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 initially 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 an adjunctive 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 can be 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 nerve’s afferent fibers, 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 unable to predict the impact these strategies 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.
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 will receive a non-refundable, upfront payment for the licenses and rights granted to Teijin. 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 are closely monitoring the impact of the COVID-19 pandemic on all aspects of our business and geographies, including how it will impact business partners, customers and the global supply chain. In particular, the pandemic has resulted in a significant reduction in non-essential contact between patients and healthcare providers, shifting of focus by healthcare providers to the acute treatment of COVID-19 related illness regardless of specialty. We believe these restrictions have limited our sales force’s ability to generate additional interest in the Company’s products. While we began to experience disruptions from the COVID-19 pandemic during the three months ended March 31, 2020, we are unable to predict the impact that the COVID-19 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, the development, rollout and availability of effective treatments and vaccines, the imposition of various protective public safety measures including vaccine mandates, as well as the transmissibility and effects of new coronavirus variants such as those experienced with respect to Omicron and subsequent variants beginning in early December 2021, and the direct and indirect economic effects of the pandemic and containment measures, among others. The outbreak of COVID-19 in many countries, including the United States, has significantly adversely impacted global economic activity and has contributed to significant volatility and pressure in financial markets. The global impact of the outbreak has been rapidly evolving and many countries have reacted by instituting quarantines, mandating business and school closures and restricting travel. Certain states and cities, including those where our principal place of business is located and sales force seeks to operate, have also reacted by instituting quarantines, restrictions on travel, “shelter in place” rules, and restrictions on types of business that may continue to operate. We cannot predict if additional states and cities will implement similar restrictions or when restrictions currently in place will expire. As a result, the COVID-19 pandemic is negatively impacting almost every industry directly or indirectly, including industries in which we operate. Further, the impacts of a potential worsening of global economic conditions and the continued disruptions to, and volatility in, the credit and financial markets, consumer spending as well as other unanticipated consequences remain unknown of effective treatments and vaccines.
Because the COVID-19 pandemic affected, among other things, our access to prescribing physicians and their access to headache patients, on March 23, 2020 we suspended our earlier full-year revenue guidance until we could better understand the trajectory of our business, as well as announced a reduction in our activities, and adjusted our cash runway expectations in response to the potential adverse impact caused by the COVID-19 pandemic. Compared to our earlier expectations, we believe that our results for the year ended December 31, 2021 reflect a negative impact from, among other things, the global pandemic. Moreover, our expectations for at least the beginning of 2022 have also been adversely affected by both the uncertainty and potential negative impact of the global pandemic. We believe that the resurgence of UK COVID-19 cases during 2022 further negatively impacted our UK business. 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 March 31, 2022 to the three months ended March 31, 2021
The following table sets forth amounts from our condensed consolidated statements of operations for the three months ended March 31, 2022 and 2021:
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Three months ended March 31,
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|
|
|
|
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2022
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2021
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Change
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(in thousands)
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Consolidated statements of operations:
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|
|
|
|
|
|
|
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|
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Net sales
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$
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1,899
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|
|
$
|
1,204
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|
|
$
|
695
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|
Cost of goods sold
|
|
|
360
|
|
|
|
364
|
|
|
|
(4)
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|
Gross profit
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|
|
1,539
|
|
|
|
840
|
|
|
|
699
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|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
934
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|
|
|
499
|
|
|
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435
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|
Selling, general and administrative
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|
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6,186
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|
|
|
5,725
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|
|
|
461
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|
Total operating expenses
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|
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7,120
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|
|
|
6,224
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|
|
|
896
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|
Loss from operations
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|
|
(5,581
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) |
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(5,384
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)
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|
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(197
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) |
Other (income) expense
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|
|
|
|
|
|
|
|
|
|
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Interest and other income
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|
(4
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) |
|
|
(3
|
) |
|
|
(1
|
) |
Other expense
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|
|
5
|
|
|
|
3
|
|
|
|
2
|
|
Total other (income) expense
|
|
|
1
|
|
|
|
—
|
|
|
|
1
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|
Loss before income taxes |
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|
(5,582 |
) |
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|
(5,384 |
) |
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|
(198 |
) |
Provision for income taxes |
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|
— |
|
|
|
— |
|
|
|
— |
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Net loss
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|
$
|
(5,582
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) |
|
$
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(5,384
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)
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|
$
|
(198
|
) |
Net Sales
Net sales increased 58% for the three months ended March 31, 2022 compared to the comparable prior year period. This increase of $695,000 is due to a $770,000 increase in net sales from the U.S. Department of Veteran Affairs and our U.S. commercial channel, offset by a $75,000 decrease in net sales from outside the U.S due principally to the impact of the COVID-19 pandemic in the United Kingdom in the first quarter of 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, however, we expect to increase revenue from our commercial channel through cash pay models via direct-to-consumer approaches through our online stores in the U.S. and United Kingdom. Further, we are expanding our cash pay proposition to 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, functional and integrative medicine professionals, as well as chiropractors, and PharmDs (Doctors of Pharmacy).
Gross Profit
Gross profit increased by $699,000 for the three months ended March 31, 2022 compared to the comparable prior year period. Gross margin was 81% and 70% for the three months ended March 31, 2022 and 2021, respectively. Our evolving commercial strategy has resulted in the launch of cash payment models under which we license certain starter devices. The cost of the licensed starter device is being recognized as cost of goods sold over the estimated useful life of the starter device versus expensing the cost of goods at the time of sale. Moreover, in recent quarters, we have sold an increasing amount of longer duration therapy, resulting in a higher average selling price. These factors and favorable absorption of labor and overhead costs 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 starter devices, and the pricing levels of our therapy.
Research and Development
Research and development expense increased by $435,000, or 87%, for the three months ended March 31, 2022 compared to the prior year period. This increase was primarily due to targeted investments to support product development, certain investigator-initiated trials, and scientific publications. We expect research and development expenses to continue to increase during the remainder of 2022 largely due to planned expenditures in connection with the next generation of our therapy delivery platform.
Selling, General and Administrative
Selling, general and administrative expense of $6.2 million for the three months ended March 31, 2022 increased by $461 or 8%, compared to the comparable prior year period as we began to make targeted investments to support our commercial efforts. We expect our selling, general, and administrative expense to continue to increase for the remainder of 2022.
Other (Income) Expense
Other (income) expense primarily consisted of interest earned on cash, cash equivalents offset by interest expense related to borrowings used to partially fund the premiums due under certain of our insurance policies.
Cash Flows
The following table sets forth the significant sources and uses of cash for the periods noted below:
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For the three months ended March 31,
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2022
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2021
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(in thousands)
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Net cash (used in) provided by
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|
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|
|
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Operating activities
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$
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(4,780
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) |
|
$
|
(4,156
|
) |
Investing activities
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|
$
|
—
|
|
|
$
|
1,917
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|
Financing activities
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|
$
|
—
|
|
|
$
|
6,920
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|
Operating Activities
Net cash used in operating activities was $4.8 million and $4.2 million for the three months ended March 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 three months ended March 31, 2022. For the three months ended March 31, 2021, net cash provided by investing activities was $1.9 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 three months ended March 31, 2022. For the three months ended March 31, 2021, net cash provided by financing activities was $6.9 million representing proceeds from the sale of our common stock.
Liquidity Outlook
As of March 31, 2022, our cash and cash equivalents totaled $29.9 million.
We have experienced recurring losses since our inception. We incurred net losses of $5.6 million and $5.4 million for the three months ended March 31, 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 ongoing COVID-19 pandemic. We believe our 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 for 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 increase our 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.
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.