Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
We are a commercial-stage medical device company focused on developing, manufacturing and commercializing innovative and minimally invasive neuromodulation solutions for patients with cardiovascular disease. Our proprietary platform technology, Barostim, is designed to leverage the power of the brain and nervous system to address the imbalance of the Autonomic Nervous System, which causes HF with reduced Ejection Fraction (“ HFrEF”) and other cardiovascular diseases. Our second-generation product, Barostim, is the first and only commercially available neuromodulation device indicated to improve symptoms for patients with HFrEF. Barostim provides Baroreflex Activation Therapy by sending imperceptible and persistent electrical pulses to baroreceptors located in the wall of the carotid artery to signal the brain to modulate cardiovascular function. Barostim is currently approved by the U.S. Food and Drug Administration (“FDA”) to improve the symptoms of patients with HFrEF and is CE Marked for HFrEF and resistant hypertension.
Since our inception we have generated minimal revenue, as our activities have consisted primarily of developing Barostim Therapy, conducting our BeAT-HF pre-market and post-market pivotal studies in the U.S. and filing for regulatory approvals. Our ability to generate revenue from product sales and become profitable will depend on our ability to continue to successfully commercialize Barostim and any product enhancements we may advance in the future. We expect to derive future revenue by continuing to both expand our own dedicated salesforce and increase awareness of Barostim among payors, physicians and patients.
Our sales and marketing efforts are directed at electrophysiologists, HF specialists, interventional and general cardiologists and vascular surgeons because they are the primary users of our technology. However, we consider hospitals, where the procedures are performed primarily in an outpatient setting, to be our customers, as they are the purchasing entities of Barostim in the U.S. We intend to continue making significant investments building our U.S. commercial infrastructure by expanding and training our U.S. sales force. We have dedicated significant resources to educate physicians who treat HFrEF about the advantages of Barostim and train them on the implant procedure.
The costs for the device and implantation procedure are reimbursed through various third-party payors, such as government agencies and commercial payors. In the U.S., we estimate that 67% of our target patient population is Medicare-eligible based on the age demographic of the HFrEF patient population indicated for Barostim. As a result, we have prioritized coverage by the Centers for Medicare and Medicaid Services while simultaneously developing processes to engage commercial payors. All Medicare Administrative Contractors have retired automatic coverage denial policies for our Current Procedural Terminology codes, thereby allowing hospitals to be paid for the Barostim procedure. Our reimbursement strategy involves continuing to broaden our current coverage and build our in-house market access team to obtain appropriate prior authorization approvals in advance of treatment on a case-by-case basis where positive coverage policies currently do not exist. Outside the U.S., reimbursement levels vary by country and within some countries by region. Barostim is eligible for reimbursement in certain countries in the European Economic Area (“EEA”), such as Germany, where annual healthcare budgets for the hospital generally determine the number of patients to be treated and the prices to be paid for the related devices that may be purchased.
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We manage all aspects of manufacturing operations and product supply of Barostim, which include final assembly, testing and packaging of our implantable pulse generator (“IPG”) and stimulation lead, at our headquarters in Minneapolis, Minnesota. We utilize components or various subassemblies manufactured by third-party suppliers, some of which have significant lead times. Many of these components are from a limited number of suppliers. We believe that our component manufacturers are recognized in their field for their competency to manufacture the respective portions of Barostim and have quality systems established that meet FDA requirements. We seek to maintain higher levels of inventory to protect ourselves from supply interruptions and continue to seek to broaden and strengthen our supply chain through additional sourcing channels.
From our inception until the IPO, we financed our operations primarily through preferred stock financings, and additionally, from sales of our Barostim products and amounts borrowed under our credit facilities. We then devoted substantially all of our resources to research and development activities related to Barostim Therapy, including clinical and regulatory initiatives to obtain marketing approval and sales and marketing activities.
We used a portion of the IPO proceeds to continue funding the expansion of our direct sales force and commercial organization related to Barostim in the U.S. We continued investing in research and development in the near term to improve clinical outcomes, optimize patient adoption and comfort, increase patient access and enhance the physician and patient experience. Longer term, we plan to explore Barostim’s potential to expand its indications for use to other cardiovascular diseases. On October 31, 2022, we entered into a loan and security agreement under which we may borrow, subject to our achievement of certain milestones, up to a total of $50.0 million in a series of term loans described in Note 4 to our consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q, and we borrowed $7.5 million of such total on that date to fund our commercial and investment efforts. On March 10, 2023, we borrowed the $7.5 million remaining under the first tranche of the Loan Agreement, with $4.0 million received on March 13, 2023 and $3.5 million received on March 15, 2023 . Following this draw, we have $15.0 million in outstanding term loans under the Loan Agreement. The Loan Agreement provides for up to two additional tranches of loans totaling up to an additional $35.0 million, based on timing, the achievement of certain trailing three months revenue targets and other conditions set forth in the Loan Agreement. As a result of these investments and our commercialization efforts, we expect to continue to incur net losses for the next several years, which may require additional funding and could include future equity and debt financing.
Recent developments
In February 2023, we were unblinded to the morbidity and mortality data from the BeAT-HF pivotal trial. The totality of the evidence from the trial shows long-term benefits for patients with heart failure. While the trial did not reach statistical significance on the primary endpoint, it did contain additional clinically meaningful prespecified analyses favoring Barostim. Accordingly, we anticipate making a regulatory submission to the FDA for expanded labeling. If successful, this label expansion could expand our addressable patient population.
The COVID-19 pandemic has negatively impacted our business, financial condition and results of operations by decreasing and delaying procedures performed to implant Barostim. Beginning in March 2020, our revenue was negatively impacted by COVID-19 as healthcare facilities and clinics began restricting in-person access to their clinicians, reducing patient consultations and treatments or temporarily closing their facilities. While the impact of the pandemic has lessened in 2023, the extent to which the pandemic may impact our business, financial condition and results of operations remains uncertain, especially in the event of any resurgence or variants that may affect public health and the economy.
Factors affecting our performance
We believe there are several important factors that have impacted and that we expect will continue to impact our business and results of operations. These factors include:
● Growing and supporting our U.S. commercial organization;
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● Seeking expanded labeling for Barostim and promoting awareness among physicians, hospitals and patients to accelerate adoption of Barostim;
● Raising awareness among payors to build upon reimbursement for Barostim;
● Investing in research and development to foster innovation and further simplify the Barostim procedure; and
● Leveraging our manufacturing capacity to further improve our gross margins.
Components of results of operations
Revenue
Our U.S. sales have increased since the pre-market approval of Barostim by the FDA in August 2019, and the subsequent reimbursement changes in 2020. We expect to continue to drive increases in revenue through our efforts to increase awareness of Barostim among physicians, patients and payors and by the expansion of our U.S. sales force, as well as by seeking expanded labeling for Barostim. As a result, we expect that U.S. sales will continue to account for the majority of our revenue going forward.
We derive a portion of our revenue from the sale of Barostim to hospitals in Germany and other select countries in Europe. Revenue from sales of Barostim in Europe fluctuates based on the average selling price of Barostim as determined by location of sale and channel mix, each of which may vary significantly from country to country. Our revenue from international sales can also be significantly impacted by fluctuations in foreign currency exchange rates.
Cost of goods sold and gross margin
Cost of goods sold consists primarily of acquisition costs of the components and subassemblies of Barostim, allocated manufacturing overhead and scrap and inventory obsolescence, as well as distribution-related expenses such as logistics and shipping costs. We expect cost of goods sold to increase in absolute dollars primarily as, and to the extent, our revenue grows. Gross margin may also vary based on regional differences in rebates and incentives negotiated with certain customers.
We calculate gross margin as revenue less cost of goods sold divided by revenue. Our gross margin has been and will continue to be affected by a variety of factors, but is primarily driven by the average sale price of our product, the percentage of products sold that include a full system (i.e., an IPG and a stimulation lead), as compared to individual IPG sales, and the allocated manufacturing overhead. Although we sell the majority of our devices directly to hospitals, the impact of the average selling price on gross margin is driven by the percentage of products we sold to distributors as compared to those sold directly to hospitals, as our average selling price is typically higher on products we sell directly. The full system sales typically have a lower gross margin as they include the cost of an IPG and a stimulation lead whereas individual IPG sales only include the cost of an IPG. The manufacturing overhead costs of Barostim are directly aligned to our production volume and therefore the cost per product is reduced if production levels increase. While we expect our gross margin to be positively affected over time to the extent we are successful in selling more product through our direct sales force and by increasing our production volumes, it will likely fluctuate from period to period as we continue to introduce new products and adopt new manufacturing processes and technologies.
Research and development expenses
Research and development (“R&D”) expenses consist primarily of personnel costs, including salaries, bonuses, employee benefits and stock-based compensation expenses for our R&D employees. R&D expenses also include costs associated with product design efforts, development prototypes, testing, clinical
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trial programs and regulatory activities, contractors and consultants, equipment and software to support our development, facilities and information technology. We expense R&D costs as they are incurred. We expect R&D expenses to increase in absolute dollars as we continue to develop enhancements to Barostim. Our R&D expenses may fluctuate from period to period due to the timing and extent of our product development and clinical trial expenses.
Selling, general and administrative expenses
Selling, general and administrative (“SG&A”) expenses consist primarily of personnel costs, including base salaries, bonuses, employee benefits and stock-based compensation expense for our sales and marketing personnel, including sales commissions, and for administrative personnel that support our general operations such as executive management, financial accounting, information technology and human resources personnel. SG&A expenses also include costs attributable to marketing, as well as travel, legal fees, financial audit fees, insurance, fees for other consulting services, depreciation and facilities. We expense commissions at the time of the sale.
We expect SG&A expenses to increase in absolute dollars as we continue to expand our direct sales force and commercial organization in the U.S. In addition, we will continue to increase our international presence and to develop and assist our channel partners. However, we expect our SG&A expenses to decrease as a percentage of revenue as our revenue grows.
Interest expense
Interest expense consists of interest on our debt and amortization of associated financing costs.
Other income (expense), net
Other income, net consists primarily of interest income on our interest-bearing account. Other expense, net consists primarily of the effect of exchange rates on our foreign currency-denominated asset and liability balances.
Provision for income taxes
Provision for income taxes consists primarily of income taxes in foreign jurisdictions in which we conduct business. We maintain a full valuation allowance for deferred tax assets including NOL carryforwards, R&D credits and other tax credits.
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Results of operations
Consolidated results of operations for the three months ended March 31, 2023, compared to the three months ended March 31, 2022
Three months ended
March 31,
Change
(unaudited and in thousands)
2023
2022
$
%
Revenue
$
7,979
$
4,076
$
3,903
96
%
Cost of goods sold
1,328
949
379
40
%
Gross profit
6,651
3,127
3,524
113
%
Gross margin
83
%
77
%
Operating expenses:
Research and development
3,416
2,258
1,158
51
%
Selling, general and administrative
15,397
10,777
4,620
43
%
Total operating expenses
18,813
13,035
5,778
44
%
Loss from operations
(12,162)
(9,908)
(2,254)
23
%
Interest expense
(240)
—
(240)
NM
Other income (expense), net
1,062
(57)
1,119
NM
Loss before income taxes
(11,340)
(9,965)
(1,375)
14
%
Provision for income taxes
(34)
(26)
(8)
31
%
Net loss
$
(11,374)
$
(9,991)
$
(1,383)
14
%
NM – Not meaningful
The following table provides revenue by geography:
Three months ended
March 31,
Change
(unaudited and in thousands)
2023
2022
$
%
United States
$
6,942
$
3,058
$
3,884
127
%
Europe
1,037
1,018
19
2
%
Total Revenue
$
7,979
$
4,076
$
3,903
96
%
Revenue was $8.0 million for the three months ended March 31, 2023, an increase of $3.9 million, or 96%, over the three months ended March 31, 2022.
Revenue generated in the U.S. was $6.9 million for the three months ended March 31, 2023, an increase of $3.9 million, or 127%, over the three months ended March 31, 2022. Total HF revenue units in the U.S. totaled 225 and 99 for the three months ended March 31, 2023 and 2022, respectively.
HF revenue in the U.S. totaled $6.8 million for the three months ended March 31, 2023, an increase of $3.9 million, or 132%, over the three months ended March 31, 2022. The increase was primarily driven by continued growth in the U.S. HF business as a result of the expansion into new sales territories, new accounts, and increased physician and patient awareness of Barostim.
As of March 31, 2023, we had a total of 122 active implanting centers as compared to 56 as of March 31, 2022. Active implanting centers are customers that have completed at least one commercial HF implant in the last 12 months. As of March 31, 2023, the Company had a total of 29 sales territories as compared to 17 as of March 31, 2022.
Revenue generated in Europe was $1.0 million for the three months ended March 31, 2023, an increase of $19,000, or 2%, over the three months ended March 31, 2022. Total revenue units in Europe were 52 for the three months ended March 31, 2023 as compared to 50 in the prior year period. As of March 31, 2023, we had a total of six sales territories in Europe.
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Cost of goods sold and gross margin
Cost of goods sold increased $0.4 million, or 40%, to $1.3 million for the three months ended March 31, 2023, compared to the three months ended March 31, 2022. This increase was primarily due to higher sales of Barostim.
Gross profit was $6.7 million for the three months ended March 31, 2023, an increase of $3.5 million, or 113%, over the three months ended March 31, 2022. Gross margin increased to 83% for the three months ended March 31, 2023, compared to 77% for the three months ended March 31, 2022. Gross margin for the three months ended March 31, 2023 improved due primarily to a decrease in the cost per unit driven by an increase in the production volume.
Research and development expenses
R&D expenses increased $1.2 million, or 51%, to $3.4 million for the three months ended March 31, 2023, compared to the three months ended March 31, 2022. This change was primarily driven by a $0.5 million increase in compensation expenses, mainly as a result of increased headcount, a $0.4 million increase in non-cash stock-based compensation expense and a $0.4 million increase in consulting fees.
Selling, general and administrative expenses
SG&A expenses increased $4.6 million, or 43%, to $15.4 million for the three months ended March 31, 2023, compared to the three months ended March 31, 2022. This change was primarily driven by a $2.6 million increase in compensation expenses, mainly as a result of increased headcount, a $0.8 million increase in travel expenses, a $0.6 million increase in marketing and advertising expenses associated with the commercialization of Barostim in the U.S. and a $0.5 million increase in non-cash stock-based compensation expense.
Interest expense
Interest expense increased $0.2 million for the three months ended March 31, 2023, compared to the three months ended March 31, 2022. This increase was driven by the interest expense on the Loan Agreement.
Other income (expense), net
Other income, net was $1.1 million for the three months ended March 31, 2023, compared to other expense, net of $0.1 million for the three months ended March 31, 2022. The income in the first quarter of 2023 was primarily driven by interest income on our interest-bearing account.
Provision for income taxes
Provision for income taxes was nominal for each of the three months ended March 31, 2023, and March 31, 2022.
Liquidity, capital resources and plan of operations
We have incurred significant operating losses and negative cash flows from operations since our inception, and we anticipate that we will incur significant losses for at least the next several years. As of March 31, 2023 and December 31, 2022, we had cash and cash equivalents of $103.3 million and $106.2 million, respectively. For the three months ended March 31, 2023 and 2022, our net losses were $11.4 million and $10.0 million, respectively. Our net cash used in operating activities for the three months ended March 31, 2023 and 2022 was $10.2 million and $10.6 million, respectively.
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On October 31, 2022, we entered into the Loan Agreement under which we may borrow, subject to our achievement of certain milestones, up to a total of $50.0 million in a series of term loans described in Note 4 to our consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q, and we borrowed $7.5 million of such total on that date to fund our commercial and investment efforts. On March 10, 2023, we borrowed the $7.5 million remaining under the first tranche of the Loan Agreement, with $4.0 million received on March 13, 2023 and $3.5 million received on March 15, 2023 . Following this draw, we have $15.0 million in outstanding term loans under the Loan Agreement. The Loan Agreement provides for up to two additional tranches of loans totaling up to an additional $35.0 million, based on timing, the achievement of certain trailing three months revenue targets and other conditions set forth in the Loan Agreement.
On November 4, 2022, we entered into an Equity Distribution Agreement with Piper Sandler & Co., as agent, under which we may offer and sell, from time to time at our sole discretion, shares of our common stock having an aggregate offering price of up to $50.0 million in an “at-the-market” or ATM offering, to or through the agent. As of March 31, 2023, no shares have been sold.
Our future liquidity and capital funding requirements will depend on numerous factors, including:
● our investment in our U.S. commercial infrastructure and sales forces;
● the degree and rate of market acceptance of Barostim and the ability for our customers to obtain appropriate levels of reimbursement;
● the costs of commercialization activities, including product sales, marketing, manufacturing and distribution;
● our R&D activities for product enhancements and to expand our indications;
● the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights;
● our need to implement additional infrastructure and internal systems;
● our ability to hire additional personnel to support our operations as a public company; and
● the emergence of competing technologies or other adverse market developments.
We believe that our existing cash resources and term loan facility together with revenue will be sufficient to meet our forecasted requirements for operating liquidity, capital expenditures and debt services for at least the next three years. If these sources are insufficient to satisfy our liquidity requirements, however, we may seek to sell additional equity or enter into an additional loan agreement. If we raise additional funds by issuing equity securities, our stockholders would experience dilution. Additional debt financing, if available, may involve covenants further restricting our operations or our ability to incur additional debt. Any such debt financing or additional equity that we raise may contain terms that are not favorable to us or our stockholders.
Additional financing may not be available at all or may only be available in amounts or on terms that we do not deem to be favorable. If we are unable to obtain additional financing when needed to satisfy our liquidity requirements, we may be required to delay the commercialization and marketing of Barostim.
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Cash flows
The following table sets forth the primary sources and uses of cash for each of the periods indicated below:
Three months ended
March 31
(unaudited)
(in thousands)
2023
2022
Net cash (used in) provided by:
Operating activities
$
(10,249)
$
(10,644)
Investing activities
(240)
(293)
Financing activities
7,568
48
Effect of exchange rate changes on cash and cash equivalents
3
(6)
Net change in cash and cash equivalents
$
(2,918)
$
(10,895)
Cash used in operating activities
Net cash used in operating activities for the three months ended March 31, 2023, was $10.2 million and consisted primarily of a net loss of $11.4 million and a decrease in net operating assets of $0.7 million, partially offset by a non-cash charge of $1.7 million related to stock-based compensation expense. Net operating assets consisted primarily of accounts receivable, inventory, prepaid expenses and other current assets, accounts payable and accrued expenses to support the growth of our operations.
Net cash used in operating activities for the three months ended March 31, 2022 was $10.6 million and consisted primarily of a net loss of $10.0 million and a decrease in net operating assets of $1.5 million, partially offset by a non-cash charge of $0.8 million related to stock-based compensation expense. Net operating assets consisted primarily of inventory, accounts receivable, prepaid expenses, accounts payable and accrued expenses to support the growth of our operations.
Cash used in investing activities:
Cash used in investing activities was $0.2 million and $0.3 million for each of the three months ended March 31, 2023 and 2022, respectively, and consisted of purchases of property and equipment.
Cash provided by financing activities:
Net cash provided by financing activities for the three months ended March 31, 2023, was $7.6 million and consisted of $7.5 million related to the proceeds under the Loan Agreement and $0.1 million related to proceeds from the exercise of common stock options, partially offset by $0.1 million related to debt financing costs.
Net cash provided by financing activities was nominal for the three months ended March 31, 2022, and was entirely attributed to the proceeds from the exercise of common stock options.
Contractual obligations and commitments
There have been no material changes to our contractual obligations as of March 31, 2023, as compared to those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022.
Critical accounting policies and estimates
For a discussion of our potential risks and uncertainties, see the information in Part II, Item 7. “Management's Discussion and Analysis of Financial Condition and Results of Operations—Critical accounting policies and estimates" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022. We have
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reviewed and determined that those critical accounting policies and estimates remain our critical accounting policies and estimates as of and for the three months ended March 31, 2023.
JOBS Act accounting election
The JOBS Act permits an “emerging growth company” such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies until those standards would otherwise apply to private companies. We have elected to use this extended transition period under the JOBS Act until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our financial statements may not be comparable to the financial statements of issuers who are required to comply with the effective dates for new or revised accounting standards that are applicable to public companies, which may make comparison of our financials to those of other public companies more difficult.
Recent accounting pronouncements
A discussion of recent accounting pronouncements is included in Note 2 to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
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