Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
CONDITION AND RESULTS OF OPERATIONS
You should read this section in conjunction with our unaudited interim condensed consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q and our audited consolidated financial statements and related notes thereto and management’s discussion and analysis of financial condition and results of operations for the year ended December 31, 2021 included in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission, or SEC. As discussed in the section titled “Cautionary Note Regarding Forward-Looking Statements,” the following discussion and analysis contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those 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, and those under the caption "Risk Factors" in the aforementioned Annual Report and this Form 10-Q.
Overview
We are a commercial-stage medical device company with a proprietary non-invasive vagus nerve stimulation, or nVNS, therapy, called gammaCore. nVNS is a platform bioelectronic medical therapy that modulates neurotransmitters and immune function through its effects on both the peripheral and central nervous systems. We are focused on utilizing gammaCore in the management and treatment of primary headache conditions.
Our gammaCore nVNS therapy is the first non-invasive, hand-held medical therapy applied at the neck as a therapy to treat migraine and cluster headache through the utilization of a mild electrical stimulation to the vagus nerve that passes through the skin. Designed as a portable, easy-to-use technology, gammaCore is self-administered by patients, prophylactically or as needed, without the potential side effects associated with commonly prescribed drugs. When placed on a patient ’s neck over the vagus nerve, gammaCore stimulates the afferent fiber, which may lead to a reduction of pain in patients. gammaCore (nVNS) is FDA cleared in the United States for adjunctive use for the preventive treatment of cluster headache in adult patients, the acute treatment of pain associated with episodic cluster headache in adult patients, the acute and preventive treatment of migraine in adults and adolescent (ages 12 and older) patients, and paroxysmal hemicrania and hemicrania continua in adult patients. gammaCore is CE-marked in the United Kingdom and European Union for the acute and/or prophylactic treatment of primary headache (Migraine, Cluster Headache, Trigeminal Autonomic Cephalalgias and Hemicrania Continua) and Medication Overuse Headache in adults.
Since May 2019, we have primarily focused our sales efforts in two channels, the U.S. Department of Veterans Affairs and U.S. Department of Defense, and the United Kingdom. More recently, we began making targeted investments to increase the adoption of our gammaCore therapy in both the United States and abroad. We continue to evaluate strategies to expand commercial adoption of gammaCore, including traditional reimbursement models as well as the potential use of e-commerce and cash pay models through direct-to-physician and direct-to-consumer approaches. We expect to make continued targeted investments in the evaluation and possible execution of these strategies in future quarters. We are also continuing to make targeted investments in future iterations of our therapy delivery platform. We are unable to predict the impact these strategies and investments will have on our financial condition, results of operations and cash flows due to numerous uncertainties, including the potential impact of inflation, currency exchange rates, and general overall economic conditions.
In April 2022, we announced that nVNS was selected for further study under the United States Department of Defense Biotech Optimized for Operational and Tactics (BOOST) research program conducted under the leadership of the 711 Human Performance Wing Performance Optimization Branch of the United States Air Force to provide accelerated training, sustained attention, reduced fatigue, and improved mood. The continued efforts of the BOOST Program may result in adoption by the United States Air Force of a device not intended for primary headache, which may result in the requirement by the Company to provide field devices to the United States Air Force in the future. We are unable to predict the impact the BOOST Program will have on our financial condition, results of operations and cash flows due to numerous uncertainties.
In addition, we have announced agreements with new distributors to make gammaCore Sapphire available in several countries beyond the U.S. and United Kingdom, as well as a licensing agreement enabling market access activities to begin in Japan.
Capital Activities
On January 18, 2022, we filed a Form S-3 registration statement, or the 2022 Shelf Registration Statement, with the SEC, for the issuance of common stock, preferred stock, warrants, rights, debt securities and units, up to an aggregate amount of $75 million. The 2022 Shelf Registration Statement was declared effective on January 25, 2022. The proposed maximum offering price per unit and the proposed maximum aggregate offering price per class of security will be determined from time to time by us in connection with the issuance by us of the securities registered under the 2022 Shelf Registration Statement. Until such time as the aggregate market value of our securities held by non-affiliates equals or exceeds $75 million, the aggregate maximum offering price of all securities issued by the us in any given 12-calendar month period pursuant to this and any of our other registration statements may not exceed one-third of the aggregate market value of our securities held by non-affiliates.
License Agreement with Teijin Limited
On March 29, 2022, we entered into an agreement with Teijin Limited (Teijin), to license certain exclusive rights to its nVNS technology for commercialization in Japan for a range of primary headache disorders.
Under the agreement, we received a one-time non-refundable, upfront payment for the license and rights granted to Teijin, which we received in the third quarter of 2022. The Company began to recognize revenue for this upfront payment ratably over a period of one year commencing in the second quarter of 2022. The financial terms contain milestone payments, payable upon the decision by Teijin to commercialize the licensed product for specific indications. We will also receive an annual license fee commencing on the first anniversary of the agreement and payable annually until the first commercial sale on any approved indication. Upon favorable regulatory and payor coverage decisions in Japan, the parties plan to enter into an exclusive commercial supply agreement for gammaCore nVNS.
The agreement contains customary terms and conditions, including renewal and termination provisions, as well as minimum purchase commitments once a commercial supply agreement is in place. Furthermore, Teijin is responsible for all costs associated with regulatory approval by the Pharmaceuticals and Medical Devices Agency (PMDA), the Japanese FDA equivalent. As part of the agreement, Teijin will have the right of first negotiation for a license to additional indications in Japan.
Sale of New Jersey Net Operating Losses
We may be eligible, from time to time, to receive cash from the sale of our net operating losses under New Jersey's Department of the Treasury - Division of Taxation NOL Transfer Program. On April 14, 2022, we received a net cash amount of approximately $445,000 from the sale of our New Jersey state net operating losses.
Impact of COVID-19
We continue to monitor the impact of the coronavirus pandemic on all aspects of our business and geographies, including how it will impact business partners, customers and the global supply chain. While we experienced disruptions during the three and nine months ended September 30, 2022 and 2021 from the coronavirus pandemic, we are unable to predict the full impact that the coronavirus pandemic may have on our financial condition, results of operations and cash flows due to numerous uncertainties. These uncertainties include the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact and the direct and indirect economic effects of the pandemic and containment measures, the emergence of new viral strains that are not responsive to the vaccines, among others. The coronavirus pandemic has significantly adversely impacted global economic activity and has contributed to significant volatility and negative pressure in financial markets. Depending upon the duration and severity of the pandemic, the continuing effect on our results and outlook over the long term remains uncertain.
Critical Accounting Policies and Estimates
The significant accounting policies and basis of presentation of our condensed consolidated financial statements are described in Note 2 “Summary of Significant Accounting Policies” of the consolidated financial statements included with the annual report on Form 10-K.included in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission, or SEC on March 10, 2022 ("2021 Annual Report"), and in Note 2 "Summary of Significant Accounting Policies" of the condensed consolidated financial statements included within this quarterly report on Form 10-Q.
The preparation of our financial statements is in accordance with U.S. Generally Accepted Accounting Principles, or GAAP, require us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and other related disclosures. While we believe our estimates, assumptions and judgments are reasonable, they are based on information presently available. Actual results may differ significantly from these estimates due to changes in judgments, assumptions and conditions as a result of unforeseen events or otherwise, which could have a material impact on our financial position and results of operations.
The critical accounting policies that we believe, the judgements, estimates, and assumptions associated with such policies, have the greatest potential impact on the condensed consolidated financial statements are disclosed in the section titled Critical Accounting Policies and Estimates in Part II of our 2021 Annual Report.
Results of Operations
Comparison of the three months ended September 30, 2022 to the three months ended September 30, 2021
The following table sets forth amounts from our condensed consolidated statements of operations for the three months ended September 30, 2022 and 2021:
|
|
For the three months ended September 30,
|
|
|
|
|
|
|
|
2022
|
|
|
2021
|
|
|
Change
|
|
|
|
(in thousands)
|
|
Consolidated statements of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,976
|
|
|
$
|
1,487
|
|
|
$
|
489
|
|
Cost of goods sold
|
|
|
258
|
|
|
|
355
|
|
|
|
(97
|
) |
Gross profit
|
|
|
1,718
|
|
|
|
1,132
|
|
|
|
586
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
1,617
|
|
|
|
470
|
|
|
|
1,147
|
|
Selling, general and administrative
|
|
|
5,657
|
|
|
|
4,647
|
|
|
|
1,010
|
|
Total operating expenses
|
|
|
7,274
|
|
|
|
5,117
|
|
|
|
2,157
|
|
Loss from operations
|
|
|
(5,556
|
) |
|
|
(3,985
|
)
|
|
|
(1,571
|
) |
Other (income) expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other income
|
|
|
(103
|
) |
|
|
(4
|
) |
|
|
(99
|
) |
Other expense
|
|
|
—
|
|
|
|
4
|
|
|
|
(4
|
) |
Total other (income) expense
|
|
|
(103
|
) |
|
|
—
|
|
|
|
(103
|
) |
Loss before income taxes |
|
|
(5,453 |
) |
|
|
(3,985 |
) |
|
|
(1,468 |
) |
Provision for income taxes |
|
|
— |
|
|
|
(8 |
) |
|
|
8 |
|
Net loss
|
|
$
|
(5,453
|
) |
|
$
|
(3,993
|
)
|
|
$
|
(1,460
|
) |
Net Sales
Net sales increased 33% for the three months ended September 30, 2022 compared to the comparable prior year period. This increase of $489,000 is due to an increase in net sales across all major channels including the U.S. Department of Veteran Affairs, U.S. commercial channel, and sales from outside the U.S. which includes licensing revenue of $45,000 in the three months ended September 30, 2022. There was no licensing revenue in the comparable prior year. Revenue from outside the U.S. was adversely impacted due to the strengthening of the U.S. dollar during the three months ended September 30, 2022. We expect that the majority of our remaining 2022 fiscal year revenue will continue to come from the U.S. Department of Veterans Affairs and United Kingdom. Additionally, we expect revenues to expand from our cash pay propositions which include direct to physician models for traditional neurology headache specialists, as well as the wide range of medical providers who manage patients' headache conditions including primary care physicians, women's health, pain management, sports medicine, functional and integrative medicine professionals, as well as chiropractors, and PharmDs (Doctors of Pharmacy).
Gross Profit
Gross profit increased by $586,000 for the three months ended September 30, 2022 compared to the comparable prior year period. Gross margin was 87% and 76% for the three months ended September 30, 2022 and 2021, respectively. Our evolving commercial strategy has resulted in the launch of cash payment models under which we license a portion of our devices. The cost of the licensed device is being recognized as cost of goods sold over the estimated useful life of the device. The incremental favorable impact on gross margin associated with licensing a portion of our devices was 9% in the three months ended September 30, 2022. Moreover, in recent quarters, we have sold an increasing amount of longer duration therapy, resulting in a higher average selling price, as well as selling an increased number of refill kits with a lower cost of goods. These factors, including Teijin license revenue with no associated cost of goods, and favorable absorption of labor and overhead costs associated with the increased number of units sold contributed to the increase in gross margin. Gross profit and gross margin for the remainder of 2022 will be largely dependent on revenue levels, product mix, any changes in the estimated useful lives of licensed devices.
Research and Development
Research and development expense for the three months ended September 30, 2022 of $1.6 million increased by $1.1 million compared to the prior year period. This increase was primarily due to targeted investments to support the future iterations of our therapy delivery platform, including the use of our intellectual property around the delivery of smart phone-integrated and smart phone-connected non-invasive therapies.
Selling, General and Administrative
Selling, general and administrative expense of $5.7 million for the three months ended September 30, 2022 increased by $1.0 million, or 22%, compared to the comparable prior year period as we continued to make targeted investments to support our commercial efforts, particularly around sales and marketing efforts for our cash pay propositions which include direct to physician models for traditional neurology headache specialists, as well as the wide range of medical providers who manage patients' headache conditions including primary care physicians, women's health, pain management, sports medicine, functional and integrative medicine professionals, as well as chiropractors, and PharmDs (Doctors of Pharmacy).
Other (Income) Expense
The increase in Other (Income) Expense is primarily due to an increase in interest earned on cash and cash equivalents during the current period as funds were concentrated in interest earning instruments during the three months ended September 30, 2022. Also contributing to the increase in interest income was rising interest rates.
Comparison of the nine months ended September 30, 2022 to the nine months ended September 30, 2021
The following table sets forth amounts from our condensed consolidated statements of operations for the nine months ended September 30, 2022 and 2021:
|
|
For the nine months ended September 30,
|
|
|
|
|
|
|
|
2022
|
|
|
2021
|
|
|
Change
|
|
|
|
(in thousands)
|
|
Consolidated statements of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
6,032
|
|
|
$
|
3,960
|
|
|
$
|
2,072
|
|
Cost of goods sold
|
|
|
976
|
|
|
|
1,093
|
|
|
|
(117
|
) |
Gross profit
|
|
|
5,056
|
|
|
|
2,867
|
|
|
|
2,189
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
3,892
|
|
|
|
1,794
|
|
|
|
2,098
|
|
Selling, general and administrative
|
|
|
18,121
|
|
|
|
15,644
|
|
|
|
2,477
|
|
Total operating expenses
|
|
|
22,013
|
|
|
|
17,438
|
|
|
|
4,575
|
|
Loss from operations
|
|
|
(16,957
|
) |
|
|
(14,571
|
) |
|
|
(2,386
|
) |
Other (income) expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on extinguishment of debt |
|
|
— |
|
|
|
(1,422 |
) |
|
|
1,422 |
|
Interest and other income
|
|
|
(145
|
) |
|
|
(8
|
) |
|
|
(137
|
) |
Other expense
|
|
|
5
|
|
|
|
7
|
|
|
|
(2
|
) |
Total other (income) expense
|
|
|
(140
|
) |
|
|
(1,423
|
) |
|
|
1,283
|
|
Loss before income taxes |
|
|
(16,817 |
) |
|
|
(13,148 |
) |
|
|
(3,669 |
) |
Benefit for income taxes |
|
|
445 |
|
|
|
877 |
|
|
|
(432 |
) |
Net loss
|
|
$
|
(16,372
|
) |
|
$
|
(12,271
|
) |
|
$
|
(4,101
|
) |
Net Sales
Net sales increased 52% for the nine months ended September 30, 2022 compared to the prior year period. The increase of $2.1 million is due net sales from all major channels including the U.S. Department of Veteran Affairs, U.S. commercial channel, and net sales from outside the U.S. which include $93,000 of licensing revenue recognized in the nine months ended September 30, 2022.
Gross Profit
Gross profit increased by $2.2 million for the nine months ended September 30, 2022 compared to the prior year. Gross margin increased 84% for the nine months ended September 30, 2022 compared to 72% for the nine months ended September 30, 2021. Our evolving commercial strategy has resulted in the launch of cash payment models under which we license a portion of our devices. The cost of the licensed device is being recognized as cost of goods sold over the estimated useful life of the device. The incremental favorable impact on gross margin associated with licensing a portion of our devices was 8% in the nine months ended September 30, 2022. Moreover, in recent quarters, we have sold an increasing amount of longer duration therapy, resulting in a higher average selling price, as well as selling an increased number of refill kits with a lower cost of goods. These factors, including Teijin license revenue with no associated cost of goods and favorable absorption of labor and overhead costs associated with the increased number of units sold contributed to the increase in gross margin.
Research and Development
Research and development expense for the nine months ended September 30, 2022 of $3.9 million increased by $2.1 million compared to the prior year period. This increase was primarily due to targeted investments to support the future iterations of our therapy delivery platform, including the use of our intellectual property around the delivery of smartphone-integrated and smartphone-connected non-invasive therapies.
Selling, General and Administrative
Selling, general and administrative expense was $18.1 million and $15.6 million for the nine months ended September 30, 2022 and 2021, respectively, as we continued to make targeted investments to support our commercial efforts, particularly around sales and marketing efforts for our cash pay propositions which include direct to physician models for traditional neurology headache specialists, as well as the wide range of medical providers who manage patients' headache conditions including primary care physicians, women's health, pain management, sports medicine, functional and integrative medicine professionals, as well as chiropractors, and PharmDs (Doctors of Pharmacy).
Other (Income) Expense
Other (income) expense for the nine months ended September 30, 2021 primarily represents the gain of $1.4 million recorded by the Company in association with the forgiveness of its Paycheck Protection Program ("PPP") loan. The increase in Interest and other income is primarily due to an increase in interest earned on cash and cash equivalents due to the increase in rising interest rates.
Benefit for Income Taxes
The Benefit for income taxes of $0.4 million and $0.9 million for the nine months ended September 30, 2022 and 2021, respectively, represent the sale of our 2019 and 2018 state net operating losses and research and development tax credits under the State of New Jersey's NOL Transfer Program.
Cash Flows
The following table sets forth the significant sources and uses of cash for the periods noted below:
|
|
For the nine months ended September 30,
|
|
|
|
2022
|
|
|
2021
|
|
|
|
(in thousands)
|
|
Net cash (used in) provided by
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
(12,631
|
) |
|
$
|
(9,273
|
) |
Investing activities
|
|
$
|
—
|
|
|
$
|
17,217
|
|
Financing activities
|
|
$
|
—
|
|
|
$
|
25,685
|
|
Operating Activities
Net cash used in operating activities was million and $12.6 million and $9.3 million for the nine months ended September 30, 2022 and 2021, respectively. This increase is primarily due to the increase in our net loss from operations.
Investing Activities
No cash was provided by investing activities during the nine months ended September 30, 2022. For the nine months ended September 30, 2021, net cash provided by investing activities was $17.2 million reflecting funds received from the maturity of marketable securities partially offset by our purchases of marketable securities during the prior period.
Financing Activities
No cash was provided by financing activities during the nine months ended September 30, 2022. For the nine months ended September 30, 2021, net cash provided by financing activities was $25.7 million representing proceeds from the sale of our common stock.
Liquidity Outlook
As of September 30, 2022, our cash and cash equivalents and restricted cash totaled $21.9 million.
We have experienced recurring losses since our inception. We incurred net losses of $16.4 million and $12.3 million for the nine months ended September 30, 2022 and 2021, respectively. We expect to continue to incur substantial negative cash flows from operations for at least the next several years as we work to increase market acceptance of our gammaCore therapy for the acute treatment of primary headache and its other indications.
Our expected cash requirements for the next 12 months and beyond are largely based on the commercial success of our products and the level of targeted investment in our commercial strategies. There are significant risks and uncertainties as to our ability to achieve these operating results, including as a result of the adverse impact on our headache business from the COVID-19 pandemic and macroeconomic factors such as inflation and the strengthening of the U.S. dollar. We believe our current cash and cash equivalents will enable us to fund our operating expenses and capital expenditure requirements, as currently planned, for at least the next 12 months from the date the financial statements included in this Form 10-Q are made available.
Beyond the next 12 months, we believe that our growth will depend, in part, on our ability to fund our commercial efforts for our gammaCore therapy; and to opportunistically pursue research and development activities for additional indications, and the next generation of our gammaCore therapy. Our existing resources are unlikely to allow us to conduct all the activities that we believe could be beneficial for our future growth. As a result, we will need to seek additional funds in the future or curtail or forgo some or all such activities. If we seek to and are unable to raise funds on favorable terms, or at all, we may not be able to support our commercialization efforts or research and development activities and the growth of our business may be negatively impacted. As a result, we may be unable to compete effectively. Changes, including those relating to the payer and competitive landscape, our commercialization strategy, our development activities and regulatory matters, may occur beyond our control that would cause us to consume our available capital more quickly.
In connection with the transfer of our common stock from the Nasdaq Global Select Market to the Nasdaq Capital Market effective June 23, 2022, we have been granted a 180-day grace period, or until December 19, 2022, to regain compliance with the Nasdaq requirement that the bid price per share of our common stock on the Nasdaq Capital Market be at least $1.00 for at least 10 consecutive business days on or prior to December 19, 2022. If we fail to regain compliance during the additional compliance period, the common stock could be delisted from the Nasdaq Capital Market. Such a delisting could have a negative effect on the price of our common stock, impair the ability of investors to sell or purchase our common stock when they wish to do so, and materially adversely affect our ability to raise capital or pursue strategic, financing or other transactions on acceptable terms, or at all. See also Part II – Item 1A “Risk Factors” of our Quarterly Report on Form 10-Q for the period ending June 30, 2022 filed with the SEC on August 4, 2022.
On January 18, 2022, we filed a Form S-3 registration statement, or the 2022 Shelf Registration Statement, with the SEC, for the issuance of common stock, preferred stock, warrants, rights, debt securities and units, which we refer to collectively as the Shelf Securities, up to an aggregate amount of $75 million. The 2022 Shelf Registration Statement was declared effective on January 25, 2022. The proposed maximum offering price per unit and the proposed maximum aggregate offering price per class of security will be determined from time to time by us in connection with the issuance by us of the securities registered under the 2022 Shelf Registration Statement. Until such time as the aggregate market value of our securities held by non-affiliates equals or exceeds $75 million, the aggregate maximum offering price of all securities issued by the us in any given 12-calendar month period pursuant to this and any of our other registration statements may not exceed one-third of the aggregate market value of our securities held by non-affiliates.