NEVRO CORP. You should read the following management's discussion and analysis of our financial condition and results of operations in conjunction with our unaudited condensed consolidated financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q (Quarterly Report) and with our audited consolidated financial statements and notes thereto for the year endedDecember 31, 2020 , included in our Annual Report on Form 10-K filed with theU.S. Securities and Exchange Commission (SEC) onFebruary 24, 2021 .
Special note regarding forward-looking statements
This report contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those discussed
in the forward-looking statements. The statements contained in this report that
are not purely historical are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the Securities Act), and
Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange
Act). Forward-looking statements are often identified by the use of words such
as, but not limited to, "anticipate," "believe," "can," "continue," "could,"
"estimate," "expect," "intend," "may," "plan," "project," "seek," "should,"
"strategy," "target," "will," "would" and similar expressions or variations
intended to identify forward-looking statements. These statements are based on
the beliefs and assumptions of our management based on information currently
available to management. Such forward-looking statements are subject to risks,
uncertainties and other important factors that could cause actual results and
the timing of certain events to differ materially from future results expressed
or implied by such forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, those identified
below and those discussed in the section titled "Risk Factors" included under
Part II, Item 1A below. Furthermore, such forward-looking statements speak only
as of the date of this report. Except as required by law, we undertake no
obligation to update any forward-looking statements to reflect events or
circumstances after the date of such statements.
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Overview
We are a global medical device company focused on providing innovative products that improve the quality of life of patients suffering from chronic pain. We have developed and commercialized the Senza spinal cord stimulation (SCS) system, an evidence-based neuromodulation platform for the treatment of chronic pain, and in 2019 launched our newest product platform, Senza® Omnia™. Our proprietary, paresthesia-free HF10® therapy, delivered by our Senza system, was demonstrated in our SENZA-RCT study to be superior to traditional SCS therapy. HF10 therapy was nearly twice as successful in treating back pain and 1.5 times as successful in treating leg pain when compared to traditional SCS therapy. Comparatively, traditional SCS therapy has not demonstrated the same level of efficacy in treating back pain and is used primarily for treating leg pain, limiting its market adoption. Our SENZA-RCT study, along with our European studies, represents what we believe is the most robust body of clinical evidence for any SCS therapy. We currently have multiple clinical trials in progress, including two large randomized control trials seeking additional data to support new indications. We believe the superiority of HF10 therapy over traditional SCS therapies has allowed us to capitalize on and expand the approximately$2.5 billion , pre-COVID-19 pandemic, global SCS market by treating both back and leg pain without paresthesia. We launched Senza commercially inthe United States inMay 2015 , after receiving a label from theU.S. Food and Drug Administration (FDA) supporting the superiority of our HF10 therapy over traditional SCS. The Senza system has been commercially available in certain European markets sinceNovember 2010 and inAustralia sinceAugust 2011 . We have experienced significant revenue growth inthe United States since commercial launch. Senza is currently reimbursed by all of the major insurance providers. In early 2017, we commenced a controlled commercial launch of our family of surgical leads, marketed as the Surpass surgical lead, and inApril 2020 received FDA approval for our reduced-size Surpass-C surgical lead. InJanuary 2018 , we received FDA approval of our next generationSenza II SCS system. In the fourth quarter of 2019, we received FDA approval of our next generation product platform, Senza Omnia, which we launched inthe United States in the fourth quarter of 2019. Additionally, we received approval to commercially launch Senza Omnia inEurope during the second quarter of 2020 and inAustralia inJuly 2020 . In the first quarter of 2021, we received FDA approval for our first Senza Omnia upgrade and our next generation trial stimulator. The tables below set forth our revenue fromU.S. and international sales the past nine quarters on a quarterly basis and total revenue for each of the past five full years. Q1 2019 Q2 2019 Q3 2019 Q4 2019 Q1 2020 Q2 2020 Q3 2020 Q4 2020 Q1 2021 Revenue from: (in millions) U.S. sales$ 65.8 $ 78.1 $ 84.2 $ 97.9 $ 75.3 $ 51.0 $ 90.9 $ 94.6 $ 74.7 International sales 16.3 15.5 16.0 16.5 12.2 5.4 17.5 15.1 13.9 Total sales revenue$ 82.1 $ 93.6 $ 100.2 $ 114.4 $ 87.5 $ 56.4 $ 108.5 $ 109.7 $ 88.6 Three Months Ended 2016 2017 2018 2019 2020 March 31, 2021 Revenue from: (in millions) U.S. sales$ 173.3 $ 263.5 $ 321.8 $ 326.0 $ 311.9 $ 74.7 International sales 55.2 63.2 65.5 64.3 50.2 13.9 Total sales revenue$ 228.5 $ 326.7 $ 387.3 $ 390.3 $ 362.0 $ 88.6 Since our inception, we have financed our operations primarily through equity and debt financings and borrowings under a debt facility. Our accumulated deficit as ofMarch 31, 2021 was$522.4 million . A significant amount of our capital resources has been used to support the development of our Senza products and HF10 therapy, and we have also made a significant investment building ourU.S. commercial infrastructure and sales force to support our commercialization efforts inthe United States . We intend to continue to make significant investments in ourU.S. commercial infrastructure, as well as in research and development (R&D) to develop Senza to treat other chronic pain indications, including conducting clinical trials to support our future regulatory submissions. In order to further enhance our R&D efforts, pursue product expansion opportunities or acquire a new business or products that are complementary to our business, we may choose to raise additional funds, which may include future equity and debt financings. InApril 2020 , we issued$165.0 million aggregate principal amount of 2.75% convertible senior notes due 2025 (the 2025 Notes) in a registered underwritten public offering and an additional$24.8 million aggregate principal amount of such notes pursuant to the underwriters' exercise in full of their option to purchase additional 2025 Notes. The 2025 Notes' interest rates are fixed at 2.75% per annum, with interest payable semi-annually in arrears onApril 1 andOctober 1 of each year, which commenced onOctober 1, 2020 . The total net proceeds from the 2025 Notes, after deducting initial purchase discounts and debt issuance costs, were approximately$183.6 million . In connection with the offering of the 2025 Notes, we entered into convertible note hedge transactions in which we have the option to purchase initially (subject to adjustment for certain specified events) a total of approximately 1.8 million shares of common stock at a price of approximately$105.00 per share. The total cost of the convertible note hedge transactions was$52.4 million . In addition, we sold warrants to certain bank counterparties whereby the holders of the warrants have the option to purchase initially (subject to adjustment for certain specified events) a total of approximately 1.8 million shares of our 20 -------------------------------------------------------------------------------- common stock at a price of$147.00 per share. We received$34.9 million in cash proceeds from the sale of these warrants. The net cost incurred in connection with the convertible note hedge and warrant transactions was$17.5 million . Concurrent with the registered underwritten public offering of the 2025 Notes, we completed an underwritten public offering of common stock and issued 1,868,750 shares of common stock, including 243,750 shares issued pursuant to the exercise in full of the underwriters' option to purchase additional shares. As a result of this public offering of common stock, we received cash proceeds of$147.1 million , net of underwriting discounts and commissions and offering costs. We rely on third-party suppliers for all of the components of our Senza products, and currently for the assembly of these systems. Several of these suppliers are currently single-source suppliers. We have entered into and/or amended several supply agreements in an effort to reinforce our supply chain. We are also required to maintain high levels of inventory, and, as a result, we are subject to the risk of inventory obsolescence and expiration, which may lead to inventory impairment charges. Additionally, as compared to direct manufacturers, our dependence on third-party manufacturers makes us vulnerable to supply shortage problems and exposes us to greater lead times, increasing our risk of inventory obsolescence. In the third quarter of 2020, we made the strategic decision to vertically integrate the assembly of IPG's, peripherals and various other manufacturing related activities to mitigate our reliance on third-party manufacturers and improve our long-term gross margins. We plan on conducting these manufacturing activities in a facility inCosta Rica , for which our lease will begin inApril 2021 . The integration process is expected to be completed in 2022. Even after this integration process is completed, we expect that we will continue to rely on third-party manufacturers to provide key components to support the assembly process. We may incur significant capital expenditures and implementation costs to initiate the manufacturing operations inCosta Rica .
COVID-19 Pandemic
We are subject to risks related to the public health crises such as the global pandemic associated with COVID-19. InDecember 2019 , a novel strain of coronavirus, SARS-CoV-2, was reported to have surfaced inWuhan, China . Since then, SARS-CoV-2, and the resulting disease COVID-19, has spread to most countries, and all 50 states withinthe United States . The COVID-19 outbreak has negatively impacted, and may continue to negatively impact our operations and revenues and overall financial condition by decreasing the number of Senza systems procedures performed. The number of Senza systems procedures performed, similar to other elective surgical procedures, has decreased as health care organizations globally have prioritized the treatment of patients with COVID-19 and as governments imposed restrictions on the performance of elective procedures. Additionally, overall patient willingness to pursue elective procedures has decreased due to the pandemic. These measures and challenges, however, will likely continue for the duration of the pandemic, which is uncertain, and will reduce our revenue while the pandemic continues. In addition, even as the severity of the pandemic subsides, we expect that demand for Senza system procedures may not return to historic levels as rapidly as originally anticipated as prospective patients may decide to delay the procedure until fully vaccinated for COVID-19. As a result of the timing associated with the full rollout of the COVID-19 vaccines, it has, and could continue to, result in a meaningful delay in patients seeking to have a Senza system trial in the near term. Further, we anticipate that the substantial backlog of patients seeking appointments with physicians and surgeries to be performed at hospitals and ambulatory surgery centers relating to a variety of other medical conditions, will result in patients seeking to have Senza system trials or implant procedures performed having to navigate limited provider capacity. We believe these factors may have an adverse effect on the recovery of the global SCS therapy market and, as a result, the amount of time we predict for our sales to recover following the end of the pandemic. Numerous state and local jurisdictions, as well as foreign governments such as theUnited Kingdom andGermany , imposed, and others in the future may impose, "shelter-in-place" orders, quarantines, executive orders and similar government orders and restrictions for their residents to control the spread of COVID-19. Multiple times in 2020, the governor ofCalifornia , where our headquarters are located, issued a temporary "shelter-in-place" or "stay at home" orders restricting non-essential activities, travel and business operations for an indefinite period of time, subject to certain exceptions for necessary activities. Such orders or restrictions have resulted in our headquarters temporarily closing, work stoppages, slowdowns and delays, travel restrictions and cancellation of events, among other effects, thereby negatively impacting our operations. Other disruptions or potential disruptions include restrictions on our personnel and personnel of partners to travel and access customers for training and case support; delays in approvals by regulatory bodies; delays in product development efforts; and additional government requirements or other incremental mitigation efforts that may further impact our capacity to manufacture, sell and support the use of our Senza systems. While the potential economic impact brought by and the duration of COVID-19 may be difficult to assess or predict, the widespread pandemic has resulted in, and may continue to result in, significant disruption of global financial markets, reducing our ability to access capital, which could in the future negatively affect our liquidity, including our ability to repay our senior convertible notes which are due inJune 2021 andApril 2025 . The COVID-19 pandemic has also resulted in a significant increase in unemployment inthe United States which may continue even after the pandemic. The occurrence of any such events may lead to reduced disposable income and access to health insurance which could adversely affect the number of Senza systems sold after the pandemic has ended. We expect any further shelter-in-place policies and restrictions on elective surgical procedures worldwide to 21 -------------------------------------------------------------------------------- have a substantial near term impact on our revenue. In addition, a recession or market correction resulting from the spread of COVID-19 could materially affect our business and the value of our common stock.
Important Factors Affecting our Results of Operations
In addition to the impact of COVID-19, we believe that the following factors have impacted, and we expect will continue to impact, our results of operations.
Importance of Physician Awareness and Acceptance of Our Products
We continue to invest in programs to educate physicians who treat chronic pain about the advantages of Senza. This requires significant commitment by our marketing team and sales organization, and can vary depending upon the physician's practice specialization, personal preferences and geographic location. Further, we are competing with well-established companies in our industry that have strong existing relationships with many of these physicians. Educating physicians about the advantages of our Senza products, including our latest product, Senza Omnia, and influencing these physicians to use these products to treat chronic pain, is required to grow our revenue.
Reimbursement and Coverage Decisions by Third-Party Payors
Healthcare providers inthe United States generally rely on third-party payors, principally federal Medicare, state Medicaid and private health insurance plans, to cover and reimburse all or part of the cost of our products and the related implant procedure for patients. The revenue we are able to generate from sales of our products depends in large part on the availability of reimbursement from such payors. While we currently have a favorable National Coverage Determination (NCD) and reimbursement by Medicare, decisions of coverage and reimbursement for Senza and the related implant procedure from private health insurance providers can vary. In general, these decisions require that such payors perform analyses to determine if the procedure is medically necessary and if our technology is covered under their existing coverage policies. These payors may deny reimbursement if they determine that the device or procedure was not medically necessary for the patient and used in accordance with the payor's coverage policy. A significant component of our commercial efforts includes working with private payors to ensure positive coverage decisions for our products. We believe that favorable coverage and reimbursement for procedures using our products from Medicare and certain commercial payors, such asAetna , Cigna, Humana,Blue Cross Blue Shield and Kaiser, have contributed to our increase in revenue to date. Although the largest commercial payors and Medicare cover procedures using Senza, there can be no assurance that all private health insurance plans will cover the therapy. EffectiveJuly 1, 2021 , Medicare will require Prior Authorization for all SCS procedures. A significant number of negative coverage and reimbursement decisions by private insurers may impair our ability or delay our ability to grow our revenue.
Inventory Buildup and
Our products are composed of a substantial number of individual components and, in order to market and sell them effectively, we must maintain high levels of inventory. In particular, since our commercial launch of Senza inthe United States , we have continued to add suppliers to fortify our supply chain and we have maintained increased levels of inventory. As a result, a significant amount of our cash used in operations has been associated with maintaining these levels of inventory. There may also be times in which we determine that our inventory does not meet our product requirements. Further, the manufacturing process for our products requires lengthy lead times, during which components may become obsolete. We may also over- or underestimate the quantities of required components, in which case we may expend extra resources or be constrained in the amount of end product that we can produce. These factors subject us to the risk of inventory obsolescence and expiration, which may lead to inventory impairment charges. The sum of the charges for the items listed above were$0.5 million and$2.7 million for the three months endedMarch 31, 2021 and the year endedDecember 31, 2020 , respectively. Additionally, as we release later generations of products that contain advancements or additional features, the earlier generations may become obsolete, as was the case in the three months endedMarch 31, 2021 and the year endedDecember 31, 2020 , when we recorded a charge of$1.0 million and$2.6 million , respectively.
Investment in Research and Clinical Trials
We intend to continue investing in R&D to expand into new indications and chronic pain conditions, as well as develop product enhancements to improve outcomes and enhance the physician and patient experience. For example, we commenced commercial launches of Surpass, our surgical lead product family in early 2017 and Senza II SCS System in late 2017. Most recently, we launched our next generation product platform, Senza Omnia, inthe United States in late 2019, inEurope during the second quarter of 2020 and inAustralia inJuly 2020 . We are continuing to invest in product improvements to Senza, including enhanced MRI capabilities and next generation IPGs. While R&D and clinical testing are time consuming and costly, we believe expanding into new indications, implementing product improvements and continuing to demonstrate the efficacy, safety and cost effectiveness of HF10 therapy through clinical data are all critical to increasing the adoption of HF10 therapy. We initiated two randomized controlled trials 22
-------------------------------------------------------------------------------- in 2018, SENZA-PDN and SENZA-NSRBP, which evaluate HF10 therapy for the treatment of painful diabetic neuropathy and non-surgical refractory back pain, respectively. InJanuary 2020 at NANS 2020, we presented the three-month data from our SENZA-PDN study, which was the largest SCS randomized controlled trial conducted to date for PDN. InJanuary 2021 , we presented the six-month data from our SENZA-PDN study at NANS 2021. InApril 2021 , the six-month data from the SENZA-PDN study was additionally published in JAMA Neurology, an international peer-reviewed journal. With regard to the SENZA-NSRBP study, we presented the three-month primary endpoint results inJanuary 2021 at NANS 2021, representing the first release of data from this randomized controlled trial. Both the SENZA-PDN and SENZA-NSRBP studies are ongoing, and further data will be presented and published in leading journals as the data becomes available.
We are continuing to make investments in building ourU.S. commercial infrastructure and recruiting and training ourU.S. sales force. This is a lengthy process that requires recruiting appropriate sales representatives, establishing and, on occasion, refining a commercial infrastructure inthe United States and training our sales representatives. Following initial training for Senza, our sales representatives typically require lead time in the field to grow their network of accounts and produce sales results. Successfully recruiting and training a sufficient number of productive sales representatives has been required to achieve growth at the rate we expect.
Access to Hospital Facilities
Inthe United States , in order for physicians to use our products, the hospital facilities where these physicians treat patients often require us to enter into purchasing contracts directly with the hospital facilities or with the Group Purchasing Organizations of which the hospital facilities are members. This process can be lengthy and time-consuming and requires extensive negotiations and management time. InEurope , we may be required to engage in a contract bidding process in order to sell our products, where the bidding processes are only open at certain periods of time, and we may not be successful in the bidding process.
We Do Not Expect to Continue to Experience Our Historical Worldwide Revenue Growth Rates
Our worldwide revenue has increased from$18.2 million for the year endedDecember 31, 2012 to$362.0 million for the year endedDecember 31, 2020 . SinceMay 2015 when we commenced the commercial launch of Senza in theU.S. , our worldwide revenue growth has been substantially driven by sales of Senza inthe United States . Over the past two years, our revenue growth in international markets has slowed significantly. Although we had experienced significant growth in sales inthe United States for several years following our launch, we do not expect to continue that historic rate of revenue growth inthe United States or on a worldwide basis. The COVID-19 pandemic has impacted our revenue in 2020 and we expect continued impact in 2021 as the pandemic continues. Further, due to a number of factors, including governmental reimbursement constraints in theEuropean SCS market limiting the number of annual SCS implants, market pressure inAustralia and our current penetration in these markets, we expect minimal, if any, growth in our international markets.
Critical Accounting Policies, Significant Judgments and Use of Estimates
Our management's discussion and analysis of financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States of America (U.S. GAAP). The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, we evaluate our critical accounting policies and estimates. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable in the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions and conditions. Our significant accounting policies are more fully described in Note 2 of the accompanying unaudited condensed consolidated financial statements. We adopted ASU 2019-12, Simplifying the Accounting for Income Taxes, onJanuary 1, 2021 . There have been no other significant or material changes in our critical accounting policies during the three months endedMarch 31, 2021 to the items we disclosed as our critical accounting policies in Management's Discussion and Analysis of Financial Conditions and Results of Operations in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 .
Components of Results of Operations
Revenue
Our revenue is generated primarily from sales to two types of customers:
hospitals and outpatient medical facilities, with each being served primarily
through a direct sales force. Sales to these entities are billed to, and paid
by, the hospitals and outpatient
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medical facilities as part of their normal payment processes, with payment
received by us in the form of an electronic transfer, check or credit card
payment. Product sales to third-party distributors are billed to and paid by the
distributors as part of their normal payment processes, with payment received by
us in the form of an electronic transfer.
U.S. revenue is generally recognized after our sales representatives deliver our
product at the point of implantation and upon the completion and authorization
of the implant procedure. In response to competitive practices and pressures, we
have offered some volume price discounting for larger orders, where products are
ordered in advance of an implantation and revenue is recognized when the
transfer of control occurs at the time of shipment.
Revenue from sales of our Senza products fluctuate based on the selling price of
the system, as the average sales price of a system varies geographically and by
the type of system sold, and based on the mix of sales by geography. Our revenue
from international sales can also be significantly impacted by fluctuations in
foreign currency exchange rates, as our sales are denominated in the local
currency in the countries in which we sell our products.
We expect our revenue to fluctuate from quarter to quarter due to a variety of
factors, including seasonality. For example, the industry generally experiences
lower revenues in the first and third quarters of the year and higher revenues
in the fourth quarter. Our revenue has been impacted by these industry trends.
Further, the impact of the buying patterns and implant volumes of hospitals and
medical facilities, and third-party distributors may vary, and as a result could
have an effect on our revenue from quarter to quarter.
Cost of Revenue
We currently utilize contract manufacturers for the production of Senza products. Cost of revenue consists primarily of acquisition costs of the components of Senza, manufacturing overhead, royalty payments, scrap and inventory excess and obsolescence charges, as well as distribution-related expenses, such as logistics and shipping costs, net of costs charged to customers.
We calculate gross margin as revenue less cost of revenue divided by revenue. Our gross margin has been and will continue to be affected by a variety of factors, but primarily by our average sales price and the costs to have our products manufactured. While costs are primarily incurred inU.S. dollars, international revenue may be impacted by the appreciation or depreciation of theU.S. dollar, which may impact our overall gross margin. Our gross margin is also affected by our ability to reduce manufacturing costs as a percentage of revenue.
Operating Expenses
Our operating expenses consist of R&D expense, and sales, general and administrative (SG&A) expense. Personnel costs are the most significant component of operating expenses and consist primarily of salaries, bonus incentives, benefits, stock-based compensation and sales commissions.
Research and Development. R&D costs are expensed as incurred. R&D expense consists primarily of personnel costs, including salary, employee benefits and stock-based compensation expenses for our R&D employees. R&D expense also includes costs associated with product design efforts, development prototypes, testing, clinical trial programs and regulatory activities, contractors and consultants, equipment and software to support our development, facilities and information technology. We expect product development expenses to decrease in absolute dollars. Our R&D expenses may fluctuate from period to period due to the timing and extent of our R&D and clinical trial expenses. Sales, General and Administrative. SG&A expense consists primarily of personnel costs, including salary, employee benefits and stock-based compensation expenses for our sales and marketing personnel, including sales commissions, and for administrative personnel that support our general operations, such as information technology, executive management, financial accounting, customer service and human resources personnel. We expense commissions at the time of the sale. SG&A expense also includes costs attributable to marketing, as well as travel, intellectual property and other legal fees, financial audit fees, insurance, fees for other consulting services, depreciation and facilities. We significantly increased the size of our sales presence worldwide during 2018 and 2019, and we have maintained the overall size of our sales organization in 2020. We have historically increased marketing spending in order to generate additional sales opportunities. Additionally, we have made substantial investments in ourU.S. commercial infrastructure to support our commercialization efforts inthe United States . Since 2017, we have experienced significant legal expenses associated with our various intellectual property litigations. We anticipate significant continued expenses associated with these legal activities. Additionally, we continue to incur significant expenses related to audit, legal, regulatory and tax-related services associated with maintaining compliance with exchange listing andSEC requirements, including compliance under the Sarbanes-Oxley Act of 2002 (the Sarbanes-Oxley Act), director and officer insurance 24 -------------------------------------------------------------------------------- premiums and investor relations costs associated with being a public company. Our SG&A expense may fluctuate from period to period due to the seasonality of our revenue, the timing and extent of our SG&A expense, and the direct impact of the COVID-19 pandemic on certain discretionary expense items such as travel and trade shows.
Interest Income and Interest Expense
Interest income consists primarily of interest income earned on our investments and interest expense consists of interest paid on our outstanding debt and the amortization of debt discount and debt issuance costs.
Other Income (Expense), Net
Other income (expense), net consists primarily of foreign currency transaction
gains and losses and the gains and losses from the remeasurement of
foreign-denominated balances to the
Provision for Income Taxes
The provision for income taxes consists primarily of income taxes in foreign jurisdictions in which we conduct business as well as states where we have determined we have state nexus. We maintain a full valuation allowance for all of ourU.S. deferred tax assets including net operating loss (NOL) carryforwards and federal and state tax credits.
Allowance for Doubtful Accounts
We make estimates as to the overall collectability of accounts receivable and provide an allowance for accounts receivable considered uncollectible based on current expected credit losses. We specifically analyze accounts receivable based on historical bad debt experience, customer concentrations, customer credit-worthiness, the age of the receivable, current economic trends, and changes in customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. We record the adjustment in sales, general and administrative expense.
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