro
Dictated Subcontractor in delivering non-defective NDS Components will be deemed not to be a
breach of this Agreement if such NDS Components or the Nevro Dictated Subcontractor’s non-
performance or delay were the primary cause of CCC’s failure or delay to fully perform such
obligations.
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4.
PRICE; PAYMENT
4.1
Product Purchase Price. Nevro shall pay to CCC the prices for the Products set
forth in Exhibit A attached hereto. Notwithstanding the preceding sentence, (a) subject to clause
(b) of this Section 4.1, if there is a net increase or decrease of $[***] or more in the [***] a
Product ([***]), which increase or decrease shall be [***]), then a corresponding change equal to
[***] percent ([***]%) of the documented amount of such increase or decrease will be made to
the price of the applicable Product. The parties shall meet at least twice per Contract Year to
calculate the amount of any such increase or decrease and, if any increase or decrease in the
Product price is made as a result of any such meeting, the parties shall update the [***] after
such meeting to reflect the change in the [***] such increase or decrease. CCC shall provide to
Nevro documentation [***] such increase or decrease. All Purchase Orders for Products issued
by Nevro after the parties' agreement regarding the amount of such increase or decrease shall
reflect the adjusted Product price. For clarity, Nevro shall [***] with respect to [***].
4.2
Invoices; Payments. CCC shall invoice Nevro for the Products on or after the
date on which CCC ships the Product to Nevro. All such invoices shall be submitted by CCC to
Nevro via email. Nevro shall pay all undisputed amounts within thirty (30) days following
Nevro’s receipt of CCC’s invoice. All payments under this Agreement shall be in U.S. dollars.
All amounts referenced in or to be paid under this Agreement, exclude taxes, customs, shipping,
insurance and duties. CCC agrees to notify Nevro of any past due amounts and reserves the right
to charge interest on any such undisputed amounts which remain past due for ten (10) days after
such notification at the rate of 1.5% per month or the highest rate allowed by law, whichever is
lower. In addition to all other available rights and remedies on default, CCC may refuse orders,
require advance payment in full, ship C.O.D. or halt shipments if all undisputed prior invoices
are not paid in full within 10 days after CCC notifies Nevro in writing of the applicable past due
amounts under such invoices.
4.3
Taxes. Nevro agrees to pay any applicable sales, use, excise or similar taxes,
including value added taxes and customs duties, itemized on the applicable invoice and arising
from purchases made by Nevro under this Agreement, but not any taxes based on CCC’s net
income.
4.4
Cost Reduction Initiatives. CCC shall collaborate with Nevro to make proposals
that, if implemented, would deliver a reduction in the cost of the Product, including by reducing
Component and manufacturing costs and improving Product yields. CCC shall provide to Nevro
a plan detailing cost reduction efforts that CCC proposes to undertake to achieve the cost
reductions, which must be approved by Nevro, which approval may be provided or withheld in
Nevro’s sole discretion. The parties shall meet at least twice per Contract Year to review the
[***] Certain information has been omitted and filed separately with the Securities and Exchange
Commission. Confidential treatment has been requested with respect to the omitted portions.
10
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cost reduction efforts. Nevro and CCC will mutually agree upon the business case analysis,
including expenses, cost savings and implementation schedule. Cost reduction efforts or
proposals shall not compromise quality or reliability, and CCC shall comply with Product
Specifications and Good Manufacturing Practices. If CCC and Nevro share the expenses
associated with the implementation, cost savings shall be split [***] percent ([***]%) to Nevro
and [***] percent ([***]%) to CCC. If either party pays the full cost of such implementation (as
such payment responsibility is specified in the approval of such implementation), then that party
will receive [***] percent ([***]%) of the demonstrated cost reduction. For avoidance of doubt,
for design changes in a Product that are initiated by Nevro and for which the implementation
costs are paid by Nevro, Nevro will receive [***]% of the demonstrated cost reduction upon
implementation. CCC shall give Nevro notice of the implementation of the foregoing cost
reductions as soon as practicable, but in any event within thirty (30) days of the accomplished
reduction. After any such implementation, all invoices shall reflect the applicable reduced
pricing and the parties shall work to update Exhibit A accordingly.
5.
PROCESS CHANGE NOTIFICATION
5.1
Specification Change Process. If, during the Term of this Agreement, Nevro
wishes to engage CCC with respect to a change to any Specifications, including critical raw
material specifications and sourcing, for any Product then being manufactured by CCC, it shall
give CCC written notice of such request (a “Change Order”). CCC shall respond to such
Change Order, including any pricing change driven by such Change Order (provided that any
such pricing change shall be consistent with [***]), and the parties shall thereupon negotiate in
good faith for a written change to such Specifications, incorporating the modifications to the
Specifications and any associated regulatory approvals and facility qualifications required as a
result. CCC may not reject reasonable Change Orders requested by Nevro and CCC shall
promptly implement any Change Orders. Except as specified in this Section 5.1, CCC may not
change the manufacturing process of the Products except in accordance with the Quality
Agreement. Any Inventory that will be rendered unusable as a result of a Change Order shall be
identified in such Change Order and CCC shall provide documentation reasonably supporting the
unusability of such Inventory. [***]
5.2
Notification of Changes.
(a)
Equipment Change. CCC shall notify Nevro of all proposed changes to
any Equipment that may affect the Products or any certification, approval, or qualification by any
Governmental Authority. Any such notice shall be provided in accordance with the Quality
Agreement.
(b) Manufacturing Facility Change. Two options exist for the relocation of
the manufacturing facility as described in clauses (i) and (ii) below.
If CCC desires to relocate the manufacturing of the Product from
the Manufacturing Facility to the location specified on Exhibit E, CCC shall provide written
notice to Nevro and shall provide an updated schedule for such relocation and such other
(i)
[***] Certain information has been omitted and filed separately with the Securities and Exchange
Commission. Confidential treatment has been requested with respect to the omitted portions.
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information reasonably required by Nevro with respect to such proposed new location.
Following the notice, CCC shall deliver to Nevro qualification parts manufactured at such
proposed new location and the Validation Documentation with respect to such proposed new
location for Nevro’s review and approval (which approval shall not be unreasonably withheld).
CCC shall not ship any Product manufactured at the new location until CCC’s receipt of a
written notice from Nevro that it is ready to receive Product manufactured at the new facility (the
“Facility Approval Notice”). CCC will use reasonable commercial efforts to qualify and
otherwise achieve all regulatory approvals necessary for the relocation and the manufacture of
Products at the new location as soon as possible, excluding any such approvals with respect to
the Product that Nevro itself is legally required to obtain (“Nevro Approvals”). Nevro will use
reasonable commercial efforts to achieve the Nevro Approvals as soon as possible after Nevro’s
approval of the Validation Documentation. Nevro shall provide reasonable cooperation to CCC
in connection with the qualification of such new facility, and CCC shall provide reasonable
cooperation to Nevro in connection with obtaining the Nevro Approvals. If Nevro does not
issue the Facility Approval Notice within [***] ([***]) days after all regulatory approvals
(including Nevro Approvals) necessary to manufacture the Product at the new location have been
obtained and CCC has reasonably demonstrated that it can manufacture Products in accordance
with this Agreement at such new location, then all prices for the Products will automatically
[***] ([***]%) unless and until Nevro issues the Facility Approval Notice. Nevro understands
and agrees that the relocation of the Manufacturing Facility located at General Paz 1371, 11400
Montevideo, Uruguay is accounted for in the pricing in Exhibit A, and therefore, [***] will be
made as result of such relocation. Unless agreed upon by the parties, each party will be
responsible for their direct costs associated with the move, including all costs related to internal
Product and process validation, equipment purchase and implementation and integration costs.
Notwithstanding the foregoing, CCC will be responsible for (i) the third party expenses [***]
with the [***] for such relocation (ii) the cost of [***] required in connection with [***] required
in connection with such relocation.
(ii)
Based on business requirements and agreed upon by both parties in
writing, the manufacturing of a Product could be relocated to a CCC site located in the United
States. All requirements identified in Section 5.2(b)(i) above must be successfully completed
before such Product can be shipped from the new location. The NRE cost associated with this
facility relocation will be negotiated in good faith between the parties prior to the time the
facility relocation is to be executed. The unit price for the Products manufactured at such new
facility will be in accordance with Exhibit A, unless otherwise agreed to by the parties.
(c)
Change Approval. CCC shall comply with the Quality Agreement for
the implementation of any changes to any process, system, or activity relating to the Product. .
6.
PERSONNEL; FACILITIES; EQUIPMENT; NEVRO PROPERTY
6.1
Personnel. CCC shall ensure that all of its personnel engaged in the storage,
handling, packaging, distribution, or other processing of the Products shall have the education,
training and experience reasonably sufficient to perform their assigned functions in accordance
with Applicable Laws.
[***] Certain information has been omitted and filed separately with the Securities and Exchange
Commission. Confidential treatment has been requested with respect to the omitted portions.
12
6.2
Facilities. CCC shall ensure that the Manufacturing Facility shall be orderly and
maintains (i) reasonably adequate lighting, ventilation and water supply for the activities relating
to the Product, (ii) space for performing the activities required under this Agreement, and (iii) the
ability to reasonably separate discrete operations or processes relating to the Product in order to
prevent mixing, product errors or other contamination of Product.
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6.3
Equipment.
(a)
CCC shall bear all costs of maintenance and repair, including validation,
periodic calibration, as required, and preventive maintenance, of the Equipment, whether
required as a result of routine and ordinary wear or otherwise.
(b)
CCC shall secure and maintain in good order, at its sole cost and expense,
all current governmental registrations, permits and licenses that are required by Governmental
Authorities in order for CCC to use the Equipment and to manufacture the Products under this
Agreement. CCC shall make copies of such registrations available for viewing by Nevro and its
designees for inspection, upon reasonable request from Nevro. CCC agrees to promptly inform
Nevro of any injury that occurs on manufacturing and testing equipment that is owned by Nevro
but in a CCC Manufacturing Facility.
6.4
Nevro Property. Any Nevro Property shall reside and/or remain the property of
Nevro and shall (a) be clearly marked or tagged as the property of Nevro, (b) be and remain
personal property, and not become a fixture to real property, (c) be subject to inspection by
Nevro at any time, (d) be used solely for the purpose of supplying the Products to Nevro, (e) be
kept free by CCC from any and all liens and encumbrances, (f) not be modified in any manner by
CCC without the prior written approval of Nevro, and (g) be maintained by CCC in accordance
with Nevro’s maintenance procedures and guidelines, including, if applicable, but not limited to,
periodic calibration procedures. Nevro will pay all maintenance costs of Nevro Property. Nevro
shall retain all rights, title and interest in Nevro Property and CCC agrees to treat and maintain
the Nevro Property with the same degree of care as CCC uses with respect to its own property,
but no less care than reasonable care. All processes and specifications related to the Nevro
Property shall constitute Nevro’s Confidential Information. CCC shall bear all risk of loss or
damage to the Nevro Property, normal wear and tear excepted, until it is returned or delivered to
Nevro. Upon Nevro’s request, CCC shall deliver all of the Nevro Property to Nevro in good
condition, normal wear and tear excepted, without cost to Nevro (except freight costs); Nevro
shall determine the manner and procedure for returning the Nevro Property, and shall pay the
corresponding freight costs. CCC agrees to execute all documents, or instruments evidencing
Nevro’s ownership of the Nevro Property as Nevro may require from time to time.
7.
SUSPENSION OF MINIMUM PURCHASE THRESHOLDS
In the event that an injunction, exclusion order, or cease and desist order is issued by any
relevant court or tribunal, which thereby prevents the sale, manufacturing, or importation of a
Product due to such Product infringing the intellectual property rights of a third party, the
parties agree to suspend the Minimum Purchase Thresholds for such Product until the
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CONFIDENTIAL
injunction, exclusion order, or cease and desist order is lifted or terminated (a “Minimum
Purchase Suspension”). The Minimum Purchase Suspension shall terminate and Nevro shall
immediately commence its obligations to satisfy the Minimum Purchase Thresholds upon the
termination or lifting of the applicable injunction, exclusion order, or cease and desist order.
Nevro shall use its best efforts to prevent any such injunction, exclusion order, or cease and
desist order from being issued. desist order from being issued. If an injunction, exclusion order,
or cease and desist order is issued despite Nevro’s best efforts, Nevro shall use its best efforts to
obtain a judgment vacating, terminating or lifting any such injunction, exclusion order, or cease
and desist order as soon as possible after the issuance thereof, to the extent it is legally
permissible to do so.
8.
PROGRAM MANAGEMENT; PRODUCT SUPPORT; COMPLAINTS AND ADVERSE EVENTS;
EPIDEMIC FAILURE
8.1
Program Management. Each party shall provide a list of program team
members. The list shall include name, title, phone number, and email address. The Program
Team List is attached as Exhibit D.
8.2
Technical Support. CCC agrees to provide Nevro reasonable technical support
and assistance upon request regarding questions about the Specifications and the manufacturing
processes for the Products. Any charges for such assistance (beyond normal manufacturing
assistance consistent with standard contract manufacturing) will be agreed upon by the parties
and paid for by Nevro.
8.3 Other Support. Each party shall, in response to any complaint, or in the defense
by the other party of any litigation, hearing, regulatory proceeding or investigation relating to the
Product, make available to the other party during normal business hours and upon reasonable
prior written notice, such party’s employees and records reasonably necessary to permit the
effective response to, defense of, or investigation of such matters, subject to appropriate
confidentiality protections. Any charges for such assistance will be agreed upon by the parties.
8.4
Epidemic Failure.
(a)
For the purposes of this Agreement, epidemic failure will be deemed to
have occurred if there is an occurrence of an in-field failure rate of [***] percent ([***]%) or
more of the total units of Product delivered by CCC to Nevro in any [***] month period and the
root cause of such failure is [***] (“Epidemic Failure”). In the event of an Epidemic Failure,
CCC and Nevro will cooperate to implement the following procedure:
(i)
The discovering party shall promptly notify the other party upon
discovery of the failure; provided, however, that, in the event of a failure that creates a risk of
injury or death, the discovering party will immediately notify the other party and will also
provide the other party with written notice within [***] ([***]) business hours of any notification
made by the discovering party to any Governmental Authority responsible for regulation of
product safety.
[***] Certain information has been omitted and filed separately with the Securities and Exchange
Commission. Confidential treatment has been requested with respect to the omitted portions.
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CONFIDENTIAL
(ii) Within [***] ([***]) business day after such notification, CCC
shall provide to Nevro a preliminary plan for diagnosing the problem, which plan CCC will
revise on Nevro’s request;
plan a solution or corrective action;
(iii) CCC and Nevro shall jointly diagnose the problem (root cause) and
appropriate corrective action plan; and
(iv) CCC shall prepare and consult with Nevro regarding an
CCC and Nevro shall mutually agree on a corrective action plan,
customer notification, replacement scheduling and remediation, which may include a recall, field
action, and return inventory replacement, and repair.
(v)
Notwithstanding the foregoing, Nevro may undertake any and all action necessary independently
of CCC to correct the Epidemic Failure and shall communicate such action to CCC; provided,
that CCC is unable or unwilling to promptly correct the Epidemic Failure.
(b)
Any Defective Products subject to Epidemic Failure (including those
Defective Products outside of the Warranty Period) may be returned to CCC in accordance with
Section 10.3b.
9.
REGULATORY ACTION
9.1
Regulatory Inspection. In the event that CCC receives notice of any inspection
by a Governmental Authority of the Manufacturing Facility that involves or otherwise relates to
the Product, CCC shall notify Nevro within twenty-four (24) hours of its receipt of such notice.
CCC will cooperate, including access to the Manufacturing Facility, Records and CCC
personnel, as reasonably necessary to support any such inspection and provide communication
and access to Nevro in accordance with the Quality Agreement.
9.2
Recalls.
(a)
Incidents and Product Recalls. CCC shall notify Nevro within [***]
([***]) business day of any information which may affect the safety or the continued marketing
of the Product, including any information relating to: (i) any Product, including any production
lot, being made subject to any correction and/or removal, including a recall, market withdrawal
or stock recovery (collectively, a “Recall”), regardless of whether such Recall is initiated by
CCC, Nevro and/or any third party, including a Governmental Authority; (ii) any incident that
would cause the Product or its labeling to be mistaken for, or applied to, another article; or (iii)
any contamination or any significant chemical, physical, or other change or deterioration in such
Product that would cause it to fail to meet the Specifications; or (iv) any other matter that would
require a report to the FDA concerning the Product.
Cooperation. In the event either party believes it may be necessary to
conduct a Recall, CCC and Nevro shall consult with each other as to how best to proceed, it
(b)
[***] Certain information has been omitted and filed separately with the Securities and Exchange
Commission. Confidential treatment has been requested with respect to the omitted portions.
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being understood and agreed that the final decision as to any Recall of any end product in which
the Product is included shall be at Nevro’s sole discretion, following consultation with CCC.
Nevro will be responsible for, and oversee, notification of any such Recall for such end product
sold by Nevro to its customers and will provide CCC with a final report to confirm that the
Recall was performed in compliance with Applicable Law. In any event, with respect to any
such Recall, Nevro shall make all contacts with the FDA and shall be responsible for
coordinating all necessary activities in connection with the Recall. CCC will fully cooperate, at
CCC’s sole expense, in providing all requested information to Nevro, including any request by
Nevro that CCC (i) investigate such Recall, (ii) provide Nevro with an initial response or
preliminary report relating to the circumstances leading to the Recall, and (iii) secure any
recalled Product to prevent further distribution.
9.3
Confidentiality. All information disclosed or exchanged pursuant to this Section
9 shall be treated as Confidential Information of the disclosing party and shall not be disclosed to
any third party without the original party’s prior written consent, unless such disclosure is
permitted under Section 13.3(d).
10.
REPRESENTATIONS, WARRANTIES AND COVENANTS
10.1 Representations, Warranties and Covenants of CCC. CCC represents and
warrants to Nevro that:
(a)
as of the Effective Date, CCC is duly organized, validly existing, and in
good standing under the laws of New York and has full corporate power and authority to enter
into this Agreement;
(b)
as of the Effective Date, CCC is in good standing with all applicable
Governmental Authorities;
(c)
as of the Effective Date, CCC has taken all corporate actions necessary to
authorize the execution and delivery of this Agreement and the performance of CCC’s
obligations under this Agreement;
(d)
the performance of CCC’s obligations under this Agreement do not
materially conflict with, or constitute a material default under CCC’s charter documents, any
contractual obligation of CCC or any court order;
(e)
neither CCC nor any of
its employees, agents, consultants and
Subcontractors is debarred, suspended, proposed for debarment, or otherwise determined to be
ineligible to participate in federal health care programs (as that term is defined in 42 U.S.C.
1320a-7b(f) or under any analogous foreign counterpart), or convicted of a criminal offense
related to the provision of health care items or services;
(f)
CCC shall not, during the term of this Agreement, undertake any
obligation that conflicts with CCC’s obligations under this Agreement;
16
(g)
CCC has obtained all material licenses, permits, authorizations, and
permissions necessary or requisite under Applicable Law for meeting and performing its
obligations under this Agreement, and all such material licenses, permits, authorizations, and
permissions are in full force and effect and shall be kept in full force and effect during the term
of this Agreement;
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(h)
the appropriate
Governmental Authorities and in compliance with all applicable Governmental Authority
standards and Applicable Laws;
the Manufacturing Facility
registered with
is
(i)
CCC shall manufacture all Products at and supply all Products from the
Manufacturing Facility, and CCC shall not, without Nevro’s prior written consent, manufacture
Products at or supply Products from any facility other than the Manufacturing Facility;
(j)
CCC shall transfer to Nevro good and clear title to the Products, free and
clear of all liens, claims and encumbrances;
(k)
CCC has the right to grant the rights granted by CCC hereunder and
CCC’s manufacturing process and its performance of services under this Agreement will not
infringe any Intellectual Property Right of any third party;
(l)
CCC shall not sell or otherwise transfer the Products to any third party,
other than as consented to by Nevro in writing; and
(m)
CCC has the right and power to enter into this Agreement.
10.2 Representations, Warranties and Covenants of Nevro. Nevro represents and
warrants to CCC that
(a)
as of the Effective Date, Nevro is duly organized, validly existing and in
good standing under the laws of Delaware and has full corporate power and authority to enter
into this Agreement;
(b)
as of the Effective Date, Nevro is in good standing with all applicable
Governmental Authorities;
(c)
as of the Effective Date, Nevro has taken all corporate actions necessary to
authorize the execution and delivery of this Agreement and the performance of Nevro’s
obligations under this Agreement;
(d)
the performance of Nevro’s obligations under this Agreement do not
materially conflict with, or constitute a material default under Nevro’s charter documents, any
contractual obligation of CCC or any court order;
(e)
its employees, agents, consultants or
Subcontractors is debarred, suspended, proposed for debarment, or otherwise determined to be
ineligible to participate in federal health care programs (as that term is defined in 42 U.S.C.
neither Nevro nor any of
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CONFIDENTIAL
1320a-7b(f) or under any analogous foreign counterpart), or convicted of a criminal offense
related to the provision of health care items or services;
(f)
Nevro shall not, during the term of this Agreement, undertake any
obligation that conflicts with Nevro’s obligations under this Agreement;
(g)
Nevro has obtained all material licenses, permits, authorizations, and
permissions necessary or requisite under Applicable Law for meeting and performing its
obligations under this Agreement, and all such material licenses, permits, authorizations, and
permissions are in full force and effect and shall be kept in full force and effect during the term
of this Agreement; and
(h)
Nevro has the right and power to enter into this Agreement.
10.3 Performance Warranty and RMA Process.
(a)
CCC warrants that during the Warranty Period each Product will be free
from defects in material and workmanship, will conform to the relevant Specifications, and will
have been manufactured in accordance with Good Manufacturing Practices and otherwise in
accordance with this Agreement. In the event that any Product does not conform to such
warranty, CCC will repair or replace such Product (or refund the price paid therefor) as provided
for in Section 10.2(b).
(b)
Any Defective Products may be returned to CCC and CCC will, at its sole
expense (including shipping and handling expenses), either (i) repair the applicable Defective
Products within a reasonable time (which shall be no greater than the lead time set forth on
Exhibit A for the applicable Product); (ii) replace the applicable Defective Products within a
reasonable time (which shall be no greater than the lead time set forth on Exhibit A for the
applicable Product); and/or (iii) and if neither of (i) or (ii) is feasible within such time, upon
Nevro’s request and without limiting Nevro’s rights and remedies under this Agreement, CCC
will refund the amount of the payments paid for the Product; provided that (i) Nevro obtains a
return authorization from CCC prior to returning the Products (and CCC shall provide Nevro
with an RMA number promptly upon request), and the failure analysis, or summary thereof,
conducted by Nevro shall accompany the Product or shall otherwise be promptly be delivered to
CCC. If the Product returned to CCC is not covered by the warranty (because the return was
outside the Warranty Period or was found not to be Defective Product) CCC may charge Nevro
for any services performed on the Product.
(c)
Notwithstanding any other provision of this Agreement, CCC shall have
no obligation to Nevro under the limited warranty set forth in Section 10.3(a) or under Section
14.1 to the extent that (a) the Product is not used in accordance with the Specifications; (b) the
Product has had modifications, alterations, repairs or work performed on it by any party other
than CCC or CCC’s authorized agents; (c) the failure is due to incorrect use or handling of the
Products by Nevro or third parties after Nevro accepts such Product; (d) the failure is due to a
defect in a Tested NDS Component (which defect could not have reasonably been discovered
during NDS Component Testing and which failure or defect was not caused by CCC or its agents
18
in its handling of such Tested NDS Component or otherwise during the manufacturing process),
or (e) Nevro has not complied with Section 10.3(b) (collectively, the “Section 10.3(c) Causes”).
CONFIDENTIAL
10.4 Disclaimer of Warranties.
(a)
EXCEPT FOR THE WARRANTIES MADE IN SECTIONS 10.1 AND
10.3, CCC MAKES NO OTHER WARRANTIES, EXPRESSED OR IMPLIED, WITH
RESPECT TO THE COMPONENTS, PRODUCTS OR ANY SERVICES PROVIDED UNDER
THIS AGREEMENT, AND DISCLAIMS ALL OTHER WARRANTIES INCLUDING THE
WARRANTIES OF MERCHANTABILITY, NON-INFRINGEMENT AND FITNESS FOR A
PARTICULAR PURPOSE OR ARISING FROM A COURSE OF DEALING, USAGE OR
TRADE PRACTICE.
(b)
EXCEPT FOR THE WARRANTIES MADE IN SECTION 10.2, NEVRO
MAKES NO OTHER WARRANTIES WITH RESPECT TO THE NEVRO INTELLECTUAL
PROPERTY, CONSIGNED COMPONENTS, NEVRO PROPERTY, THE LICENSES
GRANTED HEREUNDER OR OTHER MATERIALS OR DOCUMENTATION PROVIDED
BY NEVRO HEREUNDER AND DISCLAIMS ALL OTHER WARRANTIES, EXPRESS OR
NON-INFRINGEMENT,
IMPLIED,
MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, OR ARISING FROM A
COURSE OF DEALING, USAGE OR TRADE PRACTICE.
THE WARRANTIES
INCLUDING
OF
11.
TERM AND TERMINATION
11.1 Term. Unless earlier terminated pursuant to the terms and conditions of this
Agreement, this Agreement shall commence on the Effective Date and shall remain in full force
and effect for ten (10) years. Thereafter, this Agreement will be automatically extended for
additional two (2) year periods unless one party notifies the other in writing one (1) year in
advance that it does not intend to renew the Agreement for an additional term (all such renewal
periods and the initial term collectively being the “Term”).
11.2 Termination by Nevro. Nevro may terminate this Agreement by providing three
(3) years written notice to CCC in the event a Change of Control of CCC occurs, provided that
such notice period shall be one (1) year in the event CCC is acquired by a competitor to Nevro
such as but not limited to St. Jude Medical, Boston Scientific or Medtronic or an Affiliate of any
such entities. Such notice shall be given by Nevro not less than [***] ([***]) days after the
effective date of any Change of Control or Nevro’s rights under this Section 11.2 shall expire.
11.3 Termination for Certain Events. Either party may terminate the Agreement by
providing written notice to the other party, upon the occurrence of any of the following events:
(a)
if the other party ceases to do business, or otherwise terminates its
business operations, excluding any situation where all or substantially all of such other party’s
assets, stock or business to which this Agreement relates are acquired by a third party (whether
by sale, acquisition, merger, operation of law or otherwise);
[***] Certain information has been omitted and filed separately with the Securities and Exchange
Commission. Confidential treatment has been requested with respect to the omitted portions.
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CONFIDENTIAL
(b)
if the other party breaches any material provision of this Agreement and
fails to cure such breach within [***] ([***]) days of written notice describing the breach, except
that an undisputed breach of the payment provision of this Agreement must be cured within
[***] ([***]) day of written notice describing the breach; or
(c)
if the other becomes insolvent, makes an assignment for the benefit of
creditors, files a petition in bankruptcy, permits a petition in bankruptcy to be filed against it,
presents a petition or has a petition presented by a creditor for its winding up, or enters into any
liquidation or call any meeting of its creditors, or admits in writing that it is unable to pay its
debts as they mature, or if a receiver or examiner is appointed for a substantial part of its assets.
11.4 Consequences of Termination.
(a)
Upon any termination or expiration of this Agreement, unless otherwise
agreed to by the parties, CCC shall continue to fulfill, subject to the terms of this Agreement, all
Purchase Orders placed by Nevro and accepted by CCC in accordance with this Agreement prior
to the effective date of termination or expiration. Notwithstanding the foregoing, if this
Agreement is terminated by CCC in accordance with Section 11.3, then CCC shall not be
required to fulfill its obligations on any Purchase Orders. Furthermore, CCC shall promptly turn
over to Nevro all Products (and Nevro shall pay for such Products at the then-current price) and
the Specifications, whether or not completed, and both parties shall promptly turn over to the
respective party the Confidential Information of such party.
11.5 Accrued Rights. Termination or expiration of this Agreement for any reason will
not affect the rights and obligations of the parties accrued prior to the effective date of the
termination or expiration of this Agreement.
11.6 Survival. The following Articles and Sections of this Agreement shall survive its
termination or expiration: Articles 1, 4 (solely to the extent payment obligations remain after the
effective date of such termination or expiration), 9, 10, 11, 12, 13, 14, 15, 16 and 17 and Sections
6.4 and 8.3 and 8.4.
11.7 Last Time Buy. In the event of any termination (excluding CCC’s termination
pursuant to Section 11.3 or termination pursuant to Section 11.2) or non-renewal of this
Agreement, Nevro shall have the option to make a Last Time Buy. If Nevro provides the notice
of termination, then Nevro must provide the Last Time Buy order at the same time it provides the
notice of termination. If CCC provides the notice of termination under Section 11.1, then Nevro
must provide the Last Time Buy order at least [***] ([***]) months prior to the effective date of
termination and must take delivery of such Last Time Buy within [***] ([***]) months of such
order. Any Last Time Buy under Section 11.1 or Section 11.2 will be subject to a price increase
equal to [***] (i.e., [***]), provided that such incremental costs shall not exceed [***]% of the
price of the applicable Products. CCC shall provide invoices and other reasonably detailed
costs.
documentation
demonstrate
amount
such
the
of
to
[***] Certain information has been omitted and filed separately with the Securities and Exchange
Commission. Confidential treatment has been requested with respect to the omitted portions.
20
11.8 Termination of Predecessor Agreement. The parties agree that as of the
Effective Date the Supply Agreement between Centro De Construccion de Cardioestimuladores
del Uruguary S.A. and Nevro Corp. dated March 13, 2015 is terminated. CCC warrants that it
has the power and authority to terminate such agreement.
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12.
INTELLECTUAL PROPERTY
12.1 Pre-Existing Property. The term “Pre-Existing Property” means all rights of a
party to designs, inventions (whether patentable or not), copyrights, trademarks, trade secrets,
processes, software, devices and other Intellectual Property Rights and confidential information
owned or held by a party immediately prior to the Effective Date. The parties acknowledge and
agree that all Pre-Existing Property is the property of the party or its licensors that owned such
property immediately before the Effective Date and that, except as expressly set out herein,
nothing in this Agreement shall convey or otherwise grant any rights in or to any Pre-Existing
Property from one party to the other party.
12.2 Resulting Property. The term “Resulting Property” means all designs, data,
information, inventions, improvements, discoveries, methods, processes (in each case whether
patentable or not), software, and devices and any Intellectual Property Rights in any of the
foregoing (including copyrights, trademarks, trade secrets, and patent rights) developed by either
party as a result of this Agreement.
12.3 Grant of License. To the extent that any Resulting Property or any materials,
goods or services to be delivered or provided by CCC to Nevro under this Agreement
(“Deliverables”) incorporate in any manner any of the Pre-Existing Property of CCC or any
improvements to or derivatives of the Pre-Existing Property of CCC (the “Incorporated CCC
Property”), CCC hereby grants to Nevro and its Affiliates and successors and assigns a
perpetual, irrevocable, fully paid, worldwide, sublicensable, non-exclusive license under the
Incorporated CCC Property and all Intellectual Property Rights therein to make, use, sell, offer
for sale, and import the Incorporated CCC Property and all Intellectual Property Rights therein,
in connection with such Resulting Property or Deliverables and any improvements, derivatives
or successor works of or to such Resulting Property and Deliverables as Nevro considers
appropriate, including to use, manufacture, sell, offer for sale, import, display, copy, perform,
modify, alter and support the Incorporated CCC Property and any products or services in which
such property is incorporated. The license granted to Nevro includes the rights to future
improvements to or derivatives of the Incorporated CCC Property to the extent such
improvements or derivatives are utilized in connection with a Deliverable, but it does not require
CCC to take any actions or perform any activities to incorporate such property into any
deliverable in connection with the Resulting Property or Deliverables, or any improvements,
derivatives or successor works thereof or thereto. Nothing in this Agreement will be deemed to
grant Nevro the right to market, sub-license or otherwise use the Pre-Existing Property of CCC
other than in connection with one or more Deliverables or the Resulting Property and products or
services in which they are incorporated, or improvements, derivatives or successor works of the
foregoing.
12.4 Ownership of Resulting Property. The parties acknowledge and agree that all
Resulting Property and all Intellectual Property Rights therein, excluding the Incorporated CCC
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Property and any changes or improvements to the Incorporated CCC Property made by CCC and
all Intellectual Property Rights therein, shall be solely owned by Nevro. CCC shall promptly
disclose any such Resulting Property to Nevro. CCC hereby assigns, and shall cause all of its
employees, agents, Affiliates, Subcontractors and other authorized representatives to assign, to
Nevro any and all interests it or they may have in any such Resulting Property and all Intellectual
Property Rights therein. CCC agrees to cooperate with Nevro, at Nevro’s expense, for the
purpose of filing and prosecuting patent and other Intellectual Property Right applications in
connection with the Resulting Property, including the execution of any and all legal papers
which are necessary or desirable to affect the intent of this Section 12.4.
13.
CONFIDENTIAL INFORMATION
13.1 Confidentiality Obligations. Each party agrees that, during the Term of this
Agreement and thereafter, such party shall maintain all Confidential Information of the other
party in strict confidence, and shall not use such Confidential Information for any purpose other
than to perform its obligations or exercise its rights under this Agreement. A receiving party
may disclose Confidential Information to its directors, officers, employees, authorized agents and
professional advisers to the extent such persons have a need to know such information for the
purpose of performing such party’s duties and obligations or exercising such party’s rights
hereunder, provided that such party advises each such individual of the terms of this Section 13
and ensures that each such individual receives and hold such information as if that individual
were a party to this Agreement.
13.2 Exceptions to Confidentiality. The foregoing obligations in Section 13.1 will
not apply to any portion of Confidential Information to the extent that it can be established by the
receiving party with competent proof that such portion:
(a)
was already known to the receiving party as evidenced by its written
records, other than under an obligation of confidentiality, at the time of disclosure;
(b)
was generally available to the public or was otherwise part of the public
domain at the time of its disclosure to the receiving party;
(c)
became generally available to the public or otherwise becomes part of the
public domain after its disclosure and other than through any act or omission of the receiving
party in breach of this Agreement; or
is independently developed by the receiving party without use of the
Confidential Information received from the disclosing party, as evidenced by its written records;
(d)
(e)
was subsequently lawfully disclosed to the receiving party by a third party
other than in contravention of a confidentiality obligation of such third party to the disclosing
party.
13.3 Authorized Disclosures. Each party may disclose the other party’s Confidential
Information to the extent such disclosure is reasonably necessary to (i) perform its obligations or
exercise its rights under this Agreement and such disclosure is made to a third party who has a
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CONFIDENTIAL
need to know the Confidential Information and who agrees to be bound by confidentiality
restrictions at least as restrictive as those contained in this Agreement, and (ii) to comply with
Applicable Law, a court order, or rules of a securities exchange. If a party is required to make
any such disclosure of the other party’s Confidential Information under this Section 13.3, it will
give reasonable advance notice to the other party of such disclosure requirement, will reasonably
cooperate with the other party in its efforts to secure confidential treatment of such Confidential
Information prior to its disclosure, and will use all reasonable efforts to secure confidential
treatment of such Confidential Information prior to its disclosure (whether through protective
orders or confidentiality agreements or otherwise).
13.4 Ownership and Return of Confidential Information. All Confidential
Information provided hereunder shall remain the property of the disclosing party. The receiving
party shall, within ten days of a written request to do so, return to the disclosing party all
Confidential Information that has been provided in tangible form and shall, unless prohibited by
law, destroy or otherwise
Information.
Notwithstanding the foregoing, each party will be allowed to keep one copy of the Confidential
Information in order to ensure continued compliance with the terms of this Agreement.
render unintelligible all other Confidential
13.5 Equitable Relief. The parties acknowledge that monetary damages may not be
sufficient remedy for a breach of obligation of confidentiality in this Agreement and agree that
each Party shall be entitled to seek appropriate equitable remedies, including injunctive relief, to
prevent the unauthorized use or disclosure of any Confidential Information.
13.6 Public Announcements. Except to the extent required by Applicable Law,
neither party shall make any public announcements concerning this Agreement or the terms
hereof without the prior written consent of the other party.
14.
INDEMNIFICATION.
14.1 CCC shall indemnify and hold Nevro and its Affiliates and its and their directors,
officers, agents, employees, and consultants (the “Nevro Indemnitees”) harmless from and
against any liabilities, damages, losses, costs, and expenses (including reasonable attorneys’
fees) ) which the Nevro Indemnitees may incur or suffer as a result of claims by third parties to
the proportionate extent they result from or arise out of (i) any (A) personal injury or death or (B)
other claim caused by a breach by CCC of the limited warranty set forth in Section 10.3(a), (ii)
any violation of law by CCC, (iii) the gross negligence or intentionally wrongful conduct of
CCC, and (iv) a breach of the representations, warranties or covenants in Section 3.3, Section
10.1, and Section 13. Nevro shall promptly, and in any event, within thirty (30) days, after
Nevro first learns of such claim, notify CCC of such claim tender the sole defense of such claim
to CCC (provided CCC diligently pursues such defense), and cooperate with CCC at CCC’s
expense in connection with such defense.
14.2 Nevro will indemnify, defend and hold harmless CCC and its Affiliates and each
of their officers, directors, shareholders, employees, agents, successors and assigns (the “CCC
Indemnitees”) against any and all losses, obligations, liabilities, damages, actions, settlements,
judgments and reasonable costs and expenses which the CCC Indemnitees may incur or suffer
(including, but not limited to, reasonable legal fees) as a result of claims by third parties to the
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proportionate extent arising out of or related to (a) the breach by Nevro of any of its warranties in
Section 10.2 or the covenants contained in Section 13 of this Agreement, (b) the gross
negligence or intentionally wrongful conduct of Nevro, (c) the storage, handling, modification,
distribution, marketing or sale of the Nevro System and/or any of the Products (including, but
not limited to, any design defects of the Product and any personal injury or death or other claims
resulting from such design defects), but, for clarity, excluding any liability to the extent CCC is
obligated to indemnify Nevro for such liability under Section 14.1 and any liability to the extent
such liability arises from CCC’s breach of this Agreement, (d) any statement, promise,
representation or warranty made by Nevro or by any agent or distributor of Nevro to a purchaser
beyond the limited warranty made by CCC in this Agreement, (e) any and all Section 10.3(c)
Causes after shipment by CCC, (f) materials, Components, directives or instructions given by
Nevro to CCC, made in writing, (g) any failure to include warnings required by law or regulation
on the Nevro System in which a Product is incorporated and any recall of such Nevro System
that is not caused by CCC’s breach of this Agreement, and (h) infringement of the proprietary
rights of any third party by Nevro Intellectual Property. CCC shall promptly, and in any event,
within thirty (30) days, after CCC first learns of such claim, notify Nevro of any claim under this
section, tender the defense of such claim to Nevro (provided Nevro CCC diligently pursues such
defense), and cooperate with Nevro at Nevro’s expense in connection with such defense.
15.
LIMITATION OF LIABILITY. SUBJECT TO THE REMAINDER OF THIS SECTION 15,
(A) NEITHER PARTY WILL BE LIABLE UNDER THIS AGREEMENT FOR ANY
INDIRECT, CONSEQUENTIAL, COLLATERAL, SPECIAL OR INCIDENTAL DAMAGES
(INCLUDING, BUT NOT LIMITED TO, LOSS OF PROFITS) WHETHER SUCH CLAIM IS
BASED ON CONTRACT, NEGLIGENCE, STRICT TORT, WARRANTY OR ANY OTHER
BASIS, AND (B) EACH PARTY’S TOTAL LIABILITY UNDER THIS AGREEMENT ([***])
WILL NOT EXCEED [***] FOR THE IMMEDIATELY PRECEDING [***] ([***]) MONTH
PERIOD (INCLUDING ANY PORTION OF SUCH PERIOD PRECEDING THE EFFECTIVE
DATE). NOTWITHSTANDING ANY PAYMENTS OF DAMAGES MADE UNDER THIS
SECTION, IF CCC BREACHES THIS AGREEMENT, NEVRO WILL BE ENTITLED TO
SPECIFIC PERFORMANCE AND THE LAST TIME BUY PURSUANT TO SECTION 11.7.
THE FOREGOING LIMITATIONS OF LIABILITY DO NOT APPLY TO A PARTY’S
INDEMNIFICATION OBLIGATIONS UNDER SECTION 14.1 (PROVIDED THAT WITH
RESPECT TO ANY “OTHER CLAIM” DESCRIBED IN SECTION 14.1(i)(B), CCC’S
LIABILITY SHALL BE LIMITED TO AN AMOUNT EQUAL TO [***] THE AMOUNT OF
THE LIABILITY LIMIT DESCRIBED ABOVE IN THIS SECTION 15) OR SECTION 14.2,
OR CONFIDENTIALITY OBLIGATIONS HEREUNDER.
16.
INSURANCE
16.1 CCC Insurance. CCC shall procure and maintain product liability insurance in
such amounts as ordinary good business practice for its type of business would make advisable
and shall provide Nevro with evidence of this coverage; provided, however, that in no case shall
the limits of such coverage be less than the following (but subject to any deductible or self-
insured retention (SIR)):
[***] Certain information has been omitted and filed separately with the Securities and Exchange
Commission. Confidential treatment has been requested with respect to the omitted portions.
24
Bodily Injury:
Property Damage:
$[***] Each Occurrence
$[***] General Aggregate
$[***] Each Occurrence
$[***] General Aggregate
CONFIDENTIAL
Upon request, CCC shall provide Nevro with an insurance certificate on or before
January 31st of each year concerning the year started specifying the amounts stated in this
Section 16.1 including the SIR.
16.2 Nevro Insurance. Nevro shall procure and maintain product liability insurance
in such amounts as ordinary good business practice for its type of business would make
advisable and shall provide CCC with evidence of this coverage; provided, however, that in no
case shall the limits of such coverage be less than the following (but subject to any deductible or
self-insured retention (SIR)):
Bodily Injury:
Property Damage:
$[***] Each Occurrence
$[***] General Aggregate
$[***] Each Occurrence
$[***] General Aggregate
Upon request, Nevro shall provide CCC with an insurance certificate on or before
January 31st of each year concerning the year started specifying the amounts stated in this
Section 16.2 including the SIR.
17. GENERAL PROVISIONS
17.1 Relationship of the Parties. The parties shall perform their obligations under
this Agreement as independent contractors and nothing in this Agreement is intended or will be
deemed to constitute a partnership, agency or employer-employee relationship between the
parties. Neither party will have any right, power or authority to assume, create, or incur any
expense, liability, or obligation, express or implied, on behalf of the other.
17.2 Assignments. Subject to the remainder of this provision, this Agreement shall be
binding upon, and shall inure to the benefit of, the parties’ respective successors and permitted
assigns. This Agreement shall not be assignable by either party without the prior written consent
of the other party; provided, however, that, upon [***] ([***]) days prior written notice to CCC
but without CCC’s consent, Nevro (a) may assign this Agreement to any of its Affiliates
provided that Nevro shall remain secondarily liable under this Agreement; and (b) shall assign
this Agreement to any individual or entity which acquires all or substantially all of its assets to
which this Agreement relates provided that the assignee, in the reasonable judgment of CCC, is
able to perform Nevro’s obligations under this Agreement. Any assignment not in accordance
void.
with
Section
17.2
will
null
this
and
be
[***] Certain information has been omitted and filed separately with the Securities and Exchange
Commission. Confidential treatment has been requested with respect to the omitted portions.
25
CONFIDENTIAL
17.3 Further Actions. Each party agrees to execute, acknowledge, and deliver such
further instruments and to do all such other lawful acts as may be reasonably necessary in order
to carry out the express provisions of this Agreement.
17.4 Headings; Construction. The headings to the clauses, sub-clause and parts of
this Agreement are inserted for convenience of reference only and are not intended to be part of
or to affect the meaning or interpretation of this Agreement. Any ambiguity in this Agreement
shall be interpreted equitably without regard to which party drafted the Agreement or any
provision thereof. The terms “this Agreement,” “hereof,” “hereunder” and any similar
expressions refer to this Agreement and not to any particular Section or other portion hereof. As
used in this Agreement, the words “include” and “including,” and variations thereof, will be
deemed to be followed by the words “without limitation”.
17.5 Governing Law; Arbitration. This Agreement shall be governed by and
construed under the laws of the State of Delaware, U.S.A., without regard for conflict of laws
principles. Any controversy or claim arising out of or relating to this Agreement, or its breach,
shall be subject to binding arbitration in the State of Delaware, under the Commercial Arbitration
Rules of the American Arbitration Association by three (3) arbitrators appointed in accordance
with such Rules, provided, however, that neither party shall be precluded from seeking injunctive
relief or other provisional relief in any court of law. The language of the arbitration shall be
English. Judgment on the award rendered by the arbitrators may be entered in any court having
jurisdiction. The parties expressly exclude the application of the United Nations Convention on
Contracts for the International Sale of Goods. It is not intended that any third party should be a
beneficiary under this Agreement pursuant to the Contracts (Rights of Third Parties) Act 1999.
17.6 Notices and Deliveries. Any notice, request, delivery, approval or consent
required or permitted to be given under this Agreement will be in writing and will be deemed to
have been sufficiently given if delivered in person or one (1) business day after sending by
express courier service (signature required) or five (5) days after sending by registered letter,
return receipt requested (or its equivalent), provided that no postal strike or other disruption is
then in effect or comes into effect within two (2) days after such mailing, to the party to which it
is directed at its address first shown above or as amended by notice pursuant to this subsection.
17.7 Waiver. A waiver by a party of any of the terms and conditions of this
Agreement in any instance will not be deemed or construed to be a waiver of such term or
condition for the future, or of any subsequent breach thereof. Unless otherwise expressly
specified herein, all remedies contained in this Agreement will be cumulative and none of them
will be in limitation of any other remedy.
17.8 Severability. Each provision of this Agreement will be interpreted in such
manner as to be effective and valid under Applicable Law, but, if any provision of this
Agreement is held to be prohibited by or invalid under Applicable Law, such provision will be
ineffective but only to the extent of such prohibition or invalidity, without invalidating the
remainder of such provision or of this Agreement. The parties will make a good faith effort to
replace the invalid or unenforceable provision with a valid one which in its economic effect is
most consistent with the invalid or unenforceable provision.
26
CONFIDENTIAL
17.9 Counterparts. This Agreement may be executed simultaneously in counterparts,
including by facsimile or electronic exchange of signed copies in PDF format, any one of which
need not contain the signature of more than one party but both such counterparts taken together
will constitute one and the same agreement.
17.10 Entire Agreement of the Parties; Conflicts. This Agreement, the Quality
Agreement, and the other exhibits hereto constitute and contain the entire understanding and
agreement of the parties respecting the subject matter hereof and cancels and supersedes any and
all prior and contemporaneous negotiations, correspondence, understandings, and agreements
between the parties, whether oral or written, regarding such subject matter. In the event of any
conflict between the provisions of this Agreement and the provisions of the Quality Agreement
or any other exhibit hereto, the provisions of this Agreement shall govern.
17.11 Amendments. No waiver, modification, or amendment of any provision of this
Agreement will be valid or effective unless made in writing and signed by each of the parties.
17.12 Force Majeure. The failure or delay of either Party to perform fully any of its
obligations under this Agreement (other than a payment obligation) solely by reason of acts of
God; acts of civil or military authority; civil disturbance; war; embargo; strikes or other labor
disputes (excluding those related to a party’s workforce); fire; a delay or default caused by
common carriers; or similar circumstance beyond its reasonable control which cannot reasonably
be foreseen or provided against (“Force Majeure”) will be deemed not to be a breach of this
Agreement so long as the party so prevented from complying with this Agreement has not
contributed to such Force Majeure, has used commercially reasonable efforts to avoid such Force
Majeure or to ameliorate its effects, and continues to take all commercially reasonable actions
within its power to comply as fully as possible with the terms of this Agreement. In the event of
any such Force Majeure, full performance of the obligations affected will be deferred until the
Force Majeure ceases. This Section will not apply to excuse a failure to comply with the terms
of this Agreement arising from any commercial dispute between a Party and a third party or the
failure by a Party to secure any materials, supplies, labor or other input for any reason not caused
by Force Majeure.
[Remainder of page left intentionally blank.]
27
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their
respective duly authorized representatives as of the Effective Date.
CONFIDENTIAL
CENTRO DE CONSTRUCCION DE
CARDIOESTIMULADORES DEL
URUGUAY S.A.
NEVRO CORP.
By: /s/ Antonio Gonzalez
By: /s/ Andrew Galligan
Name: Antonia Gonzalez
Name: Andrew Galligan
Title: President, CRMN
Title: Chief Financial Officer
1
CONFIDENTIAL
Exhibit A
Products
For IPG 1500:
PRODUCTS
Minimum Purchase Thresholds
Lead Time
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
Contract Year One
Contract Year Two
and thereafter
IPG Model 1500 VOLUME
PRICE
[***]
[***]
[***]
[***]
The prices in the table above reflect incremental volume pricing (for example, the
price for the first [***] units in Contract Year one is [***] per unit and the price for
the next [***] units is [***] per unit in that Contract Year). The IPG volumes above
are measured by the volumes of units ordered during a Contract Year (or at any time
during 2016 for Contract Year 1).
[***] Certain information has been omitted and filed separately with the Securities and Exchange
Commission. Confidential treatment has been requested with respect to the omitted portions.
For IPG Model 2000:
CONFIDENTIAL
The following provisions are non-binding on the parties unless and until (a) [***], (b) [***], and
(c) [***]. Both parties agree to update the lead time for IPG 2000 upon successful completion of
the qualification and release to production. Nevro shall reimburse CCC for its reasonable,
documented IPG Model 2000 manufacturing startup cost up to the amount of non-recurring
engineering fees set forth in the table below:
IPG 2000
Item
Non-Recurring Engineering Fee Milestone Payment Schedule
Milestone Price
1
NRE includes the following:
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
$[***]
$[***]
$[***]
$[***]-$[***]
Once approvals and qualifications in items (a) through (c) have occurred, the following
provisions shall apply to Nevro IPG Model 2000:
Subject to the terms and conditions of the Agreement, Nevro commits to a Minimum Purchase
Threshold of [***]% of the IPG Model 2000 worldwide requirements through the term of the
Agreement. Nevro’s Forecast provided on or about December 31 of each year shall include
Nevro’s projected volume of Products and share commitment for the IPG Model 2000 Product
for the following Contract Year. Nevro’s price per Product for each IPG Model 2000 Product
for such Contract Year shall be determined based upon such projected volume and share
commitment in accordance with the following table:
IPG Model 2000 Price Table
Price/Unit
Product
Units/Year
[***]
[***]
[***]
[***]
[***]
[***]% Share
Commitment
$[***]
$[***]
$[***]
$[***]
$[***]
[***]% Share
Commitment
$[***]
$[***]
$[***]
$[***]
$[***]
[***]% Share
Commitment
$[***]
$[***]
$[***]
$[***]
$[***]
[***] Certain information has been omitted and filed separately with the Securities and Exchange
Commission. Confidential treatment has been requested with respect to the omitted portions.
CONFIDENTIAL
On or about September 1 of each Contract Year, the parties shall meet to review the next
Contract Year Forecast and Nevro commitment and the per unit price for the Products for the
next Contract Year will be determined using the initial forecasted volume’s price per the
appropriate pricing tier set out above. If the forecasted volume is within [***]% of Products of
the next tier’s volume break, the parties agree to set the initial pricing at the higher price (i.e.,
lower volume) and review such pricing twice per year for any material changes in the Forecast.
A credit will be issued to Nevro immediately and the per unit price will be reset once shipments
scheduled for delivery during the binding portion of the Forecast (pursuant to Section 2.1)
exceed the current volume/pricing tier and subsequent Purchase Orders scheduled for delivery
during the same Contract Year would be placed at the lower price (i.e., higher volume pricing
tier. In the event that Nevro purchases in any Contract Year an amount of Products which is less
than the initial Forecast for such Contract Year and the total amount of Products purchased
during such Contract Year is in a higher price tier than the price tier offered based on the initial
Forecast for such Contract Year, Nevro shall make a payment to CCC, by the end of such
Contract Year, an amount equal to [***].
Certain Price Adjustments. If Nevro agrees to purchase from CCC or any of its Affiliates a
minimum of [***] percent ([***]%) of its finished leads products in for a Contract Year, Nevro
shall receive an additional [***] percent ([***]%) reduction in price for each IPG Model 2000
Product ordered in accordance with such Forecast. Additionally, if Nevro agrees to utilize CCC-
or an CCC Affiliate-manufactured battery, feedthrough and enclosure Components in any
Contract Year, Nevro shall receive at least a [***] dollar ($[***]) reduction in price for each IPG
Model 2000 Product ordered in accordance with such Forecast. If Nevro agrees to utilize any
one of the CCC- or CCC Affiliate-[***] in any Forecast, the parties will negotiate an applicable
reduction in price for each IPG Model 2000 Product ordered in accordance with such Forecast.
[***] Certain information has been omitted and filed separately with the Securities and Exchange
Commission. Confidential treatment has been requested with respect to the omitted portions.
CONFIDENTIAL
Exhibit B
Specifications
IPG Model 1500
Document Number
Description
[***]
[***]
[***]
[***]
IPG Model 2000
Document Number
Description
[***]
[***]
[***]
[***]
[***] Certain information has been omitted and filed separately with the Securities and Exchange
Commission. Confidential treatment has been requested with respect to the omitted portions.
Exhibit C
CCC Change Notice Form
CONFIDENTIAL
[Intentionally omitted.]
Exhibit D
Program Team List
E-mail Address
[***]
[***]
[***]
[***]
[***]
[***]
Phone Number
[***]
[***]
[***]
[***]
[***]
[***]
[***]
CONFIDENTIAL
Title/Responsibility
[***]
[***]
[***]
[***]
[***]
[***]
[***]
Phone Number
E-mail Address
[***]
Title/Responsibility
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
CCC:
Name
[***]
[***]
[***]
[***]
[***]
[***]
[***]
Nevro:
Name
[***]
[***]
[***]
[***]
[***]
Communication Counterparts:
Topics
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
CCC Representatives
Nevro Representatives
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***] Certain information has been omitted and filed separately with the Securities and Exchange
Commission. Confidential treatment has been requested with respect to the omitted portions.
Exhibit E
Approved Facility; Facilities Transfer
CONFIDENTIAL
Approved Facility:
[***]
[***]
[***] Certain information has been omitted and filed separately with the Securities and Exchange
Commission. Confidential treatment has been requested with respect to the omitted portions.
For IPG 1500:
Component
[***]
[***]
Supplier
[***]
[***]
Cost
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
TOTAL
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
Exhibit F
Bill of Materials
Qty
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
Total cost
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
For IPG 2000: [***]
[***]
[***] Certain information has been omitted and filed separately with the Securities and Exchange
Commission. Confidential treatment has been requested with respect to the omitted portions.
Exhibit 10.23(b)
FIRST AMENDMENT TO LEASE
(EXPANSION)
This First Amendment to Lease (the "Agreement") is entered into as of December 9,
2016, by and between WESTPORT OFFICE PARK, LLC, a California limited liability
company ("Landlord"), and NEVRO CORP., a Delaware corporation ("Tenant"), with respect
to the following facts and circumstances:
A.
Landlord and Tenant are parties to that certain Lease Agreement dated
March 5, 2015 (the "Original Lease") of certain premises (the "Existing Premises") within the
building commonly known as 1800 Bridge Parkway, Redwood City, California 94065 (the
"1800 Bridge Building"), and more particularly described in the Original Lease. Capitalized
terms used and not otherwise defined herein shall have the meanings given those terms in the
Original Lease. Effective as of the date hereof, all references to the "Lease" shall refer to the
Original Lease, as amended by this Agreement.
B.
Landlord and Tenant desire to amend the Original Lease to add additional
space on the terms and conditions provided herein.
IT IS, THEREFORE, agreed as follows:
1.
As used in this Agreement, the following terms have the following meanings:
"Expansion Space" means the entire building commonly known as 1600
Bridge Parkway, Redwood City, California 94065 (the "1600 Bridge Building"), containing
approximately 49,981 rentable square feet of area, and more particularly shown on
Exhibit "B-1" attached hereto.
"Expansion Space Commencement Date" shall mean the date that is the earlier
of (i) the date Tenant commences business operations in the Expansion Space, or (ii) the date
of Substantial Completion (as defined in the Tenant Work Letter attached hereto as
Exhibit "C-1") of the Expansion Space.
2.
Effective on the Expansion Space Commencement Date, the Premises shall be
expanded to include the Expansion Space. Accordingly, effective on the Expansion Space
Commencement Date, Landlord leases the Expansion Space to Tenant and Tenant leases the
Expansion Space from Landlord, and the following terms of the Original Lease are amended
as follows:
2.1
The Expansion Space is added to the Premises such that the Premises
shall be comprised of the Existing Premises and the Expansion Space, and Exhibit "B-1"
attached hereto is hereby added to Exhibit "B" to the Original Lease.
2.2
Tenant's Building Percentage and Tenant's Tax Percentage with respect
to the 1600 Bridge Building is 100%. Tenant's Common Area Building Percentage is
increased to 10.07%.
-1-
2.3
Tenant agrees to pay Landlord a monthly Base Rent for the Expansion
Space in accordance with the following schedule:
Period
(In Months)
01 – 12
13 – 15
16 – 24
25 – 36
37 – 48
49 – 60
61 – 72
72 – 84
Annual Base Rent
Monthly Base Rent
$1,199,544.00*
$1,235,530.32*
$2,471,060.64
$2,545,192.44
$2,621,548.20
$2,700,194.64
$2,781.200.52
$2,864,636.52
$99,962.00*
$102,960.86*
$205,921.72
$212,099.37
$218,462.35
$225,016.22
$231,766.71
$238,719.71
* As an inducement to Tenant entering into this Agreement, during the first fifteen (15)
months after the Expansion Space Commencement Date, so long as no Event of
Default shall have occurred under the Lease, for purposes of calculating Base Rent
only, the Expansion Space shall be deemed to contain only 24,990.50 square feet of
rentable area. The amount of Base Rent for the Expansion Space set forth in the table
in this Section 2.3 for that period reflects that deemed square footage. During such
abatement period, Tenant shall still be responsible for the payment of all of its other
monetary obligations under the Lease. The amount equal to the difference between
Base Rent payable based on that deemed square footage and the Base Rent that would
be payable if the actual square footage of the Expansion Space were used is referred to
herein as the "Rental Abatement." In the event of a default by Tenant under the terms
of the Lease that results in early termination pursuant to the provisions of Article 22 of
the Lease, then as part of the recovery set forth in Article 22 of the Lease, Landlord
shall be entitled to the recovery of the Rental Abatement.
The monthly Base Rent for the Expansion Space for the first month after the Expansion Space
Commencement Date shall be payable upon the execution of this Agreement. The monthly
Base Rent for the Expansion Space shall be payable in the manner provided for in the
Original Lease.
2.4
The Term with respect to the Expansion Space shall be coterminous
with the Existing Premises, as extended by this Agreement. In the event that Tenant exercises
an extension option pursuant to the Original Lease or the Original Lease terminates pursuant
to its terms, such extension or termination shall apply to the entire Premises then subject to
the Original Lease (including the Expansion Space).
Tenant's Parking Allocation shall be increased from one hundred
sixty-six (166) non-exclusive parking spaces to three hundred thirty (330) non-exclusive
2.5
-2-
parking spaces, which is based on a parking ratio of 3.3 non-exclusive parking spaces per one
thousand (1,000) square feet of rentable space in the Premises.
2.6
The provisions of Section 32.2 of the Original Lease shall apply
independently to each of the 1600 Bridge Building and the 1800 Bridge Building such that
Tenant shall have the right to install Monument Signage and Building-top Signage on each of
those buildings , subject to the terms and conditions of Section 32.2 of the Original Lease (as
amended hereby), except that the right to install and maintain Monument Signage on the
monument sign and Building-top Signage at the top of the 1600 Bridge Building shall
permanently terminate upon written notice from Landlord following the date upon which
Tenant ceases to occupy at least one full floor of the 1600 Bridge Building. Accordingly, for
purposes of interpreting that Section, each reference to "Building" shall be a reference to each
of the 1600 Bridge Building and the 1800 Bridge Building. Landlord hereby (a) approves the
graphics, materials, color, design, lettering size, placement and specifications and conformity
with Landlord's sign plan of the Building-top Signage to be installed on the 1600 Bridge
Building substantially in the form shown on Exhibit "D" attached hereto, and (b) agrees that
Tenant may change the color of the existing Building-top Signage on the 1800 Bridge
Building to substantially the same color as shown on Exhibit "D" attached hereto.
2.7
Except as otherwise expressly provided in this Agreement, all
references to the "Building" in the Lease shall refer to the 1600 Bridge Building and the
1800 Bridge Building, either collectively or individually, as the context requires.
3.
Tenant may take possession of the Expansion Space upon the delivery of
possession of the Expansion Space by Landlord to Tenant. Tenant's possession of the
Expansion Space prior to the Expansion Space Commencement Date shall be on all the terms
and conditions of the Original Lease, as amended hereby, except that Tenant shall not be
obligated to pay Base Rent or Tenant's Share of Operating Expenses. After the Expansion
Space Commencement Date, Tenant's obligation with respect to Base Rent and Tenant's Share
of Operating Expenses shall be as provided in the Original Lease, as amended by this
Agreement. Tenant shall accept the Expansion Space in its "AS IS" condition and Tenant
agrees that Landlord has no obligation and has made no promise to alter, remodel, improve, or
repair the Expansion Space, or any part thereof, or to repair, bring into compliance with
applicable laws, or improve any condition existing in the Expansion Space as of the
Expansion Space Commencement Date, except as provided for in the Tenant Work Letter
attached hereto as Exhibit "C-1"; provided nothing in this sentence shall limit Landlord's
ongoing obligations under the Lease with respect to repairs, restoration and maintenance.
Except as set forth herein, neither Landlord nor Landlord's agents have made any
representations or promises with respect to the condition of the 1600 Bridge Building, the
Expansion Space, the land upon which the 1600 Bridge Building is constructed, the present or
future suitability or fitness of the Expansion Space or the 1600 Bridge Building for the
conduct of Tenant's particular business, or any other matter or thing affecting or related to the
1600 Bridge Building or the Expansion Space, and no rights, easements or licenses are
acquired by Tenant by implication or otherwise except as expressly set forth in this
Agreement. Any improvements or personal property located in the Expansion Space are
delivered without any representation or warranty from Landlord, either express or implied, of
any kind, including without limitation, title, merchantability, or suitability for a particular
-3-
purpose. Tenant shall deliver to Landlord any modifications to Tenant's insurance required
under the Original Lease to reflect the addition of the Expansion Space and Tenant's entry
into the Expansion Space prior to the delivery of possession to Tenant. Without limiting the
Landlord's obligations set forth in Section 4 below, Landlord shall not be liable to Tenant or
otherwise be in default hereunder in the event that Landlord is unable to deliver the Expansion
Space to Tenant on the projected delivery date thereof due to the failure of any other tenant to
timely vacate and surrender to Landlord such Expansion Space, or any portion thereof;
provided, however, Landlord agrees to use its commercially reasonable efforts to enforce its
rights to possession of such Expansion Space against such tenant (including by bringing suit
to evict or otherwise dispossess such tenant of the Expansion Space).
4.
Temporary Space.
4.1
In the event that delivery of possession of the Expansion Space to
Tenant does not occur by the Temporary Space Date (as defined below), then Landlord shall
use commercially reasonable efforts to provide Tenant with temporary space in the Project
that is Available for Temporary Use (as defined below) containing rentable area of at least
4,000 square feet. Any space occupied by Tenant pursuant to this Section 4 is referred to in
this Section 4 as the "Temporary Space." As used in this Section 4, "Available for Temporary
Use" means that the space (i) is not occupied by any person, (ii) may be lawfully occupied
without the expenditure of additional funds, (iii) is not then subject to a lease, (iv) is not then
subject to any rights of any tenant to renew their lease or expand their premises as set forth in
their lease for the period during which Tenant would occupy such space, (v) is not then
subject to any negotiations between Landlord and a prospective tenant or an existing tenant,
and (vi) is not located in the building known as 1200 Bridge Parkway, Redwood City,
California. The term "Temporary Space Date" initially means December 1, 2017, but shall be
extended by one day for every one day in delay caused by any one or more Force Majeure
Events.
4.2
If Landlord identifies Temporary Space and Tenant elects to occupy the
Temporary Space, then during the period beginning on the delivery of possession of the
Temporary Space to Tenant and ending on the date that is five (5) days after the earlier of
(a) Expansion Space Commencement Date, and (b) if applicable, the date upon which Tenant
gives Landlord notice of termination of this Agreement pursuant to Section 6, below (such
period being referred to herein as the "Temporary Space Term"), Landlord shall allow Tenant
to use the Temporary Space for the uses permitted by the Lease. During the Temporary Space
Term, the Temporary Space shall be deemed part of the "Premises". Such Temporary Space
shall be accepted by Tenant in its "as-is" condition and configuration, it being agreed that
Landlord shall be under no obligation to perform any work in the Temporary Space or to
incur any costs in connection with Tenant's move in, move out or occupancy of the
Temporary Space. Tenant acknowledges that it shall be entitled to use and occupy the
Temporary Space at its sole cost, expense and risk. Tenant shall not construct any
improvements or make any alterations of any type to the Temporary Space without the prior
written consent of Landlord, which shall not be unreasonably withheld, conditioned or
delayed. All actual out-of-pocket of Landlord and any costs of Tenant in connection with
making the Temporary Space ready for occupancy by Tenant shall be the sole responsibility
of Tenant.
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4.3
The Temporary Space shall be subject to all the terms and conditions of
the Lease except as expressly modified in this Section 4, provided that Tenant shall not be
obligated to pay Base Rent during the Temporary Space Term with respect to the Temporary
Space. Tenant shall not be entitled to receive any allowances, abatement or other financial
concession in connection with the Temporary Space which was granted with respect to the
Premises or the Expansion Space unless such concessions are expressly provided for herein
with respect to the Temporary Space, and the Temporary Space shall not be subject to any
renewal or expansion rights of Tenant under the Lease.
4.4
Upon termination of the Temporary Space Term, Tenant shall vacate
the Temporary Space and deliver the same to Landlord in the same condition that the
Temporary Space was delivered to Tenant, ordinary wear and tear excepted and damage by
casualty excepted. At the expiration or earlier termination of the Temporary Space Term,
Tenant shall remove all debris, all items of Tenant's personalty, and any trade fixtures of
Tenant from the Temporary Space. Tenant shall be fully liable for all damage Tenant or
Tenant's agents, employees, contractors, or subcontractors cause to the Temporary Space,
ordinary wear and tear excepted and damage by casualty excepted.
4.5
Tenant shall have no right to hold over or otherwise occupy the
Temporary Space at any time following the expiration or earlier termination of the Temporary
Space Term, and in the event of such holdover, Landlord shall immediately be entitled to
institute dispossessory proceedings to recover possession of the Temporary Space, without
first providing notice thereof to Tenant. In the event of holding over by Tenant after
expiration or termination of the Temporary Space Term without the written authorization of
Landlord, Tenant shall pay, for such holding over, an amount equal to $7.80 per rentable
square foot of the rentable area of the Temporary Space each month or partial month of
holdover, plus all consequential damages that Landlord incurs as a result of the Tenant's hold
over after the date that is the later of (a) the expiration or earlier termination of the Temporary
Space Term, or (b) the date that is ten (10) days after Landlord has notified Tenant that
Landlord has executed a letter of intent or lease with another tenant for all or any portion of
the Temporary Space. During any such holdover, Tenant's occupancy of the Temporary
Space shall be deemed that of a tenant at sufferance, and in no event, either during the
Temporary Space Term or during any holdover by Tenant, shall Tenant be determined to be a
tenant-at-will under applicable law. While Tenant is occupying the Temporary Space,
Landlord or Landlord's authorized agents shall be entitled to enter the Temporary Space, upon
reasonable notice, to display the Temporary Space to prospective tenants. Tenant's
obligations under this Section 5 shall survive the termination of this Agreement pursuant to
Section 6, below.
5.
Notwithstanding Section 3 above, Landlord warrants that the roof, structural
components of the 1600 Bridge Building, HVAC system, electrical and plumbing systems,
elevator, parking lot and site lighting (the "Covered Items"), other than those constructed by
Tenant, shall be in good operating condition and repair on the date possession of the
Expansion Space is delivered to Tenant. If a non-compliance with such warranty exists as of
the delivery of possession, or if one of such Covered Items should malfunction or fail within
ninety (90) days after the delivery of possession to Tenant, Landlord shall, as Landlord's sole
obligation with respect to such matter, promptly after receipt of written notice from Tenant
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setting forth in reasonable detail the nature and extent of such non-compliance, malfunction or
failure, rectify the same at Landlord's expense. If Tenant does not give Landlord the required
notice within ten (10) days after the expiration of such ninety (90) day period, Landlord shall
have no obligation with respect to that warranty other than obligations regarding the Covered
Items set forth elsewhere in the Lease. Any replacement of the roof or HVAC system during
the Term shall be amortized as provided in Section 5.1(a)(vii) of the Original Lease.
6.
In the event that delivery of possession of the Expansion Space to Tenant does
not occur by the Scheduled Delivery Date (as defined below), then Tenant shall be entitled by
notice in writing to Landlord within ten (10) days thereafter to terminate this Agreement, in
which event the parties shall be discharged from all obligations hereunder; provided further,
however, that if such written notice of Tenant is not delivered to Landlord within such
ten (10)-day period, Tenant's right to terminate this Agreement hereunder shall terminate and
be of no further force or effect. If Tenant elects to terminate this Agreement under this Section
then such termination of this Agreement shall be effective on the date which is thirty (30)
days after delivery of notice of termination to Landlord. In the event that this Agreement is
terminated under this Section, then all of the terms and conditions of the Original Lease shall
continue to apply. The term "Scheduled Delivery Date" initially means June 1, 2018, but
such date shall be extended by one day for each day in delay caused by any one or more Force
Majeure Events or Tenant Delays (as defined in Exhibit "C-1").
7.
Landlord and Tenant acknowledge that Tenant may desire to make certain
alterations to the Existing Premises in accordance with Article 15 of the Lease ("Tenant's
Work"). So long as no Event of Default shall be existing under the Original Lease (as
amended by this Agreement) as of the date Tenant requests reimbursement of the Allowance
(as defined below), Landlord agrees to reimburse Tenant up to, and not to exceed the sum of
Three Hundred Fifty-Three Thousand Two Hundred Ninety Dollars ($353,290.00) (the
"Allowance") (based on a $7.00 prsf of the Existing Premises). Landlord shall pay the
Allowance to Tenant upon delivery to Landlord of "Tenant's Completion Notice" (as defined
below) according to the terms and conditions of this Section. The Allowance shall be used to
reimburse Tenant for hard and/or soft costs incurred in connection with Tenant's Work
("Tenant's Work Costs"); provided, however, in no event shall the Allowance be used to pay
for any of Tenant's trade fixtures, equipment or inventory. Upon the completion of Tenant's
Work, Tenant shall submit to Landlord a written notice indicating that Tenant has completed
the construction and performance of Tenant's Work in accordance with the provisions of
Article 15 of the Original Lease, as amended by this Agreement, which notice shall be
accompanied by all of the following (collectively, "Tenant's Completion Notice"): (i) copies
of paid invoices and final, unconditional lien waivers (in the form required by applicable
laws) from Tenant's general contractor and all subcontractors and material suppliers, showing
that full payment has been received for the construction of Tenant's Work; (ii) certification
from Tenant's architect that all of Tenant's Work has been completed substantially in
accordance with the plans and specifications therefor (approved by Landlord, to the extent
Landlord's approval of such plans and specifications was required under Article 15 of the
Original Lease, as amended by this Agreement) and all local governmental and quasi-
governmental authorities with jurisdiction; and (iii) a copy of the building permit for Tenant's
Work, if applicable, signed by the appropriate building inspector, indicating that Tenant's
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Work has been finally approved. The Allowance shall be available for a single
reimbursement to Tenant during the period from the Expansion Space Commencement Date
through the date that is twelve (12) months after the Expansion Space Commencement Date
(the "Window"). Any portion of the Allowance not requested by Tenant within the Window
shall be deemed forfeited by Tenant and shall no longer be available for disbursement to or
for the account of Tenant. In lieu of using some or all of the Allowance for Tenant's Work, so
long as no Event of Default then exists under the Lease (other than a default in payment of
Base Rent that would be fully cured by the requested application of the Allowance), Tenant
may elect to apply the Allowance to payment of Base Rent, first coming due after the
Expansion Space Commencement Date by written notice to Landlord.
8.
The "Expiration Date" as defined in the Original Lease is hereby amended to
be the date that is the day prior to the day that is eighty-four (84) months after the Expansion
Space Commencement Date (the "New Expiration Date"), subject to the terms set forth in this
Section 8. If the New Expiration Date falls on a day other than the last day of the calendar
month, then, the New Expiration Date shall be deemed to be the last day of such calendar
month and the Term of the Lease shall be deemed to expire on such date. The period from
July 1, 2022 (the "Extension Commencement Date") to the New Expiration Date is referred to
herein as the "Extension Term."
9.
Prior to the Extension Commencement Date, Tenant shall continue to pay to
Landlord monthly Base Rent for the Existing Premises in accordance with the terms of the
Original Lease. Commencing on the Extension Commencement Date, Tenant shall pay to
Landlord monthly Base Rent for the Existing Premises at the same rental rate per square foot
of rentable area then in effect for the Expansion Space, as the rental rate for monthly Base
Rent for the Expansion Space may increase from time to time.
10.
Tenant is in occupancy of the Existing Premises and will accept the same, as of
the commencement of the Extension Term in its "as is" condition, without any agreements,
representations, understandings or obligations on the part of Landlord to (i) perform any
alterations, additions, repairs or improvements therein, (ii) fund or otherwise pay for any
alterations, additions, repairs or improvements thereto, or (iii) grant Tenant any free rent,
concessions, credits or contributions of money with respect to the Premises, except as may be
expressly provided otherwise in this Agreement. Nothing in this Section 10 shall limit
Landlord's ongoing obligations under the Lease with respect to repairs, restoration and
maintenance.
11.
The Extension Option in Article 51 of the Original Lease shall continue to
apply during the Extension Term, except that the term "initial Lease Term" shall be replaced
with "Extension Term" each place it appears in Article 51.
12.
Except as otherwise provided herein, all of the terms and conditions of the
Original Lease shall continue to apply during the Extension Term; provided, however, that
any provisions of the Original Lease with respect to rent credit, improvement allowances,
Landlord construction obligations or other initial concessions shall be inapplicable with
respect to the Extension Term.
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13.
Landlord hereby represents and warrants to Tenant that it has dealt with no
broker, finder or similar person in connection with this Agreement, and Tenant hereby
represents and warrants to Landlord that it has dealt with no broker, finder or similar person in
connection with this Agreement, other than Cushman & Wakefield ("Landlord's Broker") and
Jones Lang LaSalle Brokerage, Inc. ("Tenant's Broker"). Landlord and Tenant shall each
defend, indemnify and hold the other harmless with respect to all claims, causes of action,
liabilities, losses, costs and expenses (including without limitation attorneys' fees and
disbursements) with respect to any leasing commission or equivalent compensation alleged to
be owing on account of the indemnifying party's dealings with any real estate broker, agent,
finder or similar person other than Landlord's Broker and Tenant's Broker. The commission
with respect to this Agreement shall be paid to Landlord's Broker by Landlord pursuant to a
separate agreement. Landlord's Broker will pay Tenant's Broker a commission pursuant to a
separate agreement. Nothing in this Agreement shall impose any obligation on Landlord to
pay a commission or fee to any party other than Landlord's Broker.
14.
As additional consideration for this Agreement, Tenant hereby certifies that:
(a)
The Original Lease (as amended hereby) is in full force and
effect.
(b)
Tenant is in possession of the Existing Premises and has not
sublet any portion of the Existing Premises or assigned its interest in the Lease
(c)
To Tenant's knowledge, there are no uncured defaults on the
part of Landlord or Tenant under the Original Lease.
(d)
All of Landlord's obligations with respect to construction of
tenant improvements in the Premises and payment of tenant improvement allowances
have been satisfied, except those provided for in the Tenant Work Letter attached
hereto as Exhibit "C-1."
There are no existing offsets or defenses which Tenant has
against the enforcement of the Original Lease (as amended hereby) by Landlord.
(e)
15.
Except as specifically provided herein, the terms and conditions of the Original
Lease as amended hereby are confirmed and continue in full force and effect. This
Agreement shall be binding on the heirs, administrators, successors and assigns (as the case
may be) of the parties hereto. This Agreement and the attached exhibits, which are hereby
incorporated into and made a part of this Agreement, together with the Original Lease, set
forth the entire agreement between the parties with respect to the matters set forth herein.
There have been no additional oral or written representations or agreements. Under no
circumstances shall Tenant be entitled to any Rent abatement, improvement allowance,
leasehold improvements, or other work to the Premises, or any similar economic incentives
that may have been provided to Tenant in connection with entering into the Original Lease,
unless specifically set forth in this Agreement. Tenant agrees that neither Tenant nor its
agents or any other parties acting on behalf of Tenant shall disclose any matters set forth in
this Agreement or disseminate or distribute any information concerning the terms, details or
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conditions hereof to any person, firm or entity without obtaining the express written consent
of Landlord. In the case of any inconsistency between the provisions of the Original Lease
and this Agreement, the provisions of this Agreement shall govern and control. Submission
of this Agreement by Landlord is not an offer to enter into this Agreement but rather is a
solicitation for such an offer by Tenant. Landlord shall not be bound by this Agreement until
Landlord has executed and delivered the same to Tenant. Time is of the essence of this
Agreement and the provisions contained herein.
16.
As an inducement to Landlord to enter into this Agreement, Tenant hereby
represents and warrants that: (i) Tenant is not, nor is it owned or controlled directly or
indirectly by, any person, group, entity or nation named on any list issued by the Office of
Foreign Assets Control of the United States Department of the Treasury ("OFAC") pursuant
to Executive Order 13224 or any similar list or any law, order, rule or regulation or any
Executive Order of the President of the United States as a terrorist, "Specially Designated
National and Blocked Person" or other banned or blocked person (any such person, group,
entity or nation being hereinafter referred to as a "Prohibited Person"); (ii) Tenant is not (nor
is it owned or controlled, directly or indirectly, by any person, group, entity or nation which
is) acting directly or indirectly for or on behalf of any Prohibited Person; and (iii) neither
Tenant (nor any person, group, entity or nation which owns or controls Tenant, directly or
indirectly) has conducted or will conduct business or has engaged or will engage in any
transaction or dealing with any Prohibited Person, including without limitation any
assignment of the Lease or any subletting of all or any portion of the Premises or the making
or receiving of any contribution of funds, goods or services to or for the benefit of a
Prohibited Person. Tenant covenants and agrees (a) to comply with all requirements of law
relating to money laundering, anti-terrorism, trade embargos and economic sanctions, now or
hereafter in effect, (b) to immediately notify Landlord in writing if any of the representations,
warranties or covenants set forth in this Section are no longer true or have been breached or if
Tenant has a reasonable basis to believe that they may no longer be true or have been
breached, (c) not to use funds from any Prohibited Person to make any payment due to
Landlord under the Lease and (d) at the request of Landlord, to provide such information as
may be reasonably requested by Landlord to determine Tenant's compliance with the terms
hereof. Any breach by Tenant of the foregoing representations and warranties shall be
deemed a default by Tenant under this Lease and shall be covered by the indemnity provisions
of the Original Lease. The representations and warranties contained in this Section shall be
continuing in nature and shall survive the expiration or earlier termination of the Lease.
17.
To satisfy compliance with the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), and Section 4975(c) of the Internal Revenue Code, Tenant
hereby certifies that the representations and warranties in Article 53 of the Original Lease are
true and correct as of the date of this Agreement.
18.
Pursuant to California Civil Code Section 1938, Tenant is hereby notified that,
as of the date hereof, the 1600 Bridge Building and the 1800 Bridge Building have not
undergone an inspection by a "Certified Access Specialist" and Landlord states the following:
"A Certified Access Specialist (CASp) can inspect the subject premises and determine
whether the subject premises comply with all of the applicable construction-related
accessibility standards under state law. Although state law does not require a CASp inspection
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of the subject premises, the commercial property owner or lessor may not prohibit the lessee
or tenant from obtaining a CASp inspection of the subject premises for the occupancy or
potential occupancy of the lessee or tenant, if requested by the lessee or tenant. The parties
shall mutually agree on the arrangements for the time and manner of the CASp inspection, the
payment of the fee for the CASp inspection, and the cost of making any repairs necessary to
correct violations of construction-related accessibility standards within the premises."
Landlord makes no representations as to the compliance of the Premises, the 1600 Bridge
Building or the 1800 Bridge Building with accessibility standards. Notwithstanding anything
contained herein or in the Original Lease to the contrary, Tenant shall not be responsible for
compliance with the path of travel provisions of the Americans with Disabilities Act at any
time during the Term (including any extension thereof) except for any compliance work
required with reference to the particular use of Tenant (other than general office use), the acts
or omissions of Tenant or any of Tenant's agents, employees, contractors, sublessees or
invitees, or any alterations, additions or improvements performed by or on behalf of Tenant
(other than the Expansion Space Improvements).
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IN WITNESS WHEREOF, this Agreement was executed as of the date first above
written.
Landlord:
WESTPORT OFFICE PARK, LLC,
a California limited liability company
By: THE PRUDENTIAL INSURANCE
COMPANY OF AMERICA, a New
Jersey corporation, acting solely on behalf
of and for the benefit of, and with its
liability limited to the assets of, its
insurance company separate account,
PRISA II, its member
/s/ Jeffrey D. Mills
Jeffrey D. Mills
Vice President
[Printed Name and Title]
By:
Tenant:
NEVRO CORP., a Delaware corporation
By:
/s/ Andrew Galligan
Its:
Chief Financial Officer
By:
/s/ Richard B. Carter
Its:
VP Finance
If Tenant is a corporation, this instrument must
be executed by the chairman of the board, the
president or any vice president and the secretary,
any assistant secretary, the chief financial officer
or any assistant financial officer or any assistant
treasurer of such corporation, unless the bylaws
or a resolution of the board of directors shall
otherwise provide, in which case the bylaws or a
certified copy of the resolution, as the case may
be, must be attached to this instrument.
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EXHIBIT B-1
EXPANSION SPACE
(See Attached.)
Exhibit B-1
EXHIBIT C-1
TENANT WORK LETTER
This Tenant Work Letter is attached to and made a part of that certain First
Amendment to Lease dated December 9, 2016 (the "Amendment") between WESTPORT
OFFICE PARK, LLC, a California limited liability company ("Landlord"), and NEVRO
CORP., a Delaware corporation ("Tenant"), which amends the Original Lease (as defined in
the Amendment). Any capitalized term used and not otherwise defined in this Tenant Work
Letter has the meaning given such term in the Amendment (or, if not defined in the
Amendment, the meaning given such term in the Original Lease). This Tenant Work Letter
sets forth the terms and conditions relating to the construction of the Expansion Improvements
in the Expansion Space.
Section 1
BASE, SHELL AND CORE; LANDLORD WORK
1.1
Base, Shell and Core. Landlord has previously constructed the base,
shell, and core (i) of the Expansion Space and (ii) of the floor(s) of the Building on which the
Expansion Space are located (collectively, the "Base, Shell, and Core") and other
improvements, and Tenant shall accept the Base, Shell and Core and such other improvements
in their current "As-Is" condition existing as of the date of the Amendment and the Expansion
Space Commencement Date. Tenant shall install in the Expansion Space certain "Expansion
Space Improvements" (as defined below) pursuant to the provisions of this Tenant Work
Letter. Except for Landlord's obligation to disburse the Expansion Space Improvement
Allowance and perform the Landlord Work and the Expansion Space Improvement work as
described below, Landlord shall not be obligated to make or pay for any alterations or
improvements to the Expansion Space, the Premises, the Building or the Project.
1.2
Landlord Work. As a condition to the delivery of possession of the
Expansion Space to Tenant, Landlord shall satisfy the following conditions at Landlord's sole
cost and expense (the "Landlord's Work"):
reasonably approved by Landlord; and
(a) install one (1) new electric car charging station in a location
(b) correct any failure of the path of travel for the Expansion Space
outside of the 1600 Bridge Building to comply with the Americans with Disabilities Act, as
interpreted by the City of Redwood City and Landlord's architect, to the extent such
correction is necessary in order for Tenant to obtain a building permit or a certificate of
occupancy for the Expansion Space Improvements in the Expansion Space for general office
purposes; provided that nothing contained herein shall be deemed to prohibit Landlord from
obtaining a variance or relying upon a grandfathered right in order to achieve compliance with
Exhibit C-1
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those codes. Notwithstanding the foregoing, Landlord shall have the right to contest any
alleged violation in good faith, including, without limitation, the right to apply for and obtain
a waiver or deferment of compliance, the right to assert any and all defenses allowed by law,
and the right to appeal any decisions, judgments or rulings to the fullest extent permitted by
law, and Landlord's obligation to perform work or take such other action to cure a violation
under this Section shall apply after the exhaustion of any and all rights to appeal or contest.
Section 2
EXPANSION SPACE IMPROVEMENTS
2.1
Expansion Space Improvement Allowance. Tenant shall be entitled to
a one-time tenant improvement allowance (the "Expansion Space Improvement Allowance")
in the amount of up to, but not exceeding $45.00 per rentable square foot of the Expansion
Space (i.e., up to $2,249,145.00, based on 49,981 rentable square feet in the Expansion
Space), for the costs relating to the initial design and construction of Tenant's improvements
which are permanently affixed to the Expansion Space (the "Expansion Space
Improvements"). In no event shall Landlord be obligated to make disbursements pursuant to
this Tenant Work Letter in a total amount which exceeds the Expansion Space Improvement
Allowance. Tenant shall not be entitled to receive any cash payment or credit against Rent or
otherwise for any unused portion of the Expansion Space Improvement Allowance which is
not used to pay for the Expansion Space Improvement Allowance Items (as such term is
defined below). In no event shall the Expansion Space Improvement Allowance be used for
purposes of constructing improvements in the Expansion Space for purposes of offering space
for sublease or for the benefit of a subtenant. Notwithstanding anything to the contrary in this
Section 2.1, so long as the Expansion Space Improvements have been completed and all cost
of the Expansion Space Improvements have been paid, and so long as no Event of Default
exists under the Lease, Tenant may use up to $499,810.00 of any unused portion of the
Expansion Space Improvement Allowance for furniture, cabling and/or moving expenses.
2.2
Disbursement of the Expansion Space Improvement Allowance.
Except as otherwise set forth in this Tenant Work Letter, the Expansion Space Improvement
Allowance shall be disbursed by Landlord (each of which disbursement shall be made
pursuant to Landlord's standard disbursement process), only for the following items and costs
(collectively, the "Expansion Space Improvement Allowance Items"):
2.2.1 Payment of the fees of the "Architect" and the "Engineers," as
those terms are defined in Section 3.1 of this Tenant Work Letter, and payment of the fees
incurred by, and the cost of documents and materials supplied by, Landlord and Landlord's
consultants in connection with the preparation and review of the "Construction Drawings," as
that term is defined in Section 3.1 of this Tenant Work Letter;
construction of the Expansion Space Improvements;
2.2.2 The payment of plan check, permit and license fees relating to
Exhibit C-1
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2.2.3 The cost of construction of the Expansion Space Improvements,
including, without limitation, contractors' fees and general conditions, testing and inspection
costs, costs of utilities, trash removal, parking and hoists;
2.2.4 The cost of any changes in the Base, Shell and Core when such
changes are required by the Construction Drawings (including if such changes are due to the
fact that such work is prepared on an unoccupied basis), such cost to include all direct
architectural and/or engineering fees and expenses incurred in connection therewith;
Expansion Space Improvements required by any applicable laws;
2.2.5 The cost of any changes to the Construction Drawings or
2.2.6 Sales and use taxes and Title 24 fees;
Section 4.3.2 of this Tenant Work Letter;
2.2.7 "Landlord's Supervision Fee," as that term is defined in
2.2.8 The costs and expenses associated with complying with all
national, state and local codes, including California Energy Code, Title 24, including, without
limitation, all costs associated with any lighting or HVAC retrofits required thereby; and
the construction of the Expansion Space Improvements.
2.2.9 All other costs to be expended by Landlord in connection with
2.3
Specifications for Building Standard Components. Landlord has
established specifications (the "Specifications") for the Building standard components to be
used in the construction of the Expansion Space Improvements in the Expansion Space, which
Specifications have been received by Tenant. Unless otherwise agreed to by Landlord, the
Expansion Space Improvements shall comply with the Specifications. Landlord may make
changes to the Specifications from time to time.
Section 3
CONSTRUCTION DRAWINGS
3.1
Selection of Architect/Construction Drawings. Landlord shall retain an
architect/space planner (the "Architect") to prepare the "Construction Drawings," as that term
is defined in this Section 3.1. Landlord shall retain Landlord's engineering consultants (the
"Engineers") to prepare all plans and engineering working drawings relating to the structural,
mechanical, electrical, plumbing, HVAC, lifesafety, and sprinkler work in the Expansion
Space. The plans and drawings to be prepared by Architect and the Engineers hereunder shall
be known collectively as the "Construction Drawings." Notwithstanding that any
Construction Drawings are reviewed by Landlord or prepared by its Architect, Engineers and
consultants, and notwithstanding any advice or assistance which may be rendered to Tenant
by Landlord or Landlord's Architect, Engineers, and consultants, Landlord shall have no
liability whatsoever in connection therewith and shall not be responsible for any omissions or
Exhibit C-1
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errors contained in the Construction Drawings, and Tenant's waiver and indemnity set forth in
the Lease shall specifically apply to the Construction Drawings.
3.2
Final Space Plan. No later than thirty (30) days after the date hereof,
Tenant shall meet with Landlord's Architect and provide Landlord's Architect with
information regarding the preliminary layout and designation of all proposed offices, rooms
and other partitioning, and their intended use and equipment to be contained therein (the
"Information"). Landlord and Architect shall, based on such Information (subject to changes
reasonably required by Landlord), prepare the final space plan for Expansion Space
Improvements in the Expansion Space (collectively, the "Final Space Plan"), which Final
Space Plan shall include a layout and designation of all offices, rooms and other partitioning,
their intended use, and equipment to be contained therein, and shall deliver the Final Space
Plan to Tenant for Tenant's approval. Tenant shall approve or reasonably disapprove the
Final Space Plan or any revisions thereto within ten (10) business days after Landlord delivers
the Final Space Plan or such revisions to Tenant; provided, however, that Tenant may only
disapprove the Final Space Plan to the extent the same is not (subject to changes reasonably
required by Landlord) in substantial conformance with the Information provided by Tenant to
Architect ("Space Plan Design Problem"). Tenant's failure to disapprove the Final Space Plan
for any Space Plan Design Problem or any revisions thereto by written notice to Landlord
(which notice shall specify in detail the reasonable reasons for Tenant's disapproval pertaining
to any Space Plan Design Problem) within said ten (10) business day period shall be deemed
to constitute Tenant's approval of the Final Space Plan or such revisions.
3.3
Final Working Drawings. Based on the Final Space Plan, Landlord
shall cause the Architect and the Engineers to complete the architectural and engineering
drawings for the Expansion Space, and Architect shall compile a fully coordinated set of
architectural, structural, mechanical, electrical and plumbing working drawings in a form
which is complete to allow subcontractors to bid on the work and to obtain all applicable
permits (collectively, the "Final Working Drawings") and shall submit the same to Tenant for
Tenant's approval. The Final Working Drawings shall incorporate modifications to the Final
Space Plan as necessary to comply with the floor load and other structural and system
requirements of the Building. To the extent that the finishes and specifications are not
completely set forth in the Final Space Plan for any portion of the Expansion Space
Improvements depicted thereon, the actual specifications and finish work shall be in
accordance with the Specifications. Tenant shall approve or reasonably disapprove the Final
Working Drawings or any revisions thereto within ten (10) business days after Landlord
delivers the Final Working Drawings or any revisions thereto to Tenant; provided, however,
that Tenant may only disapprove the Final Working Drawings to the extent the same are not
(subject to changes reasonably required by Landlord) in substantial conformance with the
Final Space Plan ("Working Drawing Design Problem"). Tenant's failure to reasonably
disapprove the Final Working Drawings or any revisions thereto by written notice to Landlord
(which notice shall specify in detail the reasonable reasons for Tenant's disapproval pertaining
to any Working Drawing Design Problem) within said ten (10) business day period shall be
deemed to constitute Tenant's approval of the Final Working Drawings or such revisions.
Exhibit C-1
-4-
3.4
Approved Working Drawings. The Final Working Drawings shall be
approved or deemed approved by Tenant (the "Approved Working Drawings") prior to the
commencement of the construction of the Expansion Space Improvements. Landlord shall
cause the Architect to submit the Approved Working Drawing to the applicable local
governmental agency for all applicable building permits necessary to allow "Contractor," as
that term is defined in Section 4.1 of this Tenant Work Letter, to commence and fully
complete the construction of the Expansion Space Improvements (the "Permits"). No
changes, modifications or alterations in the Approved Working Drawings may be made
without the prior written consent of Landlord, not to be unreasonably withheld, conditioned or
delayed beyond the applicable time periods in this Section 3, provided that Landlord may
withhold its consent, in its sole discretion, to any change in the Approved Working Drawings,
if such change would directly or indirectly delay the Substantial Completion of the Expansion
Space.
3.5
Time Deadlines. Tenant shall use reasonable efforts to cooperate with
Architect, the Engineers, and Landlord to complete all phases of the Construction Drawings
and the permitting process and to receive the Permits, and with Contractor, for approval of the
"Cost Proposal," as that term is defined in Section 4.2 below as soon as possible after the
execution of the Amendment and, in this regard, to the extent Landlord considers such
meeting(s) to be reasonably necessary, Tenant shall meet with Landlord on a weekly basis to
discuss Tenant's progress in connection with the same.
3.6
Design Problem. Notwithstanding anything to the contrary in this
Tenant Work Letter, Landlord shall be deemed to have acted reasonably in disapproving plans
or designs if Landlord determines in good faith that the matter disapproved constitutes or
would create a Design Problem (as defined below). As used herein, a "Design Problem" shall
mean (i) adverse effect on the structural integrity of the Building; (ii) possible damage to the
Building's systems; (iii) non-compliance with applicable codes; (iv) adverse effect on the
exterior appearance of the Building; (v) creation of the potential for unusual expenses to be
incurred upon the removal of the alteration or improvement and the restoration of the
Expansion Space upon termination of this Lease, unless Tenant agrees to pay for the
incremental removal costs caused by the non-typical alterations; (vi) creation of the potential
for unusual expenses to be incurred in connection with the maintenance by Landlord of the
alteration or improvement, unless Tenant agrees to pay for the incremental maintenance costs
caused by the non-typical alterations, (vii) a material effect any other tenant or occupant of
the Building, (viii) creation of an obligation to make other alterations, additions or
improvements to the Expansion Space or Common Areas in order to comply with applicable
laws (including, without limitation, the Americans with Disabilities Act) or (ix) adverse effect
on the LEED rating of the Building.
Section 4
CONSTRUCTION OF THE EXPANSION SPACE IMPROVEMENTS
4.1
Contractor. A contractor, under the supervision of and selected by
Landlord, shall construct the Expansion Space Improvements (the "Contractor").
Exhibit C-1
-5-
4.2
Cost Proposal. After the Approved Working Drawings are signed by
Landlord and Tenant, Landlord cause the Contractor to competitively bid the subcontracts
with the major trades to at least three (3) subcontractors in each such major trade and based on
that bidding process shall provide Tenant with a cost proposal in accordance with the
Approved Working Drawings, which cost proposal shall include, as nearly as possible, the
cost of all Expansion Space Improvement Allowance Items to be incurred by Tenant in
connection with the construction of the Expansion Space Improvements (the "Cost
Proposal"). Notwithstanding the foregoing, portions of the cost of the Expansion Space
Improvements may be delivered to Tenant as such portions of the Expansion Space
Improvements are priced by Contractor (on an individual item-by-item or trade-by-trade
basis), even before the Approved Working Drawings are completed (the "Partial Cost
Proposal"). Tenant shall approve and deliver the Cost Proposal to Landlord within ten (10)
business days of the receipt of the same (or, as to a Partial Cost Proposal, within five (5)
business days of receipt of the same). The date by which Tenant must approve and deliver the
Cost Proposal, or the last Partial Cost Proposal to Landlord, as the case may be, shall be
known hereafter as the "Cost Proposal Delivery Date." The total of all Partial Cost Proposals,
if any, shall be known as the Cost Proposal.
4.3
Construction of Expansion Space Improvements by Landlord's
Contractor under the Supervision of Landlord.
4.3.1. Over-Allowance Amount. On the Cost Proposal Delivery Date,
Tenant shall deliver to Landlord cash in an amount (the "Over-Allowance Amount") equal to
the difference between (i) the amount of the Cost Proposal and (ii) the amount of the
Expansion Space Improvement Allowance (less any portion thereof already disbursed by
Landlord, or in the process of being disbursed by Landlord, on or before the Cost Proposal
Delivery Date). The Over-Allowance Amount shall be disbursed by Landlord prior to the
disbursement of any then remaining portion of the Expansion Space Improvement Allowance,
and such disbursement shall be pursuant to the same procedure as the Expansion Space
Improvement Allowance. In the event that, after the Cost Proposal Delivery Date, any
revisions, changes, or substitutions shall be made to the Construction Drawings or the
Expansion Space Improvements, any additional costs which arise in connection with such
revisions, changes or substitutions shall be added to the Cost Proposal and shall be paid by
Tenant to Landlord immediately upon Landlord's request to the extent such additional costs
increase any existing Over-Allowance Amount or result in an Over-Allowance Amount.
Following completion of the Expansion Space Improvements, Landlord shall deliver to
Tenant a final cost statement which shall indicate the final costs of the Expansion Space
Improvement Allowance Items, and if such cost statement indicates that Tenant has underpaid
or overpaid the Over-Allowance Amount, then within ten (10) business days after receipt of
such statement, Tenant shall deliver to Landlord the amount of such underpayment or
Landlord shall return to Tenant the amount of such overpayment, as the case may be.
4.3.2 Landlord Supervision. After Landlord selects the Contractor,
Landlord shall independently retain Contractor to construct the Expansion Space
Improvements in accordance with the Approved Working Drawings and the Cost Proposal
and Landlord shall supervise the construction by Contractor, and Tenant shall pay a
Exhibit C-1
-6-
construction supervision and management fee (the "Landlord's Supervision Fee") to Landlord
in an amount equal to the product of (i) three percent (3%) and (ii) an amount equal to the
Expansion Space Improvement Allowance plus the Over-Allowance Amount (as such Over-
Allowance Amount may increase pursuant to the terms of this Tenant Work Letter).
4.3.3 Contractor's Warranties and Guaranties. Landlord hereby
assigns to Tenant all warranties and guaranties by Contractor relating to the Expansion Space
Improvements, which assignment shall be on a non-exclusive basis such that the warranties
and guarantees may be enforced by Landlord and/or Tenant, and Tenant hereby waives all
claims against Landlord relating to, or arising out of the construction of, the Expansion Space
Improvements.
Section 5
SUBSTANTIAL COMPLETION;
EXPANSION SPACE COMMENCEMENT DATE
5.1
Substantial Completion. For purposes of the Amendment, including
for purposes of determining the Expansion Space Commencement Date "Substantial
Completion" of the Expansion Space shall occur upon the later of (a) completion of
construction of the Expansion Space Improvements in the Expansion Space pursuant to the
Approved Working Drawings, with the exception of any punchlist items and any tenant
fixtures, work-stations, built-in furniture, or equipment to be installed by Tenant or under the
supervision of Contractor, and (b) Landlord's receipt of a final sign-off on the permits for the
Expansion Space Improvements sufficient under customary practices in Redwood City,
California, to allow legal occupancy of the Expansion Space.
5.2
Tenant Delays. If there shall be a delay or there are delays in the
Substantial Completion of the Expansion Space (as a direct, indirect, partial, or total result of
any of the following (collectively, "Tenant Delays"):
5.2.1 Tenant's failure to timely approve any matter requiring Tenant's
approval, including a Partial Cost Proposal or the Cost Proposal and/or Tenant's failure to
timely perform any other obligation or act required of Tenant hereunder;
the Lease;
5.2.2 a breach by Tenant of the terms of this Tenant Work Letter or
5.2.3 Tenant's request for changes in the Construction Drawings;
5.2.4 Tenant's requirement for materials, components, finishes or
improvements which are not available in a reasonable time (based upon the anticipated date of
the Expansion Space Commencement Date) or which are different from, or not included in,
the Specifications;
Exhibit C-1
-7-
Working Drawings;
5.2.5 changes to the Base, Shell and Core required by the Approved
5.2.6 any changes in the Construction Drawings and/or the Expansion
Space Improvements required by (i) applicable laws if such changes are directly attributable
to Tenant's use of the Expansion Space or Tenant's specialized Expansion Space
Improvement(s) (as reasonably determined by Landlord), and/or (ii) Landlord pursuant to
Section 4.2 above; or
employees;
5.2.7 any other acts or omissions of Tenant, or its agents, or
5.2.8
then, notwithstanding anything to the contrary set forth in the
Amendment and regardless of the actual date of the Substantial Completion of the Expansion
Space, the Expansion Space Commencement Date shall be deemed to be the date the
Expansion Space Commencement Date would have occurred if no Tenant Delays, as set forth
above, had occurred.
Section 6
MISCELLANEOUS
6.1
Tenant's Representative. Tenant has designated Rich Carter as its sole
representative with respect to the matters set forth in this Tenant Work Letter, who shall have
full authority and responsibility to act on behalf of the Tenant as required in this Tenant Work
Letter.
6.2
Landlord's Representative. Landlord has designated Christine Scheerer
as its sole representative with respect to the matters set forth in this Tenant Work Letter, who,
until further notice to Tenant, shall have full authority and responsibility to act on behalf of
the Landlord as required in this Tenant Work Letter.
6.3
Time of the Essence in This Tenant Work Letter. Unless otherwise
indicated, all references herein to a "number of days" shall mean and refer to calendar days.
In all instances where Tenant is required to approve or deliver an item, if no written notice of
approval is given or the item is not delivered within the stated time period, at Landlord's sole
option, at the end of said period the item shall automatically be deemed approved or delivered
by Tenant and the next succeeding time period shall commence.
6.4
Tenant's Lease Default. Notwithstanding any provision to the contrary
contained in the Lease, if an Event of Default by Tenant under the Lease has occurred at any
time on or before the Substantial Completion of the Expansion Space and is continuing, then
(i) in addition to all other rights and remedies granted to Landlord pursuant to the Lease, at
law and/or in equity, Landlord shall have the right to withhold payment of all or any portion
of the Expansion Space Improvement Allowance and/or Landlord may cause Contractor to
cease the construction of the Expansion Space (in which case, Tenant shall be responsible for
Exhibit C-1
-8-
any delay in the Substantial Completion of the Expansion Space caused by such work
stoppage as set forth in Section 5.2 of this Tenant Work Letter), and (ii) all other obligations
of Landlord under the terms of this Tenant Work Letter shall be forgiven until such time as
such Event of Default is cured pursuant to the terms of the Lease (in which case, Tenant shall
be responsible for any delay in the Substantial Completion of the Expansion Space caused by
such inaction by Landlord). In addition, if the Lease is terminated prior to the Expansion
Space Commencement Date, for any reason due to an Event of Default by Tenant under the
Lease, in addition to any other remedies available to Landlord under the Lease, at law and/or
in equity, Tenant shall pay to Landlord, as Additional Rent under the Lease, within ten (10)
days of receipt of a statement therefor, any and all reasonable out of pocket costs (if any)
incurred by Landlord (including any portion of the Expansion Space Improvement Allowance
disbursed by Landlord) and not reimbursed or otherwise paid by Tenant through the date of
such termination in connection with the Expansion Space Improvements to the extent
planned, installed and/or constructed as of such date of termination, including, but not limited
to, any costs related to the removal of all or any portion of the Expansion Space
Improvements and restoration costs related thereto.
6.5
Access. Upon reasonable prior notice, Landlord shall arrange for
Tenant and Tenant's agents to have access to inspect the Expansion Space, which inspection
shall take place at a time reasonably acceptable to Landlord, Tenant and the existing tenant.
Tenant and Tenant's agents shall be accompanied by Landlord and/or existing tenant and/or
their respective agents, to the extent Landlord and/or existing tenant so elect.
Exhibit C-1
-9-
EXHIBIT D
BUILDING-TOP SIGNAGE
(See Attached.)
Exhibit D
Subsidiary
Nevro Medical Sarl
Nevro Medical Limited
Nevro Medical Pty Ltd.
Nevro Germany GmbH
List of Subsidiaries of
Nevro Corp.
Jurisdiction of Incorporation or Organization
Switzerland
United Kingdom
Australia
Germany
Exhibit 21.1
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No.
333-211864) and Form S-8 (Nos. 333-209816, 333-202857, and 333-200145) of Nevro Corp. of our report
dated February 23, 2017 relating to the consolidated financial statements and the effectiveness of internal
control over financial reporting, which appears in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
San Jose, California
February 23, 2017
CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER
PURSUANT TO
SECURITIES EXCHANGE ACT RULES 13A-14(A) AND 15D-14(A)
Exhibit 31.1
I, Rami Elghandour, certify that:
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of Nevro Corp.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to
be designed under our supervision, to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: February 23, 2017
/s/ Rami Elghandour
Rami Elghandour
Chief Executive Officer
(Principal Executive Officer)
CERTIFICATION OF THE CHIEF FINANCIAL OFFICER
PURSUANT TO
SECURITIES EXCHANGE ACT RULES 13A-14(A) AND 15D-14(A)
Exhibit 31.2
I, Andrew H. Galligan, certify that:
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of Nevro Corp.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to
be designed under our supervision, to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: February 23, 2017
/s/ Andrew H. Galligan
Andrew H. Galligan
Chief Financial Officer
(Principal Financial and Accounting Officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the Annual Report of Nevro Corp. (the “Company”) on Form 10-K for the fiscal year ended
December 31, 2016, as filed with the Securities and Exchange Commission (the “Report”), Rami Elghandour, Chief
Executive Officer of the Company, and Andrew H. Galligan, Chief Financial Officer of the Company, respectively,
do each hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002, that:
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange
Act of 1934; and
The information in the Report fairly presents, in all material respects, the financial condition and results
of operations of the Company.
Date: February 23, 2017
/s/ Rami Elghandour
Rami Elghandour
Chief Executive Officer
(principal executive officer)
/s/ Andrew H. Galligan
Andrew H. Galligan
Chief Financial Officer
(principal financial and accounting officer)