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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
FORM 10-Q
REGISTRATION STATEMENT
Under
The Securities Act of 1933
 
 
 
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For transition period from               to
Commission File Number        
 
 
 
SILK ROAD MEDICAL, INC.
(Exact name of registrant as specified in its charter)
 
 
 
Delaware
3841
20-8777622
(State or other jurisdiction of
incorporation or organization)
(Primary Standard Industrial
Classification Code Number)
(I.R.S. Employer
Identification Number)
1213 Innsbruck Dr. Sunnyvale, CA 94089, (408) 720-9002
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
 
 
 
Erica J. Rogers
Chief Executive Officer
1213 Innsbruck Dr. Sunnyvale, CA 94089 (408) 720-9002
(Name, address, including zip code, and telephone number, including area code, of agent for service)
 
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
¨
 
Accelerated filer
¨
Non-accelerated filer
ý
 
Smaller reporting company
ý
Emerging growth company
ý
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.  ý
Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Act). Yes o No ý
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock
SILK
Nasdaq Global Market
As of April 30, 2019, the number of outstanding shares of the registrant's common stock, par value $0.001 per share, was 30,672,125.










TABLE OF CONTENTS
 
Page
 
 
 
 
 
 
 
 
 
 
 

1


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

2


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


3


Part I. Financial Information
Item 1: Unaudited Condensed Consolidated Financial Statements
Silk Road Medical, Inc.
Condensed Consolidated Balance Sheets
(unaudited)
(in thousands, except share and per share data)
March 31,
 
December 31,
 
2019
 
2018
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
15,509

 
$
24,990

Accounts receivable, net
4,096

 
4,520

Inventories
8,056

 
5,744

Prepaid expenses and other current assets
1,391

 
1,408

Total current assets
29,052

 
36,662

Property and equipment, net
2,846

 
2,880

Restricted cash
310

 
310

Other non-current assets
6,460

 
1,029

Total assets
$
38,668

 
$
40,881

Liabilities, redeemable convertible preferred stock and stockholders' deficit
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
3,134

 
$
1,252

Accrued liabilities
7,658

 
7,586

Total current liabilities
10,792

 
8,838

Long-term debt
44,597

 
44,201

Redeemable convertible preferred stock warrant liability
31,803

 
16,091

Other liabilities
4,285

 
1,069

Total liabilities
91,477

 
70,199

Commitments and contingencies (Note 7)

 

Redeemable convertible preferred stock issuable in series, $0.001 par value
 
 
 
Shares authorized: 24,069,615 at March 31, 2019 and December 31, 2018
 
 
 
Shares issued and outstanding: 21,238,105 and 21,233,190 at March 31, 2019 and December 31, 2018, respectively
 
 
 
Liquidation preference: $121,174 and $121,144 at March 31, 2019 and December 31, 2018, respectively
105,265

 
105,235

Stockholders' deficit:
 
 
 
Common stock, $0.001 par value
 
 
 
Shares authorized: 29,879,220 at March 31, 2019 and December 31, 2018
 
 
 
Shares issued and outstanding: 1,386,615 and 1,135,310 at March 31, 2019 and December 31, 2018, respectively
1

 
1

Additional paid-in capital
5,194

 
4,557

Accumulated deficit
(163,269
)
 
(139,111
)
Total stockholders' deficit
(158,074
)
 
(134,553
)
Total liabilities, redeemable convertible preferred stock and stockholders' deficit
$
38,668

 
$
40,881


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

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

 
 
 
 
(in thousands, except share and per share data)
Three Months Ended
March 31,
 
2019

2018
Revenue
$
12,766

 
$
5,706

Cost of goods sold
3,339

 
1,934

Gross profit
9,427

 
3,772

Operating expenses:
 
 
 
Research and development
2,707

 
2,100

Selling, general and administrative
13,866

 
6,319

Total operating expenses
16,573

 
8,419

Loss from operations
(7,146
)
 
(4,647
)
Interest income
52

 
13

Interest expense
(1,352
)
 
(989
)
Other income (expense), net
(15,712
)
 
215

Net loss and comprehensive loss
$
(24,158
)

$
(5,408
)
Net loss per share, basic and diluted
$
(20.12
)
 
$
(7.31
)
Weighted average common shares used to compute net loss per share, basic and diluted
1,200,719

 
739,308


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

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

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

 
$
105,235

 
 
1,135,310

 
$
1

 
$
4,557

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

 

 
 
251,305

 

 
375

 

 
375

Exercise of Series C preferred stock warrants
4,915

 
30

 
 

 

 

 

 

Employee stock-based compensation

 

 
 

 

 
241

 

 
241

Nonemployee stock-based compensation

 

 
 

 

 
21

 

 
21

Net loss and comprehensive loss

 

 
 

 

 

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

 
$
105,265

 
 
1,386,615

 
$
1

 
$
5,194

 
$
(163,269
)
 
$
(158,074
)
(in thousands, except share data)
Redeemable Convertible
Preferred Stock
 
 
Common Stock
 
Additional
Paid-in Capital
 
Accumulated Deficit
 
Total
 
Shares
 
Amount
 
 
Shares
 
Amount
 
 
 
Balances at December 31, 2017
21,233,190

 
$
105,235

 
 
663,270

 
$
1

 
$
2,977

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

 

 
 
186,944

 

 
284

 

 
284

Employee stock-based compensation

 

 
 

 

 
164

 

 
164

Nonemployee stock-based compensation

 

 
 

 

 
(2
)
 

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

 

 
 

 

 

 
87

 
87

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

 

 
 

 

 
13

 
(13
)
 

Net loss and comprehensive loss

 

 
 

 

 

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

 
$
105,235

 
 
850,214

 
$
1

 
$
3,436

 
$
(106,890
)
 
$
(103,453
)



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

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

(in thousands)
Three Months Ended March 31,
 
2019
 
2018
Cash flows from operating activities
 
 
 
Net loss
$
(24,158
)
 
$
(5,408
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization expense
174

 
57

Stock-based compensation expense
262

 
162

Change in fair value of redeemable convertible preferred stock warrant liability
15,712

 
(216
)
Amortization of debt discount and debt issuance costs
11

 
23

Amortization of right-of-use asset
162

 

Non-cash interest expense
471

 
386

Provision for accounts receivable allowances
313

 
278

Provision for excess and obsolete inventories
27

 

Changes in assets and liabilities
 
 
 
Accounts receivable
110

 
2,012

Inventories
(2,339
)
 
(433
)
Prepaid expenses and other current assets
16

 
(387
)
Other assets
(651
)
 
17

Accounts payable
2,287

 
(244
)
Accrued liabilities
52

 
(897
)
Other liabilities
(1,069
)
 

Net cash used in operating activities
(8,620
)
 
(4,650
)
 
 
 
 
Cash flows from investing activities
 
 
 
Purchase of property and equipment
(117
)
 
(455
)
Net cash used in investing activities
(117
)
 
(455
)
 
 
 
 
Cash flows from financing activities
 
 
 
Proceeds from issuance of common stock
375

 
284

Proceeds from exercise of preferred stock warrants
30

 

Payments of deferred offering costs
(1,149
)
 

Net cash provided by (used in) financing activities
(744
)
 
284

Net change in cash, cash equivalents and restricted cash
(9,481
)
 
(4,821
)
Cash, cash equivalents and restricted cash, beginning of period
25,300

 
33,841

Cash, cash equivalents and restricted cash, end of period
$
15,819

 
$
29,020

 
 
 
 
Supplemental disclosure of cash flow information
 
 
 
Cash paid for interest
$
870

 
$
580

 
 
 
 
Non-cash investing and financing activities:
 
 
 
Accounts payable and accrued liabilities for purchases of property and equipment
$
22

 
$
90

Unpaid deferred offering costs
$
1,204

 
$

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

 
$


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

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


1.    Formation and Business of the Company
The Company
Silk Road Medical, Inc. (the “Company”) was incorporated in the state of Delaware on March 21, 2007. The Company has developed a technologically advanced, minimally-invasive solution for patients with carotid artery disease who are at risk for stroke. The Company's portfolio of TCAR products enable a new procedure, referred to as transcarotid artery revascularization, or TCAR, that combines the benefits of endovascular techniques and surgical principles. The Company manufactures and sells in the United States its portfolio of TCAR products which are designed to provide direct access to the carotid artery, effective reduction in stroke risk throughout the procedure, and long-term restraint of carotid plaque. The Company commercialized its products in the United States in April 2016.
Reverse Stock Split
On March 13, 2019, the Company's Board of Directors approved an amendment to the Company's amended and restated certificate of incorporation to effect a 2.7-for-1 reverse stock split of the Company's common stock and redeemable convertible preferred stock. The par values of the common stock and redeemable convertible preferred stock were not adjusted as a result of the reverse stock split. All common stock, redeemable convertible preferred stock, stock options and warrants, and related per share amounts in the condensed consolidated financial statements have been retroactively adjusted for all periods presented to give effect to the reverse stock split. The reverse stock split was effected on March 27, 2019.
Initial Public Offering
In April 2019, the Company issued and sold 6,000,000 shares of its common stock in its initial public offering (“IPO”) at a public offering price of $20.00 per share, for net proceeds of approximately $108,800,000 after deducting underwriting discounts and commissions of approximately $8,400,000 and expenses of approximately $2,800,000. Upon the closing of the IPO, all shares of convertible preferred stock then outstanding converted into shares of common stock and the Company's outstanding warrants to purchase shares of common and convertible preferred stock were exercised, or automatically net exercised absent a prior election, resulting in the reclassification of the fair value of the related redeemable convertible preferred stock warrant liability to additional paid-in-capital.

8

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

2.    Summary of Significant Accounting Policies
Basis of Preparation
The accompanying financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America, or U.S. GAAP, and applicable rules and regulations of the Securities and Exchange Commission, or SEC, regarding interim financial reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by GAAP have been condensed or omitted, and accordingly the balance sheet as of December 31, 2018, and related disclosures, have been derived from the audited consolidated financial statements at that date but does not include all of the information required by GAAP for complete consolidated financial statements. These unaudited condensed consolidated financial statements have been prepared on the same basis as the Company’s annual consolidated financial statements and, in the opinion of management, reflect all adjustments (consisting only of normal recurring adjustments) that are necessary for the fair statement of the Company’s condensed consolidated financial information. The results of operations for the three months ended March 31, 2019 are not necessarily indicative of the results to be expected for the year ending December 31, 2019 or for any other interim period or for any other future year.
The accompanying interim unaudited condensed consolidated financial statements and related financial information should be read in conjunction with the audited consolidated financial statements and the related notes thereto for the year ended December 31, 2018 included in the Company’s prospectus dated April 3, 2019 filed pursuant to Rule 424(b)(4) with the SEC on April 4, 2019.
Principles of Consolidation
Through December 17, 2018, the condensed consolidated financial statements of the Company include the accounts of Silk Road Medical, Inc. and its consolidated variable interest entity (“VIE”), NeuroCo, Inc. On December 17, 2018, the Company acquired all assets and assumed all liabilities of its VIE. As a result of the Merger, NeuroCo merged into the Company with the Company being the surviving corporation. All intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts and disclosures reported in the financial statements. Management uses significant judgment when making estimates related to the common stock valuation and related stock-based compensation, the valuation of the redeemable convertible preferred stock warrants, the valuation of deferred tax assets, provisions for doubtful accounts receivable and excess and obsolete inventories, clinical trial accruals, and the reserves for sales returns. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Although these estimates are based on the Company’s knowledge of current events and actions it may undertake in the future, actual results may ultimately materially differ from these estimates and assumptions.
Fair Value of Financial Instruments
The Company has evaluated the estimated fair value of its financial instruments as of March 31, 2019 and December 31, 2018. The carrying amounts of cash equivalents, restricted cash, accounts receivable, accounts payable and accrued liabilities approximate their respective fair values because of the short-term nature of these instruments. Management believes that its borrowings bear interest at the prevailing market rates for instruments with similar characteristics; accordingly, the carrying value of this instrument

9

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

approximates its fair value. Fair value accounting is applied to the redeemable convertible preferred stock warrant liability.
Cash, Cash Equivalents and Restricted Cash
The Company considers all highly liquid investments with an original maturity of three months or less at the time of purchase to be cash equivalents. Cash equivalents are considered available-for-sale marketable securities and are recorded at fair value, based on quoted market prices. As of March 31, 2019 and December 31, 2018, the Company’s cash equivalents are entirely comprised of investments in money market funds.
Restricted cash as of March 31, 2019 and December 31, 2018 consists of a letter of credit of $310,000 representing collateral for the Company's facility lease.
Concentration of Credit Risk, and Other Risks and Uncertainties
Financial instruments that potentially subject the Company to credit risk consist of cash and cash equivalents and accounts receivable to the extent of the amounts recorded on the condensed consolidated balance sheet.
The Company’s policy is to invest in money market funds, which are classified as cash equivalents on the condensed consolidated balance sheet. The Company's cash are held in Company accounts at two financial institutions and such amounts may exceed federally insured limits. The Company's money market funds are invested in highly rated money market funds.
The Company provides for uncollectible amounts when specific credit problems are identified. In doing so, the Company analyzes historical bad debt trends, customer credit worthiness, current economic trends and changes in customer payment patterns when evaluating the adequacy of the allowance for doubtful accounts.
The Company’s accounts receivable are due from a variety of health care organizations in the United States. At March 31, 2019 and December 31, 2018, no customer represented 10% or more of the Company’s accounts receivable. For the three months ended March 31, 2019 and March 31, 2018, there were no customers that represented 10% or more of revenue.
The Company manufactures certain of its commercial products in-house. Certain of the Company’s product components and sub-assemblies continue to be manufactured by sole suppliers, the most significant of which is the ENROUTE stent. Disruption in component or sub-assembly supply from these manufacturers or from in-house production would have a negative impact on the Company’s financial position and results of operations.
The Company is subject to certain risks, including that its devices may not be approved or cleared for marketing by governmental authorities or be successfully marketed. There can be no assurance that the Company’s products will achieve widespread adoption in the marketplace, nor can there be any assurance that existing devices or any future devices can be developed or manufactured at an acceptable cost and with appropriate performance characteristics. The Company is also subject to risks common to companies in the medical device industry, including, but not limited to, new technological innovations, dependence upon third-party payers to provide adequate coverage and reimbursement, dependence on key personnel and suppliers, protection of proprietary technology, product liability claims, and compliance with government regulations.
Existing or future devices developed by the Company may require approvals or clearances from the FDA or international regulatory agencies. In addition, in order to continue the Company’s operations, compliance with various federal and state laws is required. If the Company were denied or delayed in

10

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

receiving such approvals or clearances, it may be necessary to adjust operations to align with the Company’s currently approved portfolio. If clearance for the products in the current portfolio were withdrawn by the FDA, this would have a material adverse impact on the Company.
Deferred Initial Public Offering Costs
Specific incremental legal, accounting and other fees and costs directly attributable to a proposed or actual offering of securities may properly be deferred and charged against the gross proceeds of the offering. In the event the Company's planned IPO did not occur or was significantly delayed, all of the costs will be expensed. As of March 31, 2019 and December 31, 2018, there were $2,585,000 and $950,000, respectively, of offering costs primarily consisting of legal and accounting fees that were capitalized in other non-current assets on the condensed consolidated balance sheet.
Leases
The Company adopted ASC 842, "Leases," on January 1, 2019 and used the modified retrospective method for all leases not substantially completed as of the date of adoption and the package of practical expedients available in the standard. As a result of adopting ASC 842, the Company recorded an operating lease right-of-use ("ROU") asset of $3,982,000 included within other non-current assets and operating lease liabilities of $5,190,000 included within accrued liabilities and other liabilities on the condensed consolidated balance sheet related to its facility lease, based on the present value of the future lease payments on the date of adoption. The operating lease right-of-use asset also includes adjustments for prepayments and excludes lease incentives. The adoption did not have an impact on prior periods or on its condensed consolidated statements of operations and comprehensive loss.
In accordance with ASC 842, the disclosure impact of adoption on the condensed consolidated balance sheet were as follows (in thousands):
Balance Sheet:
Balance at December 31, 2018
 
Adjustments Due to ASC 842
 
Balance at January 1, 2019
Other non-current assets
$

 
$
3,982

 
$
3,982

Accrued liabilities
139

 
582

 
721

Other liabilities
1,069

 
3,400

 
4,469


The Company recognizes ROU assets and lease liabilities when it obtains the right to control an asset under a leasing arrangement with an initial term greater than twelve months. The Company evaluates the nature of each lease at the inception of an arrangement to determine whether it is an operating or financing lease and recognizes the right-of-use asset and lease liabilities based on the present value of future minimum lease payments over the expected lease term. The Company’s leases do not generally contain an implicit interest rate and therefore the Company uses the incremental borrowing rate it would expect to pay to borrow on a similar collateralized basis over a similar term in order to determine the present value of its lease payments. The Company’s considers renewal options in the determination of the lease term if the option to renew is reasonably certain. The Company has elected to account separately for contracts that contain lease and non-lease components consistent with its historical practice. Variable lease payments will be expensed as incurred.
Redeemable Convertible Preferred Stock Warrant Liability
The Company accounts for its warrants for shares of redeemable convertible preferred stock as a liability based upon the characteristics and provisions of each instrument. Redeemable convertible preferred stock warrants classified as a liability are initially recorded at their fair value on the date of issuance and are subject to remeasurement at each subsequent balance sheet date. Any change in fair value as a

11

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

result of a remeasurement is recognized as a component of other income (expense), net in the condensed consolidated statements of operations and comprehensive loss.
Redeemable Convertible Preferred Stock
The Company records its redeemable convertible preferred stock at fair value on the dates of issuance, net of issuance costs. A redemption event will only occur upon the liquidation or winding up of the Company, a greater than 50% change in control, or sale of substantially all of the assets of the Company. In the event of a change of control of the Company, proceeds received from the sale of such shares will be distributed in accordance with the liquidation preferences set forth in the Company’s amended and restated certificate of incorporation unless the holders of redeemable convertible preferred stock otherwise agree or have converted their shares into shares of common stock. Therefore, redeemable convertible preferred stock is classified outside of stockholders’ deficit on the balance sheet as events triggering the liquidation preferences are not solely within the Company’s control. The Company is not required to adjust the carrying values of the redeemable convertible preferred stock to the redemption value of such shares since it is uncertain whether or when a redemption event will occur. Subsequent adjustments to increase the carrying values to the redemption values will be made only when it becomes probable that such redemption will occur.
Revenue Recognition
On January 1, 2018, the Company adopted Accounting Standards Codification (“ASC”) Topic 606, "Revenue from Contracts with Customers," using the modified retrospective method applied to contracts which were not completed as of that date.  Revenue for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period revenue amounts are not adjusted and continue to be reported in accordance with the Company’s historic accounting under ASC 605, "Revenue Recognition." Under ASC 606, revenue is recognized when a customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the Company performs the following five steps:
(i) identify the contract(s) with a customer;
(ii) identify the performance obligations in the contract;
(iii) determine the transaction price;
(iv) allocate the transaction price to the performance obligations in the contract; and
(v) recognize revenue when (or as) the entity satisfies a performance obligation.
Under ASC 606, assuming all other revenue recognition criteria have been met, the Company will recognize revenue earlier for arrangements where the Company has satisfied its performance obligations but have not issued invoices.  As of March 31, 2019 and December 31, 2018, the Company recorded $131,000 and $128,000, respectively, of unbilled receivables, which are included in accounts receivable, net on the condensed consolidated balance sheet, as the Company has an unconditional right to payment as of the end of the applicable period.  
The Company’s revenue is generated from the sale of its products to hospitals and medical centers in the United States through direct sales representatives. Revenue is recognized when obligations under the terms of a contract with customers are satisfied, which occurs with the transfer of control of the Company’s products to its customers, either upon shipment of the product or delivery of the product to the customer under the Company’s standard terms and conditions.  The Company’s products are readily available for usage as soon as the customer possesses it. Upon receipt, the customer controls the economic benefits of the product, has significant risks and rewards, and the legal title. The Company has

12

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

present right to payment; therefore, the transfer of control is deemed to happen at a point in time. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring the goods.
For sales where the Company’s sales representative hand delivers product directly to the hospital or medical center from the sales representative’s trunk stock inventory, the Company recognizes revenue upon delivery, which represents the point in time when control transfers to the customer. Upon delivery there are legally-enforceable rights and obligations between the parties which can be identified, commercial substance exists and collectibility is probable. For sales which are sent directly from the Company to hospitals and medical centers, the transfer of control occurs at the time of shipment or delivery of the product.  There are no further performance obligations by the Company or the sales representative to the customer after delivery under either method of sale. As allowed under the practical expedient, the Company does not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which it recognizes revenue at the amount to which it has the right to invoice for services performed.
The Company is entitled to the total consideration for the products ordered by customers as product pricing is fixed according to the terms of customer contracts and payment terms are short. Payment terms fall within the one-year guidance for the practical expedient which allows the Company to forgo adjustment of the promised amount of consideration for the effects of a significant financing component. The Company excludes taxes assessed by governmental authorities on revenue-producing transactions from the measurement of the transaction price.
Costs associated with product sales include commissions and royalties. The Company applies the practical expedient and recognizes commissions and royalties as expense when incurred because the expense is incurred at a point in time and the amortization period is less than one year.  Commissions are recorded as selling expense and royalties are recorded as cost of revenue in the condensed consolidated statements of operations and comprehensive loss.
The Company accepts product returns at its discretion or if the product is defective as manufactured. The Company establishes estimated provisions for returns based on historical experience.  The Company elected to expense shipping and handling costs as incurred and includes them in the cost of goods sold. In those cases where the Company bills shipping and handling costs to customers, it will classify the amounts billed as a component of revenue.
Cost of Goods Sold
The Company manufactures certain of its portfolio of TCAR products at its facility and purchases other products from third party manufacturers. Cost of goods sold consists primarily of costs related to materials, components and subassemblies, manufacturing overhead costs, direct labor, reserves for excess, obsolete and non-sellable inventories as well as distribution-related expenses. A significant portion of the Company’s cost of goods sold currently consists of manufacturing overhead costs. These overhead costs include the cost of quality assurance, material procurement, inventory control, facilities, equipment and operations supervision and management. Cost of goods sold also includes depreciation expense for production equipment and certain direct costs such as shipping costs and royalties.
Stock–Based Compensation
The Company accounts for stock-based compensation in accordance with Financial Accounting Standards Board (“FASB”) 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. ASC 718 requires companies to estimate the fair value of all share-based payment option awards on the date of grant using an option pricing model. The fair value of stock options is recognized over the period during which an

13

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

optionee is required to provide services in exchange for the option award, known as the requisite service period (usually the vesting period), on a straight-line basis. For performance-based stock options, the Company will assess the probability of performance conditions being achieved in each reporting period. The amount of stock-based compensation expense recognized in any one period related to performance-based stock options can vary based on the achievement or anticipated achievement of the performance conditions. The Company accounts for option forfeitures as they occur.
Income Taxes
The Company accounts for income taxes under the liability method, whereby deferred tax assets and liabilities are determined based on the difference between the condensed consolidated financial statements and tax bases of assets and liabilities using the enacted tax rates in effect for the year in which the differences are expected to affect taxable income. A valuation allowance is established when necessary to reduce deferred tax assets to the amounts expected to be realized. As the Company has historically incurred operating losses, it has established a full valuation allowance against its net deferred tax assets, and there is no provision for income taxes.
The Company also follows the provisions of ASC 740-10, "Accounting for Uncertainty in Income Taxes." ASC 740-10 prescribes a comprehensive model for the recognition, measurement, presentation and disclosure in financial statements of any uncertain tax positions that have been taken or expected to be taken on a tax return. No liability related to uncertain tax positions is recorded on the condensed consolidated financial statements. It is the Company's policy to include penalties and interest expense related to income taxes as part of the provision for income taxes.
Net Loss per Share
Basic net loss per share is computed by dividing the net loss by the weighted average number of shares of common stock outstanding during the period, without consideration for potential dilutive common shares. Diluted net loss per share is computed by dividing the net loss by the weighted average number of shares of common stock and potentially dilutive securities outstanding for the period. For purposes of the diluted net loss per share calculation, redeemable convertible preferred stock and warrants, and common stock options are considered to be potentially dilutive securities. Since the Company was in a loss position for all periods presented, basic net loss per share is the same as diluted net loss per share as the inclusion of all potential dilutive common shares would have been anti-dilutive.
The Company allocates no loss to participating securities because they have no contractual obligation to share in the losses of the Company. The shares of the Company’s redeemable convertible preferred stock participate in any dividends declared by the Company and are therefore considered to be participating securities.
Net loss per share was determined as follows (in thousands, except share and per share data):
 
Three Months Ended March 31,
 
2019
 
2018
Net loss
$
(24,158
)
 
$
(5,408
)
Weighted average common stock outstanding used to compute net loss per share, basic and diluted
1,200,719

 
739,308

Net loss per share, basic and diluted
$
(20.12
)
 
$
(7.31
)


14

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

The following potentially dilutive securities outstanding have been excluded from the computation of diluted weighted average shares outstanding because such securities have an antidilutive impact due to the Company's net loss, in common stock equivalent shares:
 
March 31,
 
2019
 
2018
Redeemable convertible preferred stock outstanding
21,238,105

 
21,233,190

Redeemable convertible preferred stock warrants outstanding
2,667,587

 
2,672,502

Common stock options
4,138,635

 
4,431,797

Common stock warrants outstanding
7,527

 

 
28,051,854

 
28,337,489


Comprehensive Loss
For the three months ended March 31, 2019 and March 31, 2018, there was no difference between comprehensive loss and the Company’s net loss.
Segment and Geographical Information
The Company operates and manages its business as one reportable and operating segment. The Company’s chief executive officer, who is the chief operating decision maker, reviews financial information on an aggregate basis for purposes of allocating resources and evaluating financial performance. All of the Company’s long-lived assets are based in the United States. Long-lived assets are comprised of property and equipment. All of the Company’s revenue was in the United States for the three months ended March 31, 2019 and March 31, 2018, based on the shipping location of the external customer.
3.    Recent Accounting Pronouncements
Recently Adopted Accounting Standards
In February 2016, the FASB issued ASU No. 2016-02, "Leases," that supersedes Accounting Standards Codification (“ASC”) 840, "Leases." Subsequently, the FASB issued several updates to ASU No. 2016-02, codified in ASC Topic 842 (“ASC 842”). The Company adopted ASC 842 on January 1, 2019 using the modified retrospective method for all leases not substantially completed as of the date of adoptionThe Company elected to apply the package of practical expedients, which allowed the Company to not reassess: (i) whether expired or existing contracts contain leases; (ii) lease classification for any expired or existing leases; and (iii) initial direct costs for any existing lease.
Recently Issued Accounting Standards
In June 2016, the FASB issued ASU 2016-13, "Measurement of Credit Losses on Financial Statements." This update provides financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The update replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU No. 2016-13 is effective for public entities for annual periods beginning after December 15, 2019. The Company is evaluating the impact of adopting this guidance to its consolidated financial statements and related disclosures.
In August 2018, the FASB issued ASU 2018-13, "Fair Value Measurement," which changed the disclosure requirements for fair value measurements by removing, adding and modifying certain disclosures. The standard is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning

15

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

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

16

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

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

At March 31, 2019, due to the proximity of the Company's IPO, the fair value of the redeemable convertible warrant liability was based on the estimated fair value of the Company's common stock.
The following table sets forth the fair value of the Company’s financial liabilities measured on a recurring basis, as of March 31, 2019 and December 31, 2018 (in thousands):
 
December 31, 2018
 
Level 1
 
Level 2
 
Level 3
 
Total
Liabilities
 
 
 
 
 
 
 
Redeemable convertible warrant liability
$

 
$

 
$
16,091

 
$
16,091

 
March 31, 2019
 
Level 1
 
Level 2
 
Level 3
 
Total
Liabilities
 
 
 
 
 
 
 
Redeemable convertible warrant liability
$

 
$

 
$
31,803

 
$
31,803


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

Change in fair value recorded in other income (expense), net
15,712

Fair Value at March 31, 2019
$
31,803


There were no transfers between fair value hierarchy levels during the three months ended March 31, 2019 and 2018.

17

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

5.    Balance Sheet Components
Inventories
(in thousands)
March 31,
 
December 31,
 
2019
 
2018
Raw materials
$
2,147

 
$
1,054

Finished products
5,909

 
4,690

 
$
8,056

 
$
5,744


As of March 31, 2019 and December 31, 2018, there were no work-in-process inventories.

6.    Long-term Debt
In October 2015, the Company entered into a term loan agreement with CRG. The term loan agreement provides for up to $30,000,000 in term loans split into two tranches as follows: (i) the Tranche A Loans provided for $20,000,000 in term loans, and (ii) the Tranche B Loans provided for up to $10,000,000 in term loans. The Company drew down the Tranche A Loans on October 13, 2015. The Tranche B Loans were available to be drawn prior to March 29, 2017. In January 2017, the term loan agreement was amended to extend the commitment period of the Tranche B Loans to April 28, 2017. In April 2017, the Company drew down $5,000,000 of the available Tranche B Loans.
In September 2018, the Company entered into Amendment No. 5 to the term loan agreement with CRG. Under the amended terms of the amended loan agreement the maturity date was extended to December 31, 2022 and the repayment schedule of the existing term loans were changed to interest only so that the outstanding principal amount of the term loans will be payable in a single installment at maturity. The related fixed interest rate was changed to equal 10.75% per annum, due and payable quarterly in arrears. At the election of the Company, 2.75% of the interest due and payable may be “paid in kind”, or PIK, and added to the then outstanding principal and 8.0% of the interest due and payable paid in cash. All unpaid principal, and accrued and unpaid interest, is due and payable in full on December 31, 2022. The amended term loan agreement also provided for additional term loans in an aggregate principal amount of up to $25,000,000. In September 2018, the Company drew down an additional $15,000,000 under the term loan agreement with CRG.
The Company may voluntarily prepay the borrowings in full, with a prepayment premium beginning at 8.0% and declining to 4.0% after the fourth payment date, to 2.0% after the eighth payment date, with no premium being payable if prepayment occurs after the third year of the loan. The Tranche A borrowing required a payment, on the borrowing date, of a financing fee equal to 1.75% of the borrowed loan principal, which is recorded as a discount to the debt. In addition, a facility fee equal to 5.0% of the amounts borrowed plus any PIK is payable at the end of the term or when the borrowings are repaid in full. A long-term liability is being accreted using the effective interest method for the facility fee over the term of the loan agreement. The borrowings are collateralized by a security interest in substantially all of the Company’s assets.
The Company is subject to financial covenants related to liquidity and minimum trailing revenue targets that begin in December 31, 2016 and are tested on an annual basis. The liquidity covenant requires the Company to maintain an amount which shall exceed the greater of (i) $3,000,000 and (ii) the minimum cash balance, if any, required of the Company by a creditor to the extent the Company has incurred permitted priority debt. The Company had to achieve minimum net revenue of $1,000,000 in 2016, $5,000,000 in 2017, $15,000,000 in 2018, and must achieve minimum net revenue of $30,000,000 in

18

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

2019 and $40,000,000 in 2020. The liquidity financial covenant has a 90-day equity cure period following end of the calendar year to issue additional shares of equity interests in exchange for cash, or to borrow permitted cure debt. In addition, the term loan agreement prohibits the payment of cash dividends on the Company’s capital stock and also places restrictions on mergers, sales of assets, investments, incurrence of liens, incurrence of indebtedness and transactions with affiliates. CRG may accelerate the payment terms of the term loan agreement upon the occurrence of certain events of default set forth therein, which include the failure of the Company to make timely payments of amounts due under the term loan agreement, the failure of the Company to adhere to the covenants set forth in the term loan agreement, the insolvency of the Company or upon the occurrence of a material adverse change. As of March 31, 2019, the Company was in compliance with all applicable financial covenants. As of March 31, 2019, management does not believe that it is probable that the above clauses will be triggered within the next twelve months, and therefore, the debt is classified as long-term on the condensed consolidated balance sheet.
The issuance costs and debt discount have been netted against the borrowed funds on the condensed consolidated balance sheet. The long-term debt balance as of March 31, 2019 was $44,597,000.
Future maturities under the term loan agreement as of March 31, 2019 are as follows (in thousands):
Period Ending March 31:
 
Amount
2019
 
$
2,696

2020
 
3,677

2021
 
3,771

2022
 
52,510

 
 
62,654

Add: Accretion of closing fees
 
958

 
 
63,612

Less: Amount representing interest
 
(18,841
)
Less: Amount representing debt discount and debt issuance costs
 
(174
)
Present value of minimum payments
 
$
44,597


In October 2015, CRG purchased 327,759 shares of the Company’s Series C redeemable convertible preferred stock at $6.11 per share. In addition, CRG received warrants to purchase 163,877 shares of the Company’s Series C redeemable convertible preferred stock. The warrants are immediately exercisable, at an exercise price per share of $6.11, and expire the earlier of October 2023 or upon the consummation of a change of control or initial public offering of the Company.
In July 2017, CRG purchased 163,877 shares of the Company’s Series C convertible preferred stock at $6.11 per share.
7.    Commitments and Contingencies
Operating Lease and Rights of Use
The Company’s operating lease obligation consists of leased office, laboratory, and manufacturing space under a non-cancellable operating lease that expires in October 2024. Operating lease costs were $217,000 for the three months ended March 31, 2019. Cash paid for amounts included in the measurement of operating lease liabilities was $193,000 for the three months ended March 31, 2019. As of March 31, 2019, the weighted average discount rate was approximately 6.50% and the weighted average remaining lease term was 5.60 years. Balance sheet information as of March 31, 2019 consists of the following (in thousands):

19

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

Operating Lease:
 
March 31, 2019
Operating lease right-of-use asset in other non-current assets
 
$
3,820

Operating lease liability in accrued liabilities
 
$
712

Operating lease liability in other liabilities
 
4,285

Total operating lease liabilities
 
$
4,997


The following table summarizes the Company’s operating lease maturities as of March 31, 2019 (in thousands):
Period Ending March 31:
 
Amount
2019
 
$
760

2020
 
1,037

2021
 
1,066

2022
 
1,096

2023
 
1,127

2024
 
904

Total lease payments
 
5,990

Less: imputed interest
 
(993
)
       Present value of lease liabilities
 
$
4,997


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

2020
 
1,002

2021
 
1,031

2022
 
1,044

2023
 
1,920

 
 
$
5,999


Purchase Obligations
Purchase obligations consist of agreements to purchase goods and services entered into in the ordinary course of business. The Company had non-cancellable commitments for inventory that were payable within one year to suppliers for purchases totaling $2,855,100 as of March 31, 2019.
Indemnification
In the normal course of business, the Company enters into contracts and agreements that contain a variety of representations and warranties and may provide for indemnification of the counterparty. The Company’s exposure under these agreements is unknown because it involves claims that may be made

20

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

against it in the future but have not yet been made. To date, the Company has not been subject to any claims or been required to defend any action related to its indemnification obligations.
The Company indemnifies each of its directors and officers for certain events or occurrences, subject to certain limits, while the director is or was serving at the Company’s request in such capacity, as permitted under Delaware law and in accordance with its certificate of incorporation and bylaws. The term of the indemnification period lasts as long as a director may be subject to any proceeding arising out of acts or omissions of such director in such capacity. The maximum amount of potential future indemnification is unlimited; however, the Company currently holds director liability insurance. This insurance allows the transfer of risk associated with the Company’s exposure and may enable it to recover a portion of any future amounts paid. The Company believes that the fair value of these indemnification obligations is minimal. Accordingly, the Company has not recognized any liabilities relating to these obligations as of March 31, 2019.
Contingencies
The Company is not involved in any pending legal proceedings that it believes could have a material adverse effect on its financial condition, results of operations or cash flows. From time to time, the Company may pursue litigation to assert its legal right and such litigation may be costly and divert the efforts and attention of its management and technical personnel which could adversely affect its business. The Company accrues a liability for such matters when it is probable that future expenditures will be made and such expenditures can be reasonably estimated. There were no contingent liabilities requiring accrual at March 31, 2019 and December 31, 2018.
Legal Matters
In February 2019, a former employee, through counsel, advised the Company that he had filed a charge of discrimination against the Company with the California Department of Fair Employment & Housing, or DFEH.  The former employee’s complaint alleges sexual harassment and retaliation in violation of the California Department of Fair Employment & Housing Act.  The complaint does not allege specific damages. To date, the DFEH has not contacted the Company. The Company denies the complaint’s allegations and intends to vigorously defend itself. At this time the Company cannot estimate the outcomes or possible loss or range of loss arising from this claimif any; as such, no accrual was included in the Company's balance sheet as of March 31, 2019.

21

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

8.    Redeemable Convertible Preferred Stock
The Company has the following redeemable convertible preferred stock issued and outstanding at March 31, 2019:
 
March 31, 2019
 
Shares
Authorized
 
Shares Issued and
Outstanding
 
Per share
Preference
 
Preferential
Liquidation Value (in thousands)
 
Carrying Value (in thousands)
Series
 
 
 
 
 
 
 
 
 
Series A
1,629,629

 
1,629,626

 
$
2.70

 
$
4,400

 
$
4,369

Series A-1
1,111,111

 
1,111,109

 
$
3.38

 
3,755

 
3,723

Series B
6,264,470

 
6,264,463

 
$
6.11

 
38,276

 
38,014

Series C
15,064,405

 
12,232,907

 
$
6.11

 
74,743

 
59,159

 
24,069,615

 
21,238,105

 
 
 
$
121,174

 
$
105,265

The Company has the following redeemable convertible preferred stock issued and outstanding at December 31, 2018:
 
December 31, 2018
 
Shares
Authorized
 
Shares Issued and
Outstanding
 
Per share
Preference
 
Preferential
Liquidation Value (in thousands)
 
Carrying Value (in thousands)
Series
 
 
 
 
 
 
 
 
 
Series A
1,629,629

 
1,629,626

 
$
2.70

 
$
4,400

 
$
4,369

Series A-1
1,111,111

 
1,111,109

 
$
3.38

 
3,755

 
3,723

Series B
6,264,470

 
6,264,463

 
$
6.11

 
38,276

 
38,014

Series C
15,064,405

 
12,227,992

 
$
6.11

 
74,713

 
59,129

 
24,069,615

 
21,233,190

 
 
 
$
121,144

 
$
105,235


As of March 31, 2019 and December 31, 2018, the holders of redeemable convertible preferred stock ("convertible preferred stock") have various rights and preferences as follows:
Voting Rights
The holders of Series A, Series A-1, Series B and Series C convertible preferred stock are entitled to vote on all matters on which the common stockholders are entitled to vote. Holders of Series A, Series A-1, Series B and Series C convertible preferred and common stock vote together as a single class. Each holder of Series A, Series A-1, Series B and Series C convertible preferred stock is entitled to the number of votes equal to the number of common stock shares into which the shares held by such holder are convertible.
Election of Directors
The holders of record of Series A and Series B preferred stock, exclusively and as a separate class, are entitled to each elect two and three directors of the Company, and the holders of record of Series C preferred stock, exclusively and as a separate class, are entitled to elect two directors of the Company.

22

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

Dividends
The holders of Series A, Series A-1, Series B and Series C convertible preferred stock are entitled, on a pari passu basis, when and if declared by the Board of Directors of the Company, to non-cumulative dividends out of the Company's assets legally available therefore at the rate of $0.22, $0.27, $0.49 and $0.49 per share per annum, respectively. No distributions will be made with respect to the common stock until all declared but unpaid dividends on convertible preferred stock have been paid or set aside for payment to the convertible preferred stock holders. The right to receive dividends on shares of convertible preferred stock will be non-cumulative, and no right to such dividends will accrue to holders of convertible preferred stock by reason of the fact that dividends on such shares are not declared or paid in any years. As of March 31, 2019, no dividends have been declared to date.
Liquidation
In the event of any liquidation, dissolution or winding up of the Company, either voluntary or involuntary, the holders of Series C preferred stock will be entitled to receive out of net available funds and assets of the corporation available for distribution to its stockholders, before any payment shall be made to the holders of Series B preferred stock and Series A preferred stock and Series A-1 junior stock. After the payment of all preferential amounts required to be paid to the holders of Series C preferred stock, the holders of Series B, Series A and Series A-1 outstanding shares of convertible preferred stock will be entitled to receive out of net available funds and assets, before and in preference to any distribution of any of the Company’s net available funds and assets to the holders of common stock by reason of their ownership of such common stock.
An amount per share equal to $6.11, $6.11, $3.38 and $2.70 for each share of Series C, Series B, Series A-1 and Series A, respectively, convertible preferred stock then so held equal to the applicable liquidation preference. The remaining assets, if any, shall be distributed to the holders of common stock. Should the Company’s legally available assets be insufficient to satisfy the liquidation preferences after the payment of all preferential amounts required to be paid to the holders of Series C preferred stock, the funds will be distributed ratably among the holders of Series A, Series A-1, and Series B convertible preferred stock in proportion to the preferential amount each holder is otherwise entitled to receive.
Conversion
Shares of convertible preferred stock are convertible into shares of common stock at the holders' option at any time or automatically (i) immediately prior to the closing of a firmly underwritten public offering in which the offering price per share is not less than $18.31 and the aggregate gross proceeds received by the Company are not less than $50,000,000 or (ii) upon receipt by the Company of a written request for such conversion from the holders of the majority of the convertible preferred stock then outstanding, voting as a single class and on an as-converted basis. Each share of Series A, Series A-1, Series B and Series C convertible preferred stock is convertible, at the option of the holder, into the number of shares of common stock into which such shares are convertible at the then effective conversion ratio. The initial conversion price per share for Series A, Series A-1, Series B and Series C convertible preferred stock is $2.70, $3.38, $6.11 and $6.11 per share, respectively. The initial conversion price is subject to adjustment from time to time. As of March 31, 2019, the conversion ratio for each series of convertible preferred stock was one-for-one.
Redemption
The redeemable convertible preferred stock is recorded in mezzanine equity because while it is not mandatorily redeemable, it will become redeemable at the option of the stockholders upon the occurrence of certain deemed liquidation events that are considered not solely within the Company's control.

23

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

Preferred Stock Warrants
In connection with the issuance of the Company’s Series C redeemable convertible preferred stock issuances between August 2014 through April 2016, the Company issued, to each investor who purchased shares of Series C redeemable convertible preferred stock, warrants to purchase up to the number of shares of preferred stock equal to 50% of the number of shares of the Company’s Series C redeemable convertible preferred stock purchased.
The warrants are immediately exercisable, at an exercise price per share of $6.11 and expire 8 years from their date of issuance. The warrants will be automatically net exercised upon the consummation or effective date of a change of control or initial public offering of the Company.
As of March 31, 2019 and December 31, 2018, warrants to purchase an aggregate of 2,667,587 and 2,672,502, respectively, shares of Series C redeemable convertible preferred stock were outstanding.
9.    Common Stock
At March 31, 2019, the Company’s certificate of incorporation, as amended and restated, authorizes the Company to issue up to 29,879,220 shares of common stock with $0.001 par value per share, of which 1,386,615 shares were issued and outstanding. The holders of common stock are also entitled to receive dividends whenever funds are legally available, when and if declared by the Board of Directors. As of March 31, 2019, no dividends have been declared to date. Each share of common stock is entitled to one vote.
At March 31, 2019 and December 31, 2018, the Company had reserved common stock for future issuances as follows:
(in thousands)
March 31,
 
December 31,
 
2019
 
2018
Conversion of Series A convertible preferred stock
1,629,629

 
1,629,629

Conversion of Series A-1 convertible preferred stock
1,111,111

 
1,111,111

Conversion of Series B convertible preferred stock
6,264,470

 
6,264,470

Conversion of Series C convertible preferred stock and warrants
15,064,405

 
15,064,405

Exercise of options under stock plan
4,138,635

 
4,364,377

Issuance of options under stock plan
32,326

 
57,889

Warrants to purchase common stock
7,527

 
7,527

 
28,248,103

 
28,499,408


Common Stock Warrants
In connection with the Company’s acquisition of NeuroCo in December 2018, as of the merger closing, the outstanding warrants to purchase common stock of NeuroCo converted to warrants to purchase 7,527 shares of the Company's common stock.
The warrants are exercisable, at an exercise price per share of $8.27 and expire on November 21, 2024. The warrants will be automatically net exercised upon the consummation or effective date of a change of control or initial public offering of the Company.
As of March 31, 2019 and December 31, 2018, warrants to purchase an aggregate of 7,527 shares of common stock were outstanding.

24

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

10.    Stock Option Plans
In 2007, the Company established its 2007 Stock Option Plan (the “Plan”) which provides for the granting of stock options to employees, directors and consultants of the Company. Options granted under the Plan may be either incentive stock options (“ISOs”) or nonqualified stock options (“NSOs”). ISOs may be granted only to Company employees (including officers and directors who are also employees). NSOs may be granted to Company employees, directors and consultants. As of March 31, 2019, the Company has reserved 5,488,229 shares of common stock for issuance under the Plan.
In connection with its acquisition of NeuroCo in December 2018, the Company also assumed NeuroCo’s 2015 Equity Incentive Plan, or the NeuroCo Plan. As of the merger closing, the outstanding options to purchase common stock of NeuroCo under the NeuroCo Plan converted to options to purchase 1,442 shares of the Company's common stock. There are no additional shares of common stock reserved for issuance under the NeuroCo Plan.
The exercise price of ISOs and NSOs shall not be less than 100% and 85% of the estimated fair value of the shares on the date of grant, respectively, as determined by the Board of Directors. The exercise price of ISOs and NSOs granted to a 10% stockholder shall not be less than 110% of the estimated fair value of the shares on the date of grant as determined by the Board of Directors. To date, options have a term of 10 years and generally vest over 4 years with 25% vesting on the first anniversary of the issuance date, and then monthly vesting for an additional 3 years from date of grant.
Activity under the Company’s Plan is set forth below:
 
 
 
Options Outstanding
 
Shares Available for Grant
 
Number of Shares
 
Weighted Average Exercise Price
 
Weighted Average Remaining Contractual Term (in Years)
 
Aggregate Intrinsic Value (in thousands)
Balances, December 31, 2018
57,889

 
4,364,377

 
$
3.79

 
7.36
 
$
33,132

Authorized

 
 
 
 
 
 
 
 
Options granted
(32,950
)
 
32,950

 
$
11.29

 
 
 
 
Options exercised

 
(251,305
)
 
$
1.50

 
 
 
 
Options cancelled
7,387

 
(7,387
)
 
$
1.56

 
 
 
 
Balances, March 31, 2019
32,326

 
4,138,635

 
$
4.00

 
7.26
 
$
30,602

Vested and exercisable at March 31, 2019
 
 
2,451,044

 
$
2.70

 
6.36
 
$
21,195

Vested and expected to vest at March 31, 2019
 
 
4,138,635

 
$
4.00

 
7.26
 
$
30,602


The aggregate intrinsic value of options exercised during the three months ended March 31, 2019 was $2,461,000. The aggregate intrinsic value was calculated as the difference between the exercise prices of the underlying options and the estimated fair value of the common stock on the date of exercise.
The Company's Board of Directors approved the termination of the 2007 Stock Plan and the NeuroCo 2015 Equity Incentive Plan and the adoption of the 2019 Equity Incentive Plan, or the 2019 Plan, effective immediately prior to consummation of the Company's IPO. The 2019 Plan provides for the grant of ISOs to employees and for the grant of NSOs, restricted stock, restricted stock units, stock appreciation rights, performance units and performance shares to employees, directors and consultants. A total of 2,317,000 shares of common stock were reserved for issuance pursuant to the 2019 Plan. In addition, the shares reserved for issuance under the 2019 Plan will also include shares reserved but not issued under the

25

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

2019 Plan, plus any share awards granted under the 2007 Plan that expire or terminate without having been exercised in full or that are forfeited or repurchased. In addition, the number of shares available for issuance under the 2019 Plan will also include an annual increase on the first day of each fiscal year beginning in fiscal 2020, equal to the lesser of (i) 3,000,000 shares; (ii) 4.0% of the outstanding shares of common stock as of the last day of the immediately preceding fiscal year; or (iii) an amount as determined by the Board of Directors.
2019 Employee Stock Purchase Plan
In March 2019, the Company's Board of Directors adopted the 2019 Employee Stock Purchase Plan ("ESPP") under which eligible employees are permitted to purchase common stock at a discount through payroll deductions. A total of 434,000 shares of common stock are reserved for issuance and will be increased on the first day of each fiscal year, beginning in 2019, by an amount equal to the lesser of (i) 1,200,000 shares (ii) 1.0% of the outstanding shares of common stock as of the last day of the immediately preceding fiscal year; or (iii) an amount as determined by the Board of Directors. The price of the common stock purchased will be the lower of 85% of the fair market value of the common stock at the beginning of an offering period or at the end of a purchase period. The ESPP was effective upon adoption by the Company's Board of Directors but was not in use until the completion of the IPO. The ESPP is intended to qualify as an "employee stock purchase plan" within the meaning of Section 423 of the Internal Revenue Code of 1986, as amended.
Stock‑Based Compensation
The Company estimated the fair value of stock options using the Black–Scholes option pricing model. The fair value of employee stock options is being amortized on a straight–line basis over the requisite service period of the awards. The fair value of employee stock options was estimated using the following assumptions for the three months ended March 31, 2019 and 2018:
 
Three Months Ended March 31,
 
2019
 
2018
Expected term (in years)
6.25
 
6.25
Expected volatility
42.7%
 
38.1%
Risk-free interest rate
2.54%
 
2.68%
Dividend yield
%
 
%

Total stock-based compensation expense relating to the Company’s stock options to employees and nonemployees during the three months ended March 31, 2019 and 2018, is as follows (in thousands):
 
Three Months Ended March 31,
 
2019
 
2018
Cost of goods sold
$
15

 
$
13

Research and development expenses
27

 
29

Selling, general and administrative expenses
220

 
120

 
$
262

 
$
162


As of March 31, 2019, there was total unrecognized compensation costs of $2,433,000 related to these stock options. These costs are expected to be recognized over a period of approximately 3.04 years.

26

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

11.    Subsequent Events
Amended and Restated Certificate of Incorporation
Effective upon its IPO, the Company filed an amended and restated certificate of incorporation that authorizes 100,000,000 shares of common stock, $0.001 par value per share, and 5,000,000 shares of preferred stock, $0.001 par value per share.
2019 Equity Incentive Plan
The Company’s Board of Directors approved the grant of options to purchase 687,176 shares of common stock under the 2019 Equity Incentive Plan, with a grant date of April 3, 2019 with an exercise price equal to the initial public offering price of $20.00 per share.
Long-term Debt
Prior to the Company's IPO, the term loans with CRG bore interest at a rate of 10.75%, which interest rate was further reduced to 10.00% upon the consummation of the Company's IPO. At the Company's election, it may pay the interest through a combination of cash and PIK. The interest is payable in cash and PIK as follows: 8.00% per annum in cash and 2.75% PIK; and post the consummation of the Company's IPO, 8.00% per annum in cash and 2.00% PIK.
Item 2: Management Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition and results of operations together with the section entitled “Selected consolidated financial data” and our condensed consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q. This discussion and other parts of this Quarterly Report on Form 10-Q contain forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions, that are based on the beliefs of our management, as well as assumptions made by, and information currently available to, our management. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section of this Quarterly Report on Form 10-Q entitled “Risk Factors.”
Overview
We are a medical device company focused on reducing the risk of stroke and its devastating impact. We believe a key to stroke prevention is minimally-invasive and technologically advanced intervention to safely and effectively treat carotid artery disease, one of the leading causes of stroke. We have pioneered a new approach for the treatment of carotid artery disease called transcarotid artery revascularization, or TCAR, which we seek to establish as the standard of care. We manufacture and sell in the United States our portfolio of TCAR products, which are designed to provide direct access to the carotid artery, effective reduction in stroke risk throughout the procedure, and long-term restraint of carotid plaque.
We began commercializing our products in the United States in late 2015. Our products are currently the only devices cleared and approved by the FDA specifically for transcarotid use. While our current commercial focus is on the U.S. market, our products have obtained CE Mark approval, allowing us to commercialize in Europe in the future. We also intend to pursue regulatory clearances in China, Japan, and other select international markets. TCAR is reimbursed based on established current procedural technology, or CPT, codes and International Classification of Diseases, or ICD-10, codes related to carotid stenting that track to Medicare Severity Diagnosis Related Group, or MS‐DRG, classifications.

27



We designed our commercial strategy and built our direct sales force with a particular focus on vascular surgery practices. Vascular surgeons are skilled in endovascular procedures, and our sales and marketing efforts are focused on driving adoption and supporting their practice development by offering them an innovative, safe, effective and minimally-invasive alternative for treating carotid artery disease. We also market to other specialists with experience in CEA or CAS with the appropriate skill set for TCAR, including neurosurgeons, cardiothoracic surgeons and non-surgical interventionalists in radiology, neuroradiology and cardiology. We also work on developing strong relationships with physicians and hospitals that we have identified as key opinion leaders. We consider the hospitals and medical centers where the procedure is performed to be our customers, as they typically are responsible for purchasing our products.
We manufacture and distribute the ENROUTE NPS at our facility in Sunnyvale, California, using components and sub-assemblies manufactured both in-house and by third party manufacturers and suppliers. We purchase our other products from third-party contract manufacturers, including our ENROUTE stent. Many of these third-party manufacturers and outside vendors are currently single-source suppliers. We expect that our existing manufacturing facility will be sufficient to meet our anticipated growth through at least the next four years.
Prior to our initial public offering, our primary sources of capital were private placements of convertible preferred stock, debt financing arrangements and revenue from sales of our products. Since inception, we have raised a total of $105.2 million in net proceeds from private placements of convertible preferred stock. As of March 31, 2019, we had cash and cash equivalents of $15.5 million, long-term debt of $44.6 million and an accumulated deficit of $163.3 million. In April 2019, we completed an initial public offering of six million shares. As a result of our initial public offering we received net proceeds of approximately $108.8 million, after underwriting discounts and commissions of approximately $8.4 million and other expenses associated with our initial public offering of approximately $2.8 million.
Components of our Results of Operations
Revenue
We currently derive all of our revenue from the sale of our portfolio of TCAR products to hospitals and medical centers in the United States. Our customers typically purchase an initial stocking order of our products and then reorder as needed. Each of our products is purchased individually, and the majority of our revenue is derived from sales of the ENROUTE NPS and ENROUTE stent. No single customer accounted for 10% or more of our revenue during the three months ended March 31, 2019 and 2018. We expect revenue to increase in absolute dollars as we expand our sales territories, new accounts and trained physician base and as existing physicians perform more TCAR procedures.
We expect our revenue to fluctuate from quarter-to-quarter due to a variety of factors, including seasonality. For example, in the first quarter, our results can be harmed by adverse weather and by resetting of annual patient healthcare insurance plan deductibles, both of which may cause patients to delay elective procedures. In the third quarter, the number of elective procedures nationwide is historically lower than other quarters throughout the year, which we believe is primarily attributable to the summer vacations of physicians and their patients, which results in fewer procedures.
Cost of Goods Sold and Gross Margin
We manufacture the ENROUTE NPS in California at our facility in Sunnyvale. We purchase our other products from third party manufacturers. Cost of goods sold consists primarily of costs related to materials, components and sub-assemblies, direct labor, manufacturing overhead, reserves for excess, obsolete and non-sellable inventories as well as distribution-related expenses. Overhead costs include the cost of quality assurance, material procurement, inventory control, facilities, equipment and operations supervision and management. Cost of goods sold also includes depreciation expense for

28



production equipment and certain direct costs such as those incurred for shipping our products and royalties related to the sale of our ENROUTE stent. We expense all inventory provisions as cost of goods sold. We record adjustments to our inventory valuation for estimated excess, obsolete and non-sellable inventories based on assumptions about future demand, past usage, changes to manufacturing processes and overall market conditions. We expect cost of goods sold to increase in absolute dollars to the extent more of our products are sold.
We calculate gross margin as gross profit divided by revenue. Our gross margin has been and will continue to be affected by a variety of factors, primarily average selling prices, product sales mix, production and ordering volumes, manufacturing costs, product yields, headcount and cost-reduction strategies. We expect our gross margin to increase over the long-term as our production and ordering volumes increase and as we spread the fixed portion of our overhead costs over a larger number of units produced. We intend to use our design, engineering and manufacturing know-how and capabilities to further advance and improve the efficiency of our manufacturing processes, which we believe will reduce costs and have a positive impact on our gross margin. Our gross margin could fluctuate from quarter to quarter as we introduce new products, and as we adopt new manufacturing processes and technologies.
Research and Development Expenses
Research and development, or R&D, expenses consist primarily of engineering, product development, clinical studies to develop and support our products, regulatory expenses, medical affairs, and other costs associated with products and technologies that are in development. These expenses include employee compensation, including stock-based compensation, supplies, consulting, prototyping, testing, materials, travel expenses, depreciation and an allocation of facility overhead expenses. Additionally, R&D expenses include costs associated with our clinical studies, including clinical trial design, clinical trial site initiation and study costs, data management, related travel expenses and the cost of products used for clinical trials, internal and external costs associated with our regulatory compliance and quality assurance functions and overhead costs. We expect R&D expenses as a percentage of revenue to vary over time depending on the level and timing of our new product development efforts, as well as our clinical development, clinical trial and other related activities.
Selling, General and Administrative Expenses
Selling, general and administrative, or SG&A, expenses consist primarily of compensation for personnel, including stock-based compensation, related to selling and marketing functions, physician education programs, commercial operations and analytics, finance, information technology and human resource functions. Other SG&A expenses include sales commissions, training, travel expenses, promotional activities, marketing initiatives, market research and analysis, conferences and trade shows, professional services fees (including legal, audit and tax fees), insurance costs, general corporate expenses and allocated facilities-related expenses. We expect SG&A expenses to continue to increase in absolute dollars as we expand our infrastructure to both drive and support the anticipated growth in revenue and due to additional legal, accounting, insurance and other expenses associated with being a public company.
Interest Income (Expense), net
Interest income (expense), net consists primarily of interest incurred on our outstanding indebtedness and non-cash interest related to the amortization of debt discount and issuance costs associated with our term loan agreement. We may, at our election, pay the interest through a combination and the incurrence of additional indebtedness as payment-in-kind, or PIK.

29



Other Income (Expense), net
Other income (expense), net primarily consists of gains and losses resulting from the remeasurement of the fair value of our convertible preferred stock warrant liability at each balance sheet date. We recorded adjustments to the estimated fair value of the convertible preferred stock warrants until they were exercised in connection with our initial public offering in April 2019. At such time, the final fair value of the warrant liability was reclassified to stockholders’ deficit and we will no longer record any related periodic fair value adjustments.
Results of Operations:
 
Three Months Ended
March 31,
(in thousands)
2019
 
2018
Revenue
$
12,766

 
$
5,706

Costs of goods sold
3,339

 
1,934

Gross profit
9,427

 
3,772

Operating expenses:
 
 
 
Research and development
2,707

 
2,100

Selling, general and administrative
13,866

 
6,319

Total operating expenses
16,573

 
8,419

Loss from operations
(7,146
)
 
(4,647
)
Interest income (expense), net
(1,300
)
 
(976
)
Other income (expense), net
(15,712
)
 
215

Net loss and comprehensive loss
$
(24,158
)
 
$
(5,408
)
Comparison of Three Months Ended March 31, 2019 and 2018
Revenue. Revenue increased $7.1 million, or 124%, to $12.8 million during the three months ended March 31, 2019, compared to $5.7 million during the three months ended March 31, 2018. The increase in revenue was attributable to an increase in the number of products sold as we expanded our sales territories, increased the number of new accounts, trained more physicians in TCAR and as physicians performed more TCAR procedures.
Cost of Goods Sold and Gross Margin. Cost of goods sold increased $1.4 million, or 73%, to $3.3 million during the three months ended March 31, 2019, compared to $1.9 million during the three months ended March 31, 2018. This increase was attributable to the increase in the number of products sold and additional manufacturing overhead costs as we invested significantly in our operational infrastructure to support anticipated future growth. Gross margin for the three months ended March 31, 2019 increased to 74%, compared to 66% in the three months ended March 31, 2018. Gross margin increased as our production and ordering volumes increased and we were able to spread the fixed portion of our overhead costs over a larger number of units produced.
Research and Development Expenses. R&D expenses increased $0.6 million, or 29%, to $2.7 million during the three months ended March 31, 2019, compared to $2.1 million during the three months ended March 31, 2018. The increase in R&D expenses was primarily attributable to an increase of $0.3 million in personnel-related expenses including stock-based compensation, an increase of $0.1 million in outside services, an increase of $0.1 million in product development materials and costs, and an increase of $0.1 million relating to educational grants.

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Selling, General and Administrative Expenses. SG&A expenses increased $7.6 million, or 119%, to $13.9 million during the three months ended March 31, 2019, compared to $6.3 million during the three months ended March 31, 2018. The increase in SG&A costs was due to the continued commercialization of our products and is primarily attributable to an increase of $4.7 million in personnel-related expenses, an increase of $1.0 million in consulting, legal and professional fees, an increase of $0.7 million in travel expenses, an increase of $0.5 million relating to the allocation of facilities and related expenses, an increase of $0.3 million in physician training and travel related costs, an increase of $0.2 million in marketing, tradeshow and promotional costs and an increase of $0.2 million in software related expense. Personnel-related expenses included stock-based compensation expense of $0.2 million and $0.1 million for the three months ended March 31, 2019 and 2018, respectively.
Interest Income (Expense), Net. Interest income (expense), net increased $0.3 million, or 33%, to an expense of $1.3 million during the three months ended March 31, 2019, compared to an expense of $1.0 million during the three months ended March 31, 2018. This increased expense was attributable to the additional interest expense associated with the $15.0 million of additional borrowings in September 2018 under our term loan agreement.
Other Income (Expense), Net. Other income (expense), net decreased to an expense of $15.7 million during the three months ended March 31, 2019, compared to income of $0.2 million during the three months ended March 31, 2018. The decrease was primarily attributed to the remeasurement of our convertible preferred stock warrants and recognition of the change in fair value.
Liquidity and Capital Resources
Prior to our initial public offering, our primary sources of capital were private placements of convertible preferred stock, debt financing agreements and revenue from the sale of our products. As of March 31, 2019, we had cash and cash equivalents of $15.5 million, an accumulated deficit of $163.3 million and $44.6 million outstanding under our term loan agreement. We believe that the net proceeds from our initial public offering in April 2019 together with our existing cash and cash equivalents, expected revenue and additional borrowings available under the term loan agreement, will be sufficient to meet our capital requirements and fund our operations for at least the next 12 months.
Cash Flows
The following table summarizes our cash flows for each of the three months ended March 31:
 
 
Three Months Ended March 31,
(in thousands)
 
2019
 
2018
Net cash (used in) provided by:
 
 
 
 
Operating activities
 
$
(8,620
)
 
$
(4,650
)
Investing activities
 
(117
)
 
(455
)
Financing activities
 
(744
)
 
284

Net decrease in cash, cash equivalents and restricted cash
 
$
(9,481
)
 
$
(4,821
)
Net Cash Used in Operating Activities
Net cash used in operating activities for the three months ended March 31, 2019 was $8.6 million, consisting primarily of a net loss of $24.2 million and an increase in net operating assets of $1.4 million, partially offset by non-cash charges of $17.0 million. The increase in net operating assets was primarily due to an increase in inventories, to support the growth of our operations, and increases in other assets primarily attributable to deferred initial public offering costs, partially offset by increases in accounts payable and other liabilities, due to timing of payments and growth of our operations. The non-cash

31



charges primarily consisted of depreciation, stock-based compensation, provision for accounts receivable allowances, non-cash interest expense and other charges related to our term loan agreement, and increase in the fair value of the convertible preferred stock warrants.
Net cash used in operating activities for the three months ended March 31, 2018 was $4.7 million, consisting primarily of a net loss of $5.4 million, offset by non-cash charges of $0.7 million. The non-cash charges primarily consisted of depreciation, stock-based compensation, provision for accounts receivable allowances, non-cash interest expense and other charges related to our term loan agreement, offset by the decrease in fair value of the convertible preferred stock warrants.
Net Cash Used in Investing Activities
Net cash used in investing activities in the three months ended March 31, 2019 was $0.1 million consisting of purchases of property and equipment.
Net cash used in investing activities in the three months ended March 31, 2018 was $0.5 million consisting of purchases of property and equipment.
Net Cash Provided by (Used in) Financing Activities
Net cash used in financing activities in the three months ended March 31, 2019 was $0.7 million primarily relating to cash paid for deferred initial public offering costs of $1.1 million, partially offset by proceeds of $0.4 million from the exercise of stock options .
Net cash provided by financing activities in the three months ended March 31, 2018 of $0.3 million relates to proceeds from the exercise of stock options.
Off-Balance Sheet Arrangements
We currently have no off-balance sheet arrangements, such as structured finance, special purpose entities, or variable interest entities.
Contractual Obligations and Commitments
Our principal obligations consist of the operating lease for our facility, our term loan agreement and non-cancellable inventory purchase commitments. The non-cancellable purchase commitments primarily consist of ENROUTE stents and other inventory components.
There have been no material changes to our contractual obligations from those described in our final prospectus for our IPO filed with the SEC pursuant to Rule 424(b)(4) under the Securities Act on April 4, 2019.
Critical Accounting Policies and Estimates
Management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and assumptions for the reported amounts of assets, liabilities, revenue, expenses and related disclosures. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions and any such differences may be material. There have been no significant and material changes in our critical accounting policies during the three months ended March 31, 2019, as compared to those disclosed in “Management’s Discussion and Analysis of Financial Conditions and Results of Operations - Critical Accounting Policies and

32



Estimates” in our final prospectus for our IPO filed with the SEC pursuant to Rule 424(b)(4) under the Securities Act on April 4, 2019.
Recently Issued Accounting Pronouncements
See Note 3 to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for new accounting pronouncements not yet adopted as of the date of this Quarterly Report on Form 10-Q.


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Item 3: Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
The risk associated with fluctuating interest rates is primarily limited to our cash equivalents, which are carried at quoted market prices. Due to the short-term maturities and low risk profile of our cash equivalents, an immediate 100 basis point change in interest rates would not have a material effect on the fair value of our cash equivalents. We do not currently use or plan to use financial derivatives in our investment portfolio.
Credit Risk
As of March 31, 2019, our cash and cash equivalents were maintained with two financial institutions in the United States, and our current deposits are likely in excess of insured limits. We have reviewed the financial statements of these institutions and believe each to have sufficient assets and liquidity to conduct its operations in the ordinary course of business with little or no credit risk to us. Our cash equivalents are invested in highly rated money market funds.
Our accounts receivable primarily relate to revenue from the sale of our products to hospitals and medical centers in the United States. No customer represented 10% or more of our accounts receivable as of March 31, 2019.
Foreign Currency Risk
Our business is primarily conducted in U.S. dollars. Any transactions that may be conducted in foreign currencies are not expected to have a material effect on our results of operations, financial position or cash flows.

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Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our President and Chief Executive Officer and our Chief Financial Officer, have evaluated our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) prior to the filing of this quarterly report. Based on that evaluation, our President and Chief Executive Officer and our Chief Financial Officer have concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures were not effective as described below.
However, our management, including our President and Chief Executive Officer and our Chief Financial Officer, has concluded that, notwithstanding the identified material weaknesses in our internal control over financial reporting, the condensed consolidated financial statements in this Quarterly Report fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with U.S. GAAP.
Material Weakness in Internal Control Over Financial Reporting
In connection with the audit of our consolidated financial statements as of and for the year ended December 31, 2017, we identified material weaknesses in our internal control over financial reporting. A “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
We determined that we had material weaknesses because we did not maintain a sufficient complement of personnel with an appropriate degree of knowledge, experience, and training, commensurate with our accounting and reporting requirements. As a result, there were a number of post initial close adjustments that were material to the financial statements.
The second material weakness relates to the fact that we did not appropriately design and implement controls over the review and approval of manual journal entries and the related supporting journal entry calculations, resulting in inappropriate segregation of duties over manual journal entries. This material weakness could result in a misstatement of account balances or disclosures that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.
Management’s Plan to Remediate the Material Weakness
With the oversight of senior management and our audit committee, we executed the implementation of remediation steps in 2018. These efforts focused on (i) the hiring of personnel with technical accounting and financial reporting experience and (ii) the implementation of improved accounting and financial reporting procedures and systems to improve the completeness, timeliness and accuracy of our financial reporting and disclosures including the assessment of more judgmental areas of accounting. We believe the measures described above will remediate the material weaknesses identified and strengthen our internal control over financial reporting. These improvements to our internal control infrastructure were implemented in the fourth quarter of 2018, and were ongoing during the preparation of our financial statements for the three months ended March 31, 2019. As such, the remediation initiatives outlined above were not sufficient to fully remediate the material weaknesses in internal control over financial reporting as discussed above. We are committed to continuing to improve our internal control processes and will continue to diligently and vigorously review our financial reporting controls and procedures.
Changes in Internal Control Over Financial Reporting

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Beginning January 1, 2019, we implemented ASC Topic 842, "Leases." As a result, we implemented changes to processes related to our contract review process, and the control activities within them. There were no other changes in our internal control over financial reporting that occurred during our most recently completed fiscal quarter that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.

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Part II. Other Information
Item 1. Legal Proceedings

From time to time we may become involved in legal proceedings or investigations, which could have an adverse impact on our reputation, business and financial condition and divert the attention of our management from the operation of our business.
In February 2019, a former employee, through counsel, advised us that he had filed a charge of discrimination against us with the California Department of Fair Employment & Housing, or DFEH. The former employee’s complaint alleges sexual harassment and retaliation in violation of the California Department of Fair Employment & Housing Act. The complaint does not allege specific damages. To date, the DFEH has not contacted us. We deny the complaint’s allegations and intend to vigorously defend ourselves. We have tendered the claim to our insurance carrier, and the carrier has appointed a law firm to represent us in this matter.

Item 1A. Risk Factors

We have identified the following risks and uncertainties that may have a material adverse effect on our business, financial condition, results of operations and future growth prospects. Our business could be harmed by any of these risks. The risks and uncertainties described below are not the only ones we face. The occurrence of any of the following risks or additional risk and uncertainties not presently known to us or that we currently believe to be immaterial could materially and adversely affect our business, financial condition, results of operations and future prospects. The trading price of our common stock could decline due to any of these risks, and you may lose all or part of your investment. In assessing these risks, you should also refer to the other information contained in this Quarterly Report on Form 10-Q, including our condensed consolidated financial statements and related notes. Please also see “Cautionary Notes Regarding Forward-Looking Statements.”
Risks Related to Our Business
We are an early-stage company with a history of net losses, we expect to incur operating losses in the future and we may not be able to achieve or sustain profitability. We have a limited history operating as a commercial company.
We have incurred net losses since our inception in March 2007. For the years ended December 31, 2017 and 2018, we had a net loss of $19.4 million, and $37.6 million, respectively, and a net loss of $24.2 million for the three months ended March 31, 2019, and we expect to continue to incur additional losses in the future. As of March 31, 2019, we had an accumulated deficit of $163.3 million. To date, we have financed our operations primarily through equity and debt financings and from sales of our portfolio of TCAR products that enable transcarotid artery revascularization, or TCAR. The losses and accumulated deficit have primarily been due to the substantial investments we have made to develop our products, as well as for costs related to general research and development, including clinical and regulatory initiatives to obtain marketing approval, sales and marketing efforts and infrastructure improvements.
We fully commercialized our products in the United States in 2016 and therefore do not have a long history operating as a commercial company. Over the next several years, we expect to continue to devote a substantial amount of our resources to expand commercialization efforts and increase adoption of TCAR using our products, improve reimbursement for TCAR, and develop additional products. In

37


addition, as a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. Accordingly, we expect to continue to incur operating losses for the foreseeable future and we cannot assure you that we will achieve profitability in the future or that, if we do become profitable, we will sustain profitability. Our failure to achieve and sustain profitability in the future will make it more difficult to finance our business and accomplish our strategic objectives, which would have a material adverse effect on our business, financial condition and results of operations and cause the market price of our common stock to decline. In addition, failure of our products to significantly penetrate the target markets would negatively affect our business, financial condition and results of operations.
We rely on, and currently sell products to enable, TCAR, a single and new procedure. We have limited commercial sales experience regarding TCAR, which makes it difficult to evaluate our current business, predict our future prospects and forecast our financial performance and growth.
To date, all of our revenue has been derived, and we expect it to continue to be derived in the near term, from sales of our products that enable TCAR. TCAR is a new treatment option for certain patients diagnosed with carotid artery disease and, as a result, physician awareness of TCAR and our products, and experience with TCAR and our products, is limited. As a result, our products have limited product and brand recognition and TCAR has limited recognition within the medical industry. The novelty of TCAR and our products that enable the procedure, together with our limited commercialization experience, make it difficult to evaluate our current business and predict our future prospects. A number of factors that are outside of our control may contribute to fluctuations in our financial results, including:
Physician and hospital demand for our products and adoption of TCAR, including the rate at which physicians recommend our products and TCAR to their patients;
Positive or negative media coverage, or public, patient and/or physician perception, of our products and TCAR or competing products and procedures;
Any safety or effectiveness concerns that arise regarding our products or TCAR;
Unanticipated delays in product development or product launches;
Our ability to maintain our current or obtain further regulatory clearances or approvals;
Delays in, or failure of, product and component deliveries by our third-party suppliers; and
Introduction of new products or procedures for treating carotid artery disease that compete with our products.
It is therefore difficult to predict our future financial performance and growth, and such forecasts are inherently limited and subject to a number of uncertainties. If our assumptions regarding the risks and uncertainties we face, which we use to plan our business, are incorrect or change due to circumstances in our business or our markets, or if we do not address these risks successfully, our operating and financial results could differ materially from our expectations and our business could suffer.
In addition, because we devote substantially all of our resources to our products that enable TCAR and rely on our products and the adoption of TCAR as our sole source of revenue, any factors that negatively impact our products or TCAR, or result in a decrease in sales of products, could have a material adverse effect on our business, financial condition and results of operations.
Our business is dependent upon the broad adoption of TCAR by hospitals and physicians.
To date, a substantial majority of our product sales and revenue have been derived from a limited number of hospitals and physicians who have adopted TCAR. Our future growth and profitability largely depend on our ability to increase physician awareness of TCAR and on the willingness of physicians to

38


adopt our products and TCAR, and to recommend the procedure to their patients. Physicians may not adopt our products unless they are able to determine, based on experience, clinical data, medical society recommendations and other analyses, that our products provide a safe and effective treatment alternative for carotid artery disease. Even if we are able to raise awareness among physicians, physicians tend to be slow in changing their medical treatment practices and may be hesitant to select our products or TCAR for recommendation to patients for a variety of reasons, including:
Long-standing relationships with competing companies and distributors that sell other products, such as stents and embolic protection devices for transfemoral carotid artery stenting, or CAS;
Competitive response and negative selling efforts from providers of alternative carotid revascularization products;
Lack of experience with our products and concerns that we are relatively new to market;
Perceived liability risk generally associated with the use of new products and procedures;
Lack or perceived lack of sufficient clinical evidence, including long-term data, supporting clinical benefits;
Reluctance to change to or use new products and procedures;
Perceptions that our products are unproven; and
Time commitment and skill development that may be required to gain familiarity and proficiency with TCAR and our products.
Physicians play a significant role in determining the course of a patient’s treatment for carotid artery disease and, as a result, the type of treatment that will be recommended or provided to a patient. We focus our sales, marketing and education efforts primarily on vascular surgeons, and aim to educate referring physicians such as vascular surgeons, cardiologists, radiologists, neurologists, neurosurgeons and general practitioners regarding the patient population that would benefit from TCAR. However, we cannot assure you that we will achieve broad education or market acceptance among these practitioners. For example, if diagnosing physicians that serve as the primary point of contact for patients are not made aware of TCAR, they may not refer patients to physicians for treatment using our products, and those patients may instead not seek treatment at all or may be treated with alternative procedures. In addition, some physicians may choose to utilize TCAR on only a subset of their total patient population or may not adopt TCAR at all. Further, as TCAR is a new procedure, it may not fit into the workstreams of certain physicians. If we are not able to effectively demonstrate that TCAR is beneficial in a broad range of patients, adoption of TCAR will be limited and may not occur as rapidly as we anticipate or at all, which would have a material adverse effect on our business, financial condition and results of operations. We cannot assure you that TCAR or our products will achieve broad market acceptance among hospitals and physicians. Any failure of TCAR or our products to satisfy demand or to achieve meaningful market acceptance and penetration will harm our future prospects and have a material adverse effect on our business, financial condition and results of operations.
In addition, the medical device industry’s relationship with physicians is under increasing scrutiny by the Health and Human Services Office of the Inspector General, or OIG, the Department of Justice, or DOJ, state attorneys general, and other foreign and domestic government agencies. Our failure to comply with laws, rules and regulations governing our relationships with physicians, or an investigation into our compliance by the OIG, DOJ, state attorneys general or other government agencies, could significantly harm our business.
In most cases, before physicians can use our products for the first time, our products must be approved for use by a hospital's new product or value analysis committee, or the staff of a hospital or

39


health system. Following such approval, we may be required to enter into a purchase contract. Such approvals or requirements to enter into a purchase contract could deter or delay the use of our products by physicians. We cannot provide assurance that our efforts to obtain such approvals, enter into purchase contracts, or generate adoption will be successful or increase the use of our products, and if we are not successful, it could have a material adverse effect on our business, financial condition and results of operations.
Adoption of TCAR depends upon positive clinical data and medical society recommendations, and negative clinical data or medical society recommendations would adversely affect our business.
The rate of adoption of TCAR and sales of our products that facilitate the procedure is heavily influenced by clinical data. Although the Society for Vascular Surgery’s TCAR Surveillance Project contains real world data comparing procedures, we have not conducted head-to-head clinical trials to compare TCAR to the procedures historically available to patients, such as carotid endarterectomy, or CEA, or CAS, which may limit the adoption of TCAR. Additionally, the Carotid Revascularization and Medical Management for Asymptomatic Carotid Stenosis clinical trial is currently being conducted by the National Institutes of Health, which compares the effectiveness of each of CEA and CAS with best medical management solutions. Although enrollment is not expected to be completed until at least 2020, interim results could be released at any time. At the completion of the four-year follow-up, the trial could conclude that medical management alone achieves the same therapeutic results as surgical intervention, which would have an adverse impact on the adoption of TCAR. Finally, our competitors and third parties may also conduct clinical trials of our products without our participation. Unfavorable or inconsistent clinical data from existing or future clinical trials conducted by us, our competitors or third parties, the interpretation of our clinical data or findings of new or more frequent adverse events, could have a material adverse effect on our business, financial condition and results of operations.
As physicians are influenced by guidelines issued by physician organizations, such as the Society for Vascular Surgery, the rate of adoption of TCAR and sales of our products that facilitate the procedure is also heavily influenced by medical society recommendations. We believe the Society for Vascular Surgery’s Clinical Practice Guidelines, or SVS Guidelines, are of particular importance to the broader market acceptance of TCAR. The most current SVS Guidelines on the management of carotid artery disease, published in 2011, do not specifically mention TCAR as a treatment for carotid artery disease, but generally discuss CAS and embolic protection methods, including flow reversal. If the next version of the SVS Guidelines do not recommend TCAR, or if the Society for Vascular Surgery issues a negative statement regarding TCAR, physicians may not adopt or continue to use TCAR or our products, which would have a material adverse effect on our business, financial condition and results of operations. Additionally, if key opinion leaders who currently support TCAR cease to recommend TCAR or our products, our business, financial condition and results of operations will be adversely affected.
Adoption of TCAR depends upon appropriate physician training, and inadequate training may lead to negative patient outcomes, affect adoption of TCAR and adversely affect our business.
The success of TCAR depends in part on the skill of the physician performing the procedure and on our customers’ adherence to appropriate patient selection and proper techniques provided in training sessions conducted by our training faculty. For example, we train our customers to ensure correct use of our ENROUTE NPS and proper deployment of our ENROUTE stent. However, physicians rely on their previous medical training and experience when performing TCAR, and we cannot guarantee that all such physicians will have the necessary surgical skills to perform the procedure. We do not control which physicians perform TCAR or how much training they receive, and physicians who have not completed our training sessions may nonetheless attempt to perform TCAR. If physicians perform TCAR in a manner that is inconsistent with its labeled indications, with components that are not our products or without adhering to or completing our training sessions, their patient outcomes may not be consistent with the outcomes achieved in our clinical trials. This result may negatively impact the perception of patient

40


benefit and safety and limit adoption of TCAR and our products that facilitate the procedure, which would have a material adverse effect on our business, financial condition and results of operations.
We have limited long-term data regarding the safety and effectiveness of our products, including our ENROUTE stent and TCAR generally.
Our products enable TCAR, which is a novel procedure, and our success depends on acceptance of our products and TCAR by the medical industry, including physicians and hospitals. The FDA reviews our products, and the stent manufactured for us by Cordis, for safety and effectiveness, prior to commercial launch of these products. Thereafter, physicians, through their own use of the products and evaluation of clinical data, make their own decisions as to whether our products are safe and effective for their patients and improve their clinical outcomes. Important factors upon which the effectiveness of our products, including our ENROUTE stent, will be measured are long-term data regarding the risk of stroke and death and the rate of restenosis following TCAR. The long-term clinical benefits of procedures that use our products are not known. There is limited data on the long-term performance of carotid stents beyond three years after implantation. We have limited data on the ENROUTE stent up to one year. Any failure of our stent or in-stent restenosis of the carotid artery following deployment of the stent could deter physicians from adopting our products and could have a material adverse effect on our business, financial condition and results of operations.
The results of short-term clinical experience of our products do not necessarily predict long-term clinical benefit. We believe that physicians will compare the rates of long-term risk of stroke and death, as well as restenosis and reintervention for procedures using our products, against alternative procedures, such as CEA and CAS. If the long-term data do not meet physicians’ expectations, or if long-term data indicate that our products are not as safe or effective as other treatment options or as current short-term data would suggest, our products may not become widely adopted, physicians may recommend alternative treatments for their patients and our business our be harmed.
If we are not able to maintain adequate levels of third-party coverage and reimbursement for the procedures using our products, if third parties rescind or modify their coverage or delay payments, or if patients are left with significant out-of-pocket costs, it would have a material adverse effect on our business, financial condition and results of operations.
TCAR is currently covered under certain circumstances for certain patients by the Centers for Medicare and Medicaid Services, and has been covered by some commercial payers, independent networks and other entities not governed by the National Coverage Determination. In the United States, we derive our revenue from sales to hospital and medical centers, which typically bill all or a portion of the costs and fees associated with our products to various third-party payers, including Medicare, Medicaid, private commercial insurance companies, health maintenance organizations and other healthcare-related organizations, and then bill patients for any applicable deductibles or co-payments. For example, our contracts are with the hospitals and medical centers that purchase our products for use with TCAR and not with the commercial payers. As a result, access to adequate coverage and reimbursement for our products by third-party payers is essential to the acceptance of our products by our customers.
However, in the United States, there is no uniform policy of coverage and reimbursement for medical device products and services among third-party payers, so coverage and reimbursement can differ significantly from payer to payer, and each coverage decision and level of reimbursement is independent. As a result, third-party reimbursement may not be available or adequate for our products, and there is no guarantee that we will be able to maintain our current levels of coverage or reimbursement or be able to expand coverage to other insurance carriers. Further, payers continually review new technologies for possible coverage and can, without notice, deny coverage for products and procedures or delay coverage approval until further clinical data is available. As a result, the coverage determination process is often a time-consuming and costly process that may require us to provide scientific and clinical support for the use of our products to each payer separately, with no assurance that coverage and adequate

41


reimbursement will be obtained, or maintained if obtained. If third-party reimbursement is not available or adequate for our products, or if there is any decline in the amount that payers are willing to reimburse our customers for our products, new customers may not adopt, or may reduce their rate of adoption of, our products and we could experience additional pricing pressure for us, any of which could have a material adverse effect on our business, financial condition and results of operations.
Our products are reimbursed primarily on a per-patient prior authorization basis for patients covered by commercial insurers and on a medical necessity basis for most patients covered by Medicare. Based on reimbursement information regarding CEA and CAS, we estimate that approximately 75% of TCAR procedures are reimbursed by Medicare/Medicaid and approximately 25% are reimbursed by commercial payers. Current Procedure Terminology, or CPT, codes are developed and issued by the American Medical Association, or AMA. The U.S. Centers for Medicare & Medicaid Services, or CMS, determines Medicare payment based on formulas within the Medicare Resource-Based Relative Value Scale, which uses Relative Value Units, or RVUs. The RVU totals for a CPT code are determined and periodically updated by an AMA/Specialty Society RVS Update Committee, or RUC. In the future, reimbursement for our products may change based on a new RUC review. If the Society for Vascular Surgery recommended changes to the RVUs or declined to support the use of TCAR or the Medicare National Coverage Determination no longer covers TCAR, there would be a material adverse effect on our business, financial condition and results of operations. If this were to occur, commercial insurance companies could also adjust payment rates at which they reimburse our products. Other carotid artery disease treatments, such as CEA, may be more widely covered or subject to different co-pay policies and requirements. If patients are required to cover all or a part of the cost of our products out-of-pocket, they may be less likely to elect to use our products and/or undergo the procedure. Additionally, patients may elect to reduce or defer out-of-pocket costs during times of economic uncertainty or periods of legislative change. If hospital, physician and/or patient demand for TCAR, and thus our products that facilitate the procedure, is adversely affected by third-party reimbursement policies and decisions, it will have a material adverse effect on our business, financial condition and results of operations.
Internationally, reimbursement systems in foreign markets vary significantly by country and by region within some countries, and reimbursement approvals must be obtained on a country-by-country basis. In certain international markets, a product must be approved for reimbursement before it can be approved for sale in that country. Additionally, many international markets have government-managed healthcare systems that control reimbursement for products and procedures. In most markets there are both private insurance systems and government-managed systems. If sufficient levels of coverage and reimbursement are 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.
Additionally, when payers combine their operations, the combined company may elect to reimburse for TCAR at the lowest rate paid by any of the participants in the consolidation or use its increased size to negotiate reduced rates. If one of the payers participating in the consolidation does not reimburse for TCAR at all, the combined company may elect not to reimburse for TCAR, which would adversely impact our business, financial condition and results of operations.
If we fail to comply with our obligations in our intellectual property license from Cardinal Health, we could lose license rights that are important to our business.
We are a party to a license agreement with Cordis Corporation, or Cordis, which was acquired by Cardinal Health, under which Cordis has granted us a worldwide, non-exclusive, royalty-bearing license to certain of its intellectual property related to the PRECISE® carotid stent for transcervical treatment of carotid artery disease with an intravascular stent for certain applications for accessing blood vessels through the neck and cervical area. This license agreement imposes, and we expect that any future license agreements will impose, certain diligence, royalty, and other obligations on us. If we fail to comply with these obligations, our licensors, including Cardinal Health, may have the right to reduce the scope of our rights or terminate these agreements, in which event we may not be able to develop and market any

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product that is covered by these agreements. Termination of this license for failure to comply with such obligations or for other reasons, or reduction or elimination of our licensed rights under it or any other license, may result in our having to negotiate new or reinstated licenses on less favorable terms or our not having sufficient intellectual property rights to operate our business or cause us to enter into a new license for a different stent. The occurrence of such events could materially harm our business and financial condition.
The risks described elsewhere pertaining to our intellectual property rights also apply to the intellectual property rights that we in-license, and any failure by us or our licensors, including Cordis, to obtain, maintain, defend and