Item 7. Management’s Discussion and Analysis
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Form 10-K. Further, you should read the following discussion and analysis of our financial condition and results of operations together with “Item 1A. Risk Factors” included elsewhere in this Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. See also “Forward-Looking Statements.”
Company Overview
We are a neurotechnology company focused on neurological wellness. Our purpose is to develop, license or acquire non-implantable technologies targeted at reducing symptoms of neurological disease or trauma.
Our product, known as the Portable Neuromodulation Stimulator, or PoNS®, is an innovative non-implantable medical device, inclusive of a controller and mouthpiece, which delivers mild electrical stimulation to the surface of the tongue to provide treatment of gait deficit and chronic balance deficit. PoNS Therapy® is integral to the overall PoNS solution and is the physical therapy applied by patients during use of the PoNS neuromodulation stimulator. PoNS has marketing clearance in the U.S. for use in the U.S. as a short-term treatment of gait deficit due to mild-to-moderate symptoms for MS, and is to be used as an adjunct to a supervised therapeutic exercise program in patients 22 years of age and over by prescription only. We began accepting prescriptions for PoNS in the U.S. in March 2022, and commercial sales of PoNS commenced in April 2022. PoNS is authorized for sale in Canada for three indications: (i) as a short term treatment (14 weeks) of chronic balance deficit due to mild-to-moderate traumatic brain injury, or mmTBI, and is to be used in conjunction with physical therapy; (ii) as a short term treatment (14 weeks) of gait deficit due to mild and moderate symptoms from MS and it is to be used in conjunction with physical therapy; and (iii) as a short term treatment (14 weeks) of gait deficit due to mild and moderate symptoms from stroke, to be used in conjunction with physical therapy. It has been commercially available in Canada since March 2019. PoNS is authorized for sale as a Class IIa medical device in Australia and we have been seeking a business partner to commercialize and distribute PoNS in Australia.
Recent Developments
Corporate Updates
On September 28, 2023, the Company announced that Wolters Kluwer Health – Medi-Span® assigned universal product code numbers to the Company’s PoNS device controller and mouthpiece. The NDC/UPC/HRI codes for the PoNS device controller is 64288-00046 at $25,700 and the PoNS mouthpiece is 64288-00043 at $7,900. In February 2024, the Company confirmed that the PoNS device and mouthpiece are also listed on the First Data Bank (“FDB”) Prizm® database.
Previously, on September 19, 2022, the Company received notice from the Listing Qualifications Staff (the “Staff”) of The Nasdaq Stock Market LLC (“Nasdaq”) that the bid price for the Company’s Class A Common Stock (“common stock”) had closed below $1.00 per share for the prior 30-consecutive business day period and that the Company had been granted a 180-day grace period, through March 20, 2023, to regain compliance with Nasdaq Marketplace Rule 5550(a)(2) (the "Minimum Bid Price Rule"). Subsequently, on March 21, 2023, the Company was granted a second 180-day grace period through September 18, 2023.
On August 31, 2023, following a reverse stock split of the Company’s common stock as described below, the Company received formal notification from Nasdaq confirming that is had regained compliance, and that the Company satisfied all other applicable criteria for continued listing on the Nasdaq Stock Market. As a result of the determination, the listing matter is closed.
At the annual meeting of stockholders on May 24, 2023, the Company’s stockholders voted to approve a reverse stock split of the Company’s outstanding common stock at a ratio in the range of 1-for-10 to 1-for-80 to be determined at the
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discretion of the Company’s Board of Directors (the “Board”). On August 11, 2023, the Board approved a 1-for-50 reverse stock split of the Company’s issued and outstanding shares of common stock (the “Reverse Stock Split”) and on August 15, 2023, the Company filed with the Secretary of State of the State of Delaware a Certificate of Amendment to its Certificate of Incorporation to effect the Reverse Stock Split. The Reverse Stock Split became effective as of 5:00 p.m. Eastern Time on August 16, 2023, and the Company’s common stock began trading on a split-adjusted basis when the Nasdaq Stock Market opened on August 17, 2023. All share and per share amounts in this Report have been reflected on a post-split basis.
During the third quarter of 2023, the Company began implementing the transition of the manufacturing of PoNS device controllers and mouthpieces to Minnetronix, Inc. from its previous contract manufacturer, Key Tronic Corporation. The majority of this transition was completed by the end of 2023, and the Company expects the transition to be fully completed by mid-2024.
Presently, PoNS Therapy is not covered by Center for Medicare and Medicaid (“CMS”) or reimbursed by any third-party payers in the U.S. We are pursuing commercial insurance coverage and Medicare reimbursement for PoNS within the Durable Medical Equipment, or DME, benefit category. We initially applied for unique Healthcare Common Procedure Coding System (“HCPCS”) codes during the third quarter of 2021. In order to address CMS’s request for additional information to “further understand the PoNS device indication for use”, we decided to monitor real-world utilization of PoNS Therapy and collect additional clinical evidence through our ongoing PoNSTEP study and our registry program. Based on consistent reports of positive therapeutic benefits experienced by MS patients through our commercial programs, we reapplied for HCPCS codes in the second quarter of 2023 leveraging new information addressing their questions and providing further support in favor of obtaining unique HCPCS codes for PoNS. In February 2024, CMS assigned HCPCS Level II codes A4593, “Neuromodulation stimulator system, adjunct to rehabilitation therapy regime” to describe the PoNS controller and A4594, “Neuromodulation stimulator system, adjunct to rehabilitation therapy regime, mouthpiece each” to describe the PoNS mouthpiece. The new HCPCS codes will be effective April 1, 2024. We expect to interact again with CMS in the second half of 2024 – to seek Medicare final payment determinations for both codes to be effective at the next scheduled date of October 1, 2024.
We will continue to monitor the development of CMS’s new pathway for coverage of innovative new devices, Transitional Coverage of Emerging Technology (“TCET”), which is replacing the repealed Medicare Coverage of Innovative Technologies rule. CMS is expected to provide additional information about TCET to the public for comments in 2024. As we follow the evolution of TCET, we will continue to assess our evidence generation strategy to reach the greatest potential to gain CMS reimbursement benefits as a result of our Breakthrough designation in MS.
We also intend to provide broad access and reimbursement for the PoNS Therapy over time through commercial insurers. Prior to the initiation of CMS or broad commercial payer coverage, we anticipate the primary source of sales will be self-pay patients. We expect to support the cost of the PoNS Therapy by offering a cash pay discount, collaborating with third parties to provide self-pay patients with financing options as well as working with advocacy groups and charitable organizations to help self-pay patients access our technology. In general, we anticipate that it will take at least 24 months to obtain broad coverage and reimbursement among government and private payers once the HCPCS codes become effective.
Our Patient Therapy Access Program (“PTAP”), launched in June 2022 and effective through June 2023, provided qualifying patients access to PoNS Therapy at a significantly reduced price. The PTAP was not renewed and terminated on June 30, 2023.
Material Trends and Uncertainties
Global Economic Conditions
Generally, worldwide economic conditions remain uncertain, in part due to supply chain disruptions, labor shortages, global conflicts and increased inflation. The general economic and capital market conditions both in the U.S. and worldwide, have been volatile in recent years and at times have adversely affected our access to capital and have increased the cost of capital. The capital and credit markets may not be available to support future capital raising activity
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on favorable terms. If economic conditions continue to remain volatile or decline, our future cost of equity or debt capital and access to the capital markets could be adversely affected.
Our operating results could be materially impacted by changes in the overall macroeconomic environment and other economic factors. Changes in economic conditions, supply chain constraints, logistics challenges, labor shortages, global conflicts such as the conflicts in Ukraine and in the Middle East, and steps taken by governments and central banks as well as other stimulus and spending programs, have led to higher inflation, which has led to an increase in costs and has caused changes in fiscal and monetary policy, including increased interest rates. Although we may take measures to mitigate these impacts, if these measures are not effective, our business, financial condition, results of operations, and liquidity could be materially adversely affected.
Other Trends and Uncertainties
To successfully commercialize, we need to continue to build infrastructure necessary to grow our business including adding headcount and implementing or upgrading business systems. Competition for talent in today’s labor market may impact our ability to add headcount and to recruit talent with the expertise we need to develop our commercial infrastructure.
In response to the aforementioned challenges and trends, we have supplemented our personnel including quality resources at our contract manufacturer. Additionally, during the third quarter of 2023, we began implementing the transition of the manufacturing of PoNS device controllers and mouthpieces to Minnetronix, Inc. from our previous contract manufacturer, Key Tronic Corporation. We expect the transition to be fully completed by mid-2024.
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Results of Operations
The following table summarizes our results of operations for the years ended December 31, 2023 and 2022 (in thousands):
Years Ended December 31,
2023
2022
Change
Revenue:
Product sales, net:
United States
$
324
$
318
$
6
Canada
281
460
(179)
Total product sales, net
605
778
(173)
Other revenue
39
9
30
Total revenue
644
787
(143)
Cost of revenue
583
463
120
Gross profit
61
324
(263)
Operating expenses:
Selling, general and administrative expenses
9,271
10,640
(1,369)
Research and development expenses
2,942
4,262
(1,320)
Amortization expense
117
181
(64)
Goodwill and fixed asset impairment
159
757
(598)
Total operating expenses
12,489
15,840
(3,351)
Loss from operations
(12,428)
(15,516)
3,088
Nonoperating income (expense)
Interest income (expense), net
257
(834)
1,091
Change in fair value of derivative liability
2,966
3,027
(61)
Foreign exchange (loss) gain
275
(756)
1,031
Other income (expense), net
80
7
73
Nonoperating income (expense), net
3,578
1,444
2,134
Loss before provision for income taxes
(8,850)
(14,072)
5,222
Provision for income taxes
—
—
—
Net loss
$
(8,850)
$
(14,072)
$
5,222
Year Ended December 31, 2023 Compared to Year Ended December 31, 2022
Revenue
The decrease in total net product sales was primarily attributable to lower Canada product sales. The decrease in Canada product sales resulted primarily from the inclusion of approximately $120 thousand of revenue recognized in connection with the delivery of the remaining 16 PoNS devices that had been included as noncash consideration in the Company’s acquisition of Heuro in the prior year sales. Other revenue for the years ended December 31, 2023 and 2022 was related to the amortization of the up-front payment we received in connection with agreements that contained an exclusive distribution right.
Cost of Revenue
The increase in cost of revenue was primarily attributable to fixed overhead costs, including salaries and benefits of employees involved in management of the supply chain and certain production costs.
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Gross Profit
Gross profit for the year ended December 31, 2023 was $61 thousand compared to gross profit of $324 thousand for the same period in the prior year. Reduced absorption of fixed overhead costs across the lower unit volume of PoNS device sales in 2023 as compared to the prior year was the primary reason for this decrease.
Selling, General and Administrative Expenses
The decrease in selling, general and administrative expenses was primarily from a $0.6 million decrease in stock-based compensation and a $0.6 million decrease in payroll taxes including the $0.5 million Employee Retention Credit claims we filed for the prior eligible periods. Refer to Note 9 to our consolidated financial statements for detailed information about stock-based compensation.
Research and Development Expenses
The decrease in research and development expenses was driven primarily by decreases in product development expenses and clinical trial activities as we transitioned our focus from product development and clinical trials to U.S. commercialization activities beginning in 2022.
Amortization Expense
Amortization expense is primarily comprised of the amortization of acquired finite-lived intangible assets. The decrease in amortization expense is primarily due to certain intangible assets becoming fully amortized during the year ended December 31, 2023. Refer to Note 6 to our Consolidated Financial Statements for additional information about the composition of intangible assets.
Goodwill and Fixed Asset Impairment
During the third quarter of 2023, we recorded an impairment of $0.2 million for certain machinery used in the production of our inventory. During the third quarter of 2022, we recorded a goodwill impairment charge of $0.8 million, reducing the goodwill balance to zero. Refer to Note 3 to our Consolidated Financial Statements for additional information.
Nonoperating Income (Expense)
Interest Income (Expense), Net
Net interest income for the year ended December 31, 2023 was primarily attributable to interest income earned on investments of excess cash in an unrestricted money market savings account, money market mutual funds, treasury bills and a certificate of deposit. We recorded $0.9 million of non-cash interest expense for the year ended December 31, 2022 in connection with the derivative liability classification of warrants issued in connection with the August 2022 Public Offering. Refer to Note 8 to our Consolidated Financial Statements for additional information. The interest expense for the year ended December 31, 2022 was offset by $0.1 million of interest income earned on investments of excess cash in an unrestricted money market savings account and a certificate of deposit.
Change in Fair Value of Derivative Liability
As discussed in more detail in Note 8 to our Consolidated Financial Statements, the warrants issued in connection with the August 2022 Public Offering are being accounted for as a derivative liability instrument. The change in fair value of derivative liability for the year ended December 31, 2023 of $3.0 million is the result of the decrease in our stock price offset partially by reduced outstanding warrant exposure due to warrant exercises during the year.
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Foreign Exchange (Loss) Gain
The foreign exchange gain for the year ended December 31, 2023 was primarily due to lower Canadian to U.S. dollar exchange rates in 2023.
Liquidity and Capital Resources
The following table summarizes our cash and cash equivalents and working capital as of December 31, 2023 and 2022 (in thousands):
December 31,
December 31,
2023
2022
Cash and cash equivalents
$
5,182
$
14,549
Working capital
5,559
14,709
Our available capital resources have been primarily used to expand our U.S. commercialization efforts, fund manufacturing activities for the PoNS device, conduct clinical trials and for working capital and general corporate purposes. Our primary sources of cash and cash equivalents have been proceeds from public and private offerings of our common stock which most recently included $16.3 million in net proceeds we received from a public offering of our common stock and warrants completed in August 2022 (“August 2022 Public Offering”) as discussed in more detail in Note 8 to our Consolidated Financial Statements included our 2022 Annual Report on Form 10-K.
As discussed in more detail in Note 8 to our Consolidated Financial Statements, the Company entered into a sales agreement related to our at-the-market offering program (“ATM”) under which we may offer and sell shares having gross proceeds up to $2.0 million. During the year ended December 31, 2023 the Company issued and sold shares with gross proceeds of $0.5 million under the ATM. In addition, the Company received gross proceeds of $0.6 million from the issuance of shares upon the exercise of warrants for the year ended December 31, 2023.
Statement of Cash Flows
The following table summarizes our cash flows for the year ended December 31, 2023 and 2022 (in thousands):
Years Ended December 31,
2023
2022
Change
Net cash used in operating activities
$
(10,416)
$
(14,310)
$
3,894
Net cash used in investing activities
(29)
(11)
(18)
Net cash provided by financing activities
1,077
17,869
(16,792)
Effect of foreign exchange rate changes on cash
1
(4)
5
Net increase (decrease) in cash and cash equivalents
$
(9,367)
$
3,544
$
(12,911)
Net Cash used in Operating Activities
The lower level of cash used in operating activities in 2023 primarily resulted from decreases in selling, general and administrative expenses and research and development expenses as compared to 2022.
Net Cash Used in Investing Activities
Our investing activities are primarily related to the purchase of property and equipment.
Net Cash Provided by Financing Activities
During the year ended December 31, 2023, we received net proceeds of $0.4 million from the issuance and sale of shares under the ATM. In addition, we received $0.6 million in net proceeds from the exercise of warrants. During the year ended December 31, 2022, we received net proceeds of $17.9 million from the sale of shares primarily from our August
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2022 public offering and to a lesser extent from the sale of shares to Lincoln Park Capital Fund, LLC, as described in Note 8 to our Consolidated Financial Statements.
Cash Requirements
Our ability to generate product revenues sufficient to achieve profitability will depend heavily on the successful commercialization of PoNS Therapy in the U.S. Our net loss was $8.9 million and $14.1 million for the year ended December 31, 2023 and 2022, respectively. As of December 31, 2023, we had an accumulated deficit of $160.0 million. We expect to continue to incur significant expenses and operating losses for the foreseeable future. These and other factors indicate substantial doubt about our ability to continue as a going concern. Refer to Note 1 to our Consolidated Financial Statements for additional discussion about our going concern uncertainty.
We intend to use our available capital resources primarily to expand our U.S. commercialization efforts, fund manufacturing activities for the PoNS device, conduct clinical trials and for working capital and general corporate purposes. We believe that our existing capital resources, including the $1.3 million of additional net proceeds from the ATM in 2024 through the date of this filing, will be sufficient to fund our operations through the second quarter of 2024, but we will be required to seek additional funding through the sale of equity or debt financing to continue to fund our operations thereafter. We will need additional funding for our planned clinical trial for stroke. The amount required to fund operations thereafter will depend on various factors, including timing of approval of clinical trials, duration and result of clinical trials and other factors that affect the cost of the clinical trial, manufacturing costs of product, development of our product for new indications and demand for our authorized products in the market.
There can be no assurance that we will be successful in raising additional capital or that such capital, if available, will be on terms that are acceptable to us. If we are unable to raise sufficient additional capital, we may be compelled to reduce the scope of our operations and planned capital expenditure or sell certain assets, including intellectual property, and we may be forced to cease or wind down operations, seek protection under the provisions of the U.S. Bankruptcy Code, or liquidate and dissolve our company.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our financial statements that have been prepared in accordance with U.S. GAAP. This preparation requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. U.S. GAAP provides the framework from which to make these estimates, assumption and disclosures. We choose accounting policies within U.S. GAAP that management believes are appropriate to accurately and fairly report our operating results and financial position in a consistent manner. Management regularly assesses these policies in light of current and forecasted economic conditions. Actual results could differ from those estimates made by management. While there are a number of significant accounting policies affecting our financial statements, we believe the critical accounting policies involving the most complex, difficult and subjective estimates and judgments are: revenue recognition, stock-based compensation, derivative financial instruments and accounting for warrants.
Revenue Recognition
The Company generates nearly all of its revenue from product sales directly to patients, its e-commerce partner in the United States and to clinics in Canada. Revenue from product sales is recognized at a point in time as the performance obligation is satisfied and when the customer obtains control at the established transaction price. Taxes that the Company collects concurrent with revenue-producing activities are excluded from revenue.
The Company requires some customers in the United States to prepay the full product selling price, net of cash discount, prior to shipment. The Company records a contract liability for any customer prepayment received for which delivery had not yet occurred as of the end of the period.
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Stock-Based Compensation
We account for all stock-based payments and awards under the fair value-based method. We recognize our stock-based compensation expense using the straight-line method. Compensation cost is not adjusted for estimated forfeitures, but instead is adjusted upon an actual forfeiture of a stock option.
We account for the granting of stock options using the fair value method whereby all awards are measured at fair value on the date of the grant. The fair value of stock options is expensed over the requisite service period with a corresponding increase to additional paid-in capital. Upon exercise of stock options, the consideration paid by the option holder, together with the amount previously recognized in additional paid-in capital is recorded as an increase to common stock, while the par value of the shares received is reclassified from additional paid in capital. Stock options granted to employees are accounted for as liabilities when they contain conditions or other features that are indexed to other than a market, performance or service conditions.
We use the Black-Scholes option-pricing model to calculate the fair value of stock options. The use of the Black-Scholes option-pricing model requires management to make assumptions with respect to the expected term of the option, the expected volatility of the common stock consistent with the expected term of the option, risk-free interest rates, the value of the common stock and expected dividend yield of the common stock. Changes in these assumptions can materially affect the fair value estimate.
Derivative Financial Instruments
We evaluate our financial instruments and other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for in accordance with ASC 815, Derivatives and Hedging. The result of this accounting treatment is that the fair value of the derivative is re-measured at each balance sheet date and recorded as a liability or asset and the change in fair value is recorded in the consolidated statements of operations and comprehensive loss. Upon settlement of a derivative financial instrument, the instrument is re-measured at the settlement date and then that fair value of the underlying instrument is reclassified to equity.
The classification of derivative financial instruments, including whether such instruments should be recorded as liabilities/assets or as equity, is reassessed at the end of each reporting period. Derivative financial instruments that become subject to reclassification are reclassified at the fair value of the instrument on the reclassification date. Derivative financial instrument liabilities are classified in the consolidated balance sheet as current if the right to exercise or settle the derivative financial instrument lies with the holder.
We use the Monte Carlo and Black-Scholes option-pricing models to value derivative financial instrument liabilities. This model uses Level 3 inputs in the fair value hierarchy established by ASC 820 - Fair Value Measurement.
As of December 31, 2023, our derivative financial instruments accounted for in accordance with ASC 815 were comprised of warrants issued in connection with August 2022 Public Offering.
Accounting for Warrants
We have issued and may continue to issue warrants to purchase shares of common stock through our public and private offerings. We account for such warrants in accordance with ASC 480 Distinguishing Liabilities from Equity, which identifies three categories of freestanding financial instruments that are required to be accounted for as a liability. If determined to be classified as a liability, we will remeasure the fair value of the warrants at each balance sheet date. If determined to be classified as equity, the fair value of the warrants will be measured as of the date of issuance and will not be subject to remeasurement at each balance sheet date.
The fair value of the warrants is estimated using the Black-Scholes option pricing model, based on the market value of the underlying common stock at the measurement dates, the contractual terms of the warrants, risk-free interest rates and expected volatility of the price of the underlying common stock. There are no expected dividends.
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Income Taxes
We account for income taxes using the asset and liability method. The asset and liability method provide that deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates and laws that will be in effect when the differences are expected to reverse. We record a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized.
We have adopted the provisions of ASC 740 Income Taxes regarding accounting for uncertainty in income taxes. We initially recognize tax positions in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions are initially and subsequently measured as the largest amount of the tax benefit that is greater than 50% likely of being realized upon ultimate settlement with the tax authority, assuming full knowledge of the position and all relevant facts. Application requires numerous estimates based on available information. We consider many factors when evaluating and estimating its tax positions and tax benefits. These periodic adjustments may have a material impact on the consolidated statements of operations and comprehensive loss. When applicable, we classify penalties and interest associated with uncertain tax positions as a component of income tax expense in its consolidated statements of operations and comprehensive loss.
Going Concern
Because we have generated limited revenues from commercialization, our operations to date have been principally financed through public and private offerings of our common stock and convertible debt and exercises of options and warrants. There are a number of conditions that we must satisfy before we will be able to generate sufficient revenue to fund our operations, including but not limited to the successful commercialization of the PoNS device in the U.S.
These factors raise substantial doubt about our ability to continue as a going concern through at least 12 months from the date of this Form 10-K. While we had $5.2 million of cash as of December 31, 2023, we do not currently have sufficient resources to accomplish all of the above conditions necessary for us to generate sufficient revenues to achieve profitability, and we expect that we will require additional financing to continue to fund our operations. There is no guarantee that such funding will be available at all or in sufficient amounts to satisfy our required expenditures. In reviewing this filing, you should carefully consider this uncertainty, the risks described in the section entitled “Item 1A. Risk Factors” and other risks described throughout this Form 10-K.
Recently Issued Accounting Pronouncements
Information regarding recently issued accounting pronouncements is included in Note 2 to the Consolidated Financial Statements.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is included in this Form 10-K beginning on page F-1 and is incorporated herein by reference.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.