Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes appearing elsewhere in this Annual Report. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors. We discuss factors that we believe could cause or contribute to these differences below and elsewhere in this Annual Report, including those set forth under Item 1 A. “Risk Factors” and under “Forward-Looking Statements” in this Annual Report.
Note: Information concerning the shares of our common stock and related share prices in this Item 7 has been adjusted to reflect the 1-for-15 reverse split of our common stock that was made effective on February 15, 2023. (See, “Item 8 – Notes to consolidated financial statements – Note 2 - Basis of Presentation”).
Overview
We are a commercial stage bioelectronic medicine and wellness company dedicated to improving health through our non-invasive vagus nerve stimulation (“nVNS”) technology platform. Our focus is the commercialization of medical devices for the management and treatment of certain medical conditions and consumer product offerings utilizing nVNS to promote general wellbeing and human performance in the United States and select overseas markets.
nVNS is a platform bioelectronic technology that modulates neurotransmitters and immune function through its effects on both the peripheral and central nervous systems. Our nVNS treatment is delivered through a proprietary high-frequency burst waveform that safely and comfortably passes through the skin and stimulates therapeutically relevant fibers in the vagus nerve. Various scientific publications suggest that VNS works through several mechanistic pathways including the modulation of neurotransmitters.
Historically, vagus nerve stimulation or VNS, required an invasive surgical procedure to implant a costly medical device. This limitation has generally limited VNS from being used by anyone other than the most severe patients. Our medical devices and wellness products are self-administered and intended for regular or intermittent use over many years.
Our business is supported by our in-house capabilities spanning research and development, regulatory affairs and compliance, sales and marketing, product testing, assembly, fulfillment, and customer support. We derive revenues from the sale of medical devices and wellness products in the United States and select overseas markets. We have two principal product categories:
•
Handheld, personal use medical devices for the management and treatment of certain medical conditions; and
• Handheld, personal use consumer product offerings utilizing nVNS technology to promote general wellbeing and human performance.
We believe our nVNS treatment may be used in the future to effectively treat additional medical conditions or improve human performance.
Our goal is to be a leader in non-invasive neuromodulation by using our proprietary nVNS platform technology to deliver better health. To achieve this, we offer multiple propositions:
• gammaCore for the treatment of certain medical conditions such as primary headache;
• Truvaga for the support of general health and wellbeing; and
• TAC-STIM for human performance as defined by the United States Air Force Research Laboratory.
Our flagship model, gammaCore Sapphire, is a prescription medical device currently FDA cleared for a variety of primary headache conditions. gammaCore is available by prescription only and Sapphire is a portable, reusable, rechargeable and reloadable personal use option for patients to use at home or on the go. Prescriptions are written by a health care provider and dispensed from a specialty pharmacy, through the patient’s healthcare system, or fulfilled directly to certain patients directly from our facility in Rockaway, NJ. After the initial prescription is filled, access to additional therapy can be refilled for certain of our gammaCore products periodically through the input of a prescription-only authorization.
Truvaga is a personal use consumer electronics wellness product that does not require a prescription and is available direct-to-consumer from electroCore at www.truvaga.com . Truvaga is not intended for medical use. TAC-STIM is a form of nVNS for human performance and has been developed in collaboration with the United States Department of Defense Biotech Optimized for Operational Solutions and Tactics, or BOOST program. We are exploring strategies to make this product offering available to other branches of the active-duty military and certain human performance professionals in the United States and abroad.
TAC-STIM is available as a Commercial Off the Shelf (COtS) solution to professional organizations and is the subject of ongoing research at the United States Air Force Research Laboratory. TAC-STIM is not intended for medical use.
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We have generally focused most of our historical sales efforts in two channels, the United States Department of Veterans Affairs and United States Department of Defense, or VA/DoD, and the United Kingdom utilizing our FDA cleared and CE marked product, gammaCore.
The United States Department of Veteran Affairs comprised 60.8 % of our revenue during the year ended December 31, 2022. We expect that a majority of our 2023 sales will be made pursuant to our qualifying contract under the Federal Supply Schedule or FSS, which was secured by us in December 2018, as well as open market sales to individual facilities within the government channels. The FSS is scheduled to expire on January 15, 2024. We intend to request an extension of the FSS from the United States Department of Veteran Affairs, but there is no assurance the FSS will be renewed, and if at all renewed at terms favorable to us. Our sales function in this channel is comprised of employees and independent contractors.
Sales under the MTFM program for cluster headache in the UK comprised 15.1% of our revenue during the year ended December 31, 2022. In 2023, we plan on continued expansion under this program, as well as continue to utilize distribution partners to commercialize our nVNS technology in territories outside the United States and United Kingdom. In 2023, we expect NICE to review the guidance document and any changes in recommendation or pricing may adversely impact our ability to work with NHS England on the MTFM program.
We believe there may be significant opportunities beyond these areas. In 2023, therefore, we plan to continue our investment in expanded commercial adoption of gammaCore with cash pay, physician dispense, and direct-to-consumer approaches, and continue our early efforts to begin building wellness and human performance propositions through Truvaga and TAC-STIM.
We face a variety of challenges and risks that we will need to address and manage as we pursue our strategies, including our ability to develop and retain an effective sales force, achieve market acceptance of gammaCore among physicians, patients, and third-party payers, expand the use of gammaCore to additional therapeutic indications, and to develop our nascent wellness and human performance business.
Because of the numerous risks and uncertainties associated with our commercialization efforts, as well as research and clinical development activities, we are unable to predict the timing or amount of increased expenses, or when, if ever, we will be able to achieve or maintain profitability. Even if we are able to increase sales of our products, we may not become profitable. If we fail to become profitable or are unable to sustain profitability, then we may be unable to continue our operations at planned levels and be forced to reduce or terminate our operations.
Our expected cash requirements for the next 12 months and beyond are based on the commercialization success of our products and our ability to control operating expenses. There are significant risks and uncertainties as to our ability to achieve these operating results, including as a result of the potential adverse impact on our business from the ongoing COVID-19 pandemic. Due to these risks and uncertainties, we may need to reduce our activities significantly more than our current operating plan and cash flow projections assume in order to fund operations for the next 12 months. There can be no assurance that we will have sufficient cash flow and liquidity to fund our planned activities, which could force us to significantly reduce or curtail our activities and, ultimately, potentially cease operations. These conditions raise substantial doubt about our ability to continue as a going concern. See “Liquidity and Capital Resources.”
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. If we raise additional funds by issuing equity or debt securities, either through the sale of securities pursuant to a registration statement or by other means, our existing stockholders may experience dilution, and the new equity or debt securities may have rights, preferences and privileges senior to those of our existing stockholders.
On July 2, 2021, we completed a public offering of 1,380,000 shares of our common stock at a purchase price of $15.00 per share. The net proceeds of the offering to us were approximately $18.8 million, after deducting the underwriting discounts and commissions and other estimated offering expenses. We intend to use the net proceeds of the offering for sales and marketing, working capital, and general corporate purposes. In addition, we believe that opportunities may exist from time to time to expand our current business through acquisitions or in-licenses of, or investments in, complementary companies, medicines, intellectual property, or technologies. While we have no current agreements or commitments for any specific acquisitions, in-licenses or investments at this time, we may use a portion of the net proceeds for these purposes.
On August 30, 2021, we entered into a Securities Purchase Agreement with our legal counsel pursuant to which we issued 63,479 shares of common stock, at a purchase price of $15.75 per share. Upon issuance of the shares, certain of our outstanding financial obligations to our legal counsel were deemed paid and satisfied in full.
On October 4, 2021, we issued 13,333 shares of our common stock in connection with the lease termination related to our former headquarters located in Basking Ridge, NJ.
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Outside the US
In August 2011, we received a CE Certificate of Conformity for gammaCore for the treatment of primary headache from the British Standards Institution, a European Union notified body. This CE Certificate of Conformity allowed us to affix the CE Mark on gammaCore and to commercialize it in the European Economic Area and other countries that recognize the European CE Mark. In addition to the CE Certificate of Conformity for primary headache, between September 2011 and October 2013 we received CE Certificates of Conformity on gammaCore covering four other indications for use, including reactive airway disease and gastric motility disorders. In 2019 , the National Institute for Health and Care Excellence, or NICE published a Medical Technology Guidance document recommending the use of gammaCore for Cluster Headache or CH within the National Health Service, or NHS, of England and Wales. On January 2021, NHS Scotland adopted the NICE recommendation and recommended gammaCore for use in the treatment of CH in Scotland.
NHS England awarded gammaCore a place on the Innovation Technology Payment, or ITP, program for treatment of patients with reflectory cluster headache, a reimbursement pathway that opened in April 2019. In October 2020, we announced that the ITP program was extended through March 2021. Effective April 1, 2021, gammaCore Sapphire was included in a new long-term, reimbursement policy, titled the MedTech Funding Mandate Policy 2021 / 22 , or MTFM.
In August 2021, we announced the release of an article entitled “gammaCore for Cluster Headaches: A NICE Medical Technologies Guidance” in the journal PharmacoEconomics highlighting the cost impact of gammaCore’s non-invasive vagus nerve stimulation therapy platform for patients with cluster headaches. The paper is part of a series that provides insight into the development of NICE medical technologies guidance for new or innovative medical devices or diagnostics. The aim of the guidance is to support the adoption of clinically effective and cost-saving technologies in the UK National Health Service. The paper validated that gammaCore both reduces the frequency and severity of cluster headaches when used with standard of care and provides a £ 450 per patient savings in the first year of therapy versus standard of care alone.
In October 2021, we announced the publication of a peer-reviewed paper entitled “Non-invasive vagus nerve stimulation for treatment of cluster headache: a retrospective review of prescribing in England,” in the British Journal of Healthcare Management. The paper reviews the prescribing trends of gammaCore in England from April 2019 through the end of 2020 and is one of the largest clinical audits of patients with cluster headache. The paper highlights that of the 655 patients who started on gammaCore, 46.3 % of patients were prescribed at least one refill and 30.9 % were prescribed two or more refills. These real-world results suggest a durable benefit for patients utilizing gammaCore’s non-invasive vagus nerve stimulation (nVNS) for cluster headache in England.
In April 2021, we announced that Health Canada has granted regulatory approval for the promotion and sale of the gammaCore Sapphire family of products in Canada for prevention and therapeutic treatment of migraine and cluster headache, as outlined in the registration application with Health Canada. Later in the year, the company received an amended Medical Device License from Health Canada to expand the label of gammaCore nVNS to include the acute and preventive treatment of migraine in adolescents between 12 and 17 years of age. gammaCore is now cleared for most forms of primary headache including the acute and preventive treatment of migraine in adolescents and adults, as well as the acute and preventive treatment of cluster headache in adults.
In December 2022, we announced the launch of an ecommerce shop for patients residing in the United Kingdom. The site, which can be found at www.gammacore.co.uk, requires patients to complete a healthcare questionnaire in order to purchase a gammaCore Sapphire™, non-invasive vagus nerve stimulator (nVNS) device online. The first product launched on the platform is designed to treat menstrual migraine, supporting the 60 % of women who report migraine symptoms associated with their menstrual cycle. This platform will allow patients to experience a fully virtual experience by completing an online clinical assessment, having product delivered to their door, and being trained via video calls with a member of the UK customer service team.
In 2022, we continued executing on the plan to expand international distribution by onboarding exclusive distribution partners outside the United States and United Kingdom. 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 non-refundable, upfront payment for the licenses and rights granted to Teijin. We 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 of the Teijin license agreement 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.
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Impact of COVID- 19
The ongoing coronavirus pandemic has impacted, and may continue to impact, our headquarters, manufacturing, and warehousing and ecommerce facilities, as well as those of our third-party vendors, including through the effects of facility closures, employee furloughs, reductions in operating hours, staggered shifts and other social distancing efforts, labor shortages, decreased productivity and unavailability of materials or components. The ongoing coronavirus pandemic may also impact our ability to sell our product, ship our product on a timely basis and may increase our costs.
The spread of coronavirus caused us to modify certain of our business practices (including social distancing practices, requiring non-essential production related team members to work remotely where possible, restricting business travel, cancelling certain events, and limiting visitor access to our facilities), and we may relax, extend, modify, or take further actions that may be required by government authorities or that we determine are necessary or advisable. Work-from-home and other measures introduce additional operational risks, including cybersecurity risks, and have affected the way we conduct our business, which could have an adverse effect on our operations. There is no certainty that such measures will be sufficient to mitigate the risks posed by the virus, and illness and workforce disruptions could lead to unavailability of key personnel and harm our ability to perform critical functions. In addition, work-from-home and related business practice modifications present significant challenges to maintaining our corporate culture, including employee engagement and productivity, both during the immediate pandemic crisis and as we make additional adjustments in the eventual transition from it. Implementing new business practices in order to protect employees, vendors and other parties with whom we interact may result in increased costs. Furthermore, even if we follow what we believe to be best practices, there can be no assurance that our measures will prevent the transmission of COVID- 19 between employees. Any incidents of actual or perceived transmission may expose us to liability claims, adversely impact employee productivity and morale, and result in negative publicity and reputational harm.
Additionally, our sales and marketing efforts are, and may from time to time be, adversely affected by protocols for screening and restricting outside visitors and vendors that have been adopted by the Department of Veterans Affairs, commercial prescribers and other third parties. Officially imposed quarantines and self-quarantines could also interfere with patients’ ability to see a health care provider and obtain our gammaCore therapy.
Critical Accounting Policies and Estimates
The significant accounting policies and basis of presentation of our 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.
The preparation of our financial statements is in accordance with U.S. Generally Accepted Accounting Principles, or GAAP, and we are required 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.
We believe the judgements estimates and assumptions associated with the following critical accounting policies have the greatest potential impact on the consolidated financial statements:
Revenue Recognition
Our principal source of revenue is product sales. Our contracts with customers generally contain a single performance obligation and we recognize revenue from product sales when or as we have satisfied our performance obligation by transferring control of the product to our customers. Control of the product generally transfers to the customer upon delivery. Revenue is recognized at the amount to which we expect to be entitled in exchange for the sale of our products. Variability in the transaction price for our products pursuant to our contract with customers primarily arises from discounts and rebates. We offer discounts and rebates to certain distributors and customers under our arrangements. In many cases, these amounts are fixed at the time of sale and the transaction price is reduced accordingly.
We have a standardized approach to estimate the amount of consideration that we expect to be entitled to, including the impact of discounts and rebates. Our historical collection is an integral part of the estimation process related to revenues and receivables. Further adjustments to the allowances, based on actual receipts, may be recorded upon settlement.
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Revenue from the Veterans Administration and the Department of Defense
Revenue from sales of our products is recognized under terms of the Federal Supply Schedule, or FSS, as well as purchase orders for open market sales to individual VA sites and a distributor who purchases our products on behalf of the DoD. Revenue from the VA includes sales of therapy for up to 36 months.
Sales to the VA and DoD are at a fixed price and are usually paid at the time of delivery.
A cash refund is allowed under specific circumstances for undamaged and non-defective products. Damaged or defective products are replaced at no charge.
United Kingdom Revenue
In the United Kingdom, an award from the Innovation Technology Payment program of the NHS and evidence-based recommendations published in December 2022 by NICE offer the potential for us to generate revenue from the treatment of CH. This is the primary commercial channel from which our United Kingdom revenue is derived. The first 93 days of therapy is free under this program. The cost to produce the free therapy in the 93 -day period is recorded as promotional expense within selling, general and administrative expenses.
Effective April 1, 2021, gammaCore Sapphire was included in the new MTFM long-term reimbursement policy which supports commissioners and providers in the use of selected NICE approved, clinically effective and cost-saving medical devices, diagnostics and digital technologies that will improve patient health.
Sales in the United Kingdom are primarily in increments of 93 -day therapy at a fixed price and are paid within 30 days.
Recently, product offering in the United Kingdom has expanded to 10 -day therapy at a fixed price for menstrual migraine patients purchasing product through our UK ecommerce store. All revenue associated with the menstrual migraine product are paid prior to product being shipped.
United States Commercial Revenue Outside of Federal Supply Schedule Channel
Revenue from our cash pay models through direct-to-physician and direct-to-consumer channels and our ecommerce channel are usually recognized at the time of product shipment or delivery dependent on specific contractual terms, less any discounts or rebates.
Managed care rebates represent our estimated obligations to pharmacy benefit managers. Rebate accruals are recognized in the same period the related revenue is recognized. Co-payment assistance represents financial assistance to qualified patients, to assist them with co-payments for gammaCore therapy. The calculation of the accrual is based on an estimate of claims and the cost per claim that we expect to incur associated with inventory that exists in the distribution channel at period end. The amount of monthly co-payment assistance is up to a maximum of $ 100 per prescription.
We expense the cost, as incurred, of product damaged as a result of shipping. This expense, historically, has been immaterial. We expect to receive payment on all of our customer receivables within one year and therefore classify all receivables as current assets. In accordance with our policy, damaged or defective products are replaced at no charge under our standard warranty. A cash refund is allowed in our discretion under specific circumstances for undamaged and non-defective returned product.
Accounts receivable are net of an allowance for doubtful accounts, which are accounts from which payment is not expected to be received although product was provided, and revenue was earned. Receivables are written off when deemed uncollectible. Recoveries of receivables previously written off are recorded when received.
Inventories
We value inventory at the lower of cost or net realizable value. Cost is determined on a first in first out basis. This policy requires us to make estimates regarding the net realizable value of our inventory, including an assessment of excess or obsolete inventory. We evaluate inventory for excess quantities and obsolescence based on an estimate of the future demand for our product within a specified timeframe and record an allowance to reduce the carrying value of inventory as determined necessary. The estimates we use for demand are also used for near-term capacity planning and inventory purchasing and are consistent with our revenue forecasts. We evaluate inventory with respect to our operating cycle and classify inventory as either current or long-term on our balance sheet. We further consider inventory shelf life in our estimates regarding the net realizable value of our inventory. If our actual demand is less than our forecast demand, we may be required to take additional excess inventory charges, which would decrease gross margin and adversely impact net operating results in the future.
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Licensed Products
We license a portion of our devices through our cash pay channels. The cost of these licensed devices is capitalized and included in Other Assets in our Balance Sheet at December 31, 2022 and 2021, and is being recognized as cost of goods sold over the estimated useful life of the device. I f certain licensed devices are returned and no longer meet quality specifications or the carrying amount of certain licensed devices are no longer deemed to be recoverable, we record a charge to cost of goods sold to write down such licensed devices to zero.
Income Taxes
We routinely assess whether a valuation allowance should be established against our deferred tax assets based on consideration of all available evidence, both positive and negative, using a more likely than not standard. The assessment of the realizability of deferred tax assets requires management to make numerous estimates and assumptions. Factors that are considered in this assessment include the nature, frequency, and severity of recent losses; a forecast of future profitability; the duration of statutory carryback and carryforward periods; our experience with tax attributes expiring unused; and tax planning alternatives.
Stock-based Compensation
We recognize compensation expense associated with the issuance of equity instruments to employees and non-employees for their services. Compensation expense is determined based on the grant date fair value and is expensed over the vesting period. The grant date fair value of stock options is measured using the Black-Scholes option valuation model. The input assumptions used in determining the fair value of options are expected life, expected volatility, risk-free interest rate and expected dividend yield. These input assumptions are based on management’s estimates, and these estimates are evaluated periodically for reasonability. The expected life of the option represents the period the stock-based awards are expected to be outstanding. We use the simplified method for estimating the expected life of the options. The fair value of each stock option award granted was estimated on the date of grant using the Black-Scholes model. Since our common stock was not publicly traded until June 2018 there has been insufficient volatility data available. Accordingly, we have used an expected volatility based on historical common stock volatility of our peers. Beginning in December 2022, we began incorporating our historical common stock volatility at a weighting of 50% of the total composite volatility rate. During 2023, the Company will continue to evaluate the volatility rate used to value stock options. Since we currently do not intend to pay dividends on our common stock, we estimate the dividend yield percentage to be zero. We base the risk-free interest rate on the U.S. Treasury constant maturity interest rate whose term is consistent with the expected life of the stock options being valued.
Loss Contingencies
We are subject to claims and lawsuits in the ordinary course of business, including claims by employees or former employees, with respect to our products and involving commercial disputes, or shareholder actions. We accrue for loss contingencies when it is deemed probable that a loss has been incurred and the loss is estimable. The amounts accrued are based on the full amount of the estimated loss considering insurance proceeds, if applicable, and do not include legal fees expected to be incurred in connection with the loss contingency. The process of analyzing, assessing, and establishing reserve estimates relative to legal proceedings involves a high degree of judgment. Our consolidated financial statements do not reflect any material amounts related to unfavorable outcomes of claims and lawsuits to which we are currently a party because we currently believe that such claims and lawsuits are not expected to result in a material adverse effect on our financial condition. Management estimates that its current insurance coverage is sufficient to meet the potential liabilities of pending legal proceedings. Changes in facts and circumstances related to such proceedings could lead to significant adjustments to reserve estimates for such matters and could have a material impact on our results of operations, cash flows and financial condition in the period that reserve estimates are adjusted or paid.
Emerging Growth Company Status
In April 2012, the JOBS Act was enacted by the federal government. Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards when they are required to be adopted by public companies that are not emerging growth companies.
In addition, as an emerging growth company, we are not required to provide an auditor’s attestation report on our internal control over financial reporting in future annual reports on Form 10-K.
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We will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the completion of our IPO (December 31, 2023), (b) in which we have total annual gross revenue of at least $1.235 billion, or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeds $700 million as of the prior June 30, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period.
Results of Operations
Comparison of the years ended December 31, 2022 and 2021
The following table summarizes our results of operations for the years ended December 31, 2022 and 2021 with the changes in those items in dollars.
Years ended December 31,
(in thousands)
2022
2021
Change
Net sales
$
8,592
$
5,451
$
3,141
Cost of goods sold
1,616
1,385
231
Gross profit
6,976
4,066
2,910
Operating expenses:
Research and development
5,520
2,536
2,984
Selling, general and administrative
24,330
21,573
2,757
Total operating expenses
29,850
24,109
5,741
Loss from operations
(22,874
)
(20,043
)
(2,831
)
Other (income) expense:
Gain on extinguishment of debt
—
(1,422 )
1,422
Gain on termination of joint venture
—
(549 )
549
Interest and other income
(287
)
(11
)
(276
)
Other expense
6
8
(2
)
Total other (income) expense
(281
)
(1,974
)
1,693
Loss before income taxes
(22,593
)
(18,069
)
(4,524
)
Benefit from income taxes
431
851
(420
)
Net loss
$
(22,162
)
$
(17,218
)
$
(4,944
)
Net Sales
Net sales for the year ended December 31, 2022 increased 58% as compared to the year ended December 31, 2021. The increase of $ 3.1 million 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 $ 139,000 . 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 last half of 2022. We expect that the majority of 2023 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 ecommerce stores , 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). In addition, we believe we may generate additional revenue from sales of our Truvaga and TAC-STIM products.
Gross Profit
Gross profit in creased $2.9 million for the year ended December 31, 2022 compared to the year ended December 31, 2021. Gross margin was 81% and 75% for the years ended December 31, 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 increase in gross margin was primarily due to the favorable impact on gross margin associated with the licensing of a portion of our devices in the year ended December 31, 2022. Moreover, in 2022, we 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, contributed to the increase in gross margin. Gross profit and gross margin in 2023 will be largely dependent on revenue levels, product mix, and any changes in the estimated useful lives of licensed devices.
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Research and Development
Research and development expense of $ 5.5 m illion for the year ended December 31, 2022 in creased by $3.0 million. 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 . I n 2023, we plan to continue to invest in the next generation of our therapy delivery platform.
Selling, General and Administrative
Selling, general and administrative expense of $ 24.3 million for the year ended December 31, 2022 increased by $2.8 million 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 ecommerce stores, 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 phy sicians, women's health, pain management, sports medicine, functional and integrative medicine professionals, as well as chiropractors, and PharmDs (Doctors of Pharmacy). In 2023, w e plan on continuing to make targeted investments in sales and marketing to support our commercial efforts.
Other (Income) Expense
Other (income) expense for the year ended December 31, 2021 primarily represents the gain of $1.4 million related to the forgiveness of the Paycheck Protection Program loan and the gain of $0.5 million recorded related to the termination of the joint venture in Australia. The increase in Interest and other income is primarily due rising interest rates.
Benefit from Income Taxes
The Benefit from income taxes of $0.4 million and $0.9 million for the years ended December 31, 2022 and 2021, respectively, primarily represent the sale of our state net operating losses and research and development tax credits under the State of New Jersey’s NOL Transfer Program.
Liquidity and Capital Resources
At December 31, 2022 our cash, cash equivalents, and restricted cash was $18.0 million compared to $34.7 million at December 31, 2021.
December 31,
(in thousands)
2022
2021
Net cash (used in) provided by
Operating activities
$
(16,645
)
$
(13,627
)
Investing activities
$
—
$
18,217
Financing activities
$
—
$
25,682
Operating Activities
Net cash used in operating activities was $ 16.6 million and $ 13.6 million for the years ended December 31, 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 year ended December 31, 2022. For the year ended December 31, 2021, net cash provided by investing activities was $18.2 million reflecting funds received from the maturity of marketable securities partially offset by our purchases of marketable securities.
Financing Activities
No cash was provided by financing activities during the year ended December 31, 2022. For the year ended December 31, 2021, net cash provided by financing activities was $25.7 million representing proceeds from the sale of our common stock.
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Liquidity Outlook
In 2023, we expect to continue to incur substantial negative cash flows from operations. We intend to continue to make targeted investments in sales and marketing, as well as the next generation of our therapy delivery platform.
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.
We expect that a majority of our 2023 sales will be made pursuant to our qualifying contract under the Federal Supply Schedule, or FSS, as well as open market sales to individual facilities within the government channels. The FSS is scheduled to expire on January 15, 2024. We intend to request an extension of the FSS from the United States Department of Veteran Affairs , but there is no assurance the FSS agreement will be renewed, if at all, or at terms favorable to us. In addition, other possible 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.
Even if we are not required to curtail our activities sooner, our ability to execute our operating plan beyond the next 12 months from the date these financial statements are issued depends on our ability to increase revenue, control operating expenses and obtain additional funding from the sale of equity and or debt securities, a strategic transaction or otherwise. However, these alternatives may not be available to us on attractive terms, or at all. There is no assurance that we will generate sufficient cash flow and funding through our operating results or the sale of securities or from a strategic transaction or otherwise, raising substantial doubt about our ability to continue as a going concern within one year of the date these financial statements are issued.
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.
On February 13, 2023, we held a special meeting (the “Special Meeting”) of our stockholders. At the Special Meeting, our shareholders voted to approve an amendment to our Certificate of Incorporation as amended to effect a Reverse Stock Split of our ordinary shares (the “Reverse Stock Split”) at a ratio of not less than 1-for 5 and not more than 1-for-50, with such ratio and the implementation and timing of the Reverse Stock Split to be determined by the our board of directors in its sole discretion. Following the Special Meeting, our board of directors approved a 1-for-15 Reverse Stock Split and our Certificate of Incorporation, as amended was amended accordingly. The Reverse Stock Split became effective on February 15, 2023. The purpose of the Reverse Stock Split was to increase the per share trading price of our common stock on the Nasdaq Capital Market to regain compliance with the Bid Price Rule. On March 6, 2023, we received a letter from Nasdaq confirming that our common stock had regained compliance with the Bid Price Rule, and as a result, our common stock continues to trade on the Nasdaq Capital Market. If in the future we fail to satisfy the continued listing requirements of Nasdaq, such as the corporate governance requirements or the Bid Price Rule, Nasdaq may take steps to delist our common stock.
The Reverse Stock Split of our common stock had the effect of reducing the number of shares of common stock outstanding. There can be no assurance that the value and liquidity of our common stock will not be adversely affected by the Reverse Stock Split, which in turn could have a material adverse effect on our ability to raise the additional capital that we may require or increase the dilutive impact of any such financing.
Off-Balance Sheet Arrangements
We did not have during the periods presented, and we do not have any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.
Impact of Recently Issued Accounting Standards
In the normal course of business, we evaluate all new accounting pronouncements issued by the FASB, SEC, or other authoritative accounting bodies to determine the potential impact they may have on our Consolidated Financial Statements. See Note 2 “Basis of Presentation” of the notes to our consolidated financial statements in this Annual Report for additional information about these recently issued accounting standards and their potential impact on our financial condition or results of operations.
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