10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of April 19, 2023, there were 35,817,154 shares of the registrant’s common stock, par value $0.001 per share, outstanding.

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

1. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying interim condensed consolidated financial statements as of March 31, 2023 and for the three months ended March 31, 2023 and 2022, and the related interim information contained within the notes to the financial statements, are unaudited. The unaudited interim condensed consolidated financial statements (the condensed consolidated financial statements) have been prepared in accordance with generally accepted accounting principles in the United States (U.S. GAAP) for interim financial information and on the same basis as the audited financial statements included on the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 (the Annual Report) filed with the Securities and Exchange Commission (SEC) on February 21, 2023. The condensed consolidated financial statements are prepared in U.S. dollars and include the Company’s accounts and those of its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated. In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements contain all adjustments (consisting of normal recurring adjustments) necessary to state fairly the Company’s financial position as of March 31, 2023, the results of its operations for the three months ended March 31, 2023 and 2022 and the consolidated statements of cash flows for the three months ended March 31, 2023 and 2022. All such adjustments are of a normal and recurring nature. The interim financial data as of March 31, 2023 is not necessarily indicative of the results to be expected for the year ending December 31, 2023, or for any future period.

The consolidated balance sheet as of December 31, 2022 was derived from the audited financials as of that date. The accompanying 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, 2022 included in the Annual Report.

Use of Estimates

The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Estimates are based on historical experience, where applicable, and other assumptions believed to be reasonable by the management. Actual results may differ from those estimates under different assumptions or conditions.

The COVID-19 pandemic has negatively impacted, and may continue to negatively impact the Company’s operations and revenues and overall financial condition. Due to the COVID-19 pandemic, there has been uncertainty and disruption in the global economy and financial markets which could impact the Company’s estimates and assumptions. Changes in the Company’s assessment about the length and severity of the pandemic, as well as other factors, could result in actual results differing from estimates.

Foreign Currency Translation

Unrealized foreign exchange gains and losses from the remeasurement of assets and liabilities denominated in currencies other than the functional currency of the reporting entity are recorded in other income (expense), net. Additionally, realized gains and losses resulting from transactions denominated in currencies other than the local currency are recorded in other income (expense), net in the condensed consolidated statements of operations and comprehensive loss. The Company recorded net unrealized and net realized foreign currency transaction gains (losses) during the periods presented as follows (in thousands):


	Three Months Ended
	March 31,
	2023			2022
Net unrealized foreign currency gain (loss)	$	133		$	166
Net realized foreign currency gain (loss)		(128	)		(75	)

Significant Accounting Policies

There have been no material changes to the Company’s significant accounting policies from its Annual Report.

3. Lease Accounting

The Company has operating leases for office space, a manufacturing facility, warehouse, research and development facilities and equipment. Leases with terms of 12 months or less are not recorded on the balance sheet, as the related lease expenses are recognized on a straight-line basis over the lease term. The Company accounts for lease components (such as fixed payments) separately from non-lease components (such as common area expenses).

The weighted average lease terms and discounts rates are as follows:


	March 31, 2023	December 31, 2022
Operating Lease Term and Discount Rate
Weighted-average remaining lease term	3.20 years	3.38 years
Weighted-average discount rate	7.0%	7.0%

As of March 31, 2023, the maturity of lease liabilities are as follows (in thousands):


	Operating Leases
2023, remaining months	$	4,541
2024		6,201
2025		2,849
2026		405
2027		417
Thereafter		1,561
Total lease payments		15,974
Less: Interest		(1,706	)
Present value of lease liabilities	$	14,268

Supplemental lease cost information are as follows (in thousands):


	Three Months Ended
	March 31,
	2023		2022
Operating lease cost	$	1,342	$	1,342

Supplemental balance sheet information are as follows (in thousands):


	March 31, 2023		December 31, 2022
Operating Leases:
Operating lease assets	$	12,341	$	13,430

Other current liabilities	$	5,323	$	5,195
Long term operating lease liabilities		8,945		10,296
Total operating lease liabilities	$	14,268	$	15,491

Supplemental cash flow information are as follows (in thousands):


	Three Months Ended
	March 31,
	2023		2022
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flow from operating leases	$	1,478	$	1,375

See Note 6 for further details of the Company’s lease commitments.

4. Fair Value Measurements

Cash Equivalents and Short-Term Investments

The Company’s money market funds are classified within Level 1 of the fair value hierarchy and are valued based on quoted prices in active markets for identical securities. The Company’s short-term investments are comprised of agency bonds, commercial paper, corporate notes and treasury bonds. All short-term investments have been classified within Level 1 or Level 2 of the fair value hierarchy because of the sufficient observable inputs for revaluation. The Company’s Level 2 investments are valued using third-party pricing sources. The pricing services utilize industry-standard valuation models, including both income and market-based approaches, for which all significant inputs are observable, either directly or indirectly, to estimate fair value. These inputs include reported trades of and broker/dealer quotes on the same or similar investments, issuer credit spreads, benchmark investments, prepayment/default projections based on historical data and other observable inputs. The following table sets forth the Company’s financial instruments that were measured at fair value on a recurring basis by level within the fair value hierarchy (in thousands):


Balance as of March 31, 2023	Level 1		Level 2		Level 3		Total
Assets:
Money market funds (i)	$	34,219	$	—	$	—	$	34,219
Agency bonds (ii)		—		220,446		—		220,446
Commercial paper (iii)		—		40,975		—		40,975
Treasury bonds (ii)		30,933		—		—		30,933
Total assets	$	65,152	$	261,421	$	—	$	326,573


Balance as of December 31, 2022	Level 1		Level 2		Level 3		Total
Assets:
Money market funds (i)	$	92,318	$	—	$	—	$	92,318
Agency bonds (ii)		—		183,678		—		183,678
Commercial paper (ii)		—		24,742		—		24,742
Treasury bonds (ii)		45,592		—		—		45,592
Total assets	$	137,910	$	208,420	$	—	$	346,330

(i)

Included in cash and cash equivalents on the condensed consolidated balance sheets.

(ii)

Included in short-term investments on the condensed consolidated balance sheets.

(iii)

Included in cash and cash equivalents or short-term investments on the condensed consolidated balance sheets.

Convertible Senior Notes

As of March 31, 2023 and December 31, 2022, the fair value of the 2.75% convertible senior notes due 2025 was $177.3 million and $174.2 million, respectively. The fair value was determined on the basis of market prices observable for similar instruments and is considered Level 2 in the fair value hierarchy (See Note 7).

5. Balance Sheet Components

Cash and Cash Equivalents

The Company considers all highly-liquid investments purchased with an original maturity of three months or less at the date of purchase to be cash equivalents. Cash and cash equivalents include money market funds in the amount of $34.2 million and $92.3 million as of March 31, 2023 and December 31, 2022, respectively. As of March 31, 2023 and December 31, 2022, the Company’s cash equivalents were held at institutions in the United States and include deposits in a money market fund which was unrestricted as to withdrawal or use. The Company also held cash in foreign banks of approximately $8.0 million at March 31, 2023 and $18.6 million at December 31, 2022 that was not insured. The Company has not experienced any losses on its deposits of cash and cash equivalents.

Investments

The Company measures its cash equivalents and short-term investments at fair value, with unrealized gains and losses recorded in accumulated other comprehensive income within stockholders’ equity. The Company regularly reviews its investments and evaluates the current expected credit loss by considering factors such as historical experience, market data, and the near-term prospects of the investee. The following is a summary of the gross unrealized gains and unrealized losses on the Company’s investment securities, excluding investments in money market funds (in thousands):


	March 31, 2023
	Amortized Cost		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses			Aggregate Fair Value
Investment Securities
Agency bonds	$	221,163	$	3	$	(720	)	$	220,446
Commercial paper		40,994		2		(21	)		40,975
Treasury bonds		31,038		12		(117	)		30,933
Total securities	$	293,195	$	17	$	(858	)	$	292,354


	December 31, 2022
	Amortized Cost		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses			Aggregate Fair Value
Investment Securities
Agency bonds	$	184,666	$	2	$	(990	)	$	183,678
Commercial paper		24,767		5		(30	)		24,742
Treasury bonds		46,008		—		(416	)		45,592
Total securities	$	255,441	$	7	$	(1,436	)	$	254,012

Realized gains or losses and other-than-temporary impairments, if any, on available-for-sale securities are reported in other income (expense), net as incurred. The cost of securities sold is determined based on the specific identification method. The amount of realized gains and realized losses on investments recorded for the periods presented has not been material.

The contractual maturities of the Company’s investment securities as of March 31, 2023 were as follows (in thousands):


	Amortized Cost		Fair Value
Amounts maturing within one year	$	283,671	$	282,818
Amounts maturing after one year through five years		9,524		9,536
Total investment securities	$	293,195	$	292,354

Inventories (in thousands)


	March 31,		December 31,
	2023		2022
Raw materials	$	57,477	$	53,384
Work in process		2,551		1,195
Finished goods		53,265		45,059
Total inventories	$	113,293	$	99,638

Inventories are stated at the lower of cost or net realizable value. Cost is determined using the standard cost method which approximates the first-in, first-out basis. Net realizable value is determined as the prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The Company regularly reviews inventory quantities compared to forecasted sales to record a provision for excess and obsolete inventory when appropriate. Inventory write-downs are recorded for excess and obsolete inventory. The Company estimates forecasted sales by considering product acceptance in the marketplace, customer demand, historical sales, product obsolescence and technological innovations.

The Company periodically evaluates the carrying value of inventory on hand for potential excess amount over demand using the same lower of cost or net realizable value approach as that has been used to value the inventory. The Company also periodically evaluates inventory quantities in consideration of actual loss experience. As a result of these evaluations, the Company recognized total write-downs of $1.3 million and $1.1 million, respectively, for its inventories for the three months ended March 31, 2023 and 2022.

Property and Equipment, Net (in thousands)


	March 31,			December 31,
	2023			2022
Laboratory and manufacturing equipment	$	11,940		$	11,482
Computer equipment and software		21,530			18,626
Furniture and fixtures		4,485			4,421
Leasehold improvements		10,589			10,589
Construction in process		4,739			5,984
Total		53,283			51,102
Less: Accumulated depreciation and amortization		(30,372	)		(28,831	)
Property and equipment, net	$	22,911		$	22,271

The Company recognized depreciation and amortization expense on property and equipment as follows (in thousands):


	Three Months Ended
	March 31,
	2023		2022
Depreciation and amortization expense	$	1,541	$	1,495

Accrued Liabilities (in thousands)


	March 31,		December 31,
	2023		2022
Accrued payroll and related expenses	$	26,490	$	35,341
Accrued professional fees		2,877		1,425
Accrued taxes		2,974		1,910
Accrued clinical and research expenses		235		282
Accrued interest		2,609		1,305
Accrued warranty		1,147		866
Accrued other		4,035		6,039
Total accrued liabilities	$	40,367	$	47,168

6. Commitments and Contingencies

Operating Leases

In March 2015, the Company entered into a lease agreement for approximately 50,000 square feet of office space located in Redwood City, California for a period beginning on June 30, 2015 and ending in May 2022, with initial annual payments of approximately $2.0 million, increasing to $2.4 million annually during the final year of the lease term. In December 2016, the Company entered into a first amendment to the lease for an additional approximately 50,000 square feet of office space adjacent to the premises under the original lease (the Expansion Premises), with initial annual payments of $1.2 million, increasing to $2.9 million in the final year of the amended lease term. The lease for the Expansion Premises commenced on June 1, 2018, and it will expire on May 31, 2025. The first amendment also extends the lease term for the original premises to terminate on the same date as the Expansion Premises.

The Company entered into a separate non-cancellable facility lease for warehouse space beginning on March 1, 2017 through February 28, 2022, under which it is obligated to pay approximately $0.4 million in lease payments over the term of the lease. In October 2021, the Company entered into a first amendment of the warehouse lease, which extends the lease term to terminate on May 31, 2025 and under which the Company is obligated to pay approximately $0.4 million over the term of the extension period.

In August 2020, the Company entered into a lease for approximately 35,411 square feet of space for a manufacturing facility in Costa Rica to begin in April 2021 and to last through June 2031, under which it is obligated to pay approximately $3.9 million in lease payments over the term of the lease. On the commencement date in April 2021, the Company classified and measured the lease, resulting in the recording of operating assets of $2.9 million and operating lease liabilities of $2.9 million.

See Note 3 for further discussion on Lease Accounting.

Warranty Obligations

The Company provides a limited one- to five-year warranty and warrants that its products will operate substantially in conformity with product specifications. The Company records an estimate for the provision for warranty claims in cost of revenue when the related revenues are recognized. This estimate is based on historical and anticipated rates of warranty claims, the cost per claim and the number of units sold. The Company regularly assesses the adequacy of its recorded warranty obligations and adjusts the amounts as necessary. Activities related to warranty obligations were as follows (in thousands):


	Three Months Ended
	March 31,
	2023			2022
Beginning balance	$	866		$	664
Provision for warranty		1,763			715
Utilization		(1,482	)		(927	)
Ending balance	$	1,147		$	452

Contingencies

From time to time, the Company may have certain contingent liabilities that arise in the ordinary course of business activities related to, for example, employment matters and patent issues. 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. When determining the estimated loss or range of loss, significant judgement is required.

Indemnification

The Company enters into standard indemnification arrangements in the ordinary course of business. Pursuant to these arrangements, the Company indemnifies, holds harmless and agrees to reimburse the indemnified parties for losses suffered or incurred by the indemnified party, in connection with any trade secret, copyright, patent or other intellectual property infringement claim by any third-party with respect to the Company’s technology. The term of these indemnification agreements is generally perpetual. The maximum potential amount of future payments the Company could be required to make under these agreements is not determinable because it involves claims that may be made against the Company in the future, but have not yet been made.

The Company has entered into indemnification agreements with its directors and officers that may require the Company to indemnify its directors and officers against liabilities that may arise by reason of their status or service as directors or officers, other

than liabilities arising from willful misconduct of the individual. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company has director and officer insurance coverage that reduces the Company’s exposure and enables the Company to recover a portion of any future amounts paid. The Company believes the estimated fair value of these indemnification agreements in excess of applicable insurance coverage is minimal.

Legal Matters

The Company is and may from time to time continue to be involved in various legal proceedings to defend its intellectual property, including several pending European patent oppositions at the European Patent Office (EPO) initiated by the Company’s competitors Medtronic and Boston Scientific. In addition, the Company is and may from time to time also be involved in various legal proceedings of a character normally incident to the ordinary course of business, such as employment matters, product liability matters, and professional liability matters, which the Company does not deem to be material to its business and condensed consolidated financial statements at this stage.

Flathead Partners Litigation/Arbitration

On July 15, 2022, the Company filed a lawsuit in the U.S. District Court for the Northern District of California for breach of contract against Flathead Partners, LLC, the Mayo Foundation for Medical Education and Research, and Mayo Clinic Ventures (herein referred to as “Flathead Partners”). The Company’s suit alleged that Flathead Partners breached the 2006 license agreement between the Company and the Mayo Clinic (referred to in the Company’s 10-K filing as the “Mayo License”), when Flathead Partners unilaterally asserted control of pending U.S. Patent Application 16/286,389 (the “’389 Application”), which is subject to the Mayo License. The suit sought to enjoin the Flathead Partners from taking any action at the U.S. Patent Office with respect to the ‘389 Application, and to thereafter engage in an arbitration as called for in the Mayo License. On July 27, 2022, the Flathead Partners agreed to enter into an arbitration to determine which party shall have control of prosecution of the ‘389 Application, and whether there are ongoing royalty obligations under the Mayo License. Therefore, Nevro dismissed the lawsuit in the Northern District of California. The parties have since been engaged in an arbitration.

Civil Investigative Demand

In December 2022, the Company received a civil investigative demand (CID) pursuant to the federal False Claims Act from the United States Attorney’s Office for the Northern District of California seeking information relating to the Company’s spinal cord stimulation system (SCS System). The CID primarily relates to marketing, promotion and billing practices, not the therapeutic or safety attributes of the Company’s SCS System. The Company maintains rigorous policies and procedures designed to promote compliance with the federal False Claims Act and other regulatory requirements, and is cooperating in this matter and providing the requested information.

8. Stock-Based Compensation

The Company accounts for stock-based compensation arrangements with employees in accordance with Accounting Standards Codification (ASC) 718, Compensation—Stock Compensation. ASC 718 requires the recognition of compensation expense, using a fair value-based method, for costs related to all share-based payments including stock options. The Company estimates forfeitures expected to occur to determine the amount of compensation cost recognized in each period.

In addition to restricted stock units, the Company grants performance stock units (PSUs) to certain members of the management team. For the three months ended March 31, 2023, the Company granted 175,088 shares of PSUs with a weighted average fair value of $38.90. For the three months ended March 31, 2022, the Company granted 392,742 shares of PSUs with a weighted average fair value of $54.00. These PSUs vest over a three-year period, subject to continued service, and are based on (1) the total shareholder return (TSR) of the Company’s common stock price compared to the S&P Healthcare Equipment Select Industry Index (the Index) over a two-year period or (2) specific revenue targets over a two-year performance period. Additionally, the grants from 2022 included PSUs that vest over a three-year period and are based on the attainment of specified stock prices. Since TSR and stock price attainment are considered market conditions, the PSUs based on TSR and stock price attainment have fair values that are determined at the grant date using the Monte Carlo simulation model, with the recorded expense based on fair value. Since revenue targets are considered performance conditions, the PSUs based on revenue targets have a fair value that is equal to the closing stock price on the grant date, with the recorded expense based on the fair value and the probability of achievement, which is reassessed at each reporting period.

A summary of stock-based compensation expense by line items in the consolidated statements of operations is as follows (in thousands):


	Three Months Ended
	March 31,
	2023		2022
Cost of revenue		442		554
Research and development		2,644		2,051
Sales, general and administrative		10,474		10,803
Total stock-based compensation expense		13,560		13,408

A summary of pre-tax stock-based compensation expense by category was as follows (in thousands):


	Three Months Ended
	March 31,
	2023		2022
Stock Options		295		572
Restricted stock units		9,555		8,777
Performance stock units		2,832		3,314
Employee stock purchase plan		878		745
Total stock-based compensation expense		13,560		13,408

9. Basic and Diluted Net Income (Loss) Per Share

Basic net loss per share is computed by dividing the net loss by the weighted average number of common shares outstanding for the period. Diluted net income (loss) per share is computed by dividing the net income (loss) by the weighted average number of common shares and dilutive common stock equivalents outstanding for the period, if inclusion of these is dilutive. The Company uses the if-converted method and presumes share settlement for its 2025 Notes when calculating the dilutive effect of these notes. In

connection with the offerings of the convertible senior notes, the Company entered into convertible note hedges and warrants. However, the convertible note hedges are not included when calculating potentially dilutive shares since their effect is always anti-dilutive. Warrants were considered anti-dilutive to the extent that their strike price were above the Company's average share price during the period.

Because the Company has reported a net loss for the three months ended March 31, 2023 and 2022, the diluted net loss per common share is the same as basic net loss per common share for those periods. The following potentially dilutive securities outstanding at the end of the periods presented have been excluded from the computation of diluted shares outstanding, as the effect would be anti-dilutive:

The following table summarizes the computation of basic and diluted net loss per share (in thousands, except share and per share data):


	Three Months Ended
	March 31,
	2023			2022
Net loss, basic and diluted	$	(35,029	)	$	(34,325	)
Weighted average shares used to compute basic and diluted net loss per share		35,584,685			35,073,862
Net loss per share, basic and diluted	$	(0.98	)	$	(0.98	)

The following potentially dilutive securities outstanding at the end of the periods presented have been excluded from the computation of diluted shares outstanding, as the effect would be anti-dilutive:


	March 31,
	2023		2022
Unreleased restricted stock		2,403,168		1,691,713
Options to purchase common stock		606,785		688,762
Convertible senior notes		1,807,141		1,807,141
Warrants related to the issuance of convertible senior notes		1,807,141		1,807,141
Total		6,624,235		5,994,757

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following management’s discussion and analysis of our financial condition and results of operations in conjunction with our unaudited interim condensed consolidated financial statements (the condensed consolidated financial statements) and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q (Quarterly Report) and with our audited consolidated financial statements and notes thereto for the year ended December 31, 2022, included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (the Annual Report) filed with the U.S. Securities and Exchange Commission (SEC) on February 21, 2023.

This report contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed in the forward-looking statements. The statements contained in this report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). Forward-looking statements are often identified by the use of words such as, but not limited to, “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “seek,” “should,” “strategy,” “target,” “will,” “would” and similar expressions or variations intended to identify forward-looking statements. These statements are based on the beliefs and assumptions of our management based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, those discussed in Part I, Item 1A. Risk Factors in our most recent Annual Report on Form 10-k as filed on February 21, 2023, and those discussed in the section titled “Risk Factors” included under Part II, Item 1A below. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

We are a global medical device company focused on delivering comprehensive, life-changing solutions that continue to set the standard for enduring patient outcomes in chronic pain treatment. We have developed and commercialized our HFX™ spinal cord stimulation (SCS) platform, which includes the Senza® SCS system, an evidence-based neuromodulation system for the treatment of chronic pain, with the Senza® HFX iQ™ platform being our latest addition to the Senza family of products. Our HFX solution is approved to deliver a versatile range of waveforms, including our proprietary, paresthesia-free 10 kHz Therapy and was demonstrated in our SENZA randomized controlled trial (RCT) to be superior to traditional SCS therapy, with 10 kHz Therapy being nearly twice as successful in treating back pain and 1.5 times as successful in treating leg pain when compared to traditional SCS therapy. In addition to the original approval of our therapy in back and leg pain, we received approval of our 10 kHz Therapy for the management of chronic intractable pain of the lower limbs, including unilateral or bilateral pain, associated with painful diabetic neuropathy (PDN) in July 2021 in the United States and we received expanded labeling in non-surgical back pain (NSBP) in January 2022 in the United States. Our SENZA-RCT study, along with our SENZA-PDN clinical study, SENZA-NSRBP clinical study and European studies, represents what we believe is the most robust body of clinical evidence for any SCS therapy. We believe the superiority of 10 kHz Therapy over traditional SCS therapies will allow us to capitalize on and expand the approximately $2.3 billion global SCS market by treating patients with debilitating chronic pain, including back and leg pain, NSBP and PDN.

We launched Senza commercially in the United States in May 2015, after receiving a label from the U.S. Food and Drug Administration (FDA) supporting the superiority of our 10 kHz Therapy over traditional SCS. The Senza system has been commercially available in certain European markets since November 2010 and in Australia since August 2011. Senza is currently reimbursed by all of the major insurance providers.

The tables below set forth our revenue from U.S. and international sales the past nine quarters on a quarterly basis and total revenue for each of the past five full fiscal years.

Since our inception, we have financed our operations primarily through equity and debt financings and borrowings under a debt facility. Our accumulated deficit as of March 31, 2023 was $642.2 million. A significant amount of our capital resources has been used to support the development of our Senza products and our 10 kHz Therapy, and we have also made a significant investment building our U.S. commercial infrastructure and sales force to support our commercialization efforts in the United States. We intend to continue to make significant investments in our U.S. commercial infrastructure, including a sales organization that targets physician specialties involved in PDN treatment decisions, as well as in research and development (R&D) to develop Senza to treat other chronic pain indications, including conducting clinical trials to support our future regulatory submissions. In order to further enhance our R&D efforts, pursue product expansion opportunities or acquire a new business or products that are complementary to our business, we may choose to raise additional funds, which may include future equity and debt financings.

We rely on third-party suppliers for all of the components of our Senza products, and currently for the assembly of these systems. Several of these suppliers are currently single-source suppliers. We have entered into and/or amended several supply agreements in an effort to reinforce our supply chain. We are also required to maintain high levels of inventory, and, as a result, we are subject to the risk of inventory obsolescence and expiration, which may lead to inventory impairment charges. Additionally, as compared to direct manufacturers, our dependence on third-party manufacturers makes us vulnerable to supply shortage problems and exposes us to greater lead times, increasing our risk of inventory obsolescence. In the third quarter of 2020, we made the strategic decision to vertically integrate the assembly of IPG’s, peripherals and various other manufacturing related activities to mitigate our reliance on third-party manufacturers and improve our long-term gross margins. We plan on conducting these manufacturing activities in a facility in Costa Rica, for which our lease began in April 2021. The integration process was completed in mid-2022, and we received approval from the FDA for the manufacture of our Senza system in the Costa Rica facility in September 2022. Even with this integration process completed, we expect that we will continue to rely on third-party manufacturers as we ramp our factory and in order to provide key components to support the assembly process. We have incurred and may continue to incur significant capital expenditures and implementation costs to initiate the manufacturing activities in our Costa Rica facility.

We are subject to impacts and risks related to public health crises, including epidemics and pandemics such as the COVID-19 pandemic and its lingering effects, as well as the impacts from adverse macroeconomic conditions. The COVID-19 outbreak has negatively impacted, and continues to negatively impact, our operations and revenues and overall financial condition as demand for elective procedures remains unpredictable and the number of Senza trials and permanent system implant procedures has not recovered to pre-pandemic levels. The demand for elective procedures has declined due to lowered patient and customer willingness to pursue elective procedures and due to government regulations to focus resources to the COVID-19 pandemic response rather than elective procedures. Medical procedure rates have similarly been impacted by other effects of the COVID-19 pandemic, including healthcare system staffing shortages, travel restrictions, quarantine restrictions, global and domestic supply chain disruptions, and new COVID-19 variants. For example, throughout 2021, the COVID-19 pandemic negatively impacted the global SCS therapy market, which we estimate decreased by approximately 5% to 10%. While restrictions in response to the COVID-19 pandemic have eased, these challenges may arise again at any time due to the unpredictability of the pandemic, and we continue to experience disruptions to our business as a result of patients and customers continuing to be cautious in restarting elective procedures in light of the continued risk posed by the virus.

Additionally, global and domestic supply chains and the timely availability of raw materials and products have been and may continue to be materially disrupted by quarantines, factory slowdowns or shutdowns, border closings and travel restrictions resulting from the COVID-19 pandemic. Any manufacturing supply interruption of materials could adversely affect our ability to conduct ongoing and future activities.

Our business and financial performance are significantly impacted by macroeconomic conditions. Global macroeconomic challenges, such as the effects of the ongoing war between Russian and Ukraine, the COVID-19 pandemic, supply chain constraints, market uncertainty, volatility in exchange rates, inflationary trends, lower consumer confidence and evolving dynamics in the global trade environment have impacted our business and financial performance. Such economic impacts could also impact the decision of patients and customers to seek and undertake elective procedures which would adversely impact our revenue and results of operations.

Furthermore, a recession or market correction resulting from the COVID-19 pandemic or other macroeconomic factors could materially affect our business and the value of our common stock. As a result of the COVID-19 pandemic, our customers, including hospitals, ASCs and physician offices, have experienced financial hardship and some of them may not fully recover. This could lead to some of these customers temporarily or permanently shutting down, filing for bankruptcy or being acquired by larger health systems, leading to reduced procedures and/or additional pricing pressure on our products. The COVID-19 pandemic has also resulted in a significant increase in unemployment in the United States, Europe and Australia, which may continue even after the pandemic. The occurrence of any such events may lead to reduced disposable income and access to health insurance which could adversely affect the number of Senza systems sold after the pandemic has ended as a result of customer and patient reluctance to seek elective care treatment due to increase patient copays and similar financial considerations.

Adverse macroeconomic conditions and any future impacts from the COVID-19 pandemic, other pandemics or international tensions, could also result in significant disruption of global economic conditions and consumer trends, as well as a significant disruption in financial markets, reducing our ability to access capital, which could in the future negatively affect our liquidity, including our ability to repay our 2.75% convertible senior convertible notes due 2025 (the 2025 Notes). Our ability to repay the 2025 Notes could also be adversely impacted by higher interest rates which could make it more difficult to access capital on favorable terms, or at all.

In addition to the impact of COVID-19, we believe that the following factors have impacted, and we expect will continue to impact, our results of operations.

The global economy is experiencing increased inflationary pressures, increased interest rates, supply chain issues, recession fears and lower consumer confidence as a result of current macroeconomic environment and lingering impacts from the COVID-19 pandemic as further described above, which we anticipate will continue. Higher interest rates and capital costs, increased costs of labor and volatile currency exchange rates are creating additional economic challenges. These conditions may cause patients to delay their decisions to seek medical elective procedures.

Furthermore, healthcare providers are experiencing and may continue to experience financial and operational pressures as a result of staffing shortages, the supply chain environment and increased inflation, which could impact their decision to prioritize medical elective procedures.

We continue to invest in programs to educate physicians who treat chronic back and leg pain about the advantages of Senza. This requires significant commitment by our marketing team and sales organization, and can vary depending upon the physician’s practice specialization, personal preferences and geographic location. Further, we are competing with well-established companies in our industry that have strong existing relationships with many of these physicians. Educating physicians about the advantages of our Senza products, including our latest generation SCS system, HFX iQ, and influencing these physicians to use these products to treat chronic pain, is required to grow our revenue.

In July 2021, we received FDA approval of our 10 kHz Therapy for the management of chronic intractable pain of the lower limbs, including unilateral or bilateral pain, associated with PDN, and we have initiated a commercial rollout. In order to successfully commercialize our PDN opportunity, we will need to invest in and incur significant costs for this new indication and patient population, including costs to continue to build our sales force, marketing efforts and continuing clinical activities. Our success in the PDN market will be dependent on, among other factors, the perceived efficacy of our therapy for PDN patients, our ability to educate and generate awareness of our therapy for referring physicians, treating physicians and patients, and our ability to obtain sufficient third-party coverage or reimbursement for use of our therapy in PDN patients.

In January 2022, we received FDA approval for expanded labeling for our Senza® SCS System for the management of NSBP. This approval is specific to our proprietary 10 kHz Therapy and we believe differentiates the Senza System as the only SCS system with specific labeling to treat NSBP patients. Our success in the NSBP market will be dependent on, among other factors, the perceived efficacy of our therapy for NSBP patients, our ability to support continued market penetration and market access initiatives to further expand payer coverage of this procedure.

Healthcare providers in the United States generally rely on third-party payors, principally federal Medicare, state Medicaid and private health insurance plans, to cover and reimburse all or part of the cost of our products and the related implant procedure for patients. The revenue we are able to generate from sales of our products depends in large part on the availability of reimbursement from such payors. While we currently have a favorable National Coverage Determination (NCD) and reimbursement by Medicare for chronic back and leg pain, it is silent on PDN and NSBP, thus allowing the local Medicare Administrative Contractors (MACs) the ability to establish their own policies for these newer indications. Decisions of coverage and reimbursement for Senza and the related implant procedure from private health insurance providers can vary. In general, these decisions require that such payors perform analyses to determine if the procedure is medically necessary and if our technology is covered under their existing coverage policies. These payors may deny reimbursement if they determine that the device or procedure was not medically necessary for the patient and used in accordance with the payor’s coverage policy.

A significant component of our commercial efforts includes working with private payors to ensure positive coverage decisions for our products. For our traditional chronic back and leg pain market, we believe that favorable coverage and reimbursement for procedures using our products from Medicare and certain commercial payors, such as Aetna, Cigna, Humana, Blue Cross Blue Shield (BCBS) and Kaiser, have contributed to our increase in revenue to date. Although the largest commercial payors and Medicare cover procedures using Senza, there can be no assurance that all private health insurance plans will cover the therapy. Effective July 1, 2021, Medicare now requires Prior Authorization for certain hospital outpatient procedures, including SCS procedures. While Medicare, through both national and local coverage policies, currently provides coverage for NSBP, most commercial payors still do not explicitly cover NSBP. In January 2022, we announced that UnitedHealthcare will provide coverage for our 10 kHz Therapy for the treatment of PDN for dates of service on or after March 1, 2022. In March 2022, we announced that Noridian, the Medicare Administrative Contractor (MAC) that oversees the majority of the western United States, released an update to their Local Coverage Billing and Coding article for spinal cord stimulators for chronic pain to include two new ICD-10 codes that cover PDN. This change was posted on March 4, 2022 and is retroactive for procedures performed on or after January 1, 2022.

During the second quarter of 2022, a number of coverage updates among BCBS insurers were made to explicitly cover PDN, including BCBS Idaho (effective April 28, 2022); BCBS Hawaii - Hawaii Medical Service Association (effective May 27, 2022); and BCBS Alabama (effective May 29, 2022).

During the third quarter of 2022, a number of coverage updates were made by insurers to explicitly cover PDN. Combined, these updates represent approximately 43.5 million commercially-insured covered lives, with approximately 54% of the addressable US PDN population now covered under a formal policy for PDN:

During the third quarter of 2022, Novitas Solutions (Novitas) and First Coast Service Options (FCSO), the Medicare Administrative Contractors (MACs) that represent Arkansas, Colorado, Delaware, Florida, Louisiana, Maryland, Mississippi, New Jersey, New Mexico, Oklahoma, Pennsylvania and Texas, published draft Local Coverage Determinations (LCDs) titled, “Nerve Stimulators for Chronic Intractable Pain”, which propose updated coverage criteria for SCS devices with an explicit FDA approval to treat PDN that would include PDN refractory to conventional medical management. The MACs' review of these proposed LCDs is ongoing, and they remain subject to change. Potential finalization dates have not yet been announced. If finalized as proposed, these LCDs would mean that Medicare patients in all 50 states would be eligible for coverage for PDN and would add approximately 17 million covered Medicare lives.

Effective December 1, 2022, UnitedHealthcare updated to its SCS medical coverage policy and added language to indicate SCS devices are not covered for treating chronic intractable back pain without prior spine surgery (NSBP). All other elements of their SCS coverage policy remained as they were before, including their recent decision in January 2022 to cover the use of SCS for PDN.

Effective January 10, 2023, BCBS New Jersey has updated their medical policy to explicitly cover PDN. BCBS New Jersey represents approximately 3.7 million covered lives.

With respect to both PDN and NSBP, there are many payors that have not yet updated their policies to expressly cover SCS procedures, including in the case of PDN, Cigna and Anthem Blue Cross Blue Shield. A significant number of negative coverage and reimbursement decisions by private insurers may impair our ability or delay our ability to grow our revenue.

We are working to expand payor coverage to include the use of our 10 kHz Therapy for the management of PDN and NSBP. This effort could be costly and could take many years to gain broad acceptance, and there can be no guarantee that it will be successful.

Our products are composed of a substantial number of individual components and, in order to market and sell them effectively, we must maintain high levels of inventory. In particular, since our commercial launch of Senza in the United States, we have continued to add suppliers to fortify our supply chain and we have maintained increased levels of inventory. As a result, a significant amount of our cash used in operations has been associated with maintaining these levels of inventory. There may also be times in which we determine that our inventory does not meet our product requirements. The manufacturing process for our products requires lengthy lead times, during which components may become obsolete. We may also over- or underestimate the quantities of required components, in which case we may expend extra resources or be constrained in the amount of end product that we can produce. Additionally, as we release later generations of products that contain advancements or additional features, the earlier generations may become obsolete. These factors subject us to the risk of inventory obsolescence and expiration, which may lead to inventory impairment charges. The sum of the charges for the items listed above were $1.3 million for the three months ended March 31, 2023 and $4.2 million for the year ended December 31, 2022.

We intend to continue investing in R&D to help our commercialization efforts around and to expand into new indications and chronic pain conditions, as well as develop product enhancements to improve outcomes and enhance the physician and patient experience. For example, we commenced commercial launches of Surpass, our surgical lead product family in early 2017 and Senza II SCS System in late 2017. Most recently, we launched our next generation product platform, Senza Omnia, in the United States in late 2019, in Europe during the second quarter of 2020 and in Australia in July 2020. In the first quarter of 2021, we received FDA approvals for our first Senza Omnia upgrade and a new trial stimulator. In July 2021, we received FDA approval of our 10 kHz Therapy for the management of chronic intractable pain of the lower limbs, including unilateral or bilateral pain, associated with PDN. In January 2022, we received regulatory approval for expanded labeling to include NSBP. In October 2022, we received FDA approval of our latest generation SCS system, HFX iQ™, which we launched on a limited basis in the United States in the fourth quarter of 2022 and expanded to a full market launch in the first quarter of 2023. We are continuing to invest in product improvements to Senza, including enhanced MRI capabilities and next generation IPGs. While R&D and clinical testing are time consuming and costly, we believe expanding into new indications, implementing product improvements and continuing to demonstrate the efficacy, safety and cost effectiveness of the 10 kHz Therapy through clinical data are all critical to increasing the adoption of this therapy. We initiated two RCTs in 2018, SENZA-PDN and SENZA-NSRBP, which are evaluating the 10 kHz Therapy for the treatment of PDN and NSBP, respectively.

The SENZA-PDN study is one of the largest RCTs conducted in the field of spinal cord stimulation with 216 randomized patients. The study is evaluating paresthesia-free 10 kHz Therapy among patients diagnosed with PDN and refractory to conventional medical management (CMM). Patients were randomized one-to-one to CMM alone or CMM with 10 kHz Therapy. A crossover study design was used, where subjects who did not have adequate pain relief at 6 months were given the option to cross over to the other treatment arm. Subjects were followed for 24 months, with subjects who crossed over from CMM alone to CMM with 10 kHz Therapy followed for 24 months post-implantation. We presented the complete six-month and preliminary twelve-month data in January 2021 at the North American Neuromodulation Society (NANS) conference. In April 2021, the six-month data were published online in JAMA Neurology. In June 2021, the complete 12-month data, including the six-month crossover patient data, was presented at the American Diabetes Association 81st Scientific Sessions. In July 2021, the FDA approved the Senza System for the treatment of chronic intractable pain of the lower limbs, including unilateral and bilateral pain, associated with PDN. This approval is specific to Nevro’s unique 10 kHz SCS stimulation, and the Senza system was the first spinal cord stimulation system approved by the FDA with a specific indication to treat PDN. The study continues such that future follow-ups will be utilized for publication and expanded reimbursement payor coverage. In November 2021, the 12-month results and six-month crossover data were published online in Diabetes Care. Additionally, at the 2022 NANS conference in January 2022 and the International Neuromodulation Society (INS) conference in May 2022, we presented the complete 18-month results, including the 12-month crossover patient data, for our SENZA-PDN study. In June 2022, we presented the 24-month results, including the 18-month crossover patient data, at the American Diabetes

Association (ADA) conference. In August 2022, the 12-month results and six-month crossover data on quality-of-life metrics were published in Mayo Clinic Proceedings: Innovations, Quality & Outcomes. Finally, in January 2023, we presented the full 24-month results from the SENZA-PDN study at the 2023 NANS conference, and publication of the full manuscript is planned in 2023.

At the 2021 NANS conference we also presented our three-month primary endpoint data of SENZA-NSRBP study, which includes patients with NSBP. NSBP is defined as chronic back pain in patients who have not had previous spine surgery, and based on an assessment from a spine surgeon, are not surgical candidates. The study compares patients receiving 10 kHz Therapy plus CMM to patients receiving CMM alone. Based on 6 month efficacy data showing profound improvements in pain and function with 10 kHz Therapy over CMM alone, in January 2022, the FDA approved the Senza System as an aid in the management of NSBP (intractable back pain without prior surgery and not a candidate for back surgery). At the 2022 NANS conference, we also presented our 12-month results, including six-month crossover patient data, for our SENZA-NSRBP study. Key findings at 12 months showed profound improvements in pain relief, function, quality of life measures, awareness of positive change and reduction in daily opioid use in NSRBP patients receiving 10 kHz Therapy at 12-months post-implant. Results also included comparable improvements for patients that crossed over from CMM to 10 kHz after 6 months. In February 2022, the SENZA-NSRBP 12-month results were published online in the Journal of Neurosurgery: Spine. We expect that this 12-month publication will be used to seek expanded payor coverage for this patient cohort. Finally, in January 2023, we presented the full 24-month results from the SENZA-NSRBP study at the 2023 NANS conference, and publication of the full manuscript is planned in 2023.

In 2021, we established a sales organization to support the launch of our PDN indication in the United States. This sales organization targets physician specialties involved in PDN treatment decisions, including primary care physicians, endocrinologists, internal medicine and podiatrists, to create awareness of 10 kHz Therapy to treat PDN patients. We are continuing to make investments in building our U.S. commercial infrastructure and recruiting and training our U.S. sales force. This is a lengthy process that requires recruiting appropriate sales representatives, establishing and, on occasion, refining a commercial infrastructure in the United States and training our sales representatives. Following initial training for Senza, our sales representatives typically require lead time in the field to grow their network of accounts and produce sales results. Successfully recruiting and training a sufficient number of productive sales representatives has been required to achieve growth at the rate we expect.

In the United States, in order for physicians to use our products, the hospital facilities where these physicians treat patients often require us to enter into purchasing contracts directly with the hospital facilities or with the Group Purchasing Organizations of which the hospital facilities are members. This process can be lengthy and time-consuming and requires extensive negotiations and management time. In Europe, we may be required to engage in a contract bidding process in order to sell our products, where the bidding processes are only open at certain periods of time, and we may not be successful in the bidding process.

Our management’s discussion and analysis of financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, we evaluate our critical accounting policies and estimates. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable in the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions and conditions. Our significant accounting policies are more fully described in Note 1, Summary of Significant Accounting Policies, of Notes to Condensed Consolidated Financial Statements. There have been no other significant or material changes in our critical accounting policies during the three months ended March 31, 2023 to the items we disclosed as our critical accounting policies in Management’s Discussion and Analysis of Financial Conditions and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

Our revenue is generated primarily from sales to two types of customers: hospitals and outpatient medical facilities, with each being served primarily through a direct sales force. Sales to these entities are billed to, and paid by, the hospitals and outpatient medical facilities as part of their normal payment processes, with payment received by us in the form of an electronic transfer, check

or credit card payment. Product sales to third-party distributors are billed to and paid by the distributors as part of their normal payment processes, with payment received by us in the form of an electronic transfer.

U.S. revenue is generally recognized after our sales representatives deliver our product at the point of implantation and upon the completion and authorization of the implant procedure. In response to competitive practices and pressures, we have offered some volume price discounting for larger orders, where products are ordered in advance of an implantation and revenue is recognized when the transfer of control occurs at the time of shipment.

Revenue from sales of our Senza products fluctuates based on the selling price of the system, as the average sales price of a system varies geographically and by the type of system sold, and based on the mix of sales by geography. Our revenue from international sales can also be significantly impacted by fluctuations in foreign currency exchange rates, as our sales are denominated in the local currency in the countries in which we sell our products.

We expect our revenue to fluctuate from quarter to quarter due to a variety of factors, including seasonality. For example, the industry generally experiences lower revenues in the first and third quarters of the year and higher revenues in the fourth quarter. Our revenue has been impacted by these industry trends. Further, the impact of the buying patterns and implant volumes of hospitals and medical facilities, and third-party distributors may vary, and as a result could have an effect on our revenue from quarter to quarter.

We currently utilize contract manufacturers for the production of Senza products. Cost of revenue consists primarily of acquisition costs of the components of Senza, manufacturing overhead, scrap and inventory excess and obsolescence charges, as well as distribution-related expenses, such as logistics and shipping costs, net of costs charged to customers.

We calculate gross margin as revenue less cost of revenue divided by revenue. Our gross margin has been and will continue to be affected by a variety of factors, but primarily by our average sales price and the costs to have our products manufactured. While costs are primarily incurred in U.S. dollars, international revenue may be impacted by the appreciation or depreciation of the U.S. dollar, which may impact our overall gross margin. Our gross margin is also affected by our ability to reduce manufacturing costs as a percentage of revenue.

Our operating expenses consist of R&D expense, sales, general and administrative (SG&A) expenses and certain litigation charges. Personnel costs are the most significant component of operating expenses and consist primarily of salaries, bonus incentives, benefits, stock-based compensation and sales commissions.

Research and Development. R&D costs are expensed as incurred. R&D expense consists primarily of personnel costs, including salary, employee benefits and stock-based compensation expenses for our R&D employees. R&D expense also includes costs associated with product design efforts, development prototypes, testing, clinical trial programs and regulatory activities, contractors and consultants, equipment and software to support our development, facilities and information technology. We expect product development expenses to increase in absolute dollars as we continue to develop product enhancements to Senza. Our R&D expenses may fluctuate from period to period due to the timing and extent of our R&D and clinical trial expenses.

Sales, General and Administrative. SG&A expense consists primarily of personnel costs, including salary, employee benefits and stock-based compensation expenses for our sales and marketing personnel, including sales commissions, and for administrative personnel that support our general operations, such as information technology, executive management, financial accounting, customer service and human resources personnel. We expense commissions at the time of the sale. SG&A expense also includes costs attributable to marketing, as well as travel, intellectual property and other legal fees, financial audit fees, insurance, fees for other consulting services, depreciation and facilities.

In 2021, we established a sales organization to support the launch of our PDN indication in the U.S. This sales organization targets physician specialties involved in PDN treatment decisions, including primary care physicians, endocrinologists, internal medicine and podiatrists, to create awareness of 10 kHz Therapy to treat PDN patients. In the last three years, we increased marketing spending in order to generate additional sales opportunities. Additionally, we have made substantial investments in our U.S. commercial infrastructure to support our commercialization efforts in the United States. We expect SG&A expenses to decrease as a percent of revenue as we engage in activities that leverage our existing sales and marketing personnel to support the commercialization of our products in the United States.

During 2021 and 2022, we experienced significant legal expenses associated with our intellectual property litigation with Boston Scientific. In 2023, we experienced an increase in legal expenses associated with the civil investigative demand. Additionally, we continue to incur significant expenses related to audit, legal, regulatory and tax-related services associated with maintaining compliance with exchange listing and SEC requirements, including compliance under the Sarbanes-Oxley Act of 2002 (the Sarbanes-Oxley Act), director and officer insurance premiums and investor relations costs associated with being a public company. Our SG&A expense may fluctuate from period to period due to the seasonality of our revenue, the timing and extent of our SG&A expense, and the direct impact of the COVID-19 pandemic on certain discretionary spend items such as travel and trade shows.

Interest income consists primarily of interest income earned on our investments and interest expense consists of interest paid on our outstanding debt and the amortization of debt discount and debt issuance costs.

Other income (expense), net consists primarily of foreign currency transaction gains and losses and the gains and losses from the remeasurement of foreign-denominated balances to the U.S. dollar.

The provision for income taxes consists primarily of income taxes in foreign jurisdictions in which we conduct business as well as states where we have determined we have state nexus. We maintain a full valuation allowance for all of our U.S. deferred tax assets including net operating loss (NOL) carryforwards and federal and state tax credits.

Revenue. Revenue increased to $96.3 million in the three months ended March 31, 2023 from $87.8 million in the three months ended March 31, 2022, an increase of $8.5 million, or 10%. Revenue in the United States was $82.3 million in the three months ended March 31, 2023, a 12% increase from $73.2 million in the three months ended March 31, 2022. Our trial and permanent implant volumes in the United States increased from prior year. International revenue was $14.0 million in the three months ended March 31, 2023, compared to $14.6 million in the three months ended March 31, 2022. For the three months ended March 31, 2023 and 2022, PDN represented 16% and 7% of worldwide permanent implant procedures, respectively, which resulted in approximately $15.6 million and $6.0 million in revenue, respectively.

Cost of Revenue, Gross Profit and Gross Margin. Cost of revenue increased to $31.7 million in the three months ended March 31, 2023 from $28.8 million in the three months ended March 31, 2022, an increase of $3.0 million, or 10%. This increase was primarily due to an increase of $3.3 million in the costs of manufactured components and $1.0 million related to costs associated with warranty expenses, offset by a decrease of $1.5 million in costs incurred to ramp our Costa Rica manufacturing facility. Gross profit increased to $64.6 million in the three months ended March 31, 2023 from $59.1 million in the three months ended March 31, 2022, an increase of $5.5 million, or 9%. Gross profit as a percentage of revenue, or gross margin, was flat at 67% for each of the three months ended March 31, 2023 and 2022.

Research and Development Expense. R&D expenses increased to $14.8 million in the three months ended March 31, 2023, from $12.5 million in the three months ended March 31, 2022, an increase of $2.2 million, or 18%. The increase was primarily due to an increase in personnel expenses of $1.6 million.

Sales, General and Administrative Expense. SG&A expenses increased to $86.2 million in the three months ended March 31, 2023, from $79.3 million in the three months ended March 31, 2022, an increase of $6.9 million, or 9%. The increase was primarily due to an increase in travel, meeting, and conference costs of $4.5 million and personnel expenses of $1.6 million.

Interest Income, Interest Expense and Other Income (Expense), Net, and Provision for Income Taxes

Interest Income. Interest income increased to $3.3 million in the three months ended March 31, 2023 from $0.1 million in the three months ended March 31, 2022, primarily due to a higher average investment return rates during the three months ended March 31, 2023.

Interest Expense. Interest expense remained steady at $1.6 million in each of three months ended March 31, 2023 and 2022, and represents interest for our outstanding debt and the amortization of debt issuance costs.

Other Income (Expense), Net. Other income (expense), net was primarily comprised of foreign currency transaction gains and losses, as well as gains and losses from the remeasurement of foreign-currency denominated balances, for which we recorded a gain of $0.1 million in the three months ended March 31, 2022.

Provision for Income Taxes. Income tax expense was $0.3 million in the three months ended March 31, 2023 and $0.2 million in the three months ended March 31, 2022. The income tax expense for both periods was principally comprised of foreign income tax and state income tax. We continued to have NOL carryforwards creating a deferred tax asset. We have a full valuation allowance for all of our U.S. deferred tax assets.

Since our inception, we have financed our operations through private placements of preferred stock, the issuance of common stock in our IPO in November 2014 and our underwritten public offering in June 2015, borrowings under our credit facility, which we have subsequently repaid, and the June 2016 issuance of convertible senior notes due 2021 (2021 Notes). In April 2020, we completed a concurrent underwritten public offering of common stock and convertible senior notes due 2025. Our total net proceeds from the April 2020 offerings, after giving effect to the note hedge transactions and warrant transactions and associated offering expense was $313.3 million. On June 1, 2021, our outstanding 2021 Notes matured and we paid $172.5 million to settle the outstanding principal and issued 682,912 shares of common stock to holders who elected to convert the 2021 Notes. As of March 31, 2023, we had cash, cash equivalents and short-term investments of $341.8 million. Based on our current operating plan, we expect that our cash and cash equivalents on hand, together with the anticipated funds from the collection of our receivables, will be sufficient to fund our operations through at least the next 12 months

We expect to incur continued expenditures in the future in support of our commercial infrastructure and sales force. In addition, we intend to continue to make investments in the further development of our Senza product platform and 10 kHz Therapy for the treatment of other chronic pain conditions, including ongoing R&D programs and conducting clinical trials. Further, we expect to expend significant cash resources pursuing and defending our ongoing intellectual property lawsuits. In order to further enhance our R&D efforts, pursue product expansion opportunities or acquire a new business or products that are complementary to our business, we may choose to raise additional funds.

We may continue to seek funds through equity or debt financings, or through other sources of financing. Adequate additional funding may not be available to us on acceptable terms or at all. Our failure to raise capital in the future could have a negative impact on our financial condition and our ability to pursue our business strategies. Should we choose to raise additional capital, the requirements will depend on many factors, including:

Our success depends, in part, upon our ability to establish a competitive position in the neuromodulation market by securing broad market acceptance of our 10 kHz Therapy and our Senza product platform for the treatment of chronic pain conditions. Any product we develop that achieves regulatory clearance or approval will have to compete for market acceptance and market share. We face significant competition in the United States and internationally, which we believe will intensify as we continue to commercialize in the United States. For example, our major competitors, Medtronic, Boston Scientific and Abbott Laboratories, each have approved neuromodulation systems in at least the United States, Europe and Australia and have been established for several years. In addition to these major competitors, we may also face competition from other emerging competitors and smaller companies with active neuromodulation system development programs that may emerge in the future.

If we are unable to raise, or have access, to sufficient funds when needed, we may be required to delay, reduce, or terminate some or all of our commercial development plans.

The following table sets forth the primary sources and uses of cash for each of the periods presented below:

Cash Provided by (Used in) Operating Activities. Net cash used in operating activities was $29.3 million in the three months ended March 31, 2023, compared to $28.4 million in the three months ended March 31, 2022. In the three months ended March 31,

2023, net cash provided by operating activities was primarily a result of the net losses recorded during the period of $35.0 million, as well as increases in inventory of $14.3 million, increases in prepaids and other assets of $4.6 million and decreases in accounts payable and accrued liabilities of $4.0 million. These changes were partially offset by the decreases in accounts receivable of $13.1 million, as well as the recording of non-cash stock-based compensation expense of $13.6 million. In the three months ended March 31, 2022, net cash used in operating activities was primarily a result of the net losses recorded during the period of $34.3 million, as well as decreases in accounts payable and accrued liabilities of $11.9 million and increases in prepaids and other assets of $7.9 million. These changes were partially offset by the recording of non-cash stock-based compensation expense of $13.4 million and depreciation and amortization of $1.5 million, inventory impairment of $1.1 million and amortization of operating lease assets of $1.0 million, as well as decreases in accounts receivable of $7.0 million and decreases in inventories of $1.9 million.

Cash Provided by (Used in) Investing Activities. Investing activities consisted primarily of changes in investment balances, including purchases and maturities of short-term investments. We had net purchases of short-term investments of $22.1 million in the three months ended March 31, 2023 and net proceeds from the maturity of short-term investments of $51.7 million in the three months ended March 31, 2022. We also had purchases of property and equipment of $2.6 million and $1.6 million in the three months ended March 31, 2023 and 2022, respectively.

Cash Provided by (Used in) Financing Activities. Cash used in financing activities consisted primarily of tax withholdings for net share settlement, net of cash received from the issuance of common stock to employees pursuant to the exercise of employee stock options and our employee stock purchase plan. In the three months ended March 31, 2023, we had tax withholdings of $2.3 million. In the three months ended March 31, 2022, we had tax withholdings of $7.3 million, offset by proceeds from issuance of common stock of $0.5 million.

We have lease obligations primarily consisting of operating leases for our principal offices, our warehouse space and our manufacturing facility, with expiration dates as set forth below.

In March 2015, we entered into a lease agreement for approximately 50,740 square feet of office space located in Redwood City, California for a period beginning in June 2015 and ending in May 2022, with initial annual payments of approximately $2.0 million, increasing to $2.4 million annually in the final year of the lease term. In December 2016, we entered into a first amendment to the lease for an additional approximately 49,980 square feet of office space adjacent to the premises under the original lease (the Expansion Premises) with initial annual payments of $1.2 million, increasing to $2.9 million in the final year of the amended lease term. The lease for the Expansion Premises commenced on June 1, 2018. The first amendment also extends the lease term for the original premises to terminate on the same date as the amended lease, which is May 31, 2025. In April 2017, we entered into a second amendment to the lease for a temporary space of approximately 8,171 square feet for a period beginning in May 2017, and which ended on June 1, 2018, the Commencement Date of the Expansion Premises. See Note 6, Commitments and Contingencies, of Notes to Condensed Consolidated Financial Statements for additional information.

In February 2017, we entered into a separate non-cancellable facility lease for warehouse space beginning March 1, 2017 through February 28, 2022, under which we are obligated to pay approximately $0.4 million in lease payments over the term of the lease. In October 2021, we extended our warehouse lease through May 2025, under which we are obligated to pay approximately $0.4 million over the extended term.

In August 2020, we entered into a lease for approximately 35,411 square feet of manufacturing space to begin in April 2021 and to last through June 2031 at a facility in Costa Rica, under which we are obligated to pay approximately $3.9 million in lease payments over the term of the lease. We plan to use this facility to build-out certain manufacturing capabilities so that we can vertically integrate the assembly of IPGs, peripherals and various other manufacturing related activities.

We have entered into supply agreements with certain of our suppliers that required certain minimum annual purchase agreements. As of March 31, 2023, we had minimum annual purchase commitments of $12.8 million due for the remainder of 2023 and $19.8 million due each year from 2024 to 2026.

We have also entered into a service agreement for which we are committed to pay $2.9 million in the next year, which is the remaining term of the service agreement.

As of March 31, 2023, our contractual obligations related to the 2025 Notes are payments of interest of $5.2 million due for the remainder of 2023, payments of interest of $5.2 million in 2024, and payments of interest and principal totaling $192.4 million due in 2025.

Through March 31, 2023, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. For information regarding indemnification obligations, refer to Note 6, Commitments and Contingencies, of Notes to Condensed Consolidated Financial Statements within this report.

Our exposures to other market risks related to fluctuation in interest rates, market prices, and foreign currency exchange have not changed materially since December 31, 2022. For quantitative and qualitative disclosures about market risk, see Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in our Annual Report.

The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act refers to controls and procedures that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and our management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their control objectives.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2023, the end of the period covered by this Quarterly Report. Based upon such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of such date.

There was no change in our internal control over financial reporting that occurred during the period covered by this Quarterly Report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

The legal proceedings information set forth in Note 6 Commitments and Contingencies, of Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report is incorporated herein by reference.

In addition to other information contained elsewhere in this Quarterly Report, you should carefully consider the risk factors discussed in Part I, Item 1A. Risk Factors in our Annual Report as filed on February 21, 2023, which could materially affect our business, financial condition, or future results. There have been no material changes to our risk factors since our Annual Report.

** The certification attached as Exhibit 32.1 that accompanies this Quarterly Report on Form 10-Q is not deemed filed with the SEC and is not to be incorporated by reference into any filing of Nevro Corp. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Quarterly Report on Form 10-Q, irrespective of any general incorporation language contained in such filing.

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock, $0.001 par value per share	NVRO	The New York Stock Exchange


		Page

PART I—FINANCIAL INFORMATION		3

Item 1. Condensed Consolidated Financial Statements (unaudited)		3

Condensed Consolidated Balance Sheets as of March 31, 2023 and December 31, 2022		3

Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 2023 and 2022		4

Condensed Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2023 and 2022		5

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2023 and 2022		6

Notes to Condensed Consolidated Financial Statements		7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		16

Item 3. Quantitative and Qualitative Disclosures About Market Risk		27

Item 4. Controls and Procedures		27

PART II—OTHER INFORMATION		27

Item 1. Legal Proceedings		27

Item 1A. Risk Factors		27

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		27

Item 3. Defaults Upon Senior Securities		28

Item 4. Mine Safety Disclosures		28

Item 5. Other Information		28

Item 6. Exhibits		28

SIGNATURES		30


	March 31,			December 31,
	2023			2022
Assets
Current assets
Cash and cash equivalents	$	64,227		$	120,373
Short-term investments		277,539			254,012
Accounts receivable, net of allowance for doubtful accounts of $752 and $1,270 at March 31, 2023 and December 31, 2022, respectively		65,725			78,930
Inventories		113,293			99,638
Prepaid expenses and other current assets		14,673			9,984
Total current assets		535,457			562,937
Property and equipment, net		22,911			22,271
Operating lease assets		12,341			13,430
Other assets		3,109			3,164
Restricted cash		606			606
Total assets	$	574,424		$	602,408
Liabilities and stockholders’ equity
Current liabilities
Accounts payable	$	29,229		$	26,849
Accrued liabilities		40,367			47,168
Other current liabilities		5,323			5,195
Total current liabilities		74,919			79,212
Long-term debt		187,175			186,867
Long-term operating lease liabilities		8,945			10,296
Other long-term liabilities		2,157			2,157
Total liabilities		273,196			278,532
Commitments and contingencies (Note 6)
Stockholders’ equity
Preferred stock, $0.001 par value, 10,000,000 shares authorized at March 31, 2023 and December 31, 2022; zero shares issued and outstanding at March 31, 2023 and December 31, 2022		—			—
Common stock, $0.001 par value, 290,000,000 shares authorized at March 31, 2023 and December 31, 2022; 36,376,936 and 36,203,423 shares issued at March 31, 2023 and December 31, 2022, respectively; 35,694,020 and 35,520,507 shares outstanding at March 31, 2023 and December 31, 2022, respectively		36			35
Additional paid-in capital		945,419			934,132
Accumulated other comprehensive income (loss)		(2,001	)		(3,094	)
Accumulated deficit		(642,226	)		(607,197	)
Total stockholders’ equity		301,228			323,876
Total liabilities and stockholders’ equity	$	574,424		$	602,408


	Three Months Ended
	March 31,
	2023			2022
Revenue	$	96,327		$	87,842
Cost of revenue		31,703			28,750
Gross profit		64,624			59,092
Operating expenses
Research and development		14,755			12,536
Sales, general and administrative		86,192			79,325
Total operating expenses		100,947			91,861
Income (Loss) from operations		(36,323	)		(32,769	)
Interest income		3,278			143
Interest expense		(1,613	)		(1,603	)
Other income (expense), net		(46	)		85
Income (Loss) before income taxes		(34,704	)		(34,144	)
Provision for income taxes		325			181
Net income (loss)		(35,029	)		(34,325	)
Other comprehensive loss:
Changes in foreign currency translation adjustment		506			(192	)
Changes in unrealized gains on short-term investments, net		587			(1,021	)
Net change in other comprehensive loss		1,093			(1,213	)
Comprehensive income (loss)	$	(33,936	)	$	(35,538	)
Net income (loss) per share, basic and diluted	$	(0.98	)	$	(0.98	)
Weighted average number of shares used to compute basic and diluted net (loss) per share		35,584,685			35,073,862


						Additional						Accumulated			Total
	Common Stock					Paid-In			Accumulated			Other Comprehensive			Stockholders'
	Shares			Amount		Capital			Deficit			Income (Loss)			Equity
Balances at December 31, 2022		35,520,507		$	35	$	934,132		$	(607,197	)	$	(3,094	)	$	323,876
Issuance of common stock upon release of restricted stock units		243,276			1		(1	)		—			—			—
Shares withheld for tax obligations		(69,763	)		—		(2,273	)		—			—			(2,273	)
Stock based compensation		—			—		13,561			—			—			13,561
Net loss		—			—		—			(35,029	)		—			(35,029	)
Change in other comprehensive loss		—			—		—			—			1,093			1,093
Balances at March 31, 2023		35,694,020		$	36	$	945,419		$	(642,226	)	$	(2,001	)	$	301,228


Large accelerated filer	☒	Accelerated filer	☐

Non-accelerated filer	☐	Smaller reporting company	☐

		Emerging growth company	☐


	Q1 2021		Q2 2021		Q3 2021		Q4 2021		Q1 2022		Q2 2022		Q3 2022		Q4 2022		Q1 2023
Revenue from:	(in millions)
U.S. sales	$	74.7	$	85.0	$	78.1	$	88.4	$	73.2	$	89.0	$	86.1	$	99.8	$	82.3
International sales		13.9		17.3		15.2		14.3		14.6		15.2		14.3		14.1		14.0
Total sales revenue	$	88.6	$	102.3	$	93.2	$	102.8	$	87.8	$	104.2	$	100.5	$	113.8	$	96.3


	2018		2019		2020		2021		2022		Three Months Ended March 31, 2023
Revenue from:	(in millions)
U.S. sales	$	321.8	$	326.0	$	311.9	$	326.2	$	348.2	$	82.3
International sales		65.5		64.3		50.2		60.7		58.2		14.0
Total sales revenue	$	387.3	$	390.3	$	362.0	$	386.9	$	406.4	$	96.3


	Three Months Ended March 31,
	2023		2022		Change
(in thousands)
Revenue	$	96,327	$	87,842	$	8,485
Cost of revenue		31,703		28,750		2,953
Gross profit	$	64,624	$	59,092	$	5,532
Gross margin	67%		67%		0%


Exhibit		Incorporated by Reference
Number	Description of Document	Form	Date	Number		Filed Herewith

3.1	Amended and Restated Certificate of Incorporation.	8-K	11/12/2014	3.1

3.2	Certificate of Amendment of Amended and Restated Certificate of Incorporation.	8-K	5/24/2019	3.1

3.3	Amended and Restated Bylaws.	8-K	11/12/2014	3.2

3.4	Amendment to Amended and Restated Bylaws.	8-K	5/24/2019	3.2

4.1	Reference is made to Exhibits 3.1 to 3.3.

4.2	Form of Common Stock Certificate.	S-1/A	10/27/2014	4.2

4.3	Indenture, dated as of June 13, 2016, by and between the Company and Wilmington Trust, National Association.	8-K	6/13/2016	4.1

4.5	Second Supplemental Indenture, dated April 6, 2020, by and between Nevro Corp. and Wilmington Trust, National Association, as Trustee.	8-K	4/7/2020	4.2

4.6	Form of 2.75% Senior Convertible Note Due 2025 (included in Exhibit 4.6).	8-K	4/7/2020	4.3

4.7	Description of Nevro Corp.’s Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934.	10-K	2/25/2020	4.6

31.1	Certification of Chief Executive Officer required by Rule 13a-14(a) or Rule				X


		NEVRO CORP.
		(Registrant)

Date: April 26, 2023		/s/ D. KEITH GROSSMAN
		D. Keith Grossman
		Executive Chairman (Principal Executive Officer)

Date: April 26, 2023		/s/ RODERICK H. MACLEOD
		Roderick H. MacLeod
		Chief Financial Officer (Principal Financial Officer)