Nevro(NVRO) - 2020 Q2 - Quarterly Report

PART I—FINANCIAL INFORMATION This section provides Nevro Corp.'s financial statements, management's discussion, market risk disclosures, and controls and procedures Item 1. Condensed Consolidated Financial Statements Nevro Corp.'s unaudited condensed consolidated financial statements for Q2 2020 and year-to-date are presented, detailing balance sheets, operations, cash flows, and notes Condensed Consolidated Balance Sheets As of June 30, 2020, total assets increased to $753.2 million, driven by cash and investments, with liabilities and equity also rising Condensed Consolidated Balance Sheets (in thousands) | | June 30, 2020 (in thousands) | December 31, 2019 (in thousands) | | :--- | :--- | :--- | | Total Current Assets | $716,937 | $422,052 | | Total Assets | $753,172 | $469,645 | | Total Current Liabilities | $220,768 | $70,611 | | Total Liabilities | $378,744 | $253,293 | | Total Stockholders' Equity | $374,428 | $216,352 | Condensed Consolidated Statements of Operations and Comprehensive Loss Q2 2020 revenue decreased to $56.4 million, resulting in a $41.1 million net loss, with six-month revenue also declining to $143.9 million Condensed Consolidated Statements of Operations and Comprehensive Loss (in thousands) | Metric (in thousands) | Q2 2020 | Q2 2019 | Six Months 2020 | Six Months 2019 | | :--- | :--- | :--- | :--- | :--- | | Revenue | $56,390 | $93,571 | $143,857 | $175,719 | | Gross Profit | $35,250 | $63,943 | $95,797 | $117,152 | | Loss from Operations | $(35,361) | $(26,560) | $(58,428) | $(68,814) | | Net Loss | $(41,063) | $(28,021) | $(65,951) | $(72,097) | | Net Loss Per Share | $(1.21) | $(0.91) | $(2.00) | $(2.36) | Condensed Consolidated Statements of Cash Flows For the six months ended June 30, 2020, operating cash use improved to $22.0 million, investing cash use increased, and financing cash provided surged to $341.0 million Condensed Consolidated Statements of Cash Flows (in thousands) | Cash Flow Activity (in thousands) | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | | Net cash used in operating activities | $(22,004) | $(33,377) | | Net cash provided by (used in) investing activities | $(107,626) | $37,222 | | Net cash provided by financing activities | $341,005 | $7,695 | | Net increase (decrease) in cash | $211,142 | $11,546 | Notes to Condensed Consolidated Financial Statements The notes detail accounting policies, COVID-19 impact, debt instruments, lease accounting, fair value measurements, and updates on legal proceedings, especially with Boston Scientific - The company has a history of net losses, incurring a net loss of $66.0 million and using $22.0 million in cash from operations in the first six months of 2020[19] - The COVID-19 pandemic has negatively impacted operations and revenues by decreasing the number of Senza system procedures performed, as many elective surgeries were suspended or canceled[23][24] - In April 2020, the company issued $189.8 million in 2.75% convertible senior notes due 2025 and completed a public offering of common stock, raising net proceeds of approximately $183.6 million and $147.1 million, respectively[19][123] - The company is involved in multiple patent infringement lawsuits with Boston Scientific. A recent Federal Circuit ruling vacated a lower court's judgment of invalidity on some of Nevro's patents, reinstating the claims[107][110][111] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial performance, highlighting significant Q2 and H1 2020 revenue decline due to COVID-19, withdrawal of 2020 guidance, and strengthened liquidity Overview and COVID-19 Impact Nevro, a medical device company, experienced negative COVID-19 impact on Senza SCS procedures and revenue, leading to the withdrawal of 2020 annual guidance - The COVID-19 outbreak has negatively impacted operations and revenues by decreasing the number of Senza systems procedures performed, as healthcare organizations prioritized COVID-19 treatment and suspended elective procedures[145][146] - The company has withdrawn its previously announced annual guidance for 2020 due to the continued uncertainties resulting from the COVID-19 pandemic[148] - In April 2020, the company raised approximately $183.7 million from an offering of convertible senior notes due 2025 and $147.2 million from a public offering of common stock[143] Results of Operations Q2 2020 revenue decreased 40% to $56.4 million due to COVID-19, with gross margin falling to 63% and operating expenses decreasing Results of Operations - Q2 (in thousands) | Metric (in thousands) | Q2 2020 | Q2 2019 | % Change | | :--- | :--- | :--- | :--- | | Revenue | $56,390 | $93,571 | -40% | | U.S. Revenue | $51,000 | $78,100 | -35% | | International Revenue | $5,400 | $15,500 | -65% | | Gross Profit | $35,250 | $63,943 | -45% | | Gross Margin | 63% | 68% | -5 p.p. | Results of Operations - Six Months (in thousands) | Metric (in thousands) | Six Months 2020 | Six Months 2019 | % Change | | :--- | :--- | :--- | :--- | | Revenue | $143,857 | $175,719 | -18% | | U.S. Revenue | $126,300 | $143,900 | -12% | | International Revenue | $17,500 | $31,800 | -45% | | Gross Profit | $95,797 | $117,152 | -18% | | Gross Margin | 67% | 67% | 0 p.p. | - The decrease in revenue for both the three and six-month periods was a result of a worldwide decline in procedure volume due to the COVID-19 pandemic[175][184] - Sales, General and Administrative (SG&A) expense decreased by $15.4 million (20%) in Q2 2020 compared to Q2 2019, primarily due to lower personnel costs, travel, and healthcare professional-related expenses[178] Liquidity and Capital Resources As of June 30, 2020, Nevro held $562.3 million in cash and investments, boosted by $313.3 million from April 2020 offerings, ensuring liquidity for 12 months - As of June 30, 2020, the company had cash, cash equivalents, and short-term investments of $562.3 million[193] - In April 2020, the company raised a total of $313.3 million in net proceeds from concurrent offerings of common stock and convertible senior notes due 2025[193] - Net cash used in operating activities for the first six months of 2020 was $22.0 million, an improvement from $33.4 million in the same period of 2019[198] - Management expects that current cash reserves will be sufficient to fund operations for at least the next 12 months[193] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from interest rates, foreign currency exchange, and convertible notes, with interest rate risk on short-term investments considered insignificant - The company's primary market risk exposures are interest rate sensitivity, foreign currency exchange fluctuations, and market risk associated with its convertible senior notes[208][211][213] - Exposure to interest rate risk is considered not significant because investments are primarily short-term in duration[210] - A portion of revenue and operating expenses are denominated in foreign currencies, subjecting the company to transaction gains and losses from exchange rate fluctuations. A hypothetical 10% change in exchange rates would have an immaterial impact on net loss[211] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of June 30, 2020, with no material changes to internal control over financial reporting - Based on an evaluation as of June 30, 2020, the Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective at a reasonable assurance level[215] - There were no changes in internal control over financial reporting during the quarter that materially affected, or are reasonably likely to materially affect, these controls[216] PART II—OTHER INFORMATION This section details ongoing legal proceedings, significant risk factors, and information regarding unregistered sales of equity securities Item 1. Legal Proceedings This section details ongoing patent infringement lawsuits with Boston Scientific, a settlement with Stimwave, and a new lawsuit against Nalu Medical - Nevro is engaged in ongoing patent infringement litigation with Boston Scientific. In April 2020, the U.S. Court of Appeals for the Federal Circuit vacated a lower court's judgment of invalidity, reinstating Nevro's asserted system claims[218][220] - Boston Scientific has also filed two lawsuits against Nevro in Delaware, alleging patent infringement, trade secret misappropriation, and tortious interference. These cases have been partially stayed and consolidated, with a trial scheduled for October 2021[221][222] - In February 2020, Nevro and Stimwave Technologies settled a lawsuit, with Stimwave agreeing to a permanent injunction to cease commercialization of all high-frequency spinal cord stimulation systems worldwide[223] - Nevro filed a new lawsuit for patent infringement against Nalu Medical, Inc. in February 2020[224] Item 1A. Risk Factors This section outlines significant risks including COVID-19 impact, market acceptance of HF10 therapy, intense competition, supply chain reliance, product liability, IP litigation, financial losses, and regulatory oversight - The COVID-19 pandemic has harmed and may continue to harm the business by decreasing the number of Senza system procedures, as elective surgeries are suspended or cancelled[227] - The company faces significant competition from large, well-established medical device companies like Medtronic, Boston Scientific, and Abbott Laboratories, which have substantially greater resources[240][243] - The company is involved in expensive and time-consuming lawsuits to protect its intellectual property, which could result in the diversion of significant resources and hinder growth[235] - Dependence on third-party, and in some cases sole-source, suppliers for critical components makes the company vulnerable to supply shortages, price fluctuations, and manufacturing problems[271][276] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities during the period - There were no unregistered sales of equity securities in the period[399]