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 indicated by the U.S. Food and Drug Administration (“FDA”) for patients who are NYHA Class III or II (who had a recent history of Class III) despite treatment with guideline-directed medical therapies (medications and devices), have a LVEF ≤ 35% and a NT-proBNP < 1600 pg/m and is CE Marked for HFrEF and resistant hypertension.
Since our inception, 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 significant 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 payers, 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 payers, such as government agencies and commercial payers. 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 payers. All Medicare Administrative Contractors have retired their official automatic coverage denial policies for our Current Procedural Terminology codes, thereby allowing hospitals to submit payment requests for the Barostim procedure to be adjudicated on a claim-by-claim basis. Our reimbursement strategy involves continuing to broaden our current coverage and
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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, 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.
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 have continued investing in research and development 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 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 condensed 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. On December 15, 2023, we borrowed $15.0 million under the second tranche of the Loan Agreement. W e had $30.0 million in outstanding Term Loans under the Loan Agreement as of March 31, 2024. The Loan Agreement provides for an additional tranche of up to $20.0 million, based on the timing 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 December 2023, the FDA approved expanded labeling for Barostim based on the BeAT-HF trial data, resulting in simplification and clarification of the indications for use as well as inclusion of the primary endpoint results, the 6, 12 and 24 month symptomatic data, the Win Ratio and the all-cause mortality data in the “Clinical Summary” discussion included in Barostim’s instructions for use. This data was published in the European Journal of Heart Failure in April 2024.
We believe our annual market opportunity in the U.S. increased to an estimated $2.2 billion, or 76,000 patients, based on this new long-term safety and effectiveness data as well as our commercial experience and, as discussed below, the new reimbursement assignment for Barostim in 2024.
In the 2024 OPPS final rule issued in November 2023, Barostim was reassigned to New Technology APC 1580, which carries an average payment amount of $45,000. The new payment took effect January 1, 2024.
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On January 31, 2024, we announced that our Board of Directors appointed Kevin Hykes as President and Chief Executive Officer, effective February 12, 2024. Mr. Hykes succeeded Nadim Yared, who previously announced his plan to retire upon the appointment of his successor. Mr. Hykes has served as a member of the Board of Directors since December 2022 and remained on the Board of Directors. Mr. Yared retired from the Board at the time of his retirement as Chief Executive Officer.
In April 2024, we announced the termination of the employment of our Senior Vice President of U.S. Sales, effective April 29, 2024. Pursuant to his employment agreements, he is eligible for severance benefits provided that he signs a release of claims in favor of the Company and complies with certain covenants, including non-competition and non-solicitation restrictions.
In April 2024, we announced that we were suspending enrollment in the BATwire clinical trial due to slow enrollment, given that many patient candidates elected the commercially approved procedure, as opposed to participating in the trial. We intend to continue following the patients enrolled in the BATwire trial until the study is completed.
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;
● Seeking expanded labeling for Barostim and promoting awareness among physicians, hospitals and patients to accelerate adoption of Barostim;
● Raising awareness among payers to build upon reimbursement for Barostim;
● Investing in research and development to foster innovation; and
● Leveraging our manufacturing capacity to further improve our gross margins.
Components of results of operations
Revenue
Our U.S. sales have steadily increased since the pre-market approval of Barostim by the FDA in August 2019, and the subsequent reimbursement changes. We expect to continue to drive increases in revenue through our efforts to increase awareness of Barostim among physicians, patients and payers, 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
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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 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, net
Other income, net consists primarily of interest income on our interest-bearing accounts, partially offset by the effect of exchange rates on our foreign currency-denominated asset and liability balances.
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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.
Results of operations
Consolidated results of operations for the three months ended March 31, 2024, compared to the three months ended March 31, 2023
Three months ended
March 31,
Change
(unaudited and in thousands)
2024
2023
$
%
Revenue
$
10,770
$
7,979
$
2,791
35
%
Cost of goods sold
1,615
1,328
287
22
%
Gross profit
9,155
6,651
2,504
38
%
Gross margin
85
%
83
%
Operating expenses:
Research and development
3,057
3,416
(359)
(11)
%
Selling, general and administrative
28,330
15,397
12,933
84
%
Total operating expenses
31,387
18,813
12,574
67
%
Loss from operations
(22,232)
(12,162)
(10,070)
83
%
Interest expense
(960)
(240)
(720)
300
%
Other income, net
1,044
1,062
(18)
(2)
%
Loss before income taxes
(22,148)
(11,340)
(10,808)
95
%
Provision for income taxes
(38)
(34)
(4)
12
%
Net loss
$
(22,186)
$
(11,374)
$
(10,812)
95
%
The following table provides revenue by geography:
Three months ended
March 31,
Change
(unaudited and in thousands)
2024
2023
$
%
United States
$
9,835
$
6,942
$
2,893
42
%
Europe
935
1,037
(102)
(10)
%
Total Revenue
$
10,770
$
7,979
$
2,791
35
%
Revenue was $10.8 million for the three months ended March 31, 2024, an increase of $2.8 million, or 35%, over the three months ended March 31, 2023.
Revenue generated in the U.S. was $9.8 million for the three months ended March 31, 2024, an increase of $2.9 million, or 42%, over the three months ended March 31, 2023. HF revenue units in the U.S. totaled 319 and 225 for the three months ended March 31, 2024 and 2023, respectively. HF revenue in the U.S. totaled $9.7 million and $6.8 million for the three months ended March 31, 2024 and 2023, respectively. The increases were 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. These increases were partially offset by decreased productivity in February due primarily to turnover within the sales organization. We implemented actions to address these challenges in our U.S. Heart Failure business to rebuild these territories, resulting in stronger performance in March.
As of March 31, 2024, we had a total of 190 active implanting centers, as compared to 122 as of March 31, 2023. Active implanting centers are customers that have completed at least one commercial HF implant in the
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last 12 months. As of March 31, 2024, we had a total of 39 sales territories as compared to 29 as of March 31, 2023.
Revenue generated in Europe was $0.9 million for the three months ended March 31, 2024, a decrease of $0.1 million, or 10%, over the three months ended March 31, 2023. Total revenue units in Europe decreased to 44 for the three months ended March 31, 2024, as compared to 52 in the prior year period. As of both March 31, 2024 and 2023, we had six sales territories in Europe.
Cost of goods sold and gross margin
Cost of goods sold increased $0.3 million, or 22%, to $1.6 million for the three months ended March 31, 2024, compared to the three months ended March 31, 2023. This increase was driven by higher sales of Barostim.
Gross profit was $9.2 million for the three months ended March 31, 2024, an increase of $2.5 million, or 38%, over the three months ended March 31, 2023. Gross margin increased to 85% for the three months ended March 31, 2024, compared to 83% for the three months ended March 31, 2023. This increase was 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 decreased $0.4 million, or 11%, to $3.1 million for the three months ended March 31, 2024, compared to the three months ended March 31, 2023. This change was driven by a $0.2 million decrease in non-cash stock-based compensation expense, and a $0.2 million decrease in consulting expenses.
Selling, general and administrative expenses
SG&A expenses increased $12.9 million, or 84%, to $28.3 million for the three months ended March 31, 2024, compared to the three months ended March 31, 2023. This change was primarily driven by a $9.6 million increase in non-cash stock-based compensation expense, a $2.0 million increase in compensation expenses, mainly as a result of increased headcount, and a $0.6 million increase in travel expenses. Approximately $8.4 million of the increase in non-cash stock-based compensation expense is related to the modification of stock options held by the former CEO in connection with his retirement in the first quarter of 2024 described in Note 7 to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
Interest expense
Interest expense increased $0.7 million for the three months ended March 31, 2024, compared to the three months ended March 31, 2023. This increase was driven by the interest expense on borrowings under the Loan Agreement entered into on October 31, 2022.
Other income, net
Other income, net decreased $18,000 for the three months ended March 31, 2024, compared to the three months ended March 31, 2023. This decrease was primarily driven a lower cash balance in our interest-bearing accounts.
Provision for income taxes
Provision for income taxes was nominal for each of the three months ended March 31, 2024 and March 31, 2023.
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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, 2024 and December 31, 2023, we had cash and cash equivalents of $80.1 million and $90.6 million, respectively. For the three months ended March 31, 2024 and 2023, our net losses were $22.2 million and $11.4 million, respectively. Our net cash used in operating activities for the three months ended March 31, 2024 and 2023 was $10.9 million and $10.2 million, respectively.
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 condensed 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. On December 15, 2023, we borrowed $15.0 million under the second tranche of the Loan Agreement. We had $30.0 million in outstanding Term Loans under the Loan Agreement as of March 31, 2024. The Loan Agreement provides for an additional tranche of up to $20.0 million, based on the timing 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. In January 2024, we commenced this ATM offering and issued 23,364 shares of common stock for gross proceeds of $0.6 million under the ATM offering during the three months ended March 31, 2024. We have remaining capacity to issue and sell up to approximately $49.4 million of additional shares of common stock under this ATM offering.
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 Loan Agreement for Term Loans 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, or provide funding to execute or accelerate our growth strategies, 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
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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.
Cash flows
The following table sets forth the primary sources and uses of cash for each of the periods presented below:
Three months ended
March 31,
(unaudited)
(in thousands)
2024
2023
Net cash (used in) provided by:
Operating activities
$
(10,896)
$
(10,249)
Investing activities
(917)
(240)
Financing activities
1,362
7,568
Effect of exchange rate changes on cash and cash equivalents
(3)
3
Net change in cash and cash equivalents
$
(10,454)
$
(2,918)
Cash used in operating activities
Net cash used in operating activities for the three months ended March 31, 2024 was $10.9 million and consisted primarily of a net loss of $22.2 million, partially offset by a non-cash charge of $11.1 million related to stock-based compensation expense.
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.
Cash used in investing activities:
Cash used in investing activities was $0.9 million and $0.2 million for the three months ended March 31, 2024 and 2023, 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, 2024 was $1.4 million and consisted of $0.8 million related to proceeds from the exercise of common stock options and $0.5 million related to proceeds from the issuance of common stock through the ATM offering.
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.
Contractual obligations and commitments
There have been no material changes to our contractual obligations as of March 31, 2024, as compared to those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2023.
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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, 2023. We have 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, 2024.
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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