What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2023-03-02 compared with 2022-03-10 · 112 added, 164 removed, 186 unchanged (60% of the section changed)

3 unchanged sentences

Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of several factors, including those set forth under Part I, Item 1A, “Risk Factors” and elsewhere in this Annual Report on Form 10-K.

We are a commercial-stage medical device company focused on transforming the lives of people suffering from epilepsy by reducing or eliminating the occurrence of debilitating seizures.

We are a commercial-stage medical device company focused on transforming the lives of people living with epilepsy by reducing or eliminating the occurrence of debilitating seizures.

Our novel and differentiated RNS System is the first and only commercially available, brain-responsive neuromodulation system that delivers personalized, real-time treatment at the seizure source.

3 unchanged sentences

Our RNS System is currently indicated in the United States for use in adult epilepsy patients, meaning patients who are 18 years of age or older, with drug-resistant focal epilepsy.

As of December 31, 2021, nearly 4,000 epilepsy patients have received our RNS System.

As of December 31, 2022, over 4,000 epilepsy patients have received our RNS System.

We believe our compelling body of long-term clinical data, demonstrating continuous improvement in outcomes over time, will support the continued adoption of our RNS System among the approximately 575,000 adults in the United States with drug-resistant focal epilepsy.

We continue seeking indication expansion to, over time, more broadly reach the entire approximately 1.2 million drug-resistant epilepsy patients in the United States and may additionally seek to expand our operations to reach the approximately 16.5 million drug-resistant epilepsy patients globally.

Our commercial efforts are focused on the comprehensive epilepsy centers, or Level 4 CECs, that facilitate appropriate care for drug-resistant epilepsy patients, including procedures for implantation of epilepsy neuromodulation devices such as our RNS System.

While most drug-resistant epilepsy patients begin their care at physician offices or community hospitals, we estimate that approximately 24,000 adult drug-resistant focal epilepsy patients are treated in Level 4 CECs in the United States each year.

We estimate that this patient pool represents an annual core market opportunity of approximately $1.1 billion for initial RNS System implants, and we expect that it will continue to grow as both the number of Level 4 CECs and the number of epilepsy specialists increase, and as more patients are referred to these CECs.

We continue seeking indication expansion to, over time, more broadly reach the entire approximately 1.2 million drug-resistant epilepsy patients in the United States and have begun enrollment in clinical studies to broaden our indication including into generalized epilepsy.

We may additionally seek to expand our operations to reach the approximately 16.5 million drug-resistant epilepsy patients globally.

Our commercial efforts are focused on the comprehensive epilepsy centers, or CECs, including Level 4 CECs, that facilitate appropriate care for drug-resistant epilepsy patients.

This may include implantation of epilepsy neuromodulation devices such as our RNS System or the ongoing treatment of patients with neuromodulation devices.

We estimate that this patient pool represents an annual core market opportunity of approximately $1.1 billion for initial RNS System implants, and we expect that it will continue to grow as the number of CECs and the number of epileptologists increase, as more patients are referred to these CECs, and as more care for RNS-implanted patients can happen outside of the CECs.

In addition, the sale of replacement neuromodulation devices when the battery in our RNS neurostimulator approaches end of service provides a recurring revenue stream that is additive to our current $1.1 billion annual market opportunity for initial implants.

We received Premarket Approval, or PMA, from the FDA for our RNS System in late 2013 and began the commercial rollout of our RNS System in early 2014.

We market our RNS System in the United States through a direct sales organization primarily to the epileptologists and neurosurgeons who respectively prescribe and implant neuromodulation devices in the approximately 200 Level 4 CECs in the United States.

We have established a significant account base at these Level 4 CECs.

Given the concentrated and underpenetrated nature of our target market, we believe there is a significant opportunity to efficiently grow our account base, drive higher utilization within these centers, and expand our referral channel to increase the number of drug-resistant patients referred to Level 4 CECs with accelerated salesforce expansion.

We have established a significant account base at these CECs.

Given the concentrated and underpenetrated nature of our target market, we believe that through our sales force, there is a significant opportunity to efficiently drive higher utilization within these centers, grow our account base, and expand our referral channel to increase the number of drug-resistant patients referred to the CECs.

The implant procedure for our RNS System and the ongoing patient treatment provided by clinicians, including monitoring and programming, are reimbursed under well-established physician and hospital codes.

5 unchanged sentences

We believe the established, differentiated, and favorable reimbursement paradigm for our RNS System will continue to support its broad commercial adoption.

We currently manufacture our RNS System at and distribute all of our products from our approximately 53,000 square foot facility in Mountain View, California.

We currently manufacture our RNS System at and distribute our products from our approximately 53,000 square foot facility in Mountain View, California.

This facility provides approximately 20,000 square feet of space for our production and distribution operations, including manufacturing, quality control and storage.

1 unchanged sentence

Since our inception, we have generated significant losses.

To date, we have financed our operations primarily through private placements of equity securities, debt financing arrangements and sales of our products.

We generated revenue of $45.2 million, with a gross margin of 74.0% and a net loss of $36.1 million, for the year ended December 31, 2021, compared to revenue of $41.1 million, with a gross margin of 73.6% and a net loss of $24.3 million, for the year ended December 31, 2020.

To date, we have financed our operations primarily through the sale of equity securities, debt financing arrangements and sales of our products.

As of December 31, 2022, we had an accumulated deficit of $470.9 million, cash, cash equivalents and short-term marketable debt securities of $77.4 million, and $52.9 million of outstanding term loans, net of debt discount and issuance costs.

In January and March 2020, we raised $7.1 million and $5.4 million, respectively, through the sale and issuance of convertible notes, or the 2020 Convertible Notes.

In August 2020, we received $33.0 million in gross proceeds by issuing and selling 7,599,720 shares of our Series B’ convertible preferred stock at a price of $4.3423 per share.

In addition, in connection with the Series B’ offering, all of our outstanding convertible notes were converted into 8,379,410 shares of Series B’ convertible preferred stock.

In September 2020, as amended in March 2022, we entered into a new Term Loan Agreement, or the New Term Loan, with CRG Partners IV L.P.

and its affiliates for total borrowings of up to $60 million and borrowed $50 million.

We used the proceeds from the New Term Loan to repay the principal, interest, and fees due under the previously existing term loan.

On April 21, 2021, we completed our initial public offering of our common stock, or IPO, in which we issued and sold an aggregate of 6,900,000 shares of common stock (inclusive of 900,000 shares pursuant to the exercise by the underwriters of their option) at a price of $17.00 per share for aggregate cash proceeds of approximately $105.5 million, net of underwriting discounts and commissions and offering costs.

The sale and issuance of 6,900,000 shares in the IPO closed on April 26, 2021.

Upon the closing of the IPO on April 26, 2021, all outstanding shares of redeemable convertible preferred stock automatically converted into 16,614,178 shares of common stock.

Subsequent to the closing of the IPO, there were no shares of redeemable convertible preferred stock outstanding.

We have invested heavily and expect to continue to invest in research and development and commercial activities.

These research and development expenses include clinical studies to demonstrate the safety and efficacy of our RNS System and to obtain, as well as retain, FDA approval.

We intend to continue making significant investments in research and development, clinical studies and regulatory affairs to support ongoing and future regulatory submissions for retaining and expanding indications of our RNS System, including to adolescent patients, ages 12-17, and drug-resistant generalized epilepsy patients, support continuous improvements to our RNS System, and develop future products that address neurological disorders.

Our research and development activities include clinical studies to demonstrate the safety and efficacy of our RNS System, including in expanded indications, and to obtain, as well as retain, FDA approval.

We intend to continue making significant investments in research and development, clinical studies and regulatory affairs to support ongoing and future regulatory submissions for retaining and expanding indications of our RNS System, including to patients with drug-resistant generalized epilepsy and adolescent patients, ages 12-17, support continuous improvements to our RNS System, and develop future products that address neurological disorders.

We have also made significant investments in building our field commercial team and intend to make significant investments in sales and marketing efforts in the future, including initiatives to drive awareness and expand our referral channel to increase the number of drug-resistant epilepsy patients referred to Level 4 CECs.

Moreover, we expect to continue to incur additional expenses associated with operating as a public company.

We may in the future seek to acquire or invest in additional

businesses, products, or technologies that we believe could complement or enhance our products, enhance our technical capabilities or otherwise offer growth opportunities, although we currently have no agreements or understandings with respect to any such acquisitions or investments.

Moreover, we expect to continue to incur expenses associated with operating as a public company.

We may in the future seek to acquire or invest in additional businesses, products, or technologies that we believe could complement or enhance our products, enhance our technical capabilities or otherwise offer growth opportunities, although we currently have no agreements or understandings with respect to any such acquisitions or investments.

Because of these and other factors, we expect to continue to incur net losses and negative cash flows for the next several years.

2 unchanged sentences

Recent Developments

Impact of the COVID-19 Pandemic

Since it was reported to have surfaced in December 2019, the SARS-CoV-2 strain of coronavirus, or COVID-19, has spread across the world, being declared a pandemic by the World Health Organization.

Efforts to contain the spread of COVID-19 have been significant and governments around the world, including in the United States, have implemented severe travel restrictions, social distancing requirements, quarantines, stay-at-home orders and other significant restrictions.

As a result, the current COVID-19 pandemic has presented a substantial public health and economic challenge and is affecting hospitals, physicians, patients, communities and business operations, as well as contributing to significant volatility and negative pressure on the U.S.

and world economy and in financial markets.

The COVID-19 pandemic has negatively impacted our business, financial condition and results of operations by decreasing and delaying procedures performed to implant our RNS System, delaying and decreasing epilepsy diagnostic evaluations at epilepsy monitoring units, or EMUs, as well as creating hospital staffing shortages and periodic increased vacation demand as a result of loosening travel restrictions, and we expect the pandemic will continue to negatively impact our business, financial condition and results of operations.

Beginning in March 2020 and through today, our net sales continue to be negatively impacted by the COVID-19 pandemic as hospitals delay or cancel elective procedures, including because of staffing shortages and patients fearing potential exposure.

Many state and local governments in the U.S.

have issued periodic orders that temporarily preclude elective procedures in order to conserve scarce health system resources in view of the pandemic and to protect patient health.

The decreases in hospital admission rates and elective surgeries have reduced the demand for elective procedures, including implantation of our RNS System.

In addition, hospitals delayed or cancelled admissions for epilepsy diagnostic evaluations which we believe has reduced and will continue to temporarily reduce our patient pipeline.

In response to the COVID-19 pandemic, we have made investments to implement a variety of measures intended to help us manage its impact while maintaining business continuity to support our customers and patients.

These measures include:

• Establishing safety protocols, facility enhancements, and work-from-home strategies to protect our employees;

• Ensuring that our manufacturing and supply chain operations remain intact and operational;

• Keeping our workforce intact, including our experienced and specialized U.S.

sales and clinical support team;

• Developing new methods of supporting physicians remotely in their use of our RNS System;

• Implementing virtual physician training programs to support opening new accounts with minimal in person interaction;

• Continuing our physician education programs and direct-to-patient marketing efforts through social media and other virtual forums;

• Increasing our capital resources through the issuance of our Series B’ convertible preferred stock in August 2020 and through the completion of our IPO in April 2021.

While our hospital customers began to gradually perform elective epilepsy procedures again during the second half of 2020, we saw another reduction in these procedures in late 2020 and during parts of 2021.

Our business was negatively impacted in the third quarter due to the rise in COVID-19 Delta variant cases, increased vacation demand and hospital staffing shortages and in the fourth quarter due to the rise in COVID-19 Omicron variant cases and ongoing hospital staffing shortages.

We believe the challenges resulting from COVID-19 will likely continue for the duration of the pandemic, which is uncertain, and will continue to impact our revenue and negatively impact our business, financial condition and results of operations.

While our business did grow in 2021, we continue to experience variability in RNS procedures, largely coinciding with periodic spikes in COVID-19 cases.

Given the dramatic increase in COVID-19 infections in the beginning of 2022, we cannot provide assurance that we will not experience additional negative impacts associated with COVID-19, which could be significant.

We believe that we may see fluctuations in RNS System procedures as the impact of COVID-19 continues.

In addition, due to the pandemic, our patient pipeline may continue to be reduced temporarily due to a delay in the diagnostic evaluations that are used to identify appropriate patients for our RNS System.

Further, once the pandemic subsides, there may be a substantial backlog of EMU admissions and of procedures to be performed at hospitals for a variety of medical conditions.

As a result, patients seeking treatment with our RNS System may have to navigate limited provider capacity.

We believe this limited EMU and hospital capacity could have a significant adverse effect on our business, financial condition and results of operations throughout the remainder of and following the end of the pandemic.

We experienced unusual seasonality in the third quarter and may experience seasonality in the future as certain pandemic restrictions are relaxed and physicians and patients take vacations, resulting in a reduction in RNS procedures.

Additionally, hospitals continue to experience staffing shortages and may experience them in future, also resulting in a reduction in RNS procedures.

The extent to which the COVID-19 pandemic impacts our business will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity and spread of COVID-19 and its variants and the actions to contain the spread of COVID-19 and its variants or treat its impact, among others.

Our financial statements reflect judgments and estimates that could change in the future as a result of the COVID-19 pandemic.

COVID-19 Pandemic Update

Our business, financial condition and results of operations have been and may continue to be significantly impacted by the COVID-19 pandemic.

Beginning in 2020, our revenue has been negatively impacted and has experienced volatility as hospitals delayed or canceled elective procedures in response to the pandemic, including

procedures to implant our RNS System.

In addition, hospitals have delayed or canceled admissions for epilepsy diagnostic evaluations, which has reduced and may continue to reduce our patient pipeline.

By the second half of 2022, the impact of the COVID-19 pandemic on our revenue had diminished.

However, the extent to which the pandemic continues to adversely impact our business, financial condition and results of operations is dependent on future developments that are highly uncertain and cannot be predicted, including the emergence of new COVID-19 variants and spikes in COVID-19 cases.

For further information, refer to “Risk Factors” in Part II, Item 1A of this Annual Report on Form 10-K.

DIXI Distribution Agreement

In August 2022, we entered into an exclusive distribution agreement, or the Distribution Agreement, with DIXI Medical USA Corp., or DIXI Medical, pursuant to which we became the exclusive U.S.

distributor of DIXI Medical’s product line beginning in October 2022.

DIXI Medical is a subsidiary of a European company that pioneered the development of stereo electroencephalography, or Stereo EEG, electrodes and related products.

These products are used in the epilepsy monitoring units, or EMUs, of comprehensive epilepsy centers to determine where epileptic seizures originate.

In addition to providing us with an incremental revenue stream, the DIXI Medical partnership will provide us with improved visibility of patients moving through the EMUs, many of whom may be candidates for our RNS System.

This synergistic partnership leverages our field organization that is already calling on the same customers and supports our objective to engage earlier in the diagnostic and therapy selection process.

DIXI Medical will supply us with ongoing commercial support and will supply us with DIXI Medical products as ordered by us.

In consideration for DIXI Medical’s ongoing commercial support, we paid DIXI Medical $2.0 million in the fourth quarter of 2022 and will pay $1.25 million in each of the fourth quarters of 2023 and 2024, for a total of $4.5 million.

We recognized incremental operating expenses of approximately $1.3 million primarily in the fourth quarter of 2022 associated with the distribution launch.

We will incur ongoing expenses in connection with our performance under the Distribution Agreement, although we expect that ongoing quarterly expenses will be less than in the fourth quarter of 2022.

Factors Affecting our Performance

5 unchanged sentences

In addition, we intend to publish additional clinical data in scientific journals and to continue presenting at medical conferences.

We plan to continue building patient awareness through increasing direct-to-patient marketing initiatives, which include advertising, social media and online education.

We also intend to continue supporting patient and referring clinician outreach efforts to help increase the number of appropriate patients with drug-resistant epilepsy being treated at Level 4 CECs.

We plan to continue building patient awareness through direct-to-patient marketing initiatives, which include advertising, social media and online education.

We also intend to continue supporting patient and referring clinician outreach efforts to help increase the number of appropriate patients with drug-resistant epilepsy being treated at CECs.

These efforts require significant investment by our marketing and sales organization.

2 unchanged sentences

Significant education and training is required for our team to achieve the level of technical competency with our products that is expected by clinicians and to gain experience building demand for our RNS System.

completion of initial training, our personnel typically require time in the field to grow their network of accounts, build relationships with clinicians and increase their productivity to the levels we expect.

We believe successfully training, developing and retaining our Therapy Consultants and Field Clinical Engineers will be required to achieve growth.

Upon completion of initial training, our personnel typically require time in the field to grow their network of accounts, build relationships with clinicians and increase their productivity to the levels we expect.

We believe successfully training, developing and retaining our Therapy Consultants and Field Clinical Engineers will be required to achieve

In addition, the loss of any productive sales personnel would have a negative impact on our ability to grow our business.

15 unchanged sentences

While research and development and clinical studies are time consuming and costly, we believe that a pipeline of product enhancements and new products that improve efficacy, safety and ease of use is important for supporting increased adoption of our RNS System.

Change in Procedure Mix Due to Longer Device Replacement Cycle

Change in Product Mix

We derive revenue from sales of our RNS System to hospital facilities both for initial RNS System implant procedures and for replacement procedures when our implanted devices reach end of service.

We launched our current neurostimulator model in 2018.

The FDA recently approved labeling changes indicating that this device has an average battery life of nearly eleven years, an increase from the previous assumption of eight years.

This device has an average battery life of nearly eleven years, an increase from the previous model of the device.

We expect that our revenue from replacement procedures will decrease over the next few years as a result of the extended replacement cycle of the newer device.

In addition, a change in procedure mix between initial and replacement procedures may have a negative impact on our gross margin.

Beginning in the fourth quarter of 2022, we also derive revenue from sales of DIXI Medical products.

A change in product mix between sales of our RNS System and DIXI Medical products may have a negative impact on our gross margin.

Components of Our Results of Operations

We derive substantially all our revenue from sales of our RNS System to hospital facilities (typically Level 4 CECs) that implant our RNS System.

We derive most of our revenue from sales of our RNS System to hospital facilities (typically Level 4 CECs) that implant our RNS System.

We currently deliver our RNS System to a hospital on the date of the scheduled procedure.

2 unchanged sentences

Our revenue also fluctuates and in the future will continue to fluctuate from quarter-to-quarter due to a variety of factors, including the success of our sales force in expanding adoption of our RNS System in new accounts and the number of physicians who are aware of and prescribe our RNS System.

Beginning in the fourth quarter of 2022, we also derive revenue from sales of DIXI Medical products, primarily to our current customer base.

Our revenue from the sale of DIXI Medical products will fluctuate in the future due to a variety of factors, including our ability to take market share from competitive SEEG products.

Cost of Goods Sold and Gross Margin

Cost of goods sold consists primarily of costs related to materials, components and subassemblies, payroll and personnel-related expenses for our manufacturing and quality assurance employees, including expenses related to stock-based compensation, manufacturing overhead, charges for excess, obsolete and non-sellable inventories, and royalties.

Cost of goods sold consists primarily of costs related to materials, components and subassemblies, personnel-related expenses for our manufacturing and quality assurance employees, including stock-based compensation, manufacturing overhead, charges for excess, obsolete and non-sellable inventories, and royalties.

Overhead costs include the cost of quality assurance, testing, material procurement, inventory control, operations supervision and management personnel, an allocation of facilities and information technology expenses, including rent and utilities, and equipment depreciation.

1 unchanged sentence

We record adjustments to our inventory valuation for estimated excess, obsolete and non-sellable inventories based on assumptions about future demand, past usage, changes to manufacturing processes and overall market conditions.

We expect cost of goods sold to increase in absolute dollars as more of our RNS Systems are sold.

Beginning in the fourth quarter of 2022, cost of goods sold also includes costs of procuring DIXI Medical products.

We expect cost of goods sold to increase in absolute dollars as more of our RNS Systems and DIXI Medical products are sold.

We calculate gross margin as gross profit divided by revenue.

Our gross margin has been and will continue to be affected by a variety of factors, primarily by our manufacturing costs and pricing.

Our gross margin has been and will continue to be affected by a variety of factors, primarily by our manufacturing costs, pricing and product mix.

Our gross margin may increase over the long term to the extent our production volume increases as our fixed manufacturing costs would be spread over a larger number of units, thereby reducing our per-unit manufacturing costs.

4 unchanged sentences

Our research and development activities primarily consist of engineering and research programs associated with our products under development and clinical studies.

Research and development expenses include payroll and personnel-related costs for our research and development employees, including expenses related to stock-based compensation, consulting services, clinical trial expenses, regulatory expenses, prototyping, testing, materials and supplies, and allocated overhead including facilities and information technology expenses.

Research and development expenses include personnel-related costs for our research and development employees, including stock-based compensation, and expenses related to consulting services, clinical trials, regulatory activities, prototyping, testing, materials and supplies, and allocated overhead including facilities and information technology expenses.

Our clinical trial expenses include costs associated with clinical trial design, clinical trial site development and study costs, data management costs, related travel expenses, the cost of products used for clinical activities, and costs associated with our regulatory compliance.

We expense research and development costs as they are incurred.

We expect our research and development expenses to increase in absolute dollars as we hire additional personnel to develop new product offerings and product enhancements and conduct studies for expanded indications for use.

We expect our research and development expenses to increase in absolute dollars as we continue to develop new product offerings and product enhancements and conduct studies for expanded indications for use.

Selling, General and Administrative Expenses

Our selling, general and administrative expenses consist primarily of payroll and personnel-related costs for our sales and marketing personnel, including stock-based compensation and sales-based variable compensation, travel expenses, consulting, public relations costs, direct marketing, customer training, trade show and promotional expenses and allocated facility and information technology expenses, and for administrative personnel that support our general operations such as executive management, information technology, finance, accounting, customer services, human resources and legal personnel.

Our selling, general and administrative expenses consist primarily of personnel-related costs for our sales and marketing employees, including stock-based compensation and sales-based variable compensation, travel expenses, consulting, public relations costs, direct marketing, customer training, trade show and promotional expenses and allocated facility and information technology expenses, and for administrative personnel that support our general operations such as executive management and information technology, finance, accounting, customer services, human resources and legal personnel.

We expense sales variable compensation when revenue related to the underlying sale is recognized.

1 unchanged sentence

We intend to continue to increase our sales and marketing spending to support increased adoption of our RNS System.

We expect our sales and marketing expenses to increase in absolute dollars as we add programs in order to more fully penetrate the market opportunity.

We expect our administrative expenses, including stock-based compensation expense, to increase as we increase our headcount and expand our systems to support our operations

as a public company.

Additionally, we anticipate increased expenses related to audit, legal, regulatory and tax-related services associated with being a public company, compliance with exchange listing and Securities and Exchange Commission, or SEC, requirements, director and officer insurance premiums and investor relations costs.

We expect our sales and marketing expenses will increase in absolute dollars as we hire additional personnel and add programs in order to more fully penetrate the market opportunity.

We expect our administrative expenses, including stock-based compensation expense, will increase as we increase our headcount and expand our systems to support our operations as a public company.

Additionally, we may incur increased expenses related to audit, legal, regulatory and tax-related services associated with being a public company, compliance with exchange listing and Securities and Exchange Commission, or SEC, requirements, and director and officer insurance premiums.

Our selling, general and administrative expenses may fluctuate from period to period as we continue to grow.

Interest Expense and Income

Interest expense consists primarily of interest expense related to our term loan facilities and convertible notes, including amortization of debt discount and issuance costs.

Interest expense consists primarily of interest expense related to our term loan facility, including amortization of debt discount and issuance costs.

Interest income is predominantly derived from investing surplus cash in money market funds and short-term marketable debt securities.

Other Income (Expense), Net

Other income (expense), net primarily consists of changes in the fair value of our derivative instrument and redeemable convertible preferred stock warrant liability.

Other income (expense), net primarily consists of changes in the fair value of our redeemable convertible preferred stock warrant liability.

Results of Operations

13 unchanged sentences

Interest expense (7,529) (7,410) (119) 2 %

Other income (expense), net (5,381) 218 (5,599) NM

Other income (expense), net (337) (5,381) 5,044 (94) %

Net loss $ (47,082) $ (36,080) $ (11,002) 30 %

NM = Not Meaningful

Revenue increased by $0.3 million, or 1%, to $45.5 million during the year ended December 31, 2022, compared to $45.2 million during the year ended December 31, 2021.

The increase in revenue was primarily due to an increase in the number of units sold for initial implant procedures, partially offset by a decrease in units sold for replacement implant procedures, in the year ended December 31, 2021 as compared to the year ended December 31, 2020.

The increase in revenue was primarily due to an increase in the number of units sold for initial implant procedures as well as an increase in pricing, and the addition of sales of DIXI Medical products which began in the fourth quarter of 2022, partially offset by a decrease in units sold for replacement implant procedures in the year ended December 31, 2022 as compared to the year ended December 31, 2021.

Initial implant revenue was $35.7 million in the year ended December 31, 2022, a 6% increase from $33.7 million in the prior year period.

Replacement implant revenue was $11.5 million in the year ended December 31, 2021, a 12% decrease compared to the prior year period.

Replacement implant revenue was $8.2 million in the year ended December 31, 2022, a 29% decrease from $11.5 million in the prior year period.

This reduction in replacement implant revenue was expected due to the longer replacement cycle of our newer device.

DIXI Medical products was $1.6 million compared to $0 in the prior year period, as we began distributing these products in the fourth quarter of 2022.

All of our revenue was generated from sales in the United States.

1 unchanged sentence

Cost of goods sold increased by $1.3 million, or 11%, to $13.0 million during the year ended December 31, 2022, compared to $11.7 million during the year ended December 31, 2021.

The increase was primarily due to growth in sales volume.

Cost of goods sold in the year ended December 31, 2020 was impacted by unfavorable manufacturing variances from lower production in the year ended December 31, 2020 as a result of the COVID-19 pandemic.

Our gross margin increased from 73.6% for the year ended December 31, 2020 to 74.0% for the year ended December 31, 2021 primarily due to lower fixed costs per unit as a result of the increased production volume.

The increase was primarily due to cost associated with distribution of DIXI Medical products, as well as to an increase in indirect labor costs including stock-based compensation, partially offset by the decrease in sales volume for replacement procedures in the year ended December 31, 2022.

Our gross margin decreased from 74.0% for the year ended December 31, 2021 to 71.4% for the year ended December 31, 2022 primarily due to higher fixed costs per unit as a result of the lower production volume, and lower gross margin for distribution of DIXI Medical products as compared to the gross margin for sales of our RNS System.

Research and Development Expenses

Research and development expenses increased by $3.7 million, or 21%, to $21.9 million during the year ended December 31, 2022, compared to $18.2 million during the year ended December 31, 2021.

The increase in research and development expenses was primarily due to an increase of $1.4 million in personnel-related expenses and an increase of $1.1 million in costs associated with our clinical studies.

The increases in research and development expenses were primarily due to our COVID-19 pandemic-related cost reduction efforts in 2020 and our ongoing recovery efforts in 2021.

The increase in research and development expenses was primarily due to an increase of $2.5 million in personnel-related expenses, including stock based compensation, largely resulting from hiring additional personnel to support product development efforts and clinical studies, an increase of $0.6 million in product development costs, and an increase of $1.0 million in costs associated with our clinical studies.

The increases were offset in part by a decrease of $0.3 million in allocated facility and information technology expenses, including rent, utilities and depreciation.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased by $12.4 million, or 32%, to $51.3 million during the year ended December 31, 2022, compared to $39.0 million during the year ended December 31, 2021.

The increase in selling, general and administrative expenses was primarily due to an increase of $5.1 million in personnel-related expenses primarily driven by an increase in headcount, the adoption of new and updated incentive programs and variable compensation expense due to increased sales, and an increase of $4.4 million in general and administrative costs related to operating as a public company.

In addition, there was an increase of $1.1 million in sales, field support and marketing costs including travel, contractors, and marketing events, which was primarily due to our COVID-19 pandemic-related cost reduction efforts in 2020 and our ongoing recovery efforts in 2021, and an increase of $0.6 million in allocated facilities related expenses, including rent, depreciation, information technology costs and utilities.

The increase in selling, general and administrative expenses was primarily due to an increase of $7.0 million in personnel-related expenses primarily due to hiring additional personnel, including expanding our sales force, and to stock-based compensation, an increase of $2.2 million in general and administrative costs related to operating as a public company, an increase of $3.0 million in sales, field support and marketing costs including travel, contractors, and digital advertising due to increased marketing activities to support commercial growth and returning operations to pre-pandemic levels as well as to one-time costs associated with launch of the DIXI Medical partnership, and an increase of $0.2 million in allocated facility and information technology expenses, including rent, utilities and depreciation.

Interest Expense and Income

Interest expense decreased by $4.1 million, or 35%, to $7.4 million during the year ended December 31, 2021, compared to $11.5 million during the year ended December 31, 2020 primarily due to lower average balances of our convertible notes and term loans during 2021 compared to 2020.

Interest income increased by $0.4 million for the year ended December 31, 2021 compared to the year ended December 31, 2020, which was primarily due to an increase in average balances of our money market funds and short-term marketable debt securities during 2021 compared to 2020.

Interest expense increased by $0.1 million for the year ended December 31, 2022 compared to the year ended December 31, 2021 due to an increase in average balances of our Term Loan as a result of using the paid-in-kind option for interest whereby we added part of the interest due to the Term Loan's principal balance instead of paying it in cash for the payment dates on June 30, 2022, September 30, 2022 and December 31, 2022.

Interest income increased by $1.1 million for the year ended December 31, 2022 compared to the year ended December 31, 2021, primarily due to an increase in average balances of our money market funds and short-term marketable debt securities and higher interest yields in the year ended December 31, 2022.

Other Income (Expense), net

Other income (expense), net decreased by $5.6 million to $(5.4) million during the year ended December 31, 2021, compared to $0.2 million during the year ended December 31, 2020.

This decrease was primarily due to an increase in the fair value of redeemable convertible preferred stock warrant liability of $5.2 million due to an increase in the fair value of our redeemable convertible preferred stock prior to our IPO when it converted into common stock, partly offset by decreases in other income resulting from the change in fair value of derivative instrument and warrant liability.

Other income (expense), net increased by $5.0 million to $(0.3) million during the year ended December 31, 2022, compared to $(5.4) million during the year ended December 31, 2021, primarily due to an increase in the fair value of redeemable convertible preferred stock warrant liability by $5.2 million due to an increase in the fair value of our redeemable convertible preferred stock prior to our IPO in the year ended December 31, 2021.

Liquidity and Capital Resources

Prior to our IPO, we financed our operations primarily through private placements of equity securities, debt financing arrangements and sales of our RNS System.

As of December 31, 2021, we had cash, cash equivalents and short-term marketable debt securities of $115.6 million, an accumulated deficit of $423.8 million, and $49.8 million outstanding under the New Term Loan, net of debt discount and issuance costs.

In January and March 2020, we received $7.1 million and $5.4 million, respectively, in gross proceeds through the sale and issuance of the 2020

Convertible Notes.

In August 2020, we received $33.0 million in gross proceeds from the sale and issuance of our Series B’ convertible preferred stock.

In September 2020, we entered into the New Term Loan for total borrowings of up to $60 million and borrowed $50 million.

We used the proceeds from the New Term Loan to repay principal of $44.1 million, interest of $1.3 million and fees of $2.2 million due under the then outstanding Term Loan.

2014 Term Loan

In November 2014, we entered into a Term Loan Agreement, as amended, with Capital Royalty Partners II L.P.

and its affiliates for total borrowings of up to $40.0 million.

As of December 31, 2019, $40.0 million had been funded under this Term Loan Agreement, or the Term Loan.

The Term Loan bore interest at a rate of 12.5% per year and had a maturity date of September 30, 2020.

The Term Loan was interest-only through December 31, 2019.

Following the interest-only period, principal payments were to be made in equal installments at the end of the next three calendar quarters along with a fee equal to 5% of the aggregate principal amount repaid.

We ratably accreted the fee over the life of the loan.

In connection with the Term Loan, we paid total closing fees of $0.8 million and issued warrants to purchase 219 shares of our Series I convertible preferred stock at $1,866.80 per share.

The initial fair value of the warrants was $0.3 million and resulted in a discount to the Term Loan, which was amortized to interest expense over the life of the loan using the effective interest method.

Prior to 2020, these warrants were modified to be exercisable for 219 shares of common stock at $2.60 per share.

Upon the closing of the IPO, warrants to purchase 219 shares of common stock net exercised to 185 shares of common stock.

The Term Loan was amended to extend the interest-only period through June 30, 2020 and to allow us to pay interest entirely in kind by adding it to the aggregate principal of the loan.

We paid $1.4 million in interest due on March 31, 2020 in kind and paid $1.4 million in interest due on June 30, 2020 in cash.

In September 2020, we repaid the entire obligation under the Term Loan using the proceeds received from the New Term Loan.

2019 and 2020 Convertible Notes

In March and September 2019, we issued convertible notes, or the 2019 Convertible Notes, to certain investors for aggregate proceeds of $21.3 million.

In January and March 2020, we raised $7.1 million and $5.4 million, respectively, through the sale and issuance of the 2020 Convertible Notes.

Proceeds received from the issuance of 2020 Convertible Notes were used to fund operating expenses and other liquidity needs.

The 2019 and 2020 Convertible Notes were subordinated to the Term Loan, bore a simple interest on the outstanding principal amount at the rate of 8.0% per annum and had a maturity date of December 31, 2020.

In connection with the sale and issuance of our Series B’ convertible preferred stock, our 2019 and 2020 Convertible Notes converted into shares of our Series B’ convertible preferred stock.

The 2019 and 2020 Convertible Notes contained embedded derivative instruments, including automatic conversion into equity securities upon completion of a Qualified Financing, that were required to be bifurcated and accounted for separately as a single derivative instrument initially and were subsequently measured at fair value with the change in fair value recorded in other income (expense), net in the statements of operations and comprehensive loss.

The issuance date estimated fair values of the derivative instruments related to the March and September 2019 Convertible Notes were $4.1 million and $1.9 million, respectively, which were recorded as debt discounts.

The issuance date estimated fair values of the derivative instruments related to the January and March 2020 notes were $1.0 million and $0.7 million, respectively, which were recorded as debt discounts.

In August 2020, the derivative instrument was extinguished in connection with the issuance of Series B’ redeemable convertible preferred stock.

The discount on the 2019 and 2020 Convertible Notes was amortized over the contractual term ending on December 31, 2020, using the effective interest method.

The annual effective interest rate was estimated from 10.8% to 12.2% per year.

Interest expense for the year ended December 31, 2020 was $4.6 million, consisting of $1.4 million of contractual interest expense and $3.2 million amortization of debt discount arising from separation of the embedded derivative instrument.

Series B’ Convertible Preferred Stock

In August 2020, we received gross proceeds of $33.0 million by issuing and selling 7,599,720 shares of our Series B’ convertible preferred stock at a price of $4.3423 per share.

All outstanding convertible notes and accrued unpaid interest were converted into 8,379,410 shares of Series B’ convertible preferred stock at such price.

The conversion of the 2019 and 2020 Convertible Notes into shares of Series B’ convertible preferred stock was accounted for as a debt extinguishment with $4.1 million extinguishment gain recognized as a deemed capital contribution to additional paid-in capital in the quarter ended September 30, 2020, as the holders of the notes were existing stockholders of the Company.

Upon the closing of our IPO, all outstanding shares of redeemable convertible preferred stock automatically converted into 16,614,178 shares of common stock.

2020 Term Loan

In September 2020, we entered into the New Term Loan with CRG Partners IV L.P.

Prior to our IPO, we financed our operations primarily through the sale of equity securities, debt financing arrangements and sales of our RNS System.

As of December 31, 2022, we had cash, cash equivalents and short-term marketable debt securities of $77.4 million, compared to $115.6 million at December 31, 2021, and $52.9 million outstanding under the Term Loan, net of debt discount and issuance costs, compared to $49.8 million at December 31, 2021.

In September 2020, we entered into the Term Loan for total borrowings of up to $60.0 million and borrowed $50.0 million.

In April 2021, we completed our IPO and received $105.5 million in net proceeds after deducting underwriting discounts and commissions and offering costs, of which $4.1 million was used to repay the $4.0 million federal Small Business Administration loan under the Paycheck Protection Program received in April 2020.

In November 2022, we filed a Registration Statement on Form S-3, or Shelf, with the SEC in relation to the registration of common stock, preferred stock, debt securities, warrants or any combination thereof for up to an aggregate of $150.0 million, of which $50.0 million may be issued and sold pursuant to an at-the-market, or ATM, offering program for sales of our common stock under a sales agreement, or Sales Agreement, with SVB Securities LLC, or SVB.

We agreed to pay SVB up to 3.0% of the gross proceeds sold through the Sales Agreement.

Our common stock would be sold at prevailing market prices at the time of the sale and, as a result, prices may vary.

We have not issued or sold any securities pursuant to the Shelf or ATM offering program.

In September 2020, we entered into the Term Loan with CRG Partners IV L.P.

and its affiliates for total borrowings of up to $60 million and borrowed $50 million.

We used the proceeds from the New Term Loan to repay principal of $44.1 million, interest of $1.3 million and fees of $2.2 million due under our previous Term Loan.

The remaining $10.0 million was available to us for borrowing until March 31, 2022 if we achieved a revenue-based milestone in 2021.

The revenue-based milestone was not met, and the remaining $10.0 million of the New Term Loan expired without being drawn.

The borrowings under the New Term Loan are secured by substantially all of our properties, rights and assets, including intellectual property.

The loan bears interest at a rate of 12.5% per year.

The revenue-based milestone was not met, and the remaining $10.0 million of the Term Loan expired without being drawn.

The borrowings under the Term Loan are secured by substantially all of our properties, rights and assets, including intellectual property.

The Term Loan bears interest at a rate of 12.5% per year.

Payments under the loan are made quarterly with payment dates fixed at the end of each calendar quarter.

The loan was interest-only through September 30, 2023, which could be extended through September 30, 2025 at our option if we completed our IPO on or prior September 30, 2023.

Through December 2020, we had the option to pay the entire interest paid-in-kind, or PIK, by increasing the principal of the Term Loan.

From January 2021 through June 2025, we have the option to pay interest as follows:

7.5% per annum paid in cash and 5.0% per annum PIK by increasing the principal of the loan.

For each payment date from April 2022 through December 2022, we elected the PIK option, increasing the principal of the Term Loan by $1.9 million.

The Term Loan was interest-only through September 30, 2023, which could be extended through September 30, 2025 at our option if we completed our IPO on or prior September 30, 2023.

In connection with closing the IPO, we extended the interest-only period to September 30, 2025.

Following the interest-only period, principal payment is due in one installment on September 30, 2025.

The New Term Loan includes a fee upon repayment of the loan equal to 10% of the aggregate principal amount being prepaid or repaid.

The Term Loan includes a fee upon repayment of the loan equal to 10% of the aggregate principal amount being prepaid or repaid.

The Term Loan is collateralized by substantially all of our assets.

The loan agreement contains customary representations and warranties, covenants, events of default and termination provisions.

The financial covenants require that we achieve minimum annual revenue thresholds commencing in 2021 and maintain a minimum balance of cash and cash equivalents.

See Notes 6 and 14 to our financial statements included elsewhere in this Annual Report on Form 10-K for additional information.

We paid $1.0 million in fees to the lender and third parties which is reflected as a discount on the loan and is being accreted over the life of the loan using the effective interest method.

Paycheck Protection Program

In April 2020, we received $4.0 million from a federal Small Business Administration loan under the Paycheck Protection Program.

In April 2020, we received $4.0 million from a federal Small Business Administration loan under the Paycheck Protection Program, or PPP Loan.

The note bore interest at 1.0% per year on the outstanding principal amount and had a maturity date 24 months from the date of the note.

Payments of principal and interest were due from September 2021 through April 2022.

In April 2021, we repaid our entire obligation under the PPP Loan amounting to $4.1 million, including principal of $4.0 million and interest of less than $0.1 million, using the proceeds from our IPO.

In April 2021, we repaid our entire obligation under the PPP Loan amounting

to $4.1 million, including principal of $4.0 million and interest of less than $0.1 million, using the proceeds from our IPO.

Future Funding Requirements

1 unchanged sentence

In addition, we intend to continue to make investments in clinical studies, development of new products, and other ongoing research and development programs.

We also expect to incur additional expenses to expand our commercial organization and efforts and additional costs associated with operating as a public company.

We may incur additional expenses to further enhance our research and development efforts and pursue commercial opportunities outside of the United States.

We may incur additional expenses to expand our commercial organization to re-establish operations to pre-pandemic levels, and to plan for continued growth.

We may incur additional expenses to further enhance our research and development efforts and to pursue commercial opportunities outside of the United States.

We lease our office and manufacturing facilities in Mountain View, California under a non-cancelable operating lease which expires in June 2030.

3 unchanged sentences

Based on our current planned operations, we expect that our cash, cash equivalents and short-term marketable debt securities will enable us to fund our operating expenses for at least 12 months from the issuance of our financial statements as of and for the year ended December 31, 2022.

We have based these estimates on

assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we expect.

We believe that we will need to raise capital in the longer term to fund our operating plan.

We have based these estimates on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we expect.

Because of the numerous risks and uncertainties associated with research, development and commercialization of medical devices, we are unable to estimate the exact amount of our working capital requirements.

6 unchanged sentences

• the degree and rate of increased market acceptance of our RNS System in the United States and market acceptance elsewhere;

• our revenue and cost projections related to the DIXI Medical distribution agreement

• our need to implement additional infrastructure and internal systems;

3 unchanged sentences

If we raise additional capital through debt financing, we may be subject to covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends.

If we are unable to raise capital when needed, we will need to delay, limit, reduce or terminate planned commercialization or product development activities in order to reduce costs.

Our ability to raise additional capital may be adversely impacted by global economic conditions and the recent disruptions to, and volatility in, the financial markets in the United States and worldwide.

If we are unable to raise capital when needed, we will need to delay, limit, reduce or terminate planned commercialization or

product development activities in order to reduce costs.

In addition, COVID-19 has negatively impacted our business by decreasing and delaying procedures performed to implant our RNS System, and we expect the pandemic will continue to negatively impact our business, which may negatively impact our future liquidity.

10 unchanged sentences

Cash used in operating activities was primarily a result of the net loss of $47.1 million, adjusted for non-cash charges of $15.0 million and change in operating assets and liabilities of $4.8 million.

The non-cash charges primarily consisted of $8.3 million of stock-based compensation, $2.7 million of amortization of right-of-use assets, $1.9 million of interest incurred but paid-in-kind, $0.9 million of non-cash interest expense related to our term loan and $0.4 million of realized loss from sale of short-term investments.

The change in operating assets and liabilities was due to an increase in accounts receivable of $0.4 million primarily due to slower payments by our customers, an increase in inventories of $2.1 million largely due to inventory purchased from DIXI Medical under the Distribution Agreement, an increase in prepaid expenses and other assets of $0.8 million, a decrease in operating lease liabilities of $2.1 million due to cash paid for rent, offset in part by an increase in accounts payable of $0.6 million.

The increase in prepaid expenses and other assets and accounts payable was primarily the result of the timing of payments to our vendors.

Net cash used in operating activities was $24.6 million for the year ended December 31, 2021.

Cash used in operating activities was primarily a result of the net loss of $36.1 million, adjusted for non-cash charges of $11.1 million and change in operating assets and liabilities of $0.4 million.

The non-cash charges primarily consisted of $5.2 million in change in the fair value of redeemable convertible preferred stock warrant liability, $0.8 million of non-cash interest expense related to our term loans, and $4.3 million of stock-based compensation.

1 unchanged sentence

The increase in accrued liabilities and accounts payable was primarily the result of the timing of payments to our vendors.

Net cash used in operating activities was $21.6 million for the year ended December 31, 2020.

Cash used in operating activities was primarily a result of the net loss of $24.3 million, adjusted for non-cash charges of $8.8 million, change in operating assets and liabilities of $2.1 million and payment of PIK interest of $4.1 million on repayment of our term loan.

The non-cash charges primarily consisted of $3.5 million of amortization of debt discount and issuance costs and $3.4 million of non-cash interest expense related to our term loans and convertible notes, and $1.4 million of stock-based compensation.

The change in operating assets and liabilities was due to an increase in accounts receivable of $2.4 million largely due to revenue growth, and a decrease in accrued liabilities of $0.7 million, offset by a decrease in inventories of $0.7 million largely due to a decrease in finished goods.

The decrease in accrued liabilities was primarily the result of the timing of payments to our vendors.

Cash Flows Used in Investing Activities

Cash Flows Provided by (Used in) Investing Activities

Net cash provided by investing activities was $23.8 million for the year ended December 31, 2022, which primarily consisted of sales of marketable debt securities of $24.4 million, which amounts were partially offset by purchases of property and equipment of $0.6 million.

Net cash used in investing activities was $85.4 million for the year ended December 31, 2021, which consisted of purchases of marketable debt securities of $85.0 million and purchases of property and equipment of $0.4 million.

Net cash used in investing activities was $10.8 million for the year ended December 31, 2020, which consisted of purchases of marketable debt securities of $17.0 million and purchases of property and equipment of $0.1 million, which amounts were partially offset by proceeds from sale of marketable debt securities of $6.3 million.

Cash Flows Provided by Financing Activities

Net cash provided by financing activities was $0.5 million for the year ended December 31, 2022, which primarily relates to receipt of proceeds from the issuance of common stock under employee plans of $0.9 million, partially offset by payment of deferred offering costs of $0.4 million.

Net cash provided by financing activities was $102.5 million for the year ended December 31, 2021, which primarily relates to receipt of proceeds from our IPO of $109.1 million and proceeds from issuance of common stock under the employee stock purchase plan of $0.9 million, partially offset by payment of deferred offering costs of $3.4 million and repayment of debt obligations of $4.1 million under the PPP Loan.

Net cash provided by financing activities was $55.0 million for the year ended December 31, 2020, which primarily relates to proceeds of $53.4 million from the New Term Loan and PPP Loan, net of lender fees and costs, proceeds of $12.5 million from the issuance of convertible notes, proceeds of $31.7 million from the issuance of Series B’ redeemable convertible preferred stock, partially offset by repayment of the Term Loan of $42.1 million, payment of debt issuance costs of $0.2 million and payment of deferred offering costs of $0.2 million.

Critical Accounting Estimates

4 unchanged sentences

Our estimates are based on our historical experience, knowledge of current events and actions we may undertake in the future, and on various other factors that we believe are reasonable under the circumstances.

Our most critical accounting estimates subsequent to our IPO are those affecting stock-based compensation and the provision for excess and obsolete inventories.

We use the Black-Scholes option pricing model to estimate the fair value of stock options awarded to employees and non-employees and shares expected to be issued to employees under our Employee Stock Purchase Plan, or ESPP.

Option valuation models such as the Black-Scholes model require the input of several assumptions of which the most significant subjective assumption is an estimate of the expected volatility of our stock price.

We estimate the stock price volatility assumption based on the historical volatilities of publicly traded industry peers as we do not have sufficient trading history regarding the volatility of our own common stock.

Changes in these assumptions could materially affect our estimate of fair value of stock options and ESPP shares and, consequently, the related amount of stock-based compensation expense recognized in our financial statements.

Our most critical accounting estimates subsequent to our IPO are those affecting the provision for excess and obsolete inventories.

We regularly review inventory quantities in consideration of actual loss experiences, projected future demand, and remaining shelf life to record a provision for excess and obsolete inventory when appropriate.

13 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis