You should read the following discussion and analysis of our financial condition
and results of operations together with our condensed financial statements and
related notes included in this Quarterly Report on Form 10-Q and our audited
consolidated financial statements and related notes thereto contained in our
Annual Report on Form 10-K for the year ended
Overview
We are a medical device company focused on developing and commercializing
products intended to transform the way calcified cardiovascular disease is
treated. We aim to establish a new standard of care for medical device treatment
of atherosclerotic cardiovascular disease through our differentiated and
proprietary local delivery of sonic pressure waves for the treatment of
calcified plaque, which we refer to as intravascular lithotripsy ("IVL"). Our
IVL system (our "IVL System"), which leverages our IVL technology (our "IVL
Technology"), is a minimally invasive, easy-to-use and safe way to significantly
improve patient outcomes. Our Shockwave M5 IVL catheter ("M5 catheter") was
CE-Marked in
The first two indications we are targeting with our IVL System are PAD, the narrowing or blockage of vessels that carry blood from the heart to the extremities, and CAD, the narrowing or blockage of the arteries that supply blood to the heart. In the future, we see significant opportunity in the potential treatment of aortic stenosis, a condition where the heart's aortic valve becomes increasingly calcified with age, causing it to narrow and obstruct blood flow from the heart.
We have adapted the use of lithotripsy to the cardiovascular field with the aim of creating what we believe can become the safest, most effective means of addressing the growing challenge of cardiovascular calcification. Lithotripsy has been used to successfully treat kidney stones (deposits of hardened calcium) for over 30 years. By integrating lithotripsy into a device that resembles a standard balloon catheter, physicians can prepare, deliver and treat calcified lesions using a familiar form factor, without disruption to their standard procedural workflow. Our differentiated IVL System works by delivering shockwaves through the entire depth of the artery wall, modifying calcium in the medial layer of the artery, not just at the superficial most intimal layer. The shockwaves crack this calcium and enable the stenotic artery to expand at low pressures, thereby minimizing complications inherent to traditional balloon dilations, such as dissections or tears. Preparing the vessel with IVL facilitates optimal outcomes with other therapies, including stents and drug-eluting technologies. Using IVL also avoids complications associated with atherectomy devices such as dissection, perforation and embolism. When followed by an anti-proliferative therapy such as a drug-coated balloons or drug-eluting stents, the micro-fractures may enable better drug penetration into the arterial wall and improve drug uptake, thereby improving the effectiveness of the combination treatment.
We market our products to hospitals whose interventional cardiologists, vascular
surgeons and interventional radiologists treat patients with PAD and CAD. We
have dedicated meaningful resources to establish a direct sales capability in
For the three months ended
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For the six months ended
Impact of the COVID-19 pandemic
The global COVID-19 pandemic presents significant risks to us and may have far reaching impacts on our business, operations, and financial results and condition, directly and indirectly, including, without limitation, impacts on: the health of our management and employees; manufacturing, distribution, marketing and sales operations; research and development activities, including clinical activities; and customer and patient behaviors.
Beginning in
Moreover, beginning in
We are continuing to monitor the impact of the COVID-19 pandemic on our employees and customers and on the markets in which we operate, and will take further actions that we consider prudent to address the COVID-19 pandemic, including reducing spending, while ensuring that we can support our customers and continue to develop our products.
The ultimate extent of the impact of the COVID-19 pandemic on us remains highly uncertain and will depend on future developments and factors that continue to evolve, most of which are outside of our control, and could exist for an extended period of time even after the pandemic might end.
Quarantines, shelter-in-place and similar government orders have also impacted and may continue to impact, our third-party manufacturers and suppliers, and could in turn adversely impact the availability or cost of materials, which could disrupt our supply chain.
Components of Our Results of Operations
Product revenue
Product revenue is primarily from the sale of our IVL catheters.
We sell our products to hospitals, primarily through direct sales representatives, as well as through distributors in select international markets. For products sold through direct sales representatives, control is transferred upon delivery to customers. For products sold to distributors internationally and products sold to customers that utilize stocking orders, control is transferred upon shipment or delivery to the customer's named location, based on the contractual shipping terms. Additionally, a significant portion of our revenue is generated through a consignment model under which inventory is maintained at hospitals. For consignment inventory, control is transferred at the time the catheters are consumed in a procedure.
The COVID-19 pandemic reduced sales of our IVL catheters during the second
quarter of 2020 as compared to our sales in the first quarter of 2020, although
we did see an increase in daily sales volume towards the end of the second
quarter of 2020. We are continuing to monitor the potential impact of COVID-19
in certain
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Cost of product revenue
Cost of product revenue consists primarily of costs of components for use in our products, the materials and labor that are used to produce our products, the manufacturing overhead that directly supports production and the depreciation relating to the equipment used in our IVL System that we loan to our hospital customers without charge to facilitate the use of our IVL catheters in their procedures. We depreciate equipment over a three-year period. We expect cost of product revenue to increase in absolute terms as our revenue grows.
Our gross margin has been and will continue to be affected by a variety of factors, primarily production volumes, the cost of direct materials, product mix, geographic mix, discounting practices, manufacturing costs, product yields, headcount and cost-reduction strategies. We expect our gross margin percentage to increase over the long term to the extent we are successful in increasing our sales volume and are therefore able to leverage our fixed costs. We intend to use our design, engineering and manufacturing capabilities to further advance and improve the efficiency of our manufacturing processes, which, if successful, we believe will reduce costs and enable us to increase our gross margin percentage. While we expect gross margin percentage to increase over the long term, it will likely fluctuate from quarter to quarter as we continue to introduce new products and adopt new manufacturing processes and technologies. In addition, if the increase in elective procedures using our products and the corresponding increase in sales that we experienced towards the end of the second quarter of 2020, continues in the third quarter of 2020, we would expect to realize an increase in our gross margin percentage due to fixed costs being allocated over higher sales volume; however, the impact of the COVID-19 pandemic on our sales and procedures using our products in the third quarter of 2020 remains uncertain.
Research and development expenses
Research and development ("R&D") expenses consist of applicable personnel, consulting, materials and clinical trial expenses. R&D expenses include:
• certain personnel-related expenses, including salaries, benefits, bonus,
travel and stock-based compensation;
• cost of clinical studies to support new products and product enhancements,
including expenses for clinical research organizations and site payments;
• materials and supplies used for internal R&D and clinical activities;
• allocated overhead including facilities and information technology
expenses; and
• cost of outside consultants who assist with technology development,
regulatory affairs, clinical affairs and quality assurance.
R&D costs are expensed as incurred. In the future, we expect R&D expenses to increase in absolute dollars as we continue to develop new products, enhance existing products and technologies and perform activities related to obtaining additional regulatory approvals. The increase in engineering and clinical expenditures may be partially offset in the near term by delayed clinical projects and streamlined product development due to COVID-19 cost reduction efforts.
Sales and marketing expenses
Sales and marketing expenses consist of personnel-related expenses, including salaries, benefits, sales commissions, travel and stock-based compensation. Other sales and marketing expenses consist of marketing and promotional activities, including trade shows and market research. We expect to continue to grow our sales force and increase marketing efforts as we continue commercializing products based on our IVL Technology. As a result, we expect sales and marketing expenses to increase in absolute dollars over the long term. We expect certain costs will increase in the third quarter of 2020 as compared to the second quarter of 2020, such as travel and related expenses as sales personnel are able to visit customer hospitals. However, we are continuing to monitor the impact of COVID-19 on our sales and on elective procedures utilizing our products, and such impact in the third quarter of 2020 remains uncertain.
General and administrative expenses
General and administrative expenses consist of personnel-related expenses,
including salaries, benefits, bonus, travel and stock-based compensation. Other
general and administrative expenses consist of professional services fees,
including legal, audit and tax fees, insurance costs, outside consultant fees
and employee recruiting and training costs. Moreover, we expect to incur
additional expenses associated with operating as a public company, including
legal, accounting, insurance, exchange listing and
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Results of Operations
Comparison of the Three Months Ended
The following table shows our results of operations for the three months endedJune 30, 2020 and 2019: Three Months Ended June 30, Change Change 2020 2019 $ % (in thousands, except percentages) Revenue: Product revenue$ 10,286 $ 10,012 $ 274 3% Cost of revenue: Cost of product revenue 3,592 4,133 (541 ) (13)% Gross profit 6,694 5,879 815 14% Operating expenses: Research and development 8,101 6,926 1,175 17% Sales and marketing 11,206 6,961 4,245 61% General and administrative 5,398 3,245 2,153 66% Total operating expenses 24,705 17,132 7,573 44% Loss from operations (18,011 ) (11,253 ) (6,758 ) 60% Interest expense (306 ) (250 ) (56 ) 22% Other income, net 220 913 (693 ) (76)% Net loss before taxes (18,097 ) (10,590 ) (7,507 ) 71% Income tax provision 21 18 3 17% Net loss$ (18,118 ) $ (10,608 ) $ (7,510 ) 71% Product revenue
Product revenue increased by
Product revenue consisted primarily of the sale of our IVL catheters. Product
revenue, classified by the major geographic areas in which our products are
shipped, was
Cost of product revenue, gross profit and gross margin percentage
Cost of product revenue decreased by
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Research and development expenses
The following table summarizes our R&D expenses incurred during the periods
presented:
Three Months Ended
June 30,
2020 2019
(in thousands)
Compensation and personnel-related costs $ 4,344 $ 3,173
Clinical-related costs 2,010 2,257
Material and supplies 445 481
Facilities and other allocated costs 743 577
Outside consultants 425 260
Other research and development costs 134 178
Total research and development expenses $ 8,101 $ 6,926 R&D expenses increased by
Sales and marketing expenses
Sales and marketing expenses increased by
General and administrative expenses
General and administrative expenses increased by
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Comparison of the Six Months Ended
The following table shows our results of operations for the six months endedJune 30, 2020 and 2019: Six Months Ended June 30, Change Change 2020 2019 $ % (in thousands, except percentages) Revenue: Product revenue$ 25,483 $ 17,282 $ 8,201 47% Cost of revenue: Cost of product revenue 9,243 7,205 2,038 28% Gross profit 16,240 10,077 6,163 61% Operating expenses: Research and development 19,991 14,410 5,581 39% Sales and marketing 21,617 12,831 8,786 68% General and administrative 11,622 6,247 5,375 86% Total operating expenses 53,230 33,488 19,742 59% Loss from operations (36,990 ) (23,411 ) (13,579 ) 58% Interest expense (583 ) (495 ) (88 ) 18% Change in fair value of warrant liability - (609 ) 609 (100)% Other income, net 724 1,133 (409 ) (36)% Net loss before taxes (36,849 ) (23,382 ) (13,467 ) 58% Income tax provision 44 25 19 76% Net loss$ (36,893 ) $ (23,407 ) $ (13,486 ) 58% Product revenue
Product revenue increased by
Product revenue consisted primarily of the sale of our IVL catheters. Product
revenue, classified by the major geographic areas in which our products are
shipped, was
Cost of product revenue and gross margin percentage
Cost of product revenue increased by
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Research and development expenses
The following table summarizes our R&D expenses incurred during the periods
presented:
Six Months Ended
June 30,
2020 2019
(in thousands)
Compensation and personnel-related costs $ 8,319 $ 5,886
Clinical-related costs 6,598 4,989
Material and supplies 1,297 967
Facilities and other allocated costs 1,440 1,275
Outside consultants 924 790
Other research and development costs 1,413 503
Total research and development expenses $ 19,991 $ 14,410 R&D expenses increased by
Sales and marketing expenses
Sales and marketing expenses increased by
General and administrative expenses
General and administrative expenses increased by
Liquidity and Capital Resources
To date, our principal sources of liquidity have been the net proceeds we
received through the sales of our common stock in our public offerings, private
sales of our equity securities, payments received from customers purchasing our
products and to a lesser extent proceeds from our debt financings. On
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On
We believe that our cash, cash equivalents and short-term investments as of
We have a number of ongoing clinical trials, and expect to continue to make
substantial investments in these trials and in additional clinical trials that
are designed to provide clinical evidence of the safety and efficacy of our
products. Although we have limited our hiring in response to the COVID-19
pandemic, as it is prudent to do so, we intend to continue to make significant
investments in our sales and marketing organization by increasing the number of
Our future capital requirements will depend on many factors, including:
• the cost, timing and results of our clinical trials and regulatory reviews;
• the cost and timing of establishing sales, marketing and distribution
capabilities;
• the terms and timing of any other collaborative, licensing and other
arrangements that we may establish including any contract manufacturing
arrangements;
• the timing, receipt and amount of sales from our current and potential
products;
• the degree of success we experience in commercializing our products;
• the emergence of competing or complementary technologies;
• the cost of preparing, filing, prosecuting, maintaining, defending and
enforcing any patent claims and other intellectual property rights; and
• the extent to which we acquire or invest in businesses, products or
technologies, although we currently have no commitments or agreements
relating to any of these types of transactions.
In addition, as a result of the COVID-19 pandemic, we expect to continue to experience reduced cash flow from operations as a result of decreased revenues, extended payment terms on sales and increased cost of product revenue as a percentage of product revenue. Moreover, we are focused on ensuring that we have adequate supplies on hand given the potential disruption of the COVID-19 pandemic to our suppliers and their supply chain and, accordingly, we expect to continue to increase inventory during the third quarter of 2020 and beyond.
Cash Flows
The following table summarizes our cash flows for the periods indicated:
Six Months Ended
June 30,
2020 2019
(in thousands)
Cash used in operating activities $ (42,355 ) $ (24,933 )
Cash provided by (used in) investing activities 34,028 (83,975 )
Cash provided by financing activities 87,578 111,189
Net increase in cash, cash equivalents and restricted cash
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Operating activities
During the six months ended
During the six months ended
Investing activities
During the six months ended
During the six months ended
Financing activities
During the six months ended
During the six months ended
Contractual Obligations and Commitments
During the three months ended
Off-Balance Sheet Arrangements
During the periods presented, we did not have, nor do we currently have,
any off-balance sheet arrangements as defined in the rules and regulations of
the
Critical Accounting Policies and Estimates
Management's discussion and analysis of our financial condition and results of
operations is based on our consolidated financial statements, which have been
prepared in accordance with
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assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions and any such differences may be material.
In our Annual Report on Form 10-K for the fiscal year ended
Accounts receivable - allowance for bad debt
We are exposed to credit losses through our receivables from customers. Our
expected loss allowance methodology for receivables is developed using our
historical collection experience, current and future economic market conditions
and a review of the current aging status and financial condition of our
customers. Specific allowance amounts are established to record the appropriate
allowance for customers that have an identified risk of default. General
allowance amounts are established based upon our assessment of expected credit
losses for our receivables by aging category. Balances are written off when they
are ultimately determined to be uncollectible. We considered the current and
expected future economic and market conditions surrounding the COVID-19
pandemic, however, no additional reserve was required for the three months ended
Inventories - expiration risk
Inventories are valued at the lower of cost, computed on a first-in, first-out
basis, or net realizable value. We produce our IVL catheters at our facilities
in
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