Outset Medical, Inc. 10-K

Item 7A. Quantitative and Qualitative Disclosures About Market Risk. Interest Rate Risk Our cash, cash equivalents, restricted cash and short-term investments as of December 31, 2020 consist of $348.2 million in bank deposits, money market funds, U.S. Treasury and debt securities. Such interest-earning instruments carry a degree of interest rate risk. The goals of our investment policy are liquidity and capital preservation; we do not enter into investments for trading or speculative purposes and have not used any derivative financial instruments to manage our interest rate exposure. We believe that we do not have any material exposure to changes in the fair value of these assets as a result of changes in interest rates due to the short-term nature of our cash, cash equivalents and short-term investments. As of December 31, 2020, we had $30.0 million in variable rate debt outstanding. The SVB Term Loan matures on November 1, 2025, with interest-only monthly payments until June 2023. The term loan accrues interest at a rate per annum equal to the greater of (A) one-half of one percent (0.50%) above the Prime Rate as reported in the Wall Street Journal then in effect (which shall not be less than zero) and (B) three and three-quarters of one percent (3.75%). An immediate 100 basis point change in the prime rate would not have a material impact on our debt-related obligations, financial position or results of operations. Foreign Currency Exchange Risk Our expenses are generally denominated in U.S. dollars. However, we have entered into a limited number of supply contracts with vendors with payments denominated in foreign currencies. We are subject to foreign currency transaction gains or losses on our contracts denominated in foreign currencies. To date, foreign currency transaction gains and losses have not been material to our financial statements. Unfavorable changes in foreign exchange rates versus the U.S. dollar could increase our product costs, thus reducing our gross profit. We have not engaged in the hedging of foreign currency transactions to date, although we may choose to do so in the future. We do not believe that an immediate 10% increase or decrease in the relative value of the U.S. dollar to other currencies would have a material effect on operating results or financial condition. 99 Item 8. Financial Statement s and Supplementary Data. Outset Medical, Inc. Index to Financial Statements Page Report of Independent Registered Public Accounting Firm 101 Balance Sheets 102 Statements of Operations 103 Statements of Comprehensive Loss 104 Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit) 105 Statements of Cash Flows 106 Notes to Financial Statements 108 100 Report of Independent R egistered Public Accounting Firm To the Stockholders and Board of Directors Outset Medical, Inc.: Opinion on the Financial Statements We have audited the accompanying balance sheets of Outset Medical, Inc. (the Company) as of December 31, 2020 and 2019, the related statements of operations, comprehensive loss, redeemable convertible preferred stock and stockholders’ equity (deficit), and cash flows for each of the years in the three-year period ended December 31, 2020, and the related notes (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ KPMG LLP We have served as the Company's auditor since 2011. San Francisco, California March 22, 2021 101 Outset Medical, Inc. Balance Sheets (in thousands, except per share amounts) December 31, 2020 2019 Assets Current assets: Cash and cash equivalents $ 294,972 $ 36,926 Short-term investments 19,898 33,152 Accounts receivable, net 6,468 3,914 Inventories 18,384 4,596 Prepaid expenses and other current assets 6,189 1,058 Total current assets 345,911 79,646 Restricted cash 33,311 743 Property and equipment, net 14,998 7,895 Operating lease right-of-use assets 8,253 — Other assets 1,356 82 Total assets $ 403,829 $ 88,366 Labilities, redeemable convertible preferred stock and stockholders' equity (deficit) Current liabilities: Accounts payable $ 4,948 $ 4,960 Accrued compensation and related benefits 16,845 6,956 Accrued expenses and other current liabilities 7,903 2,909 Accrued warranty liability 2,913 1,702 Deferred revenue, current 3,201 883 Operating lease liabilities, current 882 — Term loan, current — 7,500 Total current liabilities 36,692 24,910 Accrued interest, noncurrent 240 217 Deferred revenue, noncurrent 570 134 Operating lease liabilities, noncurrent 8,044 — Redeemable convertible preferred stock warrant liability — 4,285 Term loan, noncurrent 29,674 21,561 Total liabilities 75,220 51,107 Commitments and contingencies (Note 6) Redeemable convertible preferred stock, $0.001 par value; no shares authorized and no shares issued and outstanding as of December 31, 2020; 154,592 shares authorized and 147,214 shares issued and outstanding as of December 31, 2019 — 409,446 Stockholders' equity (deficit): Preferred stock, $0.001 par value; 5,000 shares authorized, and no shares issued and outstanding as of December 31, 2020 and 2019 — — Common stock, $0.001 par value; 300,000 and 240,000 shares authorized as of December 31, 2020 and 2019, respectively; 42,722 and 922 shares issued and outstanding as of December 31, 2020 and 2019, respectively 43 1 Additional paid-in capital 822,624 357 Accumulated other comprehensive income 1 22 Accumulated deficit (494,059 ) (372,567 ) Total stockholders' equity (deficit) 328,609 (372,187 ) Total liabilities, redeemable convertible preferred stock and stockholders' equity (deficit) $ 403,829 $ 88,366 The accompanying notes are an integral part of these financial statements 102 Outset Medical, Inc. Statements of Operations (in thousands, except per share amounts) Years Ended December 31, 2020 2019 2018 Revenue: Product revenue $ 39,612 $ 13,750 $ 1,749 Service and other revenue 10,323 1,328 258 Total revenue 49,935 15,078 2,007 Cost of revenue: Cost of product revenue 57,035 27,164 7,806 Cost of service and other revenue 5,937 5,716 316 Total cost of revenue 62,972 32,880 8,122 Gross profit (13,037 ) (17,802 ) (6,115 ) Operating expenses: Research and development 28,850 23,327 22,916 Sales and marketing 45,068 20,259 11,279 General and administrative 30,512 8,919 6,253 Total operating expenses 104,430 52,505 40,448 Loss from operations (117,467 ) (70,307 ) (46,563 ) Interest income and other income, net 526 2,485 1,709 Interest expense (2,891 ) (4,257 ) (4,639 ) Change in fair value of redeemable convertible preferred stock warrant liability (93 ) 3,800 (262 ) Loss on extinguishment of term loan (1,567 ) — — Loss before provision for income taxes (121,492 ) (68,279 ) (49,755 ) Provision for income taxes — 20 25 Net loss $ (121,492 ) $ (68,299 ) $ (49,780 ) Adjustment to redemption value on redeemable convertible preferred stock (362 ) (134,760 ) (23,300 ) Gain on extinguishment of redeemable convertible preferred stock — 117,598 — Deemed dividend on settlement of accrued dividend 42,530 — — Net loss attributable to common stockholders, basic and diluted $ (79,324 ) $ (85,461 ) $ (73,080 ) Net loss per share attributable to common stockholders, basic and diluted $ (4.85 ) $ (99.58 ) $ (100.75 ) Weighted average shares used in computing net loss per share attributable to common stockholders, basic and diluted 16,358 858 725 The accompanying notes are an integral part of these financial statements 103 Outset Medical, Inc. Statements of Comprehensive Loss (in thousands) Years Ended December 31, 2020 2019 2018 Net loss $ (121,492 ) $ (68,299 ) $ (49,780 ) Other comprehensive income (loss): Unrealized gain (loss) on available-for-sale securities (21 ) 82 (37 ) Comprehensive loss $ (121,513 ) $ (68,217 ) $ (49,817 ) The accompanying notes are an integral part of these financial statements 104 Outset Medical, Inc. Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit) (in thousands) Redeemable Convertible Preferred Stock Common Stock Additional Paid-in Accumulated Other Comprehensive Accumulated Total Stockholders’ Equity Shares Amount Shares Amount Capital Income (Loss) Deficit (Deficit) Balance as of December 31, 2017 103,862 $ 234,418 678 $ 1 $ — $ (23 ) $ (215,915 ) $ (215,937 ) Issuance of Series D redeemable convertible preferred stock, net of issuance costs 43,352 134,567 — — — — — — Adjustment to redemption value on redeemable convertible preferred stock — 23,299 — — (1,103 ) — (22,196 ) (23,299 ) Stock option exercises — — 111 — 315 — — 315 Stock-based compensation expense — — — — 788 — — 788 Unrealized loss on available-for-sale securities — — — — — (37 ) — (37 ) Net loss — — — — — — (49,780 ) (49,780 ) Balance as of December 31, 2018 147,214 392,284 789 1 — (60 ) (287,891 ) (287,950 ) Common stock warrant exercises — — 9 — 76 — — 76 Adjustment to redemption value on redeemable convertible preferred stock — 134,760 — — (966 ) — (133,794 ) (134,760 ) Gain on extinguishment of redeemable convertible preferred stock — (117,417 ) — — — — 117,417 117,417 Costs to adjust the redemption value on redeemable convertible preferred stock — (181 ) — — — — — — Stock option exercises — — 124 — 364 — — 364 Stock-based compensation expense — — — — 883 — — 883 Unrealized gain on available-for-sale securities — — — — — 82 — 82 Net loss — — — — — — (68,299 ) (68,299 ) Balance as of December 31, 2019 147,214 409,446 922 1 357 22 (372,567 ) (372,187 ) Issuance of Series E redeemable convertible preferred stock, net of issuance costs 57,782 126,758 — — — — — — Issuance of common stock on settlement of accrued dividend — (41,763 ) 4,850 5 41,758 — — 41,763 Deemed dividend on settlement of accrued dividend — (42,530 ) — — 42,530 — — 42,530 Adjustment to redemption value on redeemable convertible preferred stock — 362 — — (362 ) — — (362 ) Issuance of common stock upon net exercises of Series B redeemable convertible preferred stock warrants — — 65 — — — — — Cash exercises of Series C redeemable convertible preferred stock warrants 1,655 4,288 — — — — — — Conversion of Series A redeemable convertible preferred stock warrants to common stock warrants — — — — 1,252 — — 1,252 Conversion of redeemable convertible preferred stock to common stock upon initial public offering (206,651 ) (456,561 ) 26,167 26 456,535 — — 456,561 Issuance of common stock upon initial public offering, net of issuance costs — — 10,294 10 254,795 — — 254,805 Reclassification of redeemable convertible preferred stock warrant liability to equity — — — — 3,126 — — 3,126 Issuance of common stock for settlement of RSUs — — 5 — — — — — Stock option exercises — — 419 1 1,194 — — 1,195 Stock-based compensation expense — — — — 21,439 — — 21,439 Unrealized loss on available-for-sale securities — — — — — (21 ) — (21 ) Net loss — — — — — — (121,492 ) (121,492 ) Balance as of December 31, 2020 — $ — 42,722 $ 43 $ 822,624 $ 1 $ (494,059 ) $ 328,609 The accompanying notes are an integral part of these financial statements 105 Outset Medical, Inc. Statements of Cash Flows (in thousands) Years Ended December 31, 2020 2019 2018 Cash flows from operating activities: Net loss $ (121,492 ) $ (68,299 ) $ (49,780 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 3,159 1,484 1,069 Non-cash lease expense 596 451 425 Non-cash interest expense 641 893 1,348 Amortization (accretion) of premium (discount) on investments, net 50 (983 ) (779 ) Provision for accounts receivable 12 59 — Provision for inventories 534 326 442 Loss on disposal of property and equipment 235 293 — Stock-based compensation expense 21,439 883 788 Change in fair value of redeemable convertible preferred stock warrant liability 93 (3,800 ) 262 Loss on extinguishment of term loan 1,567 — — Changes in operating assets and liabilities: Accounts receivable (2,566 ) (2,886 ) (552 ) Inventories (16,287 ) (5,020 ) (2,212 ) Prepaid expenses and other assets (6,245 ) (228 ) (270 ) Accounts payable 737 802 2,675 Accrued payroll and related benefits 9,889 3,119 647 Accrued expenses and other current liabilities 4,798 974 457 Accrued warranty liability 1,211 1,410 (443 ) Deferred revenue 2,754 735 (55 ) Accrued interest (217 ) — — Operating lease liabilities 77 (505 ) (464 ) Net cash used in operating activities (99,015 ) (70,292 ) (46,442 ) Cash flows from investing activities: Purchases of property and equipment (9,108 ) (3,293 ) (1,766 ) Purchases of short-term investments (32,884 ) (91,878 ) (132,310 ) Sales and maturities of short-term investments 45,908 169,468 65,300 Proceed from sales of property and equipment 31 — — Net cash provided by (used in) investing activities 3,947 74,297 (68,776 ) Cash flows from financing activities: Proceeds from issuance of common stock upon initial public offering, net of issuance costs paid 254,805 — 134,567 Proceeds from cash exercise of redeemable convertible preferred stock warrants 4,288 — — Proceeds from issuance of redeemable convertible preferred stock, net of issuance costs 126,758 — — Proceeds from stock option exercises 1,195 363 314 Proceeds from issuance of term loan, net of issuance costs 29,630 — — Repayment of term loan and extinguishment costs (30,985 ) — — Repayment of finance lease (9 ) (9 ) (9 ) Proceeds from exercise of common stock warrant — 76 — Payment of redeemable convertible preferred stock issuance costs — (181 ) — Net cash provided by financing activities 385,682 249 134,872 Net increase in cash, cash equivalents and restricted cash 290,614 4,254 19,654 Cash, cash equivalents and restricted cash as of beginning of period 37,669 33,415 13,761 Cash, cash equivalents and restricted cash as of end of period $ 328,283 $ 37,669 $ 33,415 Supplemental cash flow disclosures: Cash paid for income taxes $ 19 $ 35 $ 9 Cash paid for interest $ 3,270 $ 3,352 $ 3,292 Cash paid for amounts included in the measurement of operating lease liabilities $ — $ 505 $ 464 The accompanying notes are an integral part of these financial statements 106 Outset Medical, Inc. Statements of Cash Flows (in thousands) Years Ended December 31, 2020 2019 2018 Supplemental non-cash investing and financing activities: Capital expenditures included in accounts payable and accrued expenses $ 323 $ 867 $ 83 Transfer of inventories to property and equipment $ 2,131 $ 3,119 $ — Right-of-use assets obtained in exchange for lease liabilities $ 8,849 $ — $ — Deemed dividend on settlement of accrued dividend $ 42,530 $ — $ — Adjustment to redemption value on redeemable convertible preferred stock $ 362 $ 134,760 $ 23,299 Conversion of redeemable convertible preferred stock into common stock upon initial public offering $ 456,561 $ — $ — Reclassification of redeemable convertible preferred stock warrant liability for conversion of Series A redeemable preferred stock warrants into common stock warrants $ 1,252 $ — $ — Reclassification of redeemable convertible preferred stock warrant liability to additional paid-in capital $ 3,126 $ — $ — Issuance of common stock on settlement of accrued dividend $ 41,763 $ — $ — Gain on extinguishment of redeemable convertible preferred stock $ — $ 117,598 $ — The accompanying notes are an integral part of these financial statements 107 Notes to Financi al Statements 1. Description of Business Outset Medical, Inc. (the Company) was originally incorporated on May 5, 2003 in the state of Delaware under the name Home Dialysis Plus, Ltd. The name of the Company was changed to Outset Medical, Inc. on January 5, 2015. Outset Medical, Inc. is a medical technology company pioneering a first-of-its-kind technology to reduce the cost and complexity of dialysis. The Tablo Hemodialysis System, FDA cleared for use from the hospital to the home, represents a significant technological advancement designed to transform the dialysis experience for patients and operationally simplify it for providers. Tablo serves as a single enterprise solution that designed to be utilized across the continuum of care, allowing dialysis to be delivered anytime, anywhere and by anyone. The integration of water purification and on-demand dialysate production enables Tablo to serve as a dialysis clinic on wheels, with 2-way wireless data transmission and a proprietary data analytics platform powering a new holistic approach to dialysis care. The Company’s headquarters are located in San Jose, CA. The Company’s registration statement on Form S-1 related to its initial public offering (IPO) was declared effective by the Securities and Exchange Commission (SEC) on September 14, 2020, and the Company’s common stock began trading on the Nasdaq Global Select Market on September 15, 2020. Upon the completion of the IPO, the Company sold 10,294,000 shares of common stock (which included 1,343,000 shares that were sold pursuant to the full exercise of the underwriters’ option to purchase additional shares in connection with the IPO) at a price to the public of $27.00 per share. Including the full exercise of the underwriters’ option to purchase additional shares, the Company received aggregate net proceeds of approximately $254.8 million after deducting offering costs, underwriting discounts and commissions of approximately $23.1 million. During the year ended December 31, 2020, the Company recognized $18.5 million of cumulative stock-based compensation expense associated with stock options that vest upon the achievement of market and performance conditions satisfied on the effectiveness of the IPO (see Note 9 for further discussion). Reverse Stock Split In September 2020, the Company’s board of directors and shareholders approved a certificate of amendment to the amended and restated certificate of incorporation to effect a reverse split of shares of the Company’s common stock on a 7.9-for-one basis (the Reverse Stock Split) effective as of September 8, 2020. The number of authorized shares and the par values of the common stock and redeemable convertible preferred stock were not adjusted as a result of the Reverse Stock Split. In connection with the Reverse Stock Split, the conversion ratio for the Company’s outstanding redeemable convertible preferred stock was proportionately adjusted such that the common stock issuable upon conversion of such preferred stock was decreased in proportion to the Reverse Stock Split. All references to common stock and options to purchase common stock, share data, per share data and related information contained in these financial statements and related notes have been retrospectively adjusted to reflect the effect of the Reverse Stock Split for all periods presented. Liquidity Since inception, the Company has incurred net losses and negative cash flows from operations. During the years ended December 31, 2020, 2019 and 2018, the Company incurred net losses of $121.5 million, $68.3 million and $49.8 million, respectively. As of December 31, 2020, the Company had an accumulated deficit of $494.1 million. As of December 31, 2020, the Company had cash, cash equivalents and short-term investments of $314.9 million, which are available to fund future operations, and restricted cash of $33.3 million, for a total cash, cash equivalents, restricted cash and short-term investments balance of $348.2 million. Management expects to continue to incur significant expenses for the foreseeable future and to incur operating losses in the near term while the Company makes investments to support its anticipated growth. Management believes that the Company’s existing cash, cash equivalents and short-term investments, which include the proceeds from the IPO, and cash generated from revenues from its products, as well as services and other sales, will be sufficient to meet its anticipated needs for at least the next 12 months from the issuance date of the financial statements. 2. Summary of Significant Accounting Policies Basis of Presentation The financial statements have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP). All share amounts disclosed in the notes to the financial statements are rounded to the nearest thousand except for per share amounts. 108 Use of Estimates The preparation of the financial statements in conformity with U.S. GAAP requires management to make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses. These judgments, estimates and assumptions are used for, but not limited to, revenue recognition, allowance for doubtful accounts, inventory valuation and write-downs, warranty obligations, the fair value of common stock and redeemable convertible preferred stock, the fair value of stock options, the fair value of the redeemable convertible preferred stock warrant liability, valuation of investments, recoverability of the Company’s net deferred tax assets and the related valuation allowance, and certain accrued expenses. The Company evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors and adjusts those estimates and assumptions when facts and circumstances dictate. Actual results may differ from those estimates under different assumptions or conditions and the differences may be material. Segment The Company operates as a single operating segment. The Company’s chief operating decision maker, its Chief Executive Officer, reviews financial information on an aggregate basis for the purposes of allocating resources and evaluating financial performance. The Company’s primary operation is in the United States and it has derived its revenue from sales to customers in the United States. The Company has operated a manufacturing facility in Mexico since 2020. T he Company's long-lived tangible assets, as well as the Company's operating lease right-of-use assets recognized on the balance sheets, located in Mexico were $6.0 million as of December 31, 2020. Cash, Cash Equivalents and Restricted Cash As of December 31, 2020, the restricted cash balance of $33.3 million primarily relates to contractual obligations under the SVB Loan and Security Agreement (see Note 7) and collateral for the building leases in San Jose, CA and Tijuana, Mexico. The restricted cash balance of $0.7 million as of December 31, 2019 relates to collateral for the building leases. 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. As of December 31, 2020 and 2019, the Company’s cash equivalents were held in institutions in the United States and include deposits in a money market fund which were unrestricted as to withdrawal or use. The following table provides a reconciliation of cash, cash equivalents and restricted cash that sum to the total of the amounts shown in the statements of cash flows (in thousands): December 31, 2020 2019 Cash and cash equivalents $ 294,972 $ 36,926 Restricted cash 33,311 743 Total cash, cash equivalents and restricted cash $ 328,283 $ 37,669 Short-Term Investments Short-term investments have been classified as available-for-sale and are carried at estimated fair value as determined based upon quoted market prices or pricing models for similar securities. The Company determines the appropriate classification of its investments in debt securities at the time of purchase. Available-for-sale securities with original maturities beyond three months at the date of purchase are classified as current based on their availability for use in current operations. The Company’s investment securities are recorded at fair value based on the fair value hierarchy. Money market funds and U.S. Treasury securities are classified within Level 1 of the fair value hierarchy. Commercial paper, corporate debt and asset-backed securities are within Level 2 of the fair value hierarchy. Unrealized gains and losses, deemed temporary in nature, are reported as a separate component of accumulated other comprehensive income (loss). A decline in the fair value of any security below cost that is deemed other than temporary results in a charge to earnings and the corresponding establishment of a new cost basis for the security. Premiums (discounts) are amortized (accreted) over the life of the related security as an adjustment to yield using the straight-line interest method. Dividend and interest income are recognized when earned. Realized gains and losses are included in earnings and are derived using the specific identification method for determining the cost of securities sold. 109 Concentration of Credit Risk Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash and cash equivalents, restricted cash, short-term investments and accounts receivable. Substantially all the Company’s cash and cash equivalents, restricted cash and investments are held at one financial institution in the United States that management believes is of high credit quality. Such deposits may, at times, exceed federally insured limits or may not be covered by deposit insurance at all. The Company has not experienced any credit losses on its cash and cash equivalents, restricted cash or short-term investments through December 31, 2020. For the year ended December 31, 2020, three customers accounted for 22%, 19% and 16% of revenues, respectively. One customer accounted for 11% of revenues for the year ended December 31, 2019. Accounts receivable are unsecured and the Company does not require collateral; however, the Company does assess the collectability of accounts receivable based on a number of factors, including past transaction history with, and the creditworthiness of, the customer. Accordingly, the Company is exposed to credit risk associated with accounts receivable. Two customers accounted for 22% and 16% of accounts receivable, respectively, as of December 31, 2020. Four customers accounted for 22%, 13%, 11% and 10% of accounts receivable, respectively, as of December 31, 2019. To reduce risk, the Company closely monitors the amounts due from its customers and assesses the financial strength of its customers through a variety of methods that include, but are not limited to, engaging directly with customer operations and leadership personnel, visiting customer locations to observe operating activities, and assessing customer longevity and reputation in the marketplace. As a result, the Company believes that its accounts receivable credit risk exposure is limited. Fair Value of Financial Instruments The Company determines the fair value of an asset or liability based on the assumptions that market participants would use in pricing the asset or liability in an orderly transaction between market participants at the measurement date. The identification of market participant assumptions provides a basis for determining what inputs are to be used for pricing each asset or liability. A fair value hierarchy has been established which gives precedence to fair value measurements calculated using observable inputs over those using unobservable inputs. This hierarchy prioritized the inputs into three broad levels as follows: Level 1: Quoted prices in active markets for identical instruments; Level 2: Other significant observable inputs (including quoted prices in active markets for similar instruments); and Level 3: Significant unobservable inputs (including assumptions in determining the fair value of certain investments). The Company’s cash and cash equivalents, restricted cash, short-term investments, accounts receivable, accounts payable and accrued liabilities approximate their fair value due to their short maturities. Management believes that its term loan bears interest at the prevailing market rates for instruments with similar characteristics; accordingly, the carrying value of this instrument approximates its fair value. Money market funds are highly liquid investments and are actively traded. The pricing information on the Company’s money market funds are readily available and can be independently validated as of the measurement date. This approach results in the classification of these securities as Level 1 of the fair value hierarchy. The Company has issued redeemable convertible preferred stock warrants and estimated the fair value of these warrants using the Black-Scholes option pricing model, which is considered to be a Level 3 fair value measurement. The assumptions were based on the individual characteristics of the warrants on the valuation date, as well as assumptions for future financings, expected volatility, expected life, yield, and risk-free interest rate. Effective on the date of the IPO, the redeemable convertible preferred stock warrants were considered to be indexed to the Company’s stock, and accordingly, the fair value of redeemable convertible preferred stock warrant liability was remeasured immediately prior to the IPO (See Note 4). Accounts Receivable, Net Accounts receivable are recorded at invoice value, net of any allowance for doubtful accounts. Estimates of the allowance for doubtful accounts are determined based on existing contractual payment terms, historical payment patterns of customers and individual customer circumstances. The allowance for doubtful accounts was not significant as of December 31, 2020 and 2019, respectively. 110 Inventories Inventories are stated at the lower of cost or net realizable value. Cost is determined using the standard cost method, which approximates actual costs as determined on a first-in, first-out basis. The carrying value of inventories is reduced for any difference between cost and net realizable value of inventories that is determined to be obsolete or unmarketable, based upon assumptions about future demand and market conditions. The Company also reviews its inventory value to determine if it reflects the lower of cost or net realizable value based on factors such as inventory items sold at negative gross margins and purchase commitments. Adjustments to the value of inventory establish a new cost basis and are considered permanent even if circumstances later suggest that increased carrying amounts are recoverable. If demand is higher than expected, the Company may sell inventory that had previously been written down. Costs associated with the write-down of inventory are recorded to cost of revenue on the Company’s statements of operations. Property and Equipment, Net Property and equipment, net is stated at cost, net of accumulated depreciation. Depreciation is generally computed using the straight-line method based on the estimated useful lives of the assets, which is generally two to five years. Certain Tablo consoles under operating leases are depreciated using the accelerated method. Leasehold improvements are amortized using the straight-line method over the shorter of the assets estimated useful lives or the remaining term of the lease. Maintenance and repairs are charged to expense as incurred. Significant improvements that substantially enhance the useful life of an asset are capitalized and depreciated. When assets are retired or disposed of, the cost together with related accumulated depreciation is removed from the balance sheet and any resulting gain or loss is reflected in the Company’s statements of operations in the period realized. Impairment for Long-Lived Assets Long-lived assets, such as property and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or asset group to be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by that asset or asset group to its carrying value. If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary. There were no such impairment losses as of December 31, 2020 and 2019. Leases The Company determines if an arrangement is a lease at inception by assessing whether the arrangement contains an identified asset and whether it has the right to control the identified asset. Right-of-use (ROU) assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Lease liabilities are recognized at the lease commencement date based on the present value of future lease payments over the lease term. ROU assets are based on the measurement of the lease liability and also include any lease payments made prior to or on lease commencement and exclude lease incentives and initial direct costs incurred, as applicable. As the implicit rate in the Company’s leases is generally unknown, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The lease terms may include options to extend or terminate the lease when the Company is reasonably certain it will exercise such options. Lease costs for the Company’s operating leases are recognized on a straight-line basis over the reasonably assured lease term. Variable lease payments include lease operating expenses. The Company has elected to not separate lease and non-lease components for any leases within its existing classes of assets and, as a result, accounts for any lease and non-lease components as a single lease component. The Company has also elected to not apply the recognition requirement to any leases within its existing classes of assets with a term of 12 months or less and does not include an option to purchase the underlying asset that the Company is reasonably certain to exercise. Accrued Warranty Liability The Company generally provides a one-year warranty for defective parts and workmanship on its Tablo consoles, commencing upon the transfer of title and risk of loss to the customer. The Company accrues the estimated cost of product warranties when it invoices the customer, based on historical experience and expected results. Should actual product failure rates and material usage costs differ from these estimates, revisions to the estimated warranty liability would be required. The Company periodically assesses the adequacy of its recorded product warranty liabilities and adjusts the balance as required. Warranty expense is recorded as a component of cost of product revenue in the statements of operations. 111 Contract Liabilities - Deferred Revenue The timing of revenue recognition may differ from the timing of invoicing to customers. The Company records deferred revenue when revenue is recognized subsequent to invoicing. For multi-year service agreements, the Company generally invoices customers annually at the beginning of each annual coverage period. Deferred revenue that will be recognized during the 12 months following the balance sheet date is recorded as the current portion of deferred revenue and the remaining portion is recorded as noncurrent. Redeemable Convertible Preferred Stock Warrant Liability The Company has accounted for its freestanding warrants to purchase shares of the Company’s redeemable convertible preferred stock as liabilities at fair value upon issuance primarily because the shares underlying the warrants contained contingent redemption features outside of the Company’s control. The warrants were subject to re-measurement at each balance sheet date and any change in fair value was recognized in the statements of operations as the change in fair value of redeemable convertible preferred stock warrant liability. The carrying value of the warrants would continue to be adjusted until these instruments are exercised, expire or convert into warrants to purchase shares of the Company’s common stock upon the completion of a liquidation event, including the completion of the IPO, which occurred on September 15, 2020. Upon the closing of the IPO, the liabilities were reclassified to additional paid-in capital, a component of Stockholders’ equity (deficit). The Company estimated the fair value of these liabilities using the Black-Scholes option pricing model and assumptions that were based on the individual characteristics of the warrants on the valuation date, as well as assumptions for future financings, expected volatility, expected life, yield, and risk-free interest rate. Defined Contribution Plan The Company has a defined contribution retirement savings plan under Section 401(k) of the Internal Revenue Code. This plan allows eligible employees to defer a portion of their annual compensation on a pre-tax basis. The Company is authorized to make matching contributions but has not made such contributions for the years ended December 31, 2020, 2019 and 2018. Revenue The Company’s revenue is generated primarily from the sale of its products and services. Product revenue consists primarily of sales of the Tablo console and related consumables, including Tablo cartridges, used in treatment delivery. Service and other revenue consists primarily of revenue generated from consoles service contracts and other revenue from shipping and handling charged to customers. The Company considers each product and each service contract to be a distinct performance obligation. Revenue is recognized when a performance obligation is satisfied, which occurs when control of the promised products or services is transferred to the customer in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. Revenue from product sales is recognized at a point in time when management has determined that control has transferred to the customer, which is generally when legal title has transferred to the customer. Revenue from service contracts is recognized as the output of the service is transferred to the customer over time, typically evenly over the contract term. Revenue is recognized net of allowances for returns and any taxes collected from customers, which are subsequently remitted to governmental authorities. The Company’s contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. Judgment is also required to determine the stand-alone selling price (SSP) for each distinct performance obligation. The Company uses an observable price to estimate SSP for items that are sold separately, including customer support agreements. In instances where SSP is not directly observable, such as when the Company does not sell the product or service separately, the Company determines the SSP using information that may include market conditions and other observable inputs. The Company may offer additional goods or services to customers at the inception of customer contracts at prices not at SSP. This is considered a material right and an additional performance obligation of the contract. SSP is assigned based on the estimated value of the material right. Costs associated with product sales include commissions. The Company applies the practical expedient to expense the commissions as incurred as the expected amortization period is one year or less. Commissions are recorded as sales and marketing expenses in the statements of operations. 112 Operating Lease Arrangements The Company enters into operating lease arrangements that contain both lease and non-lease elements. The lease element includes Tablo consoles, while non-lease elements include consumables, services and training. Revenue related to such arrangements is allocated to lease and non-lease elements based on their relative SSP. Revenue for the lease element, net of any taxes collected from customers, is recognized on a straight-line basis as product revenue over the lease term, generally three months to one year, in the statements of operations. The costs of the leased Tablo consoles are included in property and equipment, net in the balance sheets and amortized to cost of product revenue. Shipping and Handling Costs Shipping and handling charged to customers are recorded as revenue. Shipping and handling costs are expensed as incurred and are included in sales and marketing expenses. Stock-Based Compensation Expense Stock-based compensation expense relates to stock options with a service condition, stock options with performance and market-based vesting conditions, stock purchase rights under our Employee Stock Purchase Plan (ESPP), restricted stock units (RSUs) and performance stock units (PSUs). Stock-based compensation expense for the Company’s stock-based awards is based on their grant date fair value. Service-based options initially granted to an optionee generally vest at a rate of 25% on the first anniversary of the original vesting date, with the balance vesting monthly over the remaining three years. Any subsequent follow-on options granted to the optionee generally vest monthly over four years. The fair value of stock options with a service condition and stock purchase rights under the ESPP on the grant date is estimated using the Black-Scholes option-pricing model. The fair value of these awards is recognized as compensation expense on a straight-line basis over the requisite service period in which the awards are expected to vest and forfeitures are recognized as they occur. The Black-Scholes model considers several variables and assumptions in estimating the fair value of service-based stock options and stock purchase rights under the ESPP. These variables include the per share fair value of the underlying common stock, exercise price, expected term, risk-free interest rate, expected annual dividend yield and expected stock price volatility over the expected term. For all service-based stock options granted, the Company calculates the expected term using the simplified method for “plain vanilla” stock option awards. The Company had no publicly available stock price information prior to the IPO and limited available stock price information subsequent to the IPO; therefore, the Company has used the historical volatility of the stock price of similar publicly traded peer companies. The risk-free interest rate is based on the yield available on U.S. Treasury zero-coupon issues similar in duration to the expected term of the equity-settled award. For stock options with performance and market-based vesting conditions, stock-based compensation expense is recognized when it is considered probably that the performance vesting condition will be satisfied. Prior to the IPO in September 2020, the Company had not recognized any stock-based compensation expense as the satisfaction of the performance condition was not considered probable. Upon the closing of the IPO, the Company recorded a cumulative stock-based compensation expense using the accelerated attribution method as the performance condition was satisfied. Stock-based compensation expense related to these options is not reversed if the achievement of the market condition does not occur. The fair value of these stock options is estimated using the Monte Carlo approach. RSUs initially granted to an optionee generally vest at a rate of 25% on the first anniversary of the original vesting date, with the balance vesting quarterly over the remaining three years. The fair value of RSUs and PSUs is based on the market price of the Company’s common stock on the date of grant. The determination of the stock-based compensation expense related to PSUs to be recognized in the Company’s statements of operations requires the use of certain estimates and assumptions. At each reported period, the Company reassesses the probability of the achievement of corporate performance goals to estimate the number of shares to be released. Any increase or decrease in stock-based compensation expense resulting from an adjustment in the estimated shares to be released is treated as accumulative catch-up in the period of adjustment. If any of the assumptions or estimates used change significantly, stock-based compensation expense may differ materially from what the Company has recorded in the current period. 113 Research and Development The Company expenses all research and development costs as incurred. These expenses include the costs of proprietary research and development efforts, quality engineering, clinical studies and trials and regulatory affairs. Costs include personnel and related costs, supplies, testing, contract and other outside service fees, depreciation expense and allocated costs including facilities and information technology. Advertising Costs Advertising costs are expensed as incurred. The advertising costs for years ended December 31, 2020, 2019 and 2018 were not significant. Income Taxes The Company accounts for income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax reporting bases of assets and liabilities and remeasured using enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. Realization of deferred tax assets is dependent upon future earnings, the timing and amount of which are uncertain. The Company utilizes a two-step approach to recognize and measure uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained upon tax authority examination, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement. The Company includes any penalties and interest expense related to income taxes as a component of other expense, net, as necessary. Net Loss per Share Attributable to Common Stockholders Basic net loss per share attributable to common stockholders is calculated by dividing the net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding for the period, without consideration for potential dilutive securities. Diluted net loss per share is computed by dividing the net loss by the weighted-average number of common shares and common share equivalents of potentially dilutive securities outstanding for the period. For purposes of the diluted net loss per share calculation, redeemable convertible preferred stock, awards under the Company’s equity compensation plan and warrants are considered to be potentially dilutive securities. For periods in which the Company reports net losses, basic net loss per share attributable to common stockholders is the same as diluted net loss per share attributable to common stockholders because the effects of potentially dilutive securities are antidilutive. Recently Adopted Accounting Pronouncements In August 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement (ASU 2018-13). The amendments on changes in unrealized gains and losses recognized in other comprehensive income categorized within Level 3, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. The Company adopted ASU 2018-13 as of January 1, 2020, which did not have a material impact on its financial statements. Recently Issued Accounting Pronouncements Not Yet Adopted In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments (ASU 2016-13), which requires an entity to utilize a new impairment model known as the current expected credit loss (CECL) model to estimate its lifetime “expected credit loss” and record an allowance that, when deducted from the amortized cost basis of the financial assets and certain other instruments, including but not limited to available-for-sale debt securities. Credit losses relating to available-for-sale debt securities will be recorded through an allowance for credit losses rather than as a direct write-down to the security. ASU 2016-13 requires a cumulative effect adjustment to the balance sheet as of the beginning 114 of the first reporting period in which the guidance is effective. In November 2019, the FASB issued ASU 2019-10, Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815) and Leases (Topic 842): Effective Dates , which defers the effective date of ASU 2016-13 to fiscal years beginning after December 15, 2022 for all entities except SEC reporting companies that are not smaller reporting companies. ASU 2016-13 will be effective for the Company beginning January 1, 2023. The Company is currently evaluating the impact of the adoption of ASU 2016-13 on its financial statements. In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740) , which simplifies the accounting for income taxes, primarily by eliminating certain exceptions to ASC 740. This standard is effective for fiscal periods beginning after December 15, 2021. The Company is currently evaluating this standard and the impact it may have on its financial statements. 3. Revenue from Contracts with Customers Disaggregation of Revenue Revenue by source consisted of the following (in thousands): Years Ended December 31, 2020 2019 2018 Consoles $ 32,871 $ 12,187 $ 1,226 Consumables 6,742 1,563 523 Total product revenue 39,612 13,750 1,749 Service and other revenue 10,323 1,328 258 Total revenue $ 49,935 $ 15,078 $ 2,007 For the years ended December 31, 2020 and 2019, $3.1 million and $0.5 million of consoles revenue were from console operating lease arrangements. There was no such lease revenue for the year ended December 31, 2018. The maturity of the Company’s operating leases as of December 31, 2020 was as follows (in thousands): Years Ending December 31: 2021 $ 4,431 2022 1,699 Total minimum lease payments 6,130 Performance Obligations As of December 31, 2020, the aggregate amount of the transaction price allocated to the remaining performance obligations related to customer service contracts that are unsatisfied or partially unsatisfied was $3.8 million, which is recorded as deferred revenue on the Company’s balance sheet. Of that amount, $3.2 million will be recognized as revenue during the year ended December 31, 2021 and approximately $0.6 million thereafter. Contract Liabilities The contract liabilities consist of deferred revenue which represents payments received in advance of revenue recognition related to console service agreements and for prepayments for products or services yet to be delivered. Revenue under these agreements is recognized over the related service period. The following table summarizes the Company’s contract liabilities (in thousands): December 31, 2020 2019 Deferred revenue, current $ 3,201 $ 883 Deferred revenue, noncurrent 570 134 Total deferred revenue $ 3,771 $ 1,017 115 During the year ended December 31, 2020, 2019 and 2018, the Company recognized $0.9 million, $0.3 million, and $0.3 million of revenue, respectively, that was included in the deferred revenue balance at the beginning of the period. 4. Fair Value Measurements The following tables summarize the Company’s financial assets and liabilities measured at fair value on a recurring basis by level within the fair value hierarchy (in thousands): December 31, 2020 Valuation Hierarchy Amortized Costs Gross Unrealized Holding Gains Gross Unrealized Holding Losses Aggregate Fair Value Assets: Cash equivalents: Money market funds Level 1 $ 56,056 $ — $ — $ 56,056 Short-term investments: U.S. Treasury securities Level 1 14,999 1 — 15,000 Corporate debt Level 2 4,898 — — 4,898 Total assets $ 75,953 $ 1 $ — $ 75,954 December 31, 2019 Valuation Hierarchy Amortized Costs Gross Unrealized Holding Gains Gross Unrealized Holding Losses Aggregate Fair Value Assets: Cash equivalents: Money market funds Level 1 $ 29,761 $ — $ — $ 29,761 Commercial paper Level 2 2,299 — — 2,299 Short-term investments: Commercial paper Level 2 10,972 — — 10,972 Corporate debt Level 2 17,357 19 — 17,376 Asset-backed securities Level 2 4,801 3 — 4,804 Total assets $ 65,190 $ 22 $ — $ 65,212 Liabilities: Redeemable convertible preferred stock warrant liability Level 3 $ 4,285 $ — $ — $ 4,285 Total liabilities $ 4,285 $ — $ — $ 4,285 The Company’s Level 2 securities 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 securities, issuer credit spreads, benchmark securities, prepayment/default projections based on historical data and other observable inputs. The Company validates the prices provided by its third-party pricing services by understanding the models used, obtaining market values from other pricing sources and confirming those securities traded in active markets. As of December 31, 2020, the remaining contractual maturities for available-for-sale securities were less than one year. Impairment assessments are made at the individual security level each reporting period. When the fair value of an available-for-sale security is less than its cost at the balance sheet date, a determination is made as to whether the impairment is other-than-temporary and, if it is other-than-temporary, an impairment loss is recognized in earnings equal to the difference between the investment’s amortized cost and fair value at such date. As of December 31, 2020 and December 31, 2019, none of the Company’s available-for-sale securities were in an unrealized loss position. 116 Redeemable Convertible Preferred Stock Warrant Liability The valuation of the Company’s redeemable convertible preferred stock warrant liability contained unobservable inputs that reflected the Company’s own assumptions for which there was little, if any, market activity at the measurement date. Accordingly, the Company’s redeemable convertible preferred stock warrant liability was measured at fair value on a recurring basis using unobservable inputs and were classified as Level 3 inputs, and any change in fair value of the redeemable convertible preferred stock warrant liability was recognized in the statements of operations. Effective on the date of the IPO, the redeemable convertible preferred stock warrants were considered to be indexed to the Company’s stock and now meet the criteria to be classified in equity. The Company remeasured the warrants immediately prior to the IPO. The fair value of the Series A redeemable convertible preferred stock warrants which were converted into common stock warrants was determined using the Black-Scholes option-pricing model and deemed a Level 3 fair value measurement. The fair value of Series B and C redeemable convertible preferred stock warrants which were exercised was determined using the intrinsic method based on the IPO price of $27.00 per share and deemed a Level 2 fair value measurement. Subsequently, the entire redeemable convertible preferred stock warrants liability was reclassified to additional paid-in capital. The fair value of the warrants, prior to the IPO, was determined using the Black-Scholes option pricing model and the following assumptions: Years Ended December 31, 2020 2019 2018 Fair value of shares of redeemable convertible preferred stock $1.39 – $27.00 $1.36 – $2.40 $2.05 – $3.25 Expected term (in years) 3.24 – 7.25 3.74 – 7.50 4.74 – 8.50 Expected volatility 53.7% – 57.2% 48.1% – 50.0% 48.8% – 50.1% Risk-free interest rate 0.18% – 1.83% 1.76% – 1.83% 2.51% – 2.59% Dividend yield 0% 0% 0% The change in fair value of the redeemable convertible preferred stock warrant liability was as follows (in thousands): Years Ended December 31, 2020 2019 2018 Beginning balance $ 4,285 $ 8,085 $ 7,823 Change in fair value 93 (3,800 ) 262 Conversion of Series A redeemable convertible preferred stock warrants to common stock warrants upon the closing of the IPO (1,252 ) — — Reclassified to additional paid-in capital (3,126 ) — — Ending balance $ — $ 4,285 $ 8,085 5. Balance Sheet Components Inventories Inventories consist of the following (in thousands): December 31, 2020 2019 Raw materials $ 7,989 $ 1,143 Work in process 6,200 842 Finished goods 4,195 2,611 Total inventories $ 18,384 $ 4,596 117 Property and Equipment, net Property and equipment, net consisted of the following (in thousands): December 31, 2020 2019 Tablos under operating leases 5,158 3,120 Computers and software 3,131 1,768 Furniture and fixtures 1,399 648 Machinery and equipment 4,496 2,395 Leasehold improvements 4,459 174 Construction in progress 1,343 2,460 Total property and equipment 19,986 10,565 Less: accumulated depreciation and amortization (4,988 ) (2,670 ) Property and equipment, net 14,998 7,895 Total depreciation and amortization expense for the years ended December 31, 2020, 2019 and 2018 was $3.2 million, $1.5 million and $1.1 million, respectively. Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities consisted of the following (in thousands): December 31, 2020 2019 Accrued inventory $ 3,576 $ 798 Accrued research and development expenses 175 421 Accrued professional services 2,187 553 Others 1,965 1,137 Total accrued expenses and other current liabilities $ 7,903 $ 2,909 Accrued Warranty Liability The change in accrued warranty liability is presented in the following table (in thousands): December 31, 2020 2019 Balance at the beginning of the period $ 1,702 $ 293 Additions charge to cost of product revenue 4,858 2,578 Consumption (3,647 ) (1,169 ) Balance at the end of the period $ 2,913 $ 1,702 6. Commitments and Contingencies Leases In September 2019, the Company entered into an operating lease agreement for its new facility and office space in San Jose, CA that commenced in April 2020 and expires in March 2027. This operating lease contains a free rent period and an escalation clause. The landlord provided the Company with a tenant improvement allowance of up to $2.0 million. The Company issued an irrevocable standby letter of credit in the amount of $0.3 million in lieu of a cash security deposit. The letter of credit is fully secured by cash held at the bank in a restricted account. In May 2020, the Company entered into an operating lease agreement for its new manufacturing facility in Tijuana, Mexico that commenced in May 2020 and will expire in August 2026. The Company took initial possession of the building with 48,437 square feet in May 2020 and will take possession of the second space with 38,750 square feet in June 2021. This operating lease contains a free rent period and an escalation clause. The Company issued an irrevocable standby letter of credit in the amount of $3.0 million, in lieu of a cash security deposit. The letter of credit is fully secured by cash held at the bank in a restricted account. 118 Both leases include renewal options at the election of the Company to renew or extend the lease . The Company evaluates renewal options at lease inception and on an ongoing basis and includes renewal options that it is reasonably certain to exercise in its expected lease terms when classifying leases and measuring lease liabilities . The Company also had a finance lease for office equipment that expired in 2020. The following table presents the Company’s ROU assets and lease liabilities (in thousands): December 31, Lease Classification Balance Sheet Classification 2020 2019 Assets: Operating Operating lease right-of-use assets $ 8,253 $ — Finance Property and equipment ― 6 Total ROU assets $ 8,253 $ 6 Liabilities: Current: Operating Operating lease liabilities, current $ 882 $ — Finance Accrued expense and other current liabilities ― 9 Noncurrent: Operating Operating lease liabilities, noncurrent 8,044 ― Total lease liabilities $ 8,926 $ 9 The components of lease costs were as follows (in thousands): Years ended December 31, 2020 2019 2018 Finance lease costs: Amortization of right-of-use assets $ 6 $ 13 $ 10 Interest on lease liabilities — 1 1 Operating lease costs 1,070 — 505 Variable lease costs 233 100 97 Short-term lease costs 371 520 — Total lease costs $ 1,680 $ 634 $ 613 The weighted-average remaining lease term and discount rate were as follows: December 31, 2020 2019 Operating leases: Weighted-average remaining lease term 6.3 years ― Weighted-average discount rate 8.7 % ― Finance lease: Weighted-average remaining lease term ― 0.5 years Weighted-average discount rate ― 10.6 % 119 The maturity of the Company’s operating lease liabilities as of December 31, 2020 were as follows (in thousands): Years Ending December 31: 2021 $ 1,619 2022 1,796 2023 1,856 2024 1,911 2025 1,969 Thereafter 2,523 Total lease payments $ 11,674 Less: imputed interest (2,748 ) Present value of operating lease liabilities $ 8,926 Operating lease liabilities, current $ 882 Operating lease liabilities, noncurrent $ 8,044 Purchase Commitments As of December 31, 2020, the Company had obligations under non-cancellable purchase commitments totaling $46.5 million, all of which will require payment within the next 12 months. Litigation From time to time, the Company may be involved in legal proceedings or investigations our reputation, business and financial condition and divert the attention of our management from the operation of our business. The Company is not presently a party to any legal proceedings that, if determined adversely to us, would individually or taken together have a material adverse effect on our business, results of operations, financial condition or cash flows. Indemnifications In the ordinary course of business, the Company often includes standard indemnification provisions its arrangements with its partners, customer and suppliers. Pursuant to these provisions, the Company may be obligated to indemnify such parties for losses or claims suffered or incurred in connection with its service, breach of representations or covenants, intellectual property infringement or other claims made against such parties. These provisions may limit the time within which an indemnification claim can be made. It is not possible to determine the maximum potential amount under these indemnification obligations due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement. To date, the Company has not incurred any material costs as a result of such indemnification obligations and has not accrued any liabilities related to such obligations in these financial statements. 7. Term Loans Term loans consist of the following (in thousands): December 31, 2020 2019 Principal of term loan $ 30,000 $ 30,000 Unamortized debt discount (326 ) (939 ) Total term loan 29,674 29,061 Less: term loan, current — (7,500 ) Term loan, noncurrent $ 29,674 $ 21,561 Perceptive Term Loans On June 30, 2017, the Company entered into a senior, secured, delayed-draw term loan facility (the Perceptive Term Loan Agreement) with Perceptive Credit Holdings, LP, as the administrative agent and the collateral agent, for various related Perceptive group companies to borrow up to $40.0 million (the Perceptive Term Loans). The Perceptive Term Loans bore interest at a rate of 8.55%, plus the greater of the three-month London Inter-bank Offered Rate (LIBOR) and 2.00%. 120 In July 2020, the Company used the SVB Term Loan (see below) to repay in full all amounts due under the Perceptive Term Loan and cash on hand to pay $ 1.2 million in early prepayment, accrued interest and exit fees. The repayment of the Perceptive Term Loan was accounted for as a debt extinguishment, which resulted in a loss on extinguishment of $ 1.6 million recorded in the statements of operations for the year ended December 31, 2020. SVB Loan and Security Agreement On July 2, 2020, the Company entered into a senior secured term loan facility with Silicon Valley Bank (SVB) (the SVB Loan and Security Agreement), which provides for a $30.0 million term loan (the SVB Term Loan). The SVB Term Loan matures on November 1, 2025. Payments under the SVB Term Loan are for interest only through May 2023, and then 30 monthly principal and interest payments from June 2023 until maturity. The SVB Term Loan bears interest at the greater of (A) 0.5% above the Prime Rate as reported in the Wall Street Journal and (B) 3.75% (3.75% as of December 31, 2020). The Company is obligated to maintain a restricted cash balance greater or equal to the outstanding principal balance of $30.0 million of the SVB Term Loan. There is also a final payment fee equal to 6.75% of the original principal amount of the SVB Term Loan, or approximately $2.0 million, due at maturity (or any earlier date of optional pre-payment or acceleration of principal due to an event of default). Such fee is being accreted to interest expense using the effective interest method with the offset recorded in noncurrent accrued interest. The Company may, at its option, prepay the SVB Term Loan in full, subject to an additional prepayment fee ranging between 1% and 3% of the outstanding principal amount of the SVB Term Loan. In the event of default or change in control, all unpaid principal and all accrued and unpaid interest amounts (if any) become immediately due and payable including the prepayment fee. Events of default include, but are not limited to, a payment default, a material adverse change, and insolvency. The SVB Term Loan is secured by substantially all of the Company’s assets, including all of the capital stock held by the Company, if any (subject to a 65% limitation on pledges of capital stock of foreign subsidiaries), subject to certain exceptions. The SVB Loan and Security Agreement contains customary representations, warranties, affirmative covenants and also contains certain restrictive covenants. Debt issuance costs paid directly to SVB and other debt issuance costs amounting to $0.4 million were accounted for as discounts on the SVB Term Loan. These debt discounts, along with the final payment fee, are being amortized over the term of the SVB Term Loan using the effective interest rate method. As of December 31, 2020, the unamortized debt discount was $0.3 million, which is recorded as a direct deduction from the SVB Term Loan on the balance sheets. Aggregate annual payments due on the SVB Term Loan as of December 31, 2020 were as follows (in thousands): Years Ending December 31: 2021 $ 1,141 2022 1,141 2023 8,073 2024 12,667 2025 13,233 Total future payments 36,255 Less: amount representing interest (4,230 ) Less: final payment (2,025 ) Total term loan 30,000 Less: unamortized debt discount (326 ) Total term loan, net of debt discount 29,674 8. Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit) Redeemable Convertible Preferred Stock Immediately prior to the closing of the Company’s IPO, all of the outstanding shares of redeemable convertible preferred stock converted into 25,958,000 shares of common stock, excluding the 274,000 shares of common stock that were issued on the exercise of outstanding redeemable convertible preferred stock warrants. 121 Preferred Stock Upon the closing of the IPO, the Company’s amended and restated certificate of incorporation authorized 5,000,000 shares of undesignated preferred stock, $0.001 par value per share, the rights, preferences and privileges of which may be designated from time to time by the Company’s board of directors. As of December 31, 2020, no shares of the preferred stock were issued and outstanding. Redeemable Convertible Preferred Stock Warrants and Common Stock Warrants On the closing of the IPO, the aggregate outstanding Series A redeemable convertible preferred stock warrants of 500,000 shares converted into 63,000 common stock warrants with an exercise price of $7.96 per share, which resulted in the reclassification of the convertible preferred stock warrant liability of $1.2 million to additional paid-in capital. The common stock warrants expire in September 2025. On the closing of the IPO, the aggregate outstanding Series B redeemable convertible preferred stock warrants of 2,176,000 shares were net exercised with an exercise price of $2.2674 per share, which resulted in the issuance of 65,000 shares of the Company’s common stock based on the IPO price of $27.00 per share. In addition, the aggregate outstanding Series C redeemable convertible preferred stock warrants of 1,655,000 shares were cash exercised at an exercise price of $2.5915 per share, which resulted in the issuance of 209,000 shares of the Company’s common stock with total aggregate cash proceeds of $4.3 million. In 2009, the Company issued a warrant to purchase 8,860 shares of common stock with an exercise price of $8.61 per share and a fair value of $30,000 in connection with a product development agreement. The warrant was fully vested and exercised during the first quarter of 2019. Common Stock The Company has reserved shares of common stock, on an as-if converted basis, for issuance as of December 31, 2020 as follows (in thousands): Shares Warrants to purchase common stock 63 Stock options outstanding 4,763 Restricted stock units outstanding 44 Performance stock units outstanding 25 Shares available for future purchase under ESPP 687 Shares available for future grant under 2020 Plan 3,537 9,118 9. Equity Incentive Plan In 2019, the Company terminated the 2010 Stock Incentive Plan (the 2010 Plan) and adopted the 2019 Equity Incentive Plan (the 2019 Plan, and together with 2010 Plan, the Prior Plans) for the purpose of providing incentive and non-statutory stock options to employees, directors and certain non-employees. In September 2020, the Company adopted the 2020 Equity Incentive Plan (the 2020 Plan, and together with the Prior Plans, the Plans), which became effective in connection with the IPO. As a result, the Company may not grant any additional awards under the Prior Plans. The Prior Plans will continue to govern outstanding equity awards previously granted thereunder. The Company has initially reserved 3,665,000 shares of common stock for the issuance of awards under the 2020 Plan. In addition, the number of shares of common stock available under the 2020 Plan will automatically increase on the first day of each fiscal year, commencing January 2021, and continuing until (and including) the fiscal year ending December 31, 2030, with such annual increase equal to an amount equal to the lesser of (i) 4% of the number of shares of common stock issued and outstanding on December 31 of the immediately preceding calendar year, and (ii) an amount determined by the Company’s board of directors. Options under the 2020 Plan have a contractual term of 10 years. The exercise price of an option shall not be less than 100% of the fair market value of the shares on the date of grant. 122 Stock Option s A summary of the Company’s stock option activity under the Plans is set forth below (in thousands, except exercise price and remaining contractual life data): Outstanding Options Weighted- Average Exercise Price Weighted- Average Remaining Terms (Years) Aggregate Intrinsic Value Balance as of December 31, 2019 3,757 $ 3.95 7.81 $ 8,618 Granted 1,542 $ 11.31 Exercised (419 ) $ 2.86 Forfeited and expired (117 ) $ 7.28 Balance as of December 31, 2020 4,763 $ 6.35 7.71 $ 240,504 Exercisable as of December 31, 2020 1,591 $ 3.89 6.40 $ 84,226 The weighted average grant date fair value of options granted to employees was $7.97, $2.77 and $1.90 per share during the years ended December 31, 2020, 2019 and 2018, respectively. The total intrinsic value of options exercised during the years ended December 31, 2020, 2019 and 2018 was $8.2 million, $0.2 million and $0.1 million, respectively. The intrinsic value is the difference between the estimated fair value of the Company’s common stock at the time of exercise and the exercise price of the stock option. The total fair value of options that vested during the years ended December 31, 2020, 2019 and 2018 was $3.3 million, $0.7 million and $0.7 million, respectively. As of December 31, 2020, the total unrecognized stock-based compensation expense related to the stock options, excluding stock options with market and performance conditions, was $6.2 million, which will be recognized over a weighted-average period of approximately 1.32 years. Stock Options with Performance and Market Conditions During the years ended December 31, 2020, 2019 and 2018, the Company granted 504,000, 632,000 and 321,000 shares of stock options with performance and market-based conditions to employees and executive officers. The options vest over the requisite service period if the Company achieves both (i) a performance condition tied to a liquidity event, which includes the effectiveness of an IPO, and (ii) certain market conditions, provided the optionee is providing services on the date of the event. In February 2020, the Company modified the market conditions, which resulted in a new grant date fair value for 1,457,000 stock options with performance and market-based conditions as of the modification date. As of December 31, 2020, 1,933,000 shares of these stock options were outstanding. For the year ended December 31, 2020, the Company recorded cumulative stock-based compensation expense of $18.5 million related to all outstanding stock options with performance and market-based vesting conditions as the performance vesting condition was satisfied upon the closing of the IPO. As of December 31, 2020, 152,000 shares of these options were fully vested. Unamortized stock-based compensation expense amounted to $4.8 million as of December 31, 2020, which the Company expects to recognize over an estimated weighted-average period of 0.29 years. Stock Option Valuation Assumptions The fair value of each stock option grant is estimated on the date of grant using the following assumptions for the periods indicated: Years Ended December 31, 2020 2019 2018 Expected term (in years) 5.06 – 10.00 4.97 – 5.05 4.78 – 4.98 Expected volatility 52.1% – 62.7% 49.3% – 50.9% 48.4% – 48.8% Risk-free interest rate 0.35% – 1.54% 1.57% – 2.48% 2.65% – 3.02% Dividend yield 0% 0% 0% 123 Restricted Stock The Company issues RSUs and PSUs, both of which are considered restricted stock. The Company grants restricted stock pursuant to the 2020 Plan and satisfies such grants through the issuance of new shares. RSUs are share awards that, upon vesting, will deliver to the holder shares of our common stock. The PSUs vest over the requisite service period if the Company achieves specified revenue targets . The PSUs vest in a range between 0% and 200% of the units approved based on the performance relative to specified revenue targets. Restricted stock activity was as follows (in thousands, except per share amounts): Restricted Stock Units Performance Stock Units Weighted-Average Grant Date Fair Value Per Share (RSU) (PSU) RSU PSU Outstanding as of December 31, 2019 — — — — Granted 49 25 $ 50.69 $ 52.55 Vested (5 ) — $ (43.26 ) — Outstanding as of December 31, 2020 44 25 The total grant date fair value of RSUs vested for the year ended December 31, 2020 was $0.2 million. There were no RSUs granted prior to 2020. As of December 31, 2020, the total unrecognized stock-based compensation expense related to the RSUs was $2.2 million, which will be recognized over a weighted-average period of approximately 3.12 years. As of December 31, 2020, the achievement of the performance goal for PSUs was not considered probable. As a result, no associated expense was recognized during the year ended December 31, 2020. There were no PSUs granted prior to 2020. The total unrecognized stock-based compensation expense related to the PSUs was $1.3 million as of December 31, 2020. Employees Stock Purchase Plan (ESPP) In September 2020, the Company adopted the Employee Stock Purchase Plan (ESPP). The Company has initially reserved 687,000 shares of common stock for purchase under the ESPP. In addition, the number of shares of common stock available for issuance under the ESPP will automatically increase on the first day of each fiscal year, commencing January 2021 and continuing until (and including) the fiscal year ending December 31, 2030, with such annual increase equal to the lesser of (i) 687,000 shares, (ii) 1% of the number of common stock issued and outstanding on December 31 of the immediately preceding fiscal year, and (iii) an amount determined by the Company’s board of directors. Subject to any limitations contained therein, the ESPP allows eligible participants to contribute, through payroll deductions, up to 15% of their eligible compensation to purchase the Company’s common stock at a purchase price equal to 85% of the fair market value of the common stock on the first day of the offering period or purchase date, whichever is lower. The ESPP generally provides for consecutive 6-month offering periods. The initial offering period began on September 15, 2020 and ran through February 26, 2021. The fair value of the stock purchase rights under the ESPP is estimated using the Black-Scholes option pricing model. For the year ended December 31, 2020, the grant date fair value was $8.00 and estimated using the following assumptions: Expected term (in years) 0.42 Expected volatility 57.0% Risk-free interest rate 0.12% Dividend yield 0% The ESPP commenced in September 2020. No shares of common stock were purchased pursuant to the ESPP in 2020. As of December 31, 2020, the total unrecognized stock-based compensation expense related to the ESPP was $0.2 million, which will be recognized over a weighted-average period of approximately 0.17 years. 124 Stock-based Compensation Expense The following table sets forth stock-based compensation expense included in the Company’s statements of operations (in thousands): Years Ended December 31, 2020 2019 2018 Cost of revenue $ 255 $ 5 $ 14 Research and development 4,615 328 234 Sales and marketing 4,423 172 176 General and administrative 12,146 378 364 Total stock-based compensation expense 21,439 883 788 10. Income Taxes The provision for income taxes was zero, $20,000 and $25,000 for the years ended December 31, 2020, 2019 and 2018, respectively. The Company has incurred net operating losses for all periods presented. The Company has not reflected any benefit of such net operating loss carryforwards in the financial statements. The Company has established a full valuation allowance against its deferred tax assets due to the uncertainty surrounding the realization of such assets. The effective tax rate of the provision for income taxes differs from the federal statutory rate as follows: Years Ended December 31, 2020 2019 2018 Federal statutory income tax rate 21.0 % 21.0 % 21.0 % State taxes 4.3 7.8 4.9 Change in valuation allowance (23.4 ) (28.5 ) (27.2 ) Federal and state tax credits 0.5 0.9 2.0 Stock based compensation (0.6 ) — — Non-deductible permanent expenses (0.4 ) — — Effect of deferred tax adjustment (1.4 ) — — Other — (1.2 ) (0.7 ) — % — % — % Deferred Tax Assets The major components of deferred tax assets were as follows as of the dates indicated (in thousands): December 31, 2020 2019 Deferred tax assets: Net operating loss carryforwards $ 76,838 $ 56,127 Tax credits 10,039 8,777 Accrual and reserves 2,392 1,675 Tangible and intangible assets 19,090 15,553 Stock-based compensation 2,843 733 Gross deferred tax assets 111,202 82,865 Valuation allowance (111,202 ) (82,865 ) Net deferred tax assets $ — $ — Realization of the deferred tax assets is dependent upon future taxable income, if any, the amount and timing of which are uncertain. The Company has established a valuation allowance to offset deferred tax assets as of December 31, 2020 and 2019 due to the uncertainty of realizing future tax benefits from its net operating loss carryforwards and other deferred tax assets. The valuation allowance increased by $28.3 million, $24.0 million and $13.6 million during the years ended December 31, 2020, 2019 and 2018, respectively. 125 Net Operating Loss and Tax Credit Carryforwards As of December 31, 2020, the Company had a net operating loss carryforward for federal income tax purposes of $301.3 million. Federal net operating losses of $173.5 million incurred after 2017 do not expire. The remaining $127.8 million of federal net operating loss carryforward will begin to expire in 2024 and continue to expire through 2037. The Company had a total state net operating loss carryforward of $174.0 million. State net operating losses of $30.9 million do not expire. The remaining state net operating loss carryforward of $143.1 million will begin to expire in 2021 and continue to expire through 2040. The Company had federal research and development credits of $5.8 million, which will begin to expire in 2030 and state research and development credits of $4.3 million which have no expiration date. These tax credits are subject to the same limitations discussed above. Federal and state laws impose substantial restrictions on the utilization of net operating loss and tax credit carryforwards in the event of an ownership change for tax purposes, as defined in Section 382 of the Internal Revenue Code. As a result of such ownership changes, the Company’s ability to realize the potential future benefit of tax losses and tax credits that existed at the time of the ownership change may be significantly reduced. The Company’s deferred tax asset and related valuation allowance would be reduced, as a result. The Company has not performed a Section 382 study to determine the amount of reduction, if any. Unrecognized tax benefits at December 31, 2020 have been recorded as an offset to federal and state research and development credit carryforwards. Unrecognized Tax Benefits A reconciliation of the total unrecognized tax benefits for the year ended December 31, 2020 was as follows (in thousands): Balance, beginning of year $ 1,020 Decrease related to current year positions — Increase related to current year positions 562 Balance, end of year $ 1,582 The Company does not have any material accrued interest or penalties associated with unrecognized tax benefits. The Company does not believe it is reasonably possible that its unrecognized tax benefits will significantly change within the next twelve months. The Company files income tax returns in the United States and various states. The Company is not currently under examination by income tax authorities in federal, state or other jurisdictions. All tax returns remain open for examination by federal and state authorities for three and four years, respectively, from the date of utilization of any net operating loss or credits. 11. Net Loss per Share Attributable to Common Stockholders A reconciliation of the numerator and denominator used in the calculation of basic and diluted net loss per share attributable to common stockholders was as follows (in thousands except per share amounts): Years Ended December 31, 2020 2019 2018 Numerator: Net loss $ (121,492 ) $ (68,299 ) $ (49,780 ) Adjustment to redemption value on redeemable convertible preferred stock (362 ) (134,760 ) (23,300 ) Deemed dividend on settlement of accrued dividend 42,530 — — Gain on extinguishment of redeemable convertible preferred stock — 117,598 — Net loss attributable to common stockholders, basic and diluted $ (79,324 ) $ (85,461 ) $ (73,080 ) Denominator: Weighted-average shares of common stock, basic and diluted 16,358 858 725 Net loss per share attributable to common stockholders, basic and diluted $ (4.85 ) $ (99.58 ) $ (100.75 ) 126 The following outstanding potentially dilutive shares have been excluded from the calculation of diluted net loss per share due to their anti-dilutive effect (in thousands): Years Ended December 31, 2020 2019 2018 Stock options to purchase common stock 4,763 3,757 3,311 Warrant to purchase common stock 63 — 9 Restricted stock units 44 — — Shares committed under ESPP 52 — — Redeemable convertible preferred stock, on an as-if converted basis — 18,644 18,634 Warrants to purchase redeemable convertible preferred stock — 505 599 Total 4,922 3,757 3,320 12. Selected Quarterly Information The following tables present certain unaudited quarterly financial information for each of the eight quarters in the two-year period ended December 31, 2020. This quarterly information has been prepared on the same basis as the audited financial statements and includes all adjustments necessary to state fairly the information for the periods presented. Fiscal 2020 Quarter Ended (Unaudited) March 31 June 30 September 30 December 31 (in thousands, except per share amounts) Revenue $ 7,190 $ 11,742 $ 13,756 $ 17,247 Gross profit $ (3,564 ) $ (4,764 ) $ (5,126 ) $ 417 Net loss $ (20,650 ) $ (26,505 ) $ (42,294 ) $ (32,043 ) Net income (loss) attributable to common stockholders, basic $ 3,387 $ (26,505 ) $ (42,294 ) $ (32,043 ) Net income (loss) attributable to common stockholders, diluted $ 4,161 $ (26,505 ) $ (42,294 ) $ (32,043 ) Net income (loss) per share attributable to common stockholders, basic $ 0.77 $ (4.58 ) $ (3.44 ) $ (0.75 ) Net income (loss) per share attributable to common stockholders, diluted $ 0.74 $ (4.58 ) $ (3.44 ) $ (0.75 ) Fiscal 2019 Quarter Ended (Unaudited) March 31 June 30 September 30 December 31 (in thousands, except per share amounts) Revenue $ 2,491 $ 2,872 $ 2,630 $ 7,085 Gross profit $ (5,258 ) $ (4,470 ) $ (5,294 ) $ (2,780 ) Net loss $ (16,422 ) $ (17,029 ) $ (15,402 ) $ (19,446 ) Net loss attributable to common stockholders, basic and diluted $ (24,292 ) $ (25,057 ) $ (16,666 ) $ (19,446 ) Net loss per share attributable to common stockholders, basic and diluted $ (30.34 ) $ (18.93 ) $ (18.93 ) $ (21.18 ) 127 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None.