The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements
.
The accompanying notes are an integral part of these condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
– Unaudited
1.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Nature of Operations
–
Nuvectra Corporation, together with its wholly-owned subsidiaries (i) Algostim, LLC (“Algostim”), (ii) PelviStim LLC (“PelviStim”), and (iii) NeuroNexus Technologies, Inc. (“NeuroNexus”) (collectively “Nuvectra” or the “Company”), is a neurostimulation company committed to helping physicians improve the lives of people with chronic conditions. The Algovita® Spinal Cord Stimulation (“SCS”) System (“Algovita”) is the Company’s first commercial offering and is Conformité Européene (“CE”) marked and United States Food & Drug Administration (“FDA”) approved for the treatment of chronic pain of the trunk and/or limbs. Nuvectra’s innovative technology platform also has capabilities under development to support other neurological indications such as sacral neuromodulation (“SNM”) for the treatment of overactive bladder and deep brain stimulation (“DBS”) for the treatment of Parkinson’s Disease. In addition, the Company’s NeuroNexus subsidiary designs, manufactures and markets neural-interface technologies for the neuroscience clinical research market.
On March 14, 2016 Integer Holdings Corporation, formerly known as Greatbatch, Inc. (“Integer”), completed the spin-off of the Company, at which time the Company became a separate public company (the “Spin-off”). Prior to the Spin-off, the Company was a limited liability company named QiG Group, LLC.
Basis of Presentation
– The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information (Accounting Standards Codification (“ASC”) 270,
Interim Reporting
) and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information necessary for a full presentation of financial position, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States of America. Operating results for interim periods are not necessarily indicative of results that may be expected for the fiscal year as a whole. In the opinion of management, the condensed consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the results of Nuvectra for the periods presented.
Liquidity and Capital Resources
– The Company has incurred significant net losses and negative cash flows from operations since inception and expects to incur additional net losses for the foreseeable future. Immediately prior to completion of the Spin-off, Integer made a cash capital contribution to Nuvectra of $75 million. This cash capital contribution, together with the Company’s cash on hand, cash generated from sales, and borrowings under its credit facility, $12.5 million of which is subject to achieving a trailing six month revenue milestone and compliance with specified conditions and covenants, is an amount that the Company estimates will, based on its current plans and expectations, meet its cash needs for at least the next twelve months. Based on the Company’s sequential quarterly revenue growth since the commercial release of its Algovita system into the United States market, and on its expectations of future and continued revenue growth, the Company believes that it should be able to achieve this trailing six month revenue milestone during the relevant period, although there can be no assurances that the Company will be able to do so due to unforeseen obstacles that may negatively affect its business. The Company periodically evaluates its liquidity requirements, alternative uses of capital, capital needs and available resources. As a result of this process, the Company has in the past sought, and may in the future seek, to explore strategic alternatives to finance its business plan, including but not limited to, a public offering of its common stock, private equity or debt financings, or other sources, such as strategic partnerships. The Company may elect to make near-term decisions, including engaging in various capital generating initiatives, to provide additional liquidity. If the Company is unable to raise or is limited under the terms of the tax matters agreement with Integer from raising additional funds when needed, it may be required to delay, reduce, or terminate some or all of its development plans. The Company is also focusing on increasing the sales of its products to generate cash flow to fund its operations. However, there can be no assurance that the Company will be successful in its plans described above or in attracting alternative debt or equity financing.
Fiscal Year End
– Prior to fiscal year 2017, the Company utilized a fifty-two, fifty-three week fiscal year ending on the Friday nearest December 31. The third quarter and first nine month periods of fiscal year 2016 contained 13 weeks and 39 weeks, respectively, and ended on September 30, 2016 and the Company’s year end was December 30, 2016. Beginning in fiscal year 2017, the Company utilizes a calendar year end.
Use of Estimates
– The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of sales and expenses during the reporting period. Actual results could differ materially from those estimates. Significant items subject to such estimates and assumptions include inventories, tangible and intangible asset valuations, accrued liabilities, revenue, stock-based compensation, warrants, and income tax accounts.
Nuvectra Corporation
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
– Unaudited
Inventories
– The value of inventories, comprised solely of finished goods, are stated at the lesser of net realizable value or cost, determined using the first-in, first-out (“FIFO”) method. To value inventory, management must estimate excess or obsolete inventory, as well as inventory that is not of saleable quality. This valuation involves an inherent level of risk and uncertainty due to unpredictability of trends in the industry and customer demand for the Company’s products. In assessing the ultimate realization of inventories, management must make judgments as to future demand requirements and compare that with the current or committed inventory levels. Reserve requirements generally increase as demand decreases due to market conditions and technological and product life-cycle changes. Writedowns of excess and obsolete inventories were $0.1 million and $0 in the third quarter of fiscal years 2017 and 2016, respectively. Future events and variations in valuation methods or assumptions may cause significant fluctuations in this estimate and could have a material impact on the Company’s results.
Impairment of Long-Lived Assets
– The Company assesses the impairment of definite-lived long-lived assets or asset groups when events or changes in circumstances indicate that the carrying value may not be recoverable. Factors that are considered in deciding when to perform an impairment review include: a significant decrease in the market price of the asset or asset group; a significant change in the extent or manner in which a long-lived asset or asset group is being used or in its physical condition; a significant change in legal factors or in the business climate that could affect the value of a long-lived asset or asset group, including an action or assessment by a regulator; an accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction; a current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset or asset group; or a current expectation that, more likely than not, a long-lived asset or asset group will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. The term more likely than not refers to a level of likelihood that is more than 50 percent.
Potential recoverability is measured by comparing the carrying amount of the asset or asset group to its related total future undiscounted cash flows. The projected cash flows for each asset or asset group considers multiple factors, including current revenue from existing customers, proceeds from the sale of the asset or asset group and expected profit margins giving consideration to historical and expected margins. If the carrying value is not recoverable, the asset or asset group is considered to be impaired. Impairment is measured by comparing the asset or asset group
’s carrying amount to its fair value. When it is determined that useful lives of assets are shorter than originally estimated, and no impairment is present, the rate of depreciation is accelerated in order to fully depreciate the assets over their new shorter useful lives.
Goodwill Valuation
– The Company tests its goodwill balances for impairment on the last day of each fiscal year, or more frequently if certain indicators are present or changes in circumstances, as described above, suggest that impairment may exist. When evaluating goodwill for impairment, the Company compares the fair value of a reporting unit with its carrying amount. The Company recognizes an impairment charge for the amount by which the carrying amount of a reporting unit, including goodwill, exceeds its fair value; however, the loss recognized would not exceed the total amount of goodwill allocated to the reporting unit. The Company first assesses qualitative factors to determine whether it is necessary to perform the quantitative goodwill impairment test. If determined to be necessary, the quantitative impairment test is used to identify goodwill impairment and measure the amount for a goodwill impairment to be recognized, if any. On December 30, 2016, following its reassessment of its reporting units and reallocation of goodwill on a relative fair value basis, the Company conducted the first step of the two-step approach for all reporting units. Upon completing the first step of the goodwill impairment test, the Company determined that the fair value of both reporting units exceeded their carrying value by 4.5% for the Nuvectra reporting unit and 34.1% for the NeuroNexus reporting unit. As of September 30, 2017 the Company also determined that it was more likely than not that the fair value of both reporting units exceeded their carrying value.
Warranty Reserve
– The Company offers a warranty on certain of its products and has established a warranty reserve, as a component of other current liabilities, for any potential claims. The Company estimates its warranty reserve based upon an analysis of all identified or expected claims and an estimate of the cost to resolve those claims. Factors that affect the Company’s warranty liability include the number of units sold, historical and anticipated rates of warranty claims, and differences between actual and expected warranty costs per claim. The Company periodically assesses the adequacy of its warranty liabilities and adjusts the amounts as necessary.
Nuvectra Corporation
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
– Unaudited
Revenue Recognition
– The Company recognizes revenue when it is realized or realizable and earned. This occurs when persuasive evidence of an arrangement exists, delivery has occurred, the risk of loss is transferred, the price is fixed or determinable, the buyer is obligated to pay (i.e., not contingent on a future event), collectability is reasonably assured, the amount of future returns can reasonably be estimated, and no material remaining performance obligations are required of the Company. In cases where the Company utilizes distributors or ships product directly to the end user, it generally recognizes revenue upon shipment provided all revenue recognition criteria have been met. When sales representatives deliver products at the point of implantation at hospitals or medical facilities, the Company recognizes revenue upon completion of the procedure and authorization. For the remaining sales, which are sent from the Company’s distribution center directly to hospitals and medical facilities, where product is ordered in advance of an implantation procedure and a valid purchase order has been received, the Company defers revenue until all post-delivery obligations are fulfilled. Deferred revenue primarily consists of amounts billed or collected upon delivery of products with material remaining post-delivery performance obligations. Deferred revenue is recorded in accrued liabilities in the Condensed Consolidated Balance Sheet. Related cost of sales have also been deferred and are recorded in prepaid expenses and other current assets in the Condensed Consolidated Balance Sheet.
Service revenue is recognized as the services are performed. The Company
’s development services are typically provided on a fixed-fee basis. The revenues for such longer duration projects are typically recognized using the proportional performance method. In using the proportional performance method, revenues are generally recorded based on the percentage of effort incurred to date on a contract relative to the estimated total expected contract effort. Estimating total contract effort and progress to completion on the arrangements, as well as whether a loss is expected to be incurred on the contract, requires significant judgment. Management uses historical experience, project plans and an assessment of the risks and uncertainties inherent in the arrangements to establish these estimates. Various uncertainties may or may not be within the Company’s control.
Deferred revenue also consists of amounts contractually billable or collected for service revenue not yet performed. Deferred revenue is recorded in accrued liabilities in the Condensed Consolidated Balance Sheet.
Subsequent Events
– The Company considers events or transactions that occur after the balance sheet date but prior to the issuance of the financial statements to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure.
I
ntangible assets are comprised of the following (in thousands):
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
At
September
30
, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
T
echnology and patents
|
|
$
|
1,058
|
|
|
$
|
(593
|
)
|
|
$
|
465
|
|
Customer lists
|
|
|
1,869
|
|
|
|
(835
|
)
|
|
|
1,034
|
|
Total intangible assets
|
|
$
|
2,927
|
|
|
$
|
(1,428
|
)
|
|
$
|
1,499
|
|
At
December 30
, 201
6
|
|
|
|
|
|
|
|
|
|
|
|
|
T
echnology and patents
|
|
$
|
1,058
|
|
|
$
|
(498
|
)
|
|
$
|
560
|
|
Customer lists
|
|
|
1,869
|
|
|
|
(715
|
)
|
|
|
1,154
|
|
Total intangible assets
|
|
$
|
2,927
|
|
|
$
|
(1,213
|
)
|
|
$
|
1,714
|
|
Aggregate intangible asset amortization expense is
classified as follows (in thousands):
|
|
Three Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
2017
|
|
|
September 30
,
2016
|
|
|
September
30, 2017
|
|
|
September 30
, 2016
|
|
Cost of sales
|
|
$
|
32
|
|
|
$
|
25
|
|
|
$
|
95
|
|
|
$
|
80
|
|
Selling, general and administrative expenses
|
|
|
39
|
|
|
|
37
|
|
|
|
120
|
|
|
|
117
|
|
Total intangible asset amortization expense
|
|
$
|
71
|
|
|
$
|
62
|
|
|
$
|
215
|
|
|
$
|
197
|
|
Nuvectra Corporation
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
– Unaudited
Estimated future intangible asset amortization expense based on the current carrying value is as follows (in thousands):
|
|
Estimated
Amortization
Expense
|
|
Remainder of
2017
|
|
$
|
71
|
|
201
8
|
|
|
298
|
|
201
9
|
|
|
293
|
|
2020
|
|
|
209
|
|
2021
|
|
|
194
|
|
Thereafter
|
|
|
434
|
|
Total estimated amortization expense
|
|
$
|
1,499
|
|
Accrued liabilities consisted of the following (in thousands):
|
|
At
|
|
|
|
September
30
,
2017
|
|
|
December 30,
2016
|
|
Inventory
|
|
$
|
1,555
|
|
|
$
|
547
|
|
Deferred revenue
|
|
|
661
|
|
|
|
—
|
|
Regulatory, clinical and quality
|
|
|
401
|
|
|
|
640
|
|
Research and development
|
|
|
365
|
|
|
|
165
|
|
Insurance
|
|
|
311
|
|
|
|
—
|
|
Sales and marketing
|
|
|
239
|
|
|
|
—
|
|
Operations engagement fee
|
|
|
200
|
|
|
|
600
|
|
Warranty reserve
|
|
|
186
|
|
|
|
98
|
|
Information technology system and infrastructure implementations
|
|
|
113
|
|
|
|
327
|
|
Interest
|
|
|
105
|
|
|
|
99
|
|
Legal
|
|
|
85
|
|
|
|
98
|
|
Sales and use tax
|
|
|
69
|
|
|
|
56
|
|
Travel and entertainment
|
|
|
—
|
|
|
|
285
|
|
Accrued other
|
|
|
685
|
|
|
|
440
|
|
Total accrued liabilities
|
|
$
|
4,975
|
|
|
$
|
3,355
|
|
4
.
|
EMPLOYEE BENEFIT PLANS
|
Nuvectra Corporation 2016 Equity Incentive Plan
– The Nuvectra Corporation 2016 Equity Incentive Plan (the “2016 Equity Plan”) was initially adopted by the Board of Managers of QiG Group, LLC (the Company’s former name) and was subsequently ratified and approved by Nuvectra’s Board of Directors effective as of March 14, 2016. The 2016 Equity Plan provides that the Compensation and Organization Committee of the Board of Directors (the “Compensation Committee”) may award eligible participants, as it may determine from time to time, the following types of awards: stock options, stock appreciation rights, restricted stock, restricted stock units and stock bonuses. Subject to the adjustment clauses in the 2016 Equity Plan, the total number of shares of Nuvectra common stock reserved for issuance under the 2016 Equity Plan is 2,362,785.
During the
nine months ended September 30, 2017, the Compensation Committee granted equity awards aggregating 546,146 shares of common stock under the 2016 Equity Plan in the form of both restricted stock units and non-qualified stock options to its directors and certain officers and key employees. Compensation cost related to the 2016 Equity Plan for the three and nine months ended September 30, 2017 was approximately $0.6 million and $1.5 million, respectively.
Nuvectra Corporation
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
– Unaudited
During the
nine months ended September 30, 2016, the Compensation Committee granted equity awards aggregating 796,026 shares of common stock under the 2016 Equity Plan in the form of both restricted stock units and non-qualified stock options to its directors and certain officers and key employees. Compensation cost related to the 2016 Equity Plan for the three and nine months ended September 30, 2016 was approximately $0.4 million and $0.8 million, respectively.
Stock-Based Compensation
– Certain of the Company’s employees participated in the stock-based compensation programs of Integer and prior to the Spin-off received awards of time-based stock options and time- and performance-based restricted stock units, which typically vest over a three-year period and are settled in shares of Integer common stock. The stock-based payment compensation expense includes the compensation expense directly attributable to Nuvectra employees from these Integer equity incentives. In addition, certain incentive awards that were originally granted under an Integer equity incentive award plan adjusted into an incentive award of Nuvectra common stock at the time of the Spin-off. Compensation cost related to these Integer equity incentives was approximately $0.04 million and $0.24 million for the three and nine months ended September 30, 2017, respectively. Compensation cost related to these Integer equity incentives was approximately $0.1 million and $1.0 million for the three and nine months ended September 30, 2016, respectively.
The components and classification of stock-based compensation expense were as follows (in thousands):
|
|
Three Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30, 2017
|
|
|
September 30,
2016
|
|
|
September 30,
2017
|
|
|
September 30,
2016
|
|
Stock options
|
|
$
|
227
|
|
|
$
|
186
|
|
|
$
|
637
|
|
|
$
|
434
|
|
Restricted stock and restricted stock units
|
|
|
379
|
|
|
|
362
|
|
|
|
1,074
|
|
|
|
1,365
|
|
Total stock-based compensation expense
|
|
$
|
606
|
|
|
$
|
548
|
|
|
$
|
1,711
|
|
|
$
|
1,799
|
|
|
|
Three Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30, 2017
|
|
|
September 30,
2016
|
|
|
September 30,
2017
|
|
|
September 30,
2016
|
|
Selling, general and administrative expense
|
|
$
|
507
|
|
|
$
|
462
|
|
|
$
|
1,491
|
|
|
$
|
1,081
|
|
Research, development and engineering costs, net
|
|
|
99
|
|
|
|
86
|
|
|
|
220
|
|
|
|
249
|
|
Other operating expenses
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
469
|
|
Total stock-based compensation expense
|
|
$
|
606
|
|
|
$
|
548
|
|
|
$
|
1,711
|
|
|
$
|
1,799
|
|
The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model with weighted-average assumptions based on the grant date. The weighted average fair value and assumptions used to value options granted under the 2016 Equity Plan were as follows:
|
|
Three Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
2017
|
|
|
September 30,
2016
|
|
|
September 30,
2017
|
|
|
September 30,
2016
|
|
Weighted average fair value
|
|
$
|
7.85
|
|
|
$
|
4.58
|
|
|
$
|
3.63
|
|
|
$
|
4.50
|
|
Risk-free interest rate
|
|
|
2.01
|
%
|
|
|
1.61
|
%
|
|
|
2.06
|
%
|
|
|
1.72
|
%
|
Expected volatility
|
|
|
65
|
%
|
|
|
55
|
%
|
|
|
55.15
|
%
|
|
|
55
|
%
|
Holding period (in years)
|
|
|
6
|
|
|
|
10
|
|
|
|
6
|
|
|
|
10
|
|
Expected dividend yield
|
|
|
—
|
%
|
|
|
—
|
%
|
|
|
—
|
%
|
|
|
—
|
%
|
Nuvectra Corporation
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
– Unaudited
The following table summarizes the stock option activity during the first
nine months of fiscal year 2017:
|
|
Number of
Time-Vested
Stock
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life (Years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at December 30, 2016
|
|
|
873,992
|
|
|
$
|
6.49
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
337,565
|
|
|
|
6.83
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(232,574
|
)
|
|
|
5.98
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(65,440
|
)
|
|
|
7.15
|
|
|
|
|
|
|
|
|
|
Outstanding at
September 30, 2017
|
|
|
913,543
|
|
|
$
|
6.70
|
|
|
|
7.58
|
|
|
$
|
5,990,267
|
|
Exercisable at
September 30, 2017
|
|
|
419,378
|
|
|
$
|
6.23
|
|
|
|
5.77
|
|
|
$
|
2,950,161
|
|
The Company received proceeds totaling $
1.3 million upon the exercise of 232,574 stock options during the first nine months of fiscal year 2017.
The following table summarizes the restricted stock and restricted stock unit activity during the
first nine months of fiscal year 2017:
|
|
Time-Vested
Activity
|
|
|
Weighted
Average
Fair Value
|
|
Nonvested at
December 30, 2016
|
|
|
551,224
|
|
|
$
|
6.90
|
|
Granted
|
|
|
208,581
|
|
|
|
6.75
|
|
Vested
|
|
|
(187,141
|
)
|
|
|
7.84
|
|
Forfeited
|
|
|
(96,007
|
)
|
|
|
6.51
|
|
Nonvested at
September 30, 2017
|
|
|
476,657
|
|
|
$
|
6.90
|
|
Nuvectra Bonus Plan
– The terms of the Nuvectra Corporation Bonus Plan (the “Bonus Plan”) provide for both annual discretionary defined contribution cash bonuses and performance-based bonuses based upon Nuvectra’s company-wide performance measures and, for certain employees, individual performance measures that are set by Nuvectra’s executive management and, in some instances, members of the Board of Directors. Compensation cost related to the Bonus Plan for the three and nine months ended September 30, 2017 was approximately $0.1 million and $1.4 million, respectively. Compensation cost related to the Bonus Plan for the nine months ended September 30, 2016 was approximately $0.4 million.
Defined Contribution Plans
– The Company sponsors a defined contribution 401(k) plan for its employees. The plan provides for the deferral of employee compensation under Section 401(k) of the Internal Revenue Code of 1986, as amended (“Section 401(k)”), and a discretionary match. For the three and nine months ended September 30, 2017 this match was 25% per dollar of participant deferral, up to 6% of the total compensation for each participant. Direct costs related to this defined contribution plan were $0.07 million and $0.2 million for the three and nine months ended September 30, 2017, respectively.
Integer sponsors a defined contribution 401(k) plan for its employees,
in which the Company’s employees historically participated. The plan provides for the deferral of employee compensation under Section 401(k) and a discretionary match. Until the spin-off in the first quarter of fiscal year 2016 this match was 35% per dollar of participant deferral, up to 6% of the total compensation for each participant. The 401(k) compensation expense for the first quarter of fiscal year 2016 recognized in these
condensed consolidated financial statements includes all of the compensation expenses directly attributable to Nuvectra employees. Direct costs related to this defined contribution plan allocated to the Company were $0.03 million and $0.1 million for the three and nine months ended September 30, 2016, respectively.
5
.
|
OTHER
OPERATING EXPENSES
|
Performance Restricted Stock Expense
– As a result of the Spin-off, certain 2015 performance stock units for Nuvectra employees were effectively cancelled with no new issuance. Therefore, the remaining unvested expense totaling $469,000 as of March 14, 2016 was accelerated and expensed immediately.
Nuvectra Corporation
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
– Unaudited
Asset Disposals
– During 2016, the Company recorded charges in connection with various asset disposals.
Long-term debt is comprised of the following (in thousands):
|
|
At
|
|
|
|
September
30,
2017
|
|
|
December 30,
2016
|
|
Term loan
|
|
$
|
29,631
|
|
|
$
|
16,163
|
|
Deferred financing fees
|
|
|
(1,049
|
)
|
|
|
(1,262
|
)
|
Discount on debt
|
|
|
(2,175
|
)
|
|
|
(1,157
|
)
|
Total debt
|
|
|
26,407
|
|
|
|
13,744
|
|
Less current portion of long-term debt
|
|
|
5,500
|
|
|
|
—
|
|
Total long-term debt
|
|
$
|
20,907
|
|
|
$
|
13,744
|
|
Credit Facility
– The Company has a credit facility, as amended in February 2017 (the “Credit Facility”), that consists of (a) term loan facilities in an aggregate maximum principal amount of $40,000,000 comprised of (i) a $15,000,000 Term Loan A Commitment, which was funded in full on March 18, 2016, (ii) a $12,500,000 Term Loan B Commitment, which was funded in full on September 28, 2017, and (iii) a $12,500,000 Term Loan C Commitment, which is available for draw December 31, 2017 through June 30, 2018 (collectively, the “Term Loans”); and (b) a Revolving Line Commitment in a maximum principal amount of $5,000,000 (the “Revolving Loans” and collectively with the Term Loans, the “Loans”). Availability of the Term Loan C Commitment is subject to the Company achieving consolidated trailing six-month revenues of at least $20,000,000. Based on the Company’s sequential quarterly revenue growth since the commercial release of its Algovita system into the United States market, and on its expectations of future and continued revenue growth, the Company believes that it should be able to achieve this consolidated trailing six-month revenue threshold during the relevant period, although there can be no assurances that the Company will be able to do so due to unforeseen obstacles that may negatively affect its business. The Company has the right to draw on the Term Loan C Commitment within 60 days of achieving the applicable revenue threshold. The Revolving Line Commitment is subject to a borrowing base of 80% of the aggregate amount of eligible accounts receivable of the Company, which advance rate and eligibility criteria may be modified from time to time based on periodic collateral examinations.
The Term Loans bear interest at a floating rate equal to the prime rate plus 4.15%, with a floor of 7.65%. At
September 30, 2017 the interest rate on borrowings under the term loan was 8.40%. The Company pays monthly accrued interest only on the Term Loans through March 2018 and thereafter the Company will pay monthly accrued interest on the Term Loans plus equal payments of principal for 30 months. At the maturity of the Term Loans, on September 1, 2020, all principal on the Term Loans then outstanding, plus an additional 7.75% of the funded loan amounts (the “Final Payment”), will be due and payable. This Final Payment has been treated as an in substance discount and will be amortized using the straight-line method over the life of the loan. The Revolving Loans bear interest at a floating rate equal to the prime rate plus 3.45%, with a floor of 6.95%. The Company pays monthly accrued interest only on the Revolving Loans until maturity on March 18, 2018, at which time all principal on the Revolving Loans will be due and payable. There were no borrowings on the Revolving Loans as of September 30, 2017.
On March 18, 2016 t
he Company paid an arrangement fee of $1,125,000 to Piper Jaffray Companies (“Piper Jaffray”), which equals 2.50% of the aggregate principal amount of the Credit Facility, a commitment fee of $200,000 for all of the Term Loan A, B, and C Commitments, and one-half of a $25,000 commitment fee for the Revolving Loans, the remaining one-half of which was due and paid on the one year anniversary of the initial closing. In connection with the amendment dated February 14, 2017, the Company also paid an amendment fee of $25,000 plus expenses of the lenders. In connection with the draw of the Term Loan B Commitment, the Company also paid expenses of the lenders. The Term Loan C Commitment is subject to a non-use fee of 2% of the amount of such commitment if the commitment becomes available, but the Company declines to borrow the Term Loan thereunder. If any Term Loans are voluntarily prepaid prior to their scheduled maturity, the Company must pay, in addition to the Final Payment, a prepayment fee equal to 3% of the prepaid principal if paid in the first year after the initial closing, 2% of the prepaid principal if paid in the second year after the initial closing, and 1% of the prepaid principal if paid thereafter.
Nuvectra Corporation
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
– Unaudited
The Loans are secured by a first priority lien on substantially all of the assets of the Company, including, without limitation, all cash, deposit accounts, accounts receivable, equipment, inventory, contract rights, and the Company
’s real property located in Blaine, Minnesota, but excluding all intellectual property of the Company (other than accounts receivable and proceeds of intellectual property). The Company’s intellectual property is subject to a negative pledge. The Company must maintain its primary operating and investment accounts with Silicon Valley Bank, which accounts are subject to customary control agreements.
The Credit Facility contains customary representations and warranties, reporting and other covenants for credit facilities of this kind including prohibitions on the payment of cash dividends on the Company
’s capital stock and restrictions on mergers, sales of assets, investments, incurrence of liens, incurrence of indebtedness and transactions with affiliates. Upon funding of the Term Loan B Commitment, the Company became subject to a quarterly financial covenant requiring the Company to achieve consolidated revenues of at least 75% of Nuvectra’s forecasts that have been previously approved by the lenders. As of September 30, 2017, the Company was in compliance with this financial covenant. The events of default in the Credit Facility are customary for credit facilities of this kind, and include failure to pay interest or principal, breaches of affirmative and negative covenants, a material adverse change occurring, and cross defaults to other material agreements of the Company.
As a condition to the lenders
’ funding the Loans under the Credit Facility, concurrently with the funding under the Term Loan A Commitment on March 18, 2016, (i) the Company issued to Oxford Finance LLC a warrant to purchase 56,533 shares of Nuvectra common stock at an exercise price of $5.97 per share, which warrant is exercisable until March 18, 2026, and (ii) the Company issued to Silicon Valley Bank a warrant to purchase 56,533 shares of Nuvectra common stock at an exercise price of $5.97 per share, which warrant is exercisable until March 18, 2026. The fair value of the warrants on the date of grant totaled approximately $0.2 million and was recorded as a discount on long-term debt and as additional paid-in capital in the Condensed Consolidated Balance Sheet, as the warrants met the criteria under the relevant accounting standard for treatment as an equity instrument. The debt discount will be amortized over the term of the Term Loan A Commitment.
As a condition to the lenders
’ funding the Loans under the Credit Facility, concurrently with the funding under the Term Loan B Commitment on September 28, 2017, (i) the Company issued to Oxford Finance LLC a warrant to purchase 22,844 shares of Nuvectra common stock at an exercise price of $12.31 per share, which warrant is exercisable until September 28, 2027, and (ii) the Company issued to Silicon Valley Bank a warrant to purchase 22,844 shares of Nuvectra common stock at an exercise price of $12.31 per share, which warrant is exercisable until September 28, 2027. The fair value of the warrants on the date of grant totaled approximately $0.4 million and was recorded as additional paid-in capital in the Condensed Consolidated Balance Sheet, as the warrants met the criteria under the relevant accounting standard for treatment as an equity instrument. The debt discount will be amortized over the term of the Term Loan B Commitment.
Upon the funding of
the Term Loan C Commitment, Oxford Finance LLC and Silicon Valley Bank will each be entitled to additional warrants for the purchase of Nuvectra common stock. The number of shares under each warrant will be equal to the amount of the Term Loan made by each lender multiplied by 4.50% and divided by the then current trading price of Nuvectra common shares. The exercise price of the warrants will be equal to the trading price of Nuvectra common shares on the date of funding. The fair value of these future warrants as of September 30, 2017 was approximately $0.3 million and is recorded in other long-term liabilities in the Condensed Consolidated Balance Sheet. These warrants were classified as a derivative liability because the Company did not meet the criteria under the relevant accounting standard for treatment as equity instruments. As a result, the derivative liability warrants will be re-measured to its fair value at the end of each reporting period until it meets the requirements for equity treatment or is cancelled. See Note 10 “Fair Value Measurements” for additional information.
Deferred Financing Fees
–
The change in deferred financing fees is as follows (in thousands):
At
December 30, 2016
|
|
$
|
1,262
|
|
Additions during the period
|
|
|
47
|
|
Amortization during the period
|
|
|
(260
|
)
|
|
|
|
|
|
At
September 30, 2017
|
|
$
|
1,049
|
|
In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2015-03, “Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs,” the Company has presented debt issuance costs as a direct deduction from Long-Term Debt in the
Condensed Consolidated Balance Sheet.
Nuvectra Corporation
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
– Unaudited
The income tax provision for interim periods is determined using an estimate of the annual effective tax rate, adjusted for discrete items, if any, that are taken into account in the relevant period. Each quarter, the estimate of the annual effective tax rate is updated, and if the estimated effective tax rate changes, a cumulative adjustment is made. There is a potential for volatility of the effective tax rate due to several factors, including changes in the mix of the pre-tax income and the jurisdictions to which it relates, changes in tax laws, business reorganizations
and settlements with taxing authorities.
The Company records a valuation allowance when it is “more likely than not” that all or a portion of a deferred tax asset will not be realized. Management reviews all available positive and negative evidence, including the Company
’s current and past performance, the market environment in which the Company operates, the utilization of past tax credits, length of carry back and carry forward periods, existing contracts or sales backlog that will result in future profits, as well as other factors. The Company maintains a full valuation allowance on all of the net deferred tax assets for the periods presented. Until an appropriate level of profitability is sustained, the Company expects to continue to record a full valuation allowance on future tax benefits.
Pursuant to the terms of the tax matters agreement
entered into with Integer at the time of the Spin-off, until March 14, 2018, the Company is prohibited from (i) causing or permitting to occur any transaction or series of transactions, subject to certain exceptions provided under the U.S. federal income tax rules, in connection with which one or more persons would (directly or indirectly) acquire an interest in its capital stock that, when combined with any other acquisition of an interest in its capital stock that occurs after the Spin-off, comprises 30% or more of the value or the total combined voting power of all interests that are treated as outstanding equity of Nuvectra for U.S. federal income tax purposes immediately after such transaction or, in the case of a series of related transactions, immediately after any transaction in such series; (ii) transferring, selling or otherwise disposing of 35% or more of its gross assets if such transfer, sale or other disposition would violate the rules and regulations of the Internal Revenue Service; (iii) liquidating its business or (iv) ceasing to maintain its active business. If the Company takes any of these actions and such actions result in tax-related costs for Integer, then the Company would generally be required to indemnify Integer for such costs. If the Company is unable to raise or is limited under the terms of the tax matters agreement with Integer from raising additional funds when needed, it may be required to delay, reduce, or terminate some or all of its development plans.
8
.
|
COMMITMENTS AND CONTINGENCIES
|
Litigation
–
Periodically the Company is a party to various legal actions, both threatened and filed, arising in the normal course of business. While the Company does not expect that the ultimate resolution of any pending actions will have a material effect on its results of operations, financial position, or cash flows, litigation is subject to inherent uncertainties. As such, there can be no assurance that any pending or threatened legal action, which the Company currently believes to be immaterial, does not become material in the future.
Purchase Commitments
– Contractual obligations for purchase of goods or services are defined as agreements that are enforceable and legally binding on the Company and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum, or variable price provisions; and the approximate timing of the transaction. The Company’s purchase orders are normally based on its current manufacturing or other operational needs.
As of September 30, 2017, the total contractual obligation related to inventory purchase orders was approximately $5.2 million. As of September 30, 2017, the Company had no material commitments to purchase capital assets; however, planned capital expenditures for the remainder of 2017 are estimated at approximately $1.4 million and will primarily be financed by existing cash and cash equivalents, cash generated from sales, or the Credit Facility. The Company also enters into contracts for outsourced services; however, the contracts generally contain clauses allowing for cancellation without significant penalty.
The Company’s significant long-term obligations are operating leases on its facilities.
Nuvectra Corporation
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
– Unaudited
9
.
|
EARNINGS
(LOSS)
PER SHARE (“EPS”)
|
Basic net loss per share is calculated by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted net loss per share is equal to basic net loss per share as the Company had no potentially dilutive securities outstanding for any of the periods presented.
The following table illustrates the calculation of Basic and Diluted EPS (in thousands, except per share amounts):
|
|
Three Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30, 2017
|
|
|
September 30
, 2016
|
|
|
September 30
, 2017
|
|
|
September 30
, 2016
|
|
Basic net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(11,638
|
)
|
|
$
|
(9,450
|
)
|
|
$
|
(35,998
|
)
|
|
$
|
(25,353
|
)
|
Weighted average common shares outstanding
|
|
|
10,697
|
|
|
|
10,279
|
|
|
|
10,497
|
|
|
|
10,268
|
|
Basic net loss per share
|
|
$
|
(1.09
|
)
|
|
$
|
(0.92
|
)
|
|
$
|
(3.43
|
)
|
|
$
|
(2.47
|
)
|
Diluted net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(11,638
|
)
|
|
$
|
(9,450
|
)
|
|
$
|
(35,998
|
)
|
|
$
|
(25,353
|
)
|
Weighted average common shares outstanding
|
|
|
10,697
|
|
|
|
10,279
|
|
|
|
10,497
|
|
|
|
10,268
|
|
Dilutive stock options, restricted stock and restricted stock units
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Weighted average common shares outstanding
– assuming dilution
|
|
|
10,697
|
|
|
|
10,279
|
|
|
|
10,497
|
|
|
|
10,268
|
|
Diluted net loss per share
|
|
$
|
(1.09
|
)
|
|
$
|
(0.92
|
)
|
|
$
|
(3.43
|
)
|
|
$
|
(2.47
|
)
|
Outstanding securities and warrants that were not included in the diluted calculation because their effect would be anti-dilutive
|
|
|
1,549
|
|
|
|
1,594
|
|
|
|
1,549
|
|
|
|
1,594
|
|
10
.
|
FAIR VALUE MEASUREMENTS
|
The carrying amounts of cash, accounts receivable, accounts payable, and accrued expenses approximate fair value because of the short-term nature of these items. As of
September 30, 2017, the fair value of the Company’s variable rate long-term debt approximates its carrying value and is categorized in Level 2 of the fair value hierarchy.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Fair value measurement standards apply to certain financial assets and liabilities that are measured at fair value on a recurring basis (each reporting period).
The Company has categorized its warrants measured at fair value on a recurring basis in Level 3 of the fair value hierarchy. The fair value of the warrants classified as liability awards was determined by utilizing a Monte Carlo simulation model, which projects the value of Nuvectra stock versus its peer group under numerous scenarios, and determines the value of the award based upon the present value of these projected outcomes. The estimated fair value of the warrants as of the date of issuance was approximately $0.
2 million and was recorded as a long-term asset and a liability in the Condensed Consolidated Balance Sheet. The estimated fair value of the warrant liability will be revalued on a periodic basis and any resulting increases or decreases in the estimated fair value will be recorded as an adjustment to earnings. During the nine months ended September 30, 2017, the Company recorded an expense of approximately $0.5 million in fair value adjustments, which is included in Other Expense on the Condensed Consolidated Statement of Operations. The estimated fair value of the warrants as of September 30, 2017 was approximately $0.3 million.
The Company
’s investments in marketable securities primarily consist of investments in debt securities, which are classified as available-for-sale and presented as current assets within Cash and Cash Equivalents on the balance sheet because of their original maturities of three months or less. Unrealized gains or losses for the periods presented are included in other comprehensive loss.
Nuvectra Corporation
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
– Unaudited
The fair values of marketable securities were estimated using the market approach using prices and other relevant information generated by market transactions involving identical or comparable assets. The Company uses quoted market prices in active markets or quoted market prices in markets that are not active to measure fair value. When developing fair value estimates, the Company maximizes the use of observable inputs and minimizes the use of unobservable inputs. As of
September 30, 2017, the fair market value of marketable securities was approximately $21.2 million, all of which had original maturities of three months or less.
Marketable securities, measured at fair value, by level within the fair value hierarchy were as follows (in thousands):
|
|
|
|
September
30
, 2017
|
|
|
|
Fair Value Hierarchy
|
|
Cost
|
|
|
Unrealized Loss
|
|
|
Fair Value
|
|
Cash
|
|
Level 1
|
|
$
|
13,073
|
|
|
$
|
—
|
|
|
$
|
13,073
|
|
Financial
|
|
Level 2
|
|
|
3,644
|
|
|
|
—
|
|
|
|
3,644
|
|
Industrial
|
|
Level 2
|
|
|
4,496
|
|
|
|
—
|
|
|
|
4,496
|
|
Total
|
|
|
|
$
|
21,213
|
|
|
$
|
—
|
|
|
$
|
21,213
|
|
|
|
|
|
December 30, 2016
|
|
|
|
Fair Value Hierarchy
|
|
Cost
|
|
|
Unrealized Loss
|
|
|
Fair Value
|
|
Cash
|
|
Level 1
|
|
$
|
33,821
|
|
|
$
|
—
|
|
|
$
|
33,821
|
|
Government
|
|
Level 1
|
|
|
2,005
|
|
|
|
—
|
|
|
|
2,005
|
|
Financial
|
|
Level 2
|
|
|
8,064
|
|
|
|
(1
|
)
|
|
|
8,063
|
|
Industrial
|
|
Level 2
|
|
|
11,125
|
|
|
|
(1
|
)
|
|
|
11,124
|
|
Total
|
|
|
|
$
|
55,015
|
|
|
$
|
(2
|
)
|
|
$
|
55,013
|
|
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Fair value standards also apply to certain assets and liabilities that are measured at fair value on a nonrecurring basis. A summary of the valuation methodologies for assets and liabilities measured on a nonrecurring basis is as follows:
Long-lived Assets
– The Company reviews the carrying amount of its long-lived assets to be held and used, other than goodwill, for potential impairment whenever certain indicators are present as described in Note 1 “Summary of Significant Accounting Policies.”
Goodwill
– Goodwill recorded is not amortized but is periodically tested for impairment. The Company assesses goodwill for impairment on the last day of each fiscal year, or more frequently if certain events occur as described in Note 1 “Summary of Significant Accounting Policies.” During the third quarter and first nine months of fiscal year 2017 and 2016, no impairment charges were recorded related to the Company’s Goodwill.
Warrants
– In order to determine the fair value of the warrants classified as equity awards, the Company used a Monte Carlo simulation model. The risk-free interest rate represents the 10-Year U.S. Treasury rate as of March 18, 2016. The expected volatility assumption is based on historical volatilities for publicly traded stock of comparable companies.
The following table summarizes the assumptions
as of September 30, 2017 used for estimating the fair value of the warrants classified as liability awards:
Risk-free interest rate
|
|
|
2.33
|
%
|
Expected volatility
|
|
|
65.00
|
%
|
Contractual term (in years)
|
|
|
10
|
|
Dividend yield
|
|
|
—
|
%
|
11
.
|
BUSINESS SEGMENT, GEOGRAPHIC AND CONCENTRATION RISK INFORMATION
|
As a new public entity, the Company commenced its first comprehensive annual operational planning process with its executive leadership team and board of directors in the fourth quarter of
fiscal year 2016. As part of that process, the Company assessed its reporting structure and changed the composition of its reporting units. Following this process, based on information that is regularly reviewed by the Company’s chief operating decision maker, the Company now has two reportable segments consisting of: Nuvectra and NeuroNexus. The Company determined its new reporting units by identifying its operating segments and assessing whether any components of these segments constituted a business for which discrete financial information is available and whether segment management would regularly review the operating results of any components. Through this process, the Company identified two reporting units: Nuvectra and NeuroNexus.
Nuvectra Corporation
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
– Unaudited
Nuvectra is a neurostimulation company committed to helping physicians improve the lives of people with chronic conditions. Algovita is the Company
’s first commercial offering and is approved for the treatment of chronic pain of the trunk and/or limbs. Nuvectra’s innovative technology platform also has capabilities under development to support other neurological indications such as SNM for the treatment of overactive bladder and DBS for the treatment of Parkinson’s Disease. Revenue includes development and engineering service fees and sales from the limited release of Algovita in the United States and Europe. Future revenues of Nuvectra are expected to come primarily from sales of Algovita, particularly after expansion of its launch commercially in the United States, and Virtis
TM
, the second application of the Company’s neurostimulation technology platform and its first product for the SNM market.
NeuroNexus designs, manufactures and markets neural-interface technologies for the neuroscience clinical research market. Revenue includes sales of neural interface technology, components and systems to the neuroscience and clinical markets.
An analysis and reconciliation of the Company
’s product lines, business segments and geographic information to the respective information in the Condensed Consolidated Financial Statements follows. Sales by geographic area are presented by allocating sales from external customers based on where the products are shipped or services are rendered (in thousands):
|
|
Three Months Ended
|
|
|
Nine
Months Ended
|
|
Product line sales:
|
|
September
30, 2017
|
|
|
September 30,
2016
|
|
|
September 30,
2017
|
|
|
September 30,
2016
|
|
Algovita
|
|
$
|
6,302
|
|
|
$
|
1,165
|
|
|
$
|
15,180
|
|
|
$
|
2,149
|
|
Neural interface components and systems
|
|
|
1,129
|
|
|
|
1,438
|
|
|
|
3,504
|
|
|
|
3,895
|
|
Development and engineering service
|
|
|
186
|
|
|
|
1,163
|
|
|
|
1,196
|
|
|
|
2,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales
|
|
$
|
7,617
|
|
|
$
|
3,766
|
|
|
$
|
19,880
|
|
|
$
|
8,382
|
|
|
|
Three Months Ended
|
|
|
Nine
Months Ended
|
|
Business segment sales:
|
|
September 30,
2017
|
|
|
September 30,
2016
|
|
|
September 30,
2017
|
|
|
September 30,
2016
|
|
Nuvectra
|
|
$
|
6,488
|
|
|
$
|
2,328
|
|
|
$
|
16,376
|
|
|
$
|
4,487
|
|
NeuroNexus
|
|
|
1,129
|
|
|
|
1,438
|
|
|
|
3,504
|
|
|
|
3,895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales
|
|
$
|
7,617
|
|
|
$
|
3,766
|
|
|
$
|
19,880
|
|
|
$
|
8,382
|
|
|
|
Three Months Ended
|
|
|
Nine
Months Ended
|
|
Segment (loss) income from operations:
|
|
September 30,
2017
|
|
|
September 30,
2016
|
|
|
September 30,
2017
|
|
|
September 30,
2016
|
|
Nuvectra
|
|
$
|
(11,092
|
)
|
|
$
|
(9,287
|
)
|
|
$
|
(34,510
|
)
|
|
$
|
(24,504
|
)
|
NeuroNexus
|
|
|
64
|
|
|
|
298
|
|
|
|
210
|
|
|
|
182
|
|
Total segment
loss from operations
|
|
|
(11,028
|
)
|
|
|
(8,989
|
)
|
|
|
(34,300
|
)
|
|
|
(24,322
|
)
|
Unallocated operating expenses
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Operating
loss
|
|
|
(11,028
|
)
|
|
|
(8,989
|
)
|
|
|
(34,300
|
)
|
|
|
(24,322
|
)
|
Unallocated other expense, net
|
|
|
(601
|
)
|
|
|
(461
|
)
|
|
|
(1,689
|
)
|
|
|
(1,031
|
)
|
Loss before provision for income taxes
|
|
$
|
(11,629
|
)
|
|
$
|
(9,450
|
)
|
|
$
|
(35,989
|
)
|
|
$
|
(25,353
|
)
|
Nuvectra Corporation
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
– Unaudited
|
|
Three Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30, 2017
|
|
|
September 30,
2016
|
|
|
September 30
, 2017
|
|
|
September 30
, 2016
|
|
Sales by geographic area:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
6,781
|
|
|
$
|
1,612
|
|
|
$
|
16,152
|
|
|
$
|
3,439
|
|
Non-Domestic locations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Switzerland
|
|
|
155
|
|
|
|
1,216
|
|
|
|
1,214
|
|
|
|
2,486
|
|
Germany
|
|
|
159
|
|
|
|
433
|
|
|
|
1,033
|
|
|
|
1,298
|
|
Rest of world
|
|
|
522
|
|
|
|
505
|
|
|
|
1,481
|
|
|
|
1,159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales
|
|
$
|
7,617
|
|
|
$
|
3,766
|
|
|
$
|
19,880
|
|
|
$
|
8,382
|
|
All of the Company
’s long-lived tangible assets are located in the United States.
12
.
|
related party transactions
|
On March 14, 2016 t
he Company entered into, or amended, various agreements with Integer to effect the Spin-off and to provide a framework for the Company’s relationship with Integer going forward after the Spin-off including a supply agreement, license agreements, a separation and distribution agreement, a tax matters agreement, a transition services agreement and an employee matters agreement, which provided for the allocation between Nuvectra and Integer of assets, employees, liabilities and obligations (including PP&E, employee benefits, and tax-related assets and liabilities) attributable to the Company’s business for the period prior to, at, and after the Spin-off. Immediately prior to the completion of the Spin-off, Integer made a cash capital contribution to Nuvectra of $75.0 million.
Employee Benefit Plans
– Certain of the Company’s employees historically participated in various Integer defined contribution and stock-based compensation plans. Compensation expense allocated to Nuvectra for these plans from Integer was based upon the costs directly attributable to Nuvectra employees. See Note 4 “Employee Benefit Plans” for additional information.
Supply Agreement
– The Company has a supply agreement with Integer pursuant to which Integer manufactures Algovita and certain of its components. Total charges incurred under this supply agreement are included in cost of sales.
13
.
|
RECENTLY ISSUED ACCOUNTING STANDARDS
|
In the normal course of business, management evaluates all new accounting pronouncements issued by the FASB to determine the potential impact they may have on the Company
’s Condensed Consolidated Financial Statements. Based upon this review, except as noted below, management does not expect any of the recently issued accounting pronouncements, which have not already been adopted, to have a material impact on the Company’s Condensed Consolidated Financial Statements.
Recently Adopted
In January 2017, the FASB issued
Accounting Standard Update (“ASU”) 2017-04, “Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” This guidance simplifies the subsequent measurement of goodwill and eliminates the two-step goodwill impairment test. Under the new guidance, an annual or interim goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount, and an impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. This update is effective prospectively for fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company has early adopted ASU 2017-04 and will apply the guidance at its next annual impairment testing date or at an earlier date if a triggering event occurs.
Nuvectra Corporation
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
– Unaudited
In March 2016, the FASB issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting,” which amends ASC Topic 718, Compensation
– Stock Compensation. ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The Company has adopted the guidance in this ASU in the first quarter of fiscal year 2017 on a prospective basis as permitted by the new standard. There has been no impact on the income taxes line item of the Company’s Condensed Consolidated Statements of Operations related to excess tax benefits upon vesting or settlement, no impact to its cash flow presentation and no impact to the computation of diluted earnings per share. Under the new guidance, the company has elected to account for forfeitures as they occur. Due to the Spin-off and related change to the Company’s equity incentive plans, this election did not result in an adjustment to the Company’s stock-based compensation expense. The adoption of ASU 2016-09 did not have a material impact on the Company’s Condensed Consolidated Financial Statements.
In July 2015, the FASB issued ASU 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory.” This update requires inventory within the scope of the standard to be measured at the lower of cost and net realizable value. Net realizable value is defined as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The amendments in this update do not apply to inventory that is measured using last-in, first-out or the retail inventory method. The amendments apply to all other inventory, which includes inventory that is measured using FIFO or average cost. The guidance in this ASU became effective for the Company in the first quarter of fiscal year 2017. The adoption of ASU 2015-11 did not have a material impact on the Company
’s
Condensed Consolidated Financial Statements.
Not Yet Adopted
In May 2017, the FASB issued
ASU 2017-09, “Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting.” ASU 2017-09 clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. Under ASU 2017-09, an entity will not apply modification accounting to a share-based payment award if the award’s fair value, vesting conditions and classification as an equity or liability instrument are the same immediately before and after the change. ASU 2017-09 will be applied prospectively to awards modified on or after the adoption date. The guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted. ASU 2017-09 is effective for the Company beginning in fiscal 2018. The Company does not expect its pending adoption of ASU 2017-09 to have a material impact on its
Condensed Consolidated Financial Statements.
In January 20
17, the FASB issued ASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business.” ASU 2017-01 provides a screen to determine when an integrated set of assets and activities (collectively referred to as a “set”) does not constitute a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen reduces the number of transactions that need to be further evaluated. If the screen is not met, the amendments in ASU 2017-01 (i) require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and (ii) remove the evaluation of whether a market participant could replace missing elements. This update is effective for annual and interim periods beginning after December 15, 2017, which will require the Company to adopt these provision in the first quarter of fiscal 2018 using a prospective approach. The Company does not expect its pending adoption of ASU 2017-01 to have a material impact on its
Condensed Consolidated Financial Statements.
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” This update provides clarification regarding how certain cash receipts and cash payment
s are presented and classified in the statement of cash flows. ASU 2016-15 addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. This update is effective for annual and interim periods beginning after December 15, 2017, which will require the Company to adopt these provisions in the first quarter of fiscal 2018 using a retrospective approach. Early adoption is permitted. The Company does not expect its pending adoption of ASU 2016-15 to have a material impact on its
Condensed Consolidated Financial Statements.
In February 2016, the FASB issued ASU 2016-02, “Leases” in order to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under previous GAAP. ASU 2016-02 requires that a lessee should recognize a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term on the balance sheet. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 (including interim periods within those periods)
, using a modified retrospective approach, and early adoption is permitted. The Company is currently in the process of evaluating the impact of adoption of the ASU on its
Condensed Consolidated Financial Statements.
Nuvectra Corporation
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
– Unaudited
In January 2016, the FASB issued ASU
2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities,” which updates certain aspects of recognition, measurement, presentation and disclosure of financial instruments. The standard is effective for interim and annual periods beginning after December 15, 2017, and early adoption is generally not permitted. The Company is currently in the process of evaluating the impact of adoption of the ASU on its
Condensed Consolidated Financial Statements.
In May 2014, the FASB issued ASC Update No. 2014-09,
Revenue from Contracts with Customers
(Topic 606), which has been subsequently updated. The purpose of Update No. 2014-09 is to provide enhancements to the quality and consistency of how revenue is reported while also improving comparability in the financial statements of companies using U.S. GAAP and International Financial Reporting Standards. The core principle requires entities to recognize revenue in a manner that depicts the transfer of goods or services to customers in amounts that reflect the consideration an entity expects to be entitled to in exchange for those goods or services. FASB ASC Topic 606, as amended, becomes effective for annual periods beginning after December 15, 2017, at which point the Company plans to adopt the standard.
The Company will adopt Topic 606 effective January 1, 2018
under the modified retrospective method and will only apply this method to contracts that are not completed as of the date of adoption. The modified retrospective method will result in a cumulative effect of initially applying the standard as an adjustment to the opening balance of retained earnings at the date of initial application for the impact to changes in the timing and amount of revenue recognition as well as the timing of amortization of contract costs for open contracts as of the adoption date. The Company has established an implementation team to assist with its assessment of the impact that the new revenue guidance will have on the Company’s operations, consolidated financial statements and related disclosures. To date, this assessment has included (1) utilizing questionnaires and inquiries within accounting, finance, sales and operations to assist with the proper identification of revenue streams, (2) performing detailed contract analyses for significant customers and a random sample of contracts for each revenue stream identified, (3) assessing the noted differences in recognition and measurement that may result from adopting this new standard, and (4) developing plans to continue monitoring the effect of new implementation guidance or accounting standards updates released for changes to the Company’s implementation plan. The Company’s most significant revenue streams identified include (i) Algovita US product sales, (ii) Algovita foreign product sales, (iii) NeuroNexus product sales, including those with custom design services and (iv) development and engineering service revenue. Based on the preliminary results of the Company’s implementation assessment, which is still in process, the Company currently believes that there will be no material impact on the timing or amount of revenue recognized for the majority of the Algovita US and foreign product sales as its contracts include only point-in-time performance obligations which are fully satisfied within the same reporting period. Although not expected to have a material impact, we are continuing to analyze the Company’s pricing practices for both Algovita and NeuroNexus as product sales priced outside of the Company’s stand-alone selling price (“SSP”) ranges may result in a change in the timing of revenue recognition for contracts with partial shipments which span between two financial reporting periods. Additionally, in the event that the Company enters into contracts which provide the customer an option to purchase additional products for quoted prices below its SSP, the Company may be required to be accounted for this option as a separate performance obligation under Topic 606. The Company will continue to monitor and assess any such arrangements through implementation. The Company believes that the timing of revenue recognition for NeuroNexus product sales may be impacted upon the adoption of the new standard as a portion of the Company’s annual revenue includes NeuroNexus product sales with custom design services which were billed and recognized under current GAAP upon completion of the services. Under the new revenue standard, the Company believes that the design work will be combined with the end product and accounted for as a single performance obligation recognized at a point-in-time since the services do not represent a distinct performance obligation under Topic 606. Lastly, the Company is continuing to assess the impact of the development and engineering service revenue stream from the agreement with Aleva Neurotherapeutics, S.A. (“Aleva”).
The Company is in the process of evaluating and designing the necessary changes to its business processes, systems and controls to support recognition and disclosure under the new standard.