NEVRO CORP Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

You should read the following management's discussion and analysis of our
financial condition and results of operations in conjunction with our unaudited
interim condensed consolidated financial statements (the condensed consolidated
financial statements) and notes thereto included in Part I, Item 1 of this
Quarterly Report on Form 10-Q (Quarterly Report) and with our audited
consolidated financial statements and notes thereto for the year ended December
31, 2021, included in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2021 (the Annual Report) filed with the U.S. Securities and
Exchange Commission (SEC) on February 23, 2022.

Special note regarding forward-looking statements

This report contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those discussed
in the forward-looking statements. The statements contained in this report that
are not purely historical are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the Securities Act), and
Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange
Act). Forward-looking statements are often identified by the use of words such
as, but not limited to, "anticipate," "believe," "can," "continue," "could,"
"estimate," "expect," "intend," "may," "plan," "project," "seek," "should,"
"strategy," "target," "will," "would" and similar expressions or variations
intended to identify forward-looking statements. These statements are based on
the beliefs and assumptions of our management based on information currently
available to management. Such forward-looking statements are subject to risks,
uncertainties and other important factors that could cause actual results and
the timing of certain events to differ materially from future results expressed
or implied by such forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, those identified
below, those discussed in Part I, Item 1A. Risk Factors in our most recent
Annual Report on Form 10-k as filed on February 23, 2002, and those discussed in
the section titled "Risk Factors" included under Part II, Item 1A below.
Furthermore, such forward-looking statements speak only as of the date of this
report. Except as required by law, we undertake no obligation to update any
forward-looking statements to reflect events or circumstances after the date of
such statements.

Overview

We are a global medical device company focused on delivering comprehensive,
life-changing solutions that continue to set the standard for enduring patient
outcomes in chronic pain treatment. We have developed and commercialized the
Senza® spinal cord stimulation (SCS) system, an evidence-based neuromodulation
platform for the treatment of chronic pain, with the Senza® Omnia™ platform
being our latest addition to the Senza family of products. Our proprietary,
paresthesia-free 10 kHz Therapy, delivered by our Senza system, was demonstrated
in our SENZA randomized controlled trial (RCT) to be superior to traditional SCS
therapy, with 10 kHz Therapy being nearly twice as successful in treating back
pain and 1.5 times as successful in treating leg pain when compared to
traditional SCS therapy. In addition to the original approval of our therapy in
back and leg pain, we received approval of unilateral or bilateral pain,
associated with painful diabetic neuropathy (PDN) in July 2021 and we received
expanded labeling in non-surgical back pain (NSBP) in January 2022. Our
SENZA-RCT study, along with our SENZA-PDN clinical study, SENZA-NSRBP clinical
study and European studies, represents what we believe is the most robust body
of clinical evidence for any SCS therapy. We believe the superiority of 10 kHz
Therapy over traditional SCS therapies will allow us to capitalize on and expand
the approximately $2.3 billion global SCS market by treating patients with
debilitating chronic pain, including back and leg pain, NSBP and PDN.

We launched Senza commercially in the United States in May 2015, after receiving
a label from the U.S. Food and Drug Administration (FDA) supporting the
superiority of our 10 kHz Therapy over traditional SCS. The Senza system has
been commercially available in certain European markets since November 2010 and
in Australia since August 2011. We have experienced significant revenue growth
in the United States since commercial launch. Senza is currently reimbursed by
all of the major insurance providers. In early 2017, we commenced a controlled
commercial launch of our family of surgical leads, marketed as the Surpass
surgical lead, and in April 2020 received FDA approval for our reduced-size
Surpass-C surgical lead. In January 2018, we received FDA approval of our next
generation Senza II SCS system. In the fourth quarter of 2019, we received FDA
approval of our next generation product platform, Senza Omnia, which we launched
in the United States in the fourth quarter of 2019. Additionally, we received
approval to commercially launch Senza Omnia in Europe during the second quarter
of 2020 and in Australia in July 2020. In the first quarter of 2021, we received
FDA approval for our first Senza Omnia upgrade, Omnia™ Powered by HFX Connect™,
and our next generation trial stimulator. In July 2021, we received FDA approval
of our 10 kHz Therapy for the management of chronic intractable pain of the
lower limbs, including unilateral or bilateral pain, associated with PDN. This
approval is specific to our unique 10 kHz stimulation, and the Senza system was
the first spinal cord stimulation system approved by the FDA with a specific
indication to treat certain forms of pain associated with PDN. We received
expanded labeling in NSBP in January 2022. In October 2022, we received FDA
approval of our latest generation SCS system, Senza HFX iQ™. We plan to initiate
a limited release of Senza HFX iQ in the United States in the fourth quarter of
2022, with a broad U.S. market launch planned for early 2023. In addition to the
U.S. approval for HFX iQ, Nevro has submitted for approval in Europe.

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The tables below set forth our revenue from U.S. and international sales the
past ten quarters on a quarterly basis and total revenue for each of the past
five full fiscal years.

                       Q1 2020       Q2 2020      Q3 2020      Q4 2020       Q1 2021      Q2 2021       Q3 2021      Q4 2021       Q1 2022      Q2 2022      Q3 2022
Revenue from:                                                                         (in millions)
U.S. sales            $    75.3     $    51.0     $   90.9     $   94.6     $    74.7     $   85.0     $    78.1     $   88.4     $    73.2     $   89.0     $   86.1
International sales        12.2           5.4         17.5         15.1          13.9         17.3          15.2         14.3          14.6         15.2         14.3
Total sales revenue   $    87.5     $    56.4     $  108.5     $  109.7     $    88.6     $  102.3     $    93.2     $  102.8     $    87.8     $  104.2     $  100.5



                                                                                 Nine Months Ended
                     2017        2018        2019        2020        2021       September 30, 2022
Revenue from:                                        (in millions)
U.S. sales          $ 263.5     $ 321.8     $ 326.0     $ 311.9     $ 326.2     $             248.4
International sales    63.2        65.5        64.3        50.2        60.7                    44.1
Total sales revenue $ 326.7     $ 387.3     $ 390.3     $ 362.0     $ 386.9     $             292.5


Since our inception, we have financed our operations primarily through equity
and debt financings and borrowings under a debt facility. Our accumulated
deficit as of September 30, 2022 was $588.0 million. A significant amount of our
capital resources has been used to support the development of our Senza products
and our 10 kHz Therapy, and we have also made a significant investment building
our U.S. commercial infrastructure and sales force to support our
commercialization efforts in the United States. We intend to continue to make
significant investments in our U.S. commercial infrastructure, including a sales
organization that targets physician specialties involved in PDN treatment
decisions, as well as in research and development (R&D) to develop Senza to
treat other chronic pain indications, including conducting clinical trials to
support our future regulatory submissions. In order to further enhance our R&D
efforts, pursue product expansion opportunities or acquire a new business or
products that are complementary to our business, we may choose to raise
additional funds, which may include future equity and debt financings.

We rely on third-party suppliers for a significant number of the components of
our Senza products, and currently for the assembly of these systems. Several of
these suppliers are currently single-source suppliers. We have entered into
and/or amended several supply agreements in an effort to reinforce our supply
chain. We are also required to maintain high levels of inventory, and, as a
result, we are subject to the risk of inventory obsolescence and expiration,
which may lead to inventory impairment charges. Additionally, as compared to
direct manufacturers, our dependence on third-party manufacturers makes us
vulnerable to supply shortage problems and exposes us to greater lead times,
increasing our risk of inventory obsolescence. In the third quarter of 2020, we
made the strategic decision to vertically integrate the assembly of implantable
pulse generators (IPGs), peripherals and various other manufacturing related
activities to mitigate our reliance on third-party manufacturers and improve our
long-term gross margins. We plan on conducting these manufacturing activities in
a facility in Costa Rica, for which our lease began in April 2021. The
integration process was completed in mid-2022, and we received approval from the
FDA for the manufacture of our Senza system in the Costa Rica facility in
October 2022. Even with this integration process completed, we expect that we
will continue to rely on third-party manufacturers as we ramp our factory and in
order to provide key components to support the assembly process. We have
incurred and may continue to incur significant capital expenditures and
implementation costs to initiate the manufacturing activities in our Costa Rica
facility.

COVID-19 Pandemic

We are subject to risks related to the public health crises such as the global
pandemic associated with COVID-19. The COVID-19 outbreak has negatively
impacted, and continues to negatively impact our operations and revenues and
overall financial condition as demand for elective procedures remains
unpredictable and the number of Senza trials and permanent system implant
procedures has not recovered to pre-pandemic levels. The magnitude of the risks
and uncertainties related to the pandemic are unpredictable and could be further
aggravated by the spread of new variants of the COVID-19 virus such as the
Omicron variant, as well as any variants thereof, which may be more contagious
and/or virulent. During the initial stages of the pandemic, the number of Senza
systems procedures performed, similar to other elective surgical procedures,
decreased significantly as health care organizations globally prioritized the
treatment of patients with COVID-19. For example, in the United States in the
first half of 2020 and more recently in connection with the spread of the
Omicron variants, governmental authorities recommended, and in certain cases
required, that elective, specialty and other procedures and appointments, be
suspended or canceled to avoid non-essential patient exposure to medical
environments and potential infection with COVID-19 and to focus limited
resources and personnel capacity toward the treatment of COVID-19. Additionally,
overall patient willingness to pursue elective procedures has decreased due to
the pandemic. Throughout 2021, the COVID-19 pandemic negatively impacted the
global SCS therapy market, which we estimate decreased by approximately 5% to
10%. These challenges may arise again at any time throughout the duration of the
pandemic, which is uncertain, and could reduce our revenue while the pandemic
continues.

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Notably, the predictability of trial and permanent implant procedures continues
to be challenging to forecast in light of the ongoing pandemic and periodic
surges in cases caused by the variants of the virus. Even if the severity of the
pandemic subsides, we are unable to predict the timing that demand for Senza
system procedures may return to historic levels as prospective patients may
decide to delay their procedures. As a result of the spread of more contagious
and virulent variants, the COVID-19 pandemic could continue to result in a
meaningful delay in patients seeking to have a Senza system trial. Further, we
anticipate that the substantial backlog of patients seeking appointments with
physicians and surgeries to be performed at hospitals and ambulatory surgery
centers relating to a variety of medical conditions will result in patients
seeking to have Senza system trials or implant procedures performed having to
navigate limited provider capacity, due to, among other reasons, a growing trend
of labor shortages with nurses and other healthcare facility staff. We believe
these factors may have an adverse effect on the recovery of the global SCS
therapy market and, as a result, the amount of time we predict for our sales to
recover following the end of the pandemic.

Further, numerous state, local and foreign jurisdictions have imposed, and
others in the future may impose, "shelter-in-place" orders, quarantines,
executive orders and similar government orders and restrictions for their
residents to control the spread of COVID-19 and its variant strains, which
continue to spread and impact the United States and other countries. For
example, multiple times in 2020, the governor of California, where our
headquarters are located, issued "shelter-in-place" or "stay at home" orders
restricting non-essential activities, travel and business operations for an
indefinite period of time, subject to certain exceptions for necessary
activities. Such orders or restrictions have resulted in our headquarters
closing, work stoppages, slowdowns and delays, travel restrictions and
cancellation of events, among other effects, thereby negatively impacting our
operations. Other disruptions or potential disruptions include restrictions on
our personnel and personnel of partners to travel and access customers for
training and case support; delays in approvals or certifications by regulatory
authorities and notified bodies; delays in product development efforts; and
additional government requirements or other incremental mitigation efforts that
may further impact our capacity to manufacture, sell and support the use of our
Senza systems. For instance, in the EU, notified bodies must be officially
designated to certify products and services in accordance with the Medical
Devices Regulation (EU) No 2017/745 (the EU Medical Devices Regulation). While
several notified bodies have been designated, the COVID-19 pandemic has
significantly slowed down their designation process and the current designated
notified bodies are facing a large amount of requests with the new regulation as
a consequence of which review times have lengthened. This situation could impact
our ability to grow our business in the EU and EEA. In addition, even after the
lift of "shelter-in-place" orders, quarantines, executive orders and similar
government orders and restrictions for their residents to control the spread of
COVID-19, we continue to experience disruptions to our business as a result of
patients and customers continuing to be cautious in restarting elective
procedures in light of the continued risk posed by the virus.

Global and domestic supply chains and the timely availability of raw materials
and products have been and may continue to be materially disrupted by
quarantines, factory slowdowns or shutdowns, border closings and travel
restrictions resulting from the COVID-19 pandemic. Any manufacturing supply
interruption of materials could adversely affect our ability to conduct ongoing
and future activities.

While the continued potential economic impact brought by and the duration of
COVID-19 may be difficult to assess or predict, the widespread pandemic has
resulted in, and may continue to result in, significant disruption of global
financial markets, reducing our ability to access capital, which could in the
future negatively affect our liquidity, including our ability to repay our 2.75%
convertible senior convertible notes due 2025 (the 2025 Notes). We expect any
further shelter-in-place policies and restrictions on elective surgical
procedures worldwide to have a substantial impact on our revenue. In addition, a
recession or market correction resulting from the spread of COVID-19 could
materially affect our business and the value of our common stock. During the
COVID-19 pandemic, our customers, including hospitals, ambulatory surgical
centers and physician offices, have experienced financial hardship and some of
them may not fully recover. This could lead to some of these customers
temporarily or permanently shutting down, filing for bankruptcy or being
acquired by larger health systems, leading to reduced procedures and/or
additional pricing pressure on our products. The COVID-19 pandemic has also
resulted in a significant increase in unemployment in the United States, Europe
and Australia, which may continue even after the pandemic. The occurrence of any
such events may lead to reduced disposable income and access to health insurance
which could adversely affect the number of Senza systems sold after the pandemic
has ended.

Important Factors Affecting our Results of Operations

In addition to the impact of COVID-19, we believe that the following factors have impacted, and we expect will continue to impact, our results of operations.

Importance of Physician Awareness and Acceptance of Our Products

We continue to invest in programs to educate physicians who treat chronic back
and leg pain about the advantages of Senza. This requires significant commitment
by our marketing team and sales organization, and can vary depending upon the
physician's practice specialization, personal preferences and geographic
location. Further, we are competing with well-established companies in our
industry that have strong existing relationships with many of these physicians.
Educating physicians about the advantages of our

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Senza products, including our latest product, Senza Omnia, and influencing these
physicians to use these products to treat chronic pain, is required to grow our
revenue.

In July 2021, we received FDA approval of our 10 kHz Therapy for the management
of chronic intractable pain of the lower limbs, including unilateral or
bilateral pain, associated with PDN, and we have initiated a commercial rollout.
In order to successfully commercialize our PDN opportunity, we will need to
invest in and incur significant costs for this new indication and patient
population, including costs to continue to build our sales force, marketing
efforts and continuing clinical activities. Our success in the PDN market will
be dependent on, among other factors, the perceived efficacy of our therapy for
PDN patients, our ability to educate and generate awareness of our therapy for
referring physicians, treating physicians and patients, and our ability to
obtain sufficient third-party coverage or reimbursement for use of our therapy
in PDN patients.

In January 2022, we received FDA approval for expanded labeling for our Senza®
SCS System for the management of NSBP. This approval is specific to our
proprietary 10 kHz Therapy and we believe differentiates the Senza System as the
only SCS system with specific labeling to treat NSBP patients. Our success in
the NSBP market will be dependent on, among other factors, the perceived
efficacy of our therapy for NSBP patients, our ability to support continued
market penetration and market access initiatives to further expand payer
coverage of this procedure.

Reimbursement and Coverage Decisions by Third-Party Payors

Healthcare providers in the United States generally rely on third-party payors,
principally federal Medicare, state Medicaid and private health insurance plans,
to cover and reimburse all or part of the cost of our products and the related
implant procedure for patients. The revenue we are able to generate from sales
of our products depends in large part on the availability of reimbursement from
such payors. While we currently have a favorable National Coverage Determination
(NCD) and reimbursement by Medicare for chronic back and leg pain, we have more
limited coverage for PDN and NSBP procedures, and decisions of coverage and
reimbursement for Senza and the related implant procedure from private health
insurance providers can vary. In general, these decisions require that such
payors perform analyses to determine if the procedure is medically necessary and
if our technology is covered under their existing coverage policies. These
payors may deny reimbursement if they determine that the device or procedure was
not medically necessary for the patient and used in accordance with the payor's
coverage policy.

A significant component of our commercial efforts includes working with private
payors to ensure positive coverage decisions for our products. For our
traditional chronic back and leg pain market, we believe that favorable coverage
and reimbursement for procedures using our products from Medicare and certain
commercial payors, such as Aetna, Cigna, Humana, Blue Cross Blue Shield (BCBS)
and Kaiser, have contributed to our increase in revenue to date. Although the
largest commercial payors and Medicare cover procedures using Senza, there can
be no assurance that all private health insurance plans will cover the therapy.
Effective July 1, 2021, Medicare now requires Prior Authorization for certain
hospital outpatient procedures, including SCS procedures. While Medicare,
through both national and local coverage policies, currently provides coverage
for NSBP, most commercial payors still do not explicitly cover NSBP. In January
2022, we announced that UnitedHealthcare will provide coverage for our 10 kHz
Therapy for the treatment of PDN for dates of service on or after March 1, 2022.
In March 2022, we announced that Noridian, the Medicare Administrative
Contractor (MAC) that oversees the majority of the western United States,
released an update to their Local Coverage Billing and Coding article for spinal
cord stimulators for chronic pain to include two new ICD-10 codes that cover
PDN. This change was posted on March 4, 2022 and is retroactive for procedures
performed on or after January 1, 2022.

During the second quarter of 2022, a number of coverage updates among BCBS insurers were made to explicitly cover PDN, including BCBS Idaho (effective April 28, 2022); BCBS Hawaii - Hawaii Medical Service Association (effective May 27, 2022); and BCBS Alabama (effective May 29, 2022).

During the third quarter of 2022, a number of coverage updates were made by insurers to explicitly cover PDN. Combined, these updates represent approximately 43.5 million commercially-insured covered lives, with approximately 54% of the addressable US PDN population now covered under a formal policy for PDN:

•

Effective July 1, 2022, Premera Blue Cross, the largest health plan in the Pacific Northwest (Washington and Alaska) representing approximately 2.5 million covered lives, updated its policy to specifically cover PDN.

•

Effective August 1, 2022, Health Care Services Corporation (HCSC) updated its
SCS policy to explicitly cover PDN. HCSC is an independent licensee of Blue
Cross Blue Shield and the parent company of BCBS Texas, Illinois, Oklahoma, New
Mexico, and Montana, representing over 16 million covered lives.

•

Effective August 29, 2022, Aetna updated is SCS policy to explicitly cover PDN. Aetna is one of the largest health plans in the United States covering approximately 22 million commercial lives.

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•

Effective October 1, 2022, BCBS Massachusetts has updated their medical policy
to explicitly cover PDN. BCBS Massachusetts represents approximately 2.3 million
covered lives.

•

Effective October 1, 2022, Capital Blue, a health plan in Pennsylvania, updated their medical policy to explicitly cover PDN. Capital Blue represents approximately 700,000 covered lives.

During the third quarter of 2022, Novitas and First Coast, the Medicare
Administrative Contractors (MACs) that represent Arkansas, Colorado, Delaware,
Florida, Louisiana, Maryland, Mississippi, New Jersey, New Mexico, Oklahoma,
Pennsylvania and Texas, published draft Local Coverage Determinations (LCDs)
titled, "Nerve Stimulators for Chronic Intractable Pain", which propose updated
coverage criteria for SCS devices with an explicit FDA approval to treat PDN
that would include PDN refractory to conventional medical management. The MACs'
review of these proposed LCDs is ongoing, and they remain subject to change.
Potential finalization dates have not yet been announced. If finalized as
proposed, these LCDs would mean that Medicare patients in all 50 states would be
eligible for coverage for PDN and would add approximately 17 million covered
Medicare lives.

Effective December 1, 2022, UnitedHealthcare updated to its SCS medical coverage
policy and added language to indicate SCS devices are not covered for treating
chronic intractable back pain without prior spine surgery (NSBP). All other
elements of their SCS coverage policy remained as they were before, including
their recent decision in January 2022 to cover the use of SCS for PDN.

With respect to both PDN and NSBP, there are many payors that have not yet
updated their policies to expressly cover SCS procedures, including in the case
of PDN, Cigna and Anthem Blue Cross Blue Shield. A significant number of
negative coverage and reimbursement decisions by private insurers may impair our
ability or delay our ability to grow our revenue.

We are working to expand payor coverage to include the use of our 10 kHz Therapy
for the management of PDN and NSBP. This effort could be costly and could take
many years to gain broad acceptance, and there can be no guarantee that it will
be successful.

Inventory Buildup and Supply Chain Management

Our products are composed of a substantial number of individual components and,
in order to market and sell them effectively, we must maintain high levels of
inventory. In particular, since our commercial launch of Senza in the United
States, we have continued to add suppliers to fortify our supply chain and we
have maintained increased levels of inventory. As a result, a significant amount
of our cash used in operations has been associated with maintaining these levels
of inventory. There may also be times in which we determine that our inventory
does not meet our product requirements. Further, the manufacturing process for
our products requires lengthy lead times, during which components may become
obsolete. We may also over- or underestimate the quantities of required
components, in which case we may expend extra resources or be constrained in the
amount of end product that we can produce. These factors subject us to the risk
of inventory obsolescence and expiration, which may lead to inventory impairment
charges. The sum of the charges for the items listed above were $3.6 million for
the nine months ended September 30, 2022 and $2.5 million for the year ended
December 31, 2021. Additionally, as we release later generations of products
that contain advancements or additional features, the earlier generations may
become obsolete, as was the case in the year ended December 31, 2021, when we
recorded a charge of $1.8 million.

Investment in Research and Clinical Trials

We intend to continue investing in R&D to help our commercialization efforts
around and to expand into new indications and chronic pain conditions, as well
as develop product enhancements to improve outcomes and enhance the physician
and patient experience. For example, we commenced commercial launches of
Surpass, our surgical lead product family in early 2017 and Senza II SCS System
in late 2017. Most recently, we launched our next generation product platform,
Senza Omnia, in the United States in late 2019, in Europe during the second
quarter of 2020 and in Australia in July 2020. In the first quarter of 2021, we
received FDA approvals for our first Senza Omnia upgrade and a new trial
stimulator. In July 2021, we received FDA approval of our 10 kHz Therapy for the
management of chronic intractable pain of the lower limbs, including unilateral
or bilateral pain, associated with PDN. In January 2022, we received regulatory
approval for expanded labeling to include NSBP. In October 2022, we received FDA
approval of our latest generation SCS system, HFX iQ™, which we launched on a
limited basis in the United States in the fourth quarter of 2022. We are
continuing to invest in product improvements to Senza, including enhanced MRI
capabilities and next generation IPGs. While R&D and clinical testing are time
consuming and costly, we believe expanding into new indications, implementing
product improvements and continuing to demonstrate the efficacy, safety and cost
effectiveness of the 10 kHz Therapy through clinical data are all critical to
increasing the adoption of this therapy. We initiated two randomized controlled
trials in 2018, SENZA-PDN and SENZA-NSRBP, which evaluate the 10 kHz Therapy for
the treatment of PDN and NSBP, respectively.

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With regard to the SENZA-PDN study, we presented the three-month data in 2020
and the six-month and 12-month data, including six-month crossover data, in
2021. The Senza-PDN six-month results, 12-month durability results, and 12-month
Quality of Life (QoL) results were published in JAMA Neurology (April 2021),
Diabetes Care (November 2021) and Mayo Clinic Proceedings: Innovations, Quality
& Outcomes (July 2022), respectively. We presented the 18-month results,
including the 12-month crossover patient data, for the SENZA-PDN study at the
North American Neuromodulation Society (NANS) conference in January 2022 and at
the International Neuromodulation Society (INS) conference in May 2022.
Additionally, the SENZA-PDN 24-month results, including the 18-month crossover
data were presented at the American Diabetes Association (ADA) conference in
June 2022.

With regard to the SENZA-NSRBP study, we presented the three-month primary endpoint results and the six-month data in 2021. The SENZA-NSRBP 12-month results, including the six-month crossover patient data were presented at the NANS conference in January 2022 and published online in the Journal of Neurosurgery: Spine (February 2022). Additionally, the SENZA-NSRBP 18-month results, including the 12-month crossover data were presented at the INS conference in May 2022.

Both the SENZA-PDN and SENZA-NSRBP studies are ongoing, and further data will be presented and published in leading journals as the data becomes available.

Significant Investment in U.S. Sales Organization

In 2021, we established a sales organization to support the launch of our PDN
indication in the United States. This sales organization targets physician
specialties involved in PDN treatment decisions, including primary care
physicians, endocrinologists, internal medicine and podiatrists, to create
awareness of 10 kHz Therapy to treat PDN patients. We are continuing to make
investments in building our U.S. commercial infrastructure and recruiting and
training our U.S. sales force. This is a lengthy process that requires
recruiting appropriate sales representatives, establishing and, on occasion,
refining a commercial infrastructure in the United States and training our sales
representatives. Following initial training for Senza, our sales representatives
typically require lead time in the field to grow their network of accounts and
produce sales results. Successfully recruiting and training a sufficient number
of productive sales representatives has been required to achieve growth at the
rate we expect.

Access to Hospital Facilities

In the United States, in order for physicians to use our products, the hospital
facilities where these physicians treat patients often require us to enter into
purchasing contracts directly with the hospital facilities or with the Group
Purchasing Organizations of which the hospital facilities are members. This
process can be lengthy and time-consuming and requires extensive negotiations
and management time. In Europe, we may be required to engage in a contract
bidding process in order to sell our products, where the bidding processes are
only open at certain periods of time, and we may not be successful in the
bidding process.

Critical Accounting Policies, Significant Judgments and Use of Estimates

Our management's discussion and analysis of financial condition and results of
operations are based upon our condensed consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America (U.S. GAAP). The preparation of these condensed
consolidated financial statements requires us to make estimates and judgments
that affect the reported amounts of assets, liabilities, revenues and expenses.
On an ongoing basis, we evaluate our critical accounting policies and estimates.
We base our estimates on historical experience and on various other assumptions
that we believe to be reasonable in the circumstances, the results of which form
the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions and conditions. Our
significant accounting policies are more fully described in Note 1, Summary of
Significant Accounting Policies, of Notes to Condensed Consolidated Financial
Statements. We adopted ASU 2020-06, Debt - Debt with Conversion and Other
Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's
Own Equity (Subtopic 815-40), on January 1, 2022.

There have been no other significant or material changes in our critical accounting policies during the three months ended September 30, 2022 to the items we disclosed as our critical accounting policies in Management's Discussion and Analysis of Financial Conditions and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

Components of Results of Operations

Revenue

Our revenue is generated primarily from sales to two types of customers:
hospitals and outpatient medical facilities, with each being served primarily
through a direct sales force. Sales to these entities are billed to, and paid
by, the hospitals and outpatient

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medical facilities as part of their normal payment processes, with payment
received by us in the form of an electronic transfer, check or credit card
payment. Product sales to third-party distributors are billed to and paid by the
distributors as part of their normal payment processes, with payment received by
us in the form of an electronic transfer.

U.S. revenue is generally recognized after our sales representatives deliver our
product at the point of implantation and upon the completion and authorization
of the implant procedure. In response to competitive practices and pressures, we
have offered some volume price discounting for larger orders, where products are
ordered in advance of an implantation and revenue is recognized when the
transfer of control occurs at the time of shipment.

Revenue from sales of our Senza products fluctuate based on the selling price of
the system, as the average sales price of a system varies geographically and by
the type of system sold, and based on the mix of sales by geography. Our revenue
from international sales can also be significantly impacted by fluctuations in
foreign currency exchange rates, as our sales are denominated in the local
currency in the countries in which we sell our products.

We expect our revenue to fluctuate from quarter to quarter due to a variety of
factors, including seasonality. For example, the industry generally experiences
lower revenues in the first and third quarters of the year and higher revenues
in the fourth quarter. Our revenue has been impacted by these industry trends.
Further, the impact of the buying patterns and implant volumes of hospitals and
medical facilities, and third-party distributors may vary, and as a result could
have an effect on our revenue from quarter to quarter.

Cost of Revenue

We currently utilize contract manufacturers for the production of Senza products. Cost of revenue consists primarily of acquisition costs of the components of Senza, manufacturing overhead, scrap and inventory excess and obsolescence charges, as well as distribution-related expenses, such as logistics and shipping costs, net of costs charged to customers.

We calculate gross margin as revenue less cost of revenue divided by revenue.
Our gross margin has been and will continue to be affected by a variety of
factors, but primarily by our average sales price and the costs to have our
products manufactured. While costs are primarily incurred in U.S. dollars,
international revenue may be impacted by the appreciation or depreciation of the
U.S. dollar, which may impact our overall gross margin. Our gross margin is also
affected by our ability to reduce manufacturing costs as a percentage of
revenue.

Operating Expenses

Our operating expenses consist of R&D expense, sales, general and administrative
(SG&A) expense and certain litigation charges. Personnel costs are the most
significant component of operating expenses and consist primarily of salaries,
bonus incentives, benefits, stock-based compensation and sales commissions.

Research and Development. R&D costs are expensed as incurred. R&D expense
consists primarily of personnel costs, including salary, employee benefits and
stock-based compensation expenses for our R&D employees. R&D expense also
includes costs associated with product design efforts, development prototypes,
testing, clinical trial programs and regulatory activities, contractors and
consultants, equipment and software to support our development, facilities and
information technology. Our R&D expenses may fluctuate from period to period due
to the timing and extent of our R&D and clinical trial expenses.

Sales, General and Administrative. SG&A expense consists primarily of personnel
costs, including salary, employee benefits and stock-based compensation expenses
for our sales and marketing personnel, including sales commissions, and for
administrative personnel that support our general operations, such as
information technology, executive management, financial accounting, customer
service and human resources personnel. We expense commissions at the time of the
sale. SG&A expense also includes costs attributable to marketing, as well as
travel, intellectual property and other legal fees, financial audit fees,
insurance, fees for other consulting services, depreciation and facilities.

Certain litigation charges (credits). We record a liability for loss contingencies related to legal actions when a loss is known or considered probable and the amount may be reasonably estimated. When determining the estimated loss or range of loss, significant judgment is required. Payments received from litigation settlements are recorded as litigation credits. We record litigation charges (credits) that we consider to be significant infrequent transactions as Certain litigation charges (credits) in our consolidated statements of operations. All other legal expenses are recorded within SG&A expense.

In 2021, we established a sales organization to support the launch of our PDN
indication in the U.S. This sales organization targets physician specialties
involved in PDN treatment decisions, including primary care physicians,
endocrinologists, internal medicine and podiatrists, to create awareness of 10
kHz Therapy to treat PDN patients. We have historically increased marketing

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spending in order to generate additional sales opportunities. Additionally, we have made substantial investments in our U.S. commercial infrastructure to support our commercialization efforts in the United States.

Since 2019, we have experienced significant legal expenses associated with our
intellectual property litigation with Boston Scientific. Additionally, we
continue to incur significant expenses related to audit, legal, regulatory and
tax-related services associated with maintaining compliance with exchange
listing and SEC requirements, including compliance under the Sarbanes-Oxley Act
of 2002 (the Sarbanes-Oxley Act), director and officer insurance premiums and
investor relations costs associated with being a public company. Our SG&A
expense may fluctuate from period to period due to the seasonality of our
revenue, the timing and extent of our SG&A expense, and the direct impact of the
COVID-19 pandemic on certain discretionary spend items such as travel and trade
shows.

Interest Income and Interest Expense

Interest income consists primarily of interest income earned on our investments
and interest expense consists of interest paid on our outstanding debt and the
amortization of debt discount and debt issuance costs.

Other Income (Expense), Net

Other income (expense), net consists primarily of foreign currency transaction gains and losses and the gains and losses from the remeasurement of foreign-denominated balances to the U.S. dollar.

Provision for Income Taxes

The provision for income taxes consists primarily of income taxes in foreign
jurisdictions in which we conduct business as well as states where we have
determined we have state nexus. We maintain a full valuation allowance for all
of our U.S. deferred tax assets including net operating loss (NOL) carryforwards
and federal and state tax credits.

Allowance for Doubtful Accounts

We make estimates as to the overall collectability of accounts receivable and
provide an allowance for accounts receivable considered uncollectible based on
current expected credit losses. We specifically analyze accounts receivable
based on historical bad debt experience, customer concentrations, customer
credit-worthiness, the age of the receivable, current economic trends, and
changes in customer payment terms when evaluating the adequacy of the allowance
for doubtful accounts. We record the adjustment in sales, general and
administrative expense.

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