NEVRO CORP

In March 2019, the Company granted performance stock units (PSUs) to the Company’s Chief Executive Officer.  The PSUs are subject to continued service to the Company through the vesting date.  The number of shares to be issued upon vesting are based on the total shareholder return of the Company’s common stock compared to the S&P Healthcare Equipment Select Industry Index (the Index), subject to an upward adjustment based on the Company’s absolute stock price performance over the specified measurement period. If the performance metrics are not met within the specified time limits, the PSUs will be canceled.  The fair value of the PSUs is determined on the date of grant using a Monte Carlo simulation model, which is based on a larger number of possible stock price outcomes for the Company’s stock and the Index.  The use of the Monte Carlo simulation model requires the input of certain assumptions, including the expected stock price volatility of the Company and members of the Index, correlation between changes in the stock price of the Company and members of the Index, risk-free interest rate and expected dividends, as applicable.  The fair value of the PSUs is recognized over the specified measurement period on a straight-line basis.

On January 1, 2019, the Company adopted the new accounting standard ASC 842, Leases, which requires entities to recognize assets and liabilities for leases with lease terms of more than 12 months on the balance sheet.  

The Company adopted the new lease standard using the transition method that allowed entities to initially apply ASC 842 at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption (the optional transition method). The Company elected the package of transitional practical expedients, such that, for leases existing prior to the adoption of ASC 842, the Company will not need to reassess whether contracts are leases, will retain historical lease classification and historical initial direct costs classification. The Company also elected the hindsight practical expedient to determine the lease term for existing leases.  Operating lease assets and operating lease liabilities are recognized based on the present value of minimum lease payments over the remaining lease term.  The Company uses its incremental borrowing rate based on information available when determining the lease liabilities.  Lease cost is recognized on a straight-line basis over the expected lease term.

The Company has operating leases for office space, 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 nonlease components (such as common area expenses).  As of March 31, 2019, the Company has leases with remaining terms of less than 1 year to 8 years, some of which may include options to extend the lease term for up to 5 years.

In February 2019, the Company entered into an agreement with a privately-held company to, among other things, provide financing in the form of a secured convertible note.  The Company has the obligation to provide additional funding of up to $2.0 million and, under certain circumstances as described below, $3.0 million, respectively, in the form of two separate additional secured convertible notes.  The Company expects the first obligation of up to $2.0 million to occur within twelve months of March 31, 2019.  The second obligation of up to $3.0 million takes effect only after the Company exercises its option to make a further investment in the privately-held company that is based on development targets.  The agreement additionally provides the Company with the exclusive right, but not the obligation, to acquire the privately-held company.  As of March 31, 2019, the fair value of the secured

convertible note and the related components is $6.5 million, and is reported in Other Assets on the Condensed Consolidated Balance Sheet.  Each component is recorded at its estimated fair value, which is subject to remeasurement at each reporting date.  The change in fair value is recorded as a charge to Other Income (Expense) in the Consolidated Statements of Operations and Comprehensive Income.  The Company concluded that the privately-held company is a variable interest entity, however the Company is not the primary beneficiary as it does not retain power to direct the activities that most significantly impact its economic performance.