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0001560258 2022-09-30 xbrli:shares xbrli:pure iso4217:USD iso4217:USD xbrli:shares ecor:subsidiary

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q



(Mark One)


QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


FOR THE QUARTERLY PERIOD ENDED September 30, 2022



TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE TRANSITION PERIOD FROM ______________ TO ______________

 

Commission File Number 001-38538

 

electroCore, Inc.

(Exact name of Registrant as specified in its charter)

 

 

Delaware

 

20-3454976

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

200 Forge Way, Suite 205, Rockaway, NJ 07866

(Address of principal executive offices, including zip code)

 

(973) 290-0097

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

 

 

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common Stock, par value $0.001 per share

 

ECOR

 

The Nasdaq Capital Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 


Large accelerated filer

 

 

Accelerated filer

Non-accelerated filer

 

 

Smaller reporting company

Emerging growth company 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes No

As of November 1, 2022 the registrant had 71,176,934 shares of common stock outstanding.


1



PART I. FINANCIAL INFORMATION

Page Number


Cautionary Note Regarding Forward-Looking Statements 3
Item 1. Financial Statements 

Condensed Consolidated Balance Sheets as of September 30, 2022 (unaudited) and December 31, 2021 4

Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2022 and 2021 (Unaudited) 5

Condensed Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended September 30, 2022 and 2021 (Unaudited) 6

Condensed Consolidated Statements of Equity for the Three and Nine Months Ended September 30, 2022 and 2021 (Unaudited) 7

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2022 and 2021 (Unaudited) 9

Notes to Condensed Consolidated Financial Statements (unaudited) 10
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 19
Item 3. Quantitative and Qualitative Disclosures About Market Risk 25
Item 4. Controls and Procedures 25

PART II. OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 1A. Risk Factors 26
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 26
Item 3. Defaults Upon Senior Securities 26
Item 4. Mine Safety Disclosures 26
Item 5. Other Information 26
Item 6. Exhibits 27

Signatures 28


2



REFERENCES TO ELECTROCORE

In this Quarterly Report on Form 10-Q, unless otherwise stated or the context otherwise requires, references to the “Company,” “electroCore,” “we,” “us” and “our” refer to electroCore, Inc. a Delaware corporation and its subsidiaries.

This Quarterly Report on Form 10-Q, or Quarterly Report, contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed in the forward-looking statements. The statements contained in this report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Forward-looking statements are often identified by the use of words such as, but not limited to, “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “seek,” “should,” “strategy,” “target,” “will,” “would” and similar expressions or variations intended to identify forward-looking statements. These statements are based on the beliefs and assumptions of our management based on information currently available to them. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, (i) risks and uncertainties related to the impact of the COVID-19 pandemic on general political and economic conditions, including as a result of efforts by governmental authorities to mitigate the COVID-19 pandemic, such as travel bans, vaccine mandates, shelter in place orders and third-party business closures and resource allocations, manufacturing and supply chains and patient access to commercial products; our ability to execute our operational and budget plans in light of the COVID-19 pandemic, and (ii) those included in our Form 10-Qs, our Annual Report on Form 10-K for the year ended December 31, 2021, in our other filings with the U.S. Securities and Exchange Commission or in materials incorporated by reference therein, including the information in the sections entitled Risk Factors and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in such filings. Furthermore, any such forward-looking statements in this Quarterly Report speak only as of the date of this report. Except as required by law, we undertake no obligation to update or revise any forward-looking statements to reflect events or circumstances after the date of such statements.

The electroCore logo, gammaCore and other trademarks of electroCore, Inc. appearing in this Quarterly Report are the property of electroCore, Inc. All other trademarks, service marks and trade names in this Quarterly Report are the property of their respective owners. We have omitted the ® and ™ designations, as applicable, for the trademarks used in this Quarterly Report.   


3


ELECTROCORE, INC. AND SUBSIDIARIES

(unaudited)

(in thousands, except share data)


 

 

 

September 30,

 

 

December 31,

 

 

 

2022

 

 

2021

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

21,645

 

 

$

34,689

 

      Restricted cash

250





Accounts receivable, net

 

 

364

 

 

 

438

 

Inventories, net

 

 

1,974

 

 

 

1,361

 

Prepaid expenses and other current assets

 

 

1,075

 

 

 

1,053

 

Total current assets

 

 

25,308

 

 

 

37,541

 

Inventories, noncurrent

 

 

2,674

 

 

 

3,941

 

Property and equipment, net

 

 

77

 

 

 

147

 

Operating lease right of use assets, net

 

 

579

 

 

 

613

 

Other assets, net

 

 

853

 

 

 

591

 

Total assets

 

$

29,491

 

 

$

42,833

 

Liabilities and Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,901

 

 

$

938

 

Accrued expenses and other current liabilities

 

 

4,670

 

 

 

4,486

 

Current portion of operating lease liabilities

 

 

71

 

 

 

61

 

Total current liabilities

 

 

6,642

 

 

 

5,485

 

Noncurrent liabilities:

 

 

 

 

 

 

 

 

Operating lease liabilities, noncurrent

 

 

645

 

 

 

700

 

Total liabilities

 

 

7,287

 

 

 

6,185

 

Commitments and contingencies

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Preferred Stock, par value $0.001 per share; 10,000,000 shares authorized at September 30, 2022 and December 31, 2021; 0 shares issued and outstanding at September 30, 2022 and December 31, 2021

 

 

 

 

 

 

Common Stock, par value $0.001 per share; 500,000,000 shares authorized at September 30, 2022 and December 31, 2021; 71,121,565 shares issued and outstanding at September 30, 2022 and 70,704,123 shares issued and outstanding at December 31, 2021

 

 

71

 

 

 

71

 

Additional paid-in capital

 

 

162,867

 

 

 

160,772

 

Accumulated deficit

 

 

(140,580

)

 

 

(124,208

)

Accumulated other comprehensive (loss) income

 

 

(154

)

 

 

13

Total equity

 

 

22,204

 

 

 

36,648

 

Total liabilities and equity

 

$

29,491

 

 

$

42,833

 

 

 


 

 

 

 

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

4


ELECTROCORE, INC. AND SUBSIDIARIES

(unaudited)

(in thousands, except per share data) 


 


   Three months ended September 30,



Nine months ended September 30,


 


2022



2021



2022

2021

Net sales

$

1,976



$

1,487



$ 6,032

$ 3,960

Cost of goods sold


258




355


976


1,093

Gross profit


1,718


1,132


5,056


2,867

Operating expenses
















Research and development


1,617


470


3,892


1,794

Selling, general and administrative


5,657




4,647


18,121


15,644

Total operating expenses


7,274




5,117


22,013


17,438

    Loss from operations


(5,556 )

(3,985 )

(16,957 )

(14,571 )

Other (income) expense
















      Gain on extinguishment of debt











(1,422 )

Interest and other income


(103 )

(4 )

(145 )

(8 )

Other expense





4


5


7

Total other (income) expense


(103 )




(140 )

(1,423 )
Loss before income taxes
(5,453 )

(3,985 )

(16,817 )

(13,148 )
(Provision) benefit from income taxes (see Note 9)



(8 )

445

877
Net loss $ (5,453 )
$ (3,993 )
$ (16,372 )
$ (12,271 )

Net loss per share of common stock - Basic and Diluted (see Note 8)

$ (0.08 )
$ (0.06 )
$ (0.23 )
$ (0.22 )

Weighted average common shares outstanding - Basic and Diluted (see Note 8)


71,090


69,511


70,862


55,308

 

See accompanying notes to unaudited condensed consolidated financial statements.


5



ELECTROCORE, INC. AND SUBSIDIARIES

(unaudited)

(in thousands)


 

Three months ended September 30,



Nine months ended September 30,


 

2022

2021

2022


2021

Net loss

$ (5,453 )
$ (3,993 )
$ (16,372 )
$ (12,271 )

   Other comprehensive (loss) income:
















    Foreign currency translation adjustment 


(82 )

(23 )

(167 )

124

    Unrealized gain (loss) on securities, net of taxes as applicable









2

    Other comprehensive (loss) income


(82

)



(23 )

(167 )

126

Comprehensive loss

$ (5,535 )
$ (4,016 )
$ (16,539 )
$ (12,145 )

 

See accompanying notes to unaudited condensed consolidated financial statements.


6


  

ELECTROCORE, INC. AND SUBSIDIARIES

(unaudited)

(in thousands)


 

Common

 

 

Additional

 

 

 

 

 

 

Accumulated other






 

Stock

 

 

paid-in

 

 

Accumulated

 

 

comprehensive



Total

 

Shares

 

 

Amount

 

 

capital

 

 

deficit

 

 

income (loss)



equity

Balances as of January 1, 2022 
70,704

$ 71

$
160,772


$ (124,208 )
$ 13

$

36,648



Net loss











(5,582 )




(5,582 )

Other comprehensive income














(27 )

(27 )

Issuance of stock related to employee compensation plans, net of forfeitures  


14
















Share based compensation








777








777

Balances as of March 31, 2022
70,718

$ 71

$ 161,549

$ (129,790 )
$ (14 )
$ 31,816

Net loss

 

 

 

 

 

 

 

 

 

 

(5,337

)

 

 




(5,337 )
   Other comprehensive income  












(58 )

(58 )

Issuance of stock related to employee compensation plans, net of forfeitures


401















Share based compensation








752










752

Balances as of June 30, 2022

71,119



$

71



$

162,301



$

(135,127

)
$

(72

)
$ 27,173

   Net loss









(5,453 )




(5,453 )
   Other comprehensive income  













(82 )

(82 )

Issuance of stock related to employee compensation plans, net of forfeitures  


3
















   Share based compensation






566








566

Balances as of September 30, 2022

71,122

$ 71

$ 162,867

$ (140,580 )
$ (154 )
$ 22,204


See accompanying notes to unaudited condensed consolidated financial statements 

 

7



ELECTROCORE, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Equity

(unaudited)

(in thousands)



Common

 


Additional

 

 

 


 


Accumulated other

 


Total electroCore, Inc.

 

 

 



 

 



 

Stock

 

 

paid-in

 

 

Accumulated

 

 

comprehensive

 

 

stockholders'

 

 

Noncontrolling

 


Total

 

 

Shares

 

 

Amount

 

 

capital

 

 

deficit

 

 

income (loss)

 

 

equity

 

 

interest

 


equity

 

Balances as of January 1, 2021
45,560

$ 45

$ 130,205

$ (106,990 )
$ (251 )
$ 23,009

$ 635

$ 23,644

Net loss











(5,384 )




(5,384 )




(5,384 )

Other comprehensive income 














144


144





144

Issuance of stock


2,750


3


6,918








6,921





6,921

Issuance of stock related to employee compensation plans, net of forfeitures 


18





















Settlement of accrued bonus 


165





400








400





400

Share based compensation








942








942





942
Balances as of March 31, 2021
48,493

$ 48

$ 138,465

$ (112,374 )
$ (107 )
$ 26,032

$ 635

$ 26,667

Net loss

 

 

 

 

 

 

 

 

 

 

(2,894

)

 

 


 

 

(2,894

)

 

 

 


 

(2,894 )

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

5

 

 

5

 

 

 


 

5

Issuance of stock related to employee compensation plans, net of forfeitures

 

197

 

 

 

 

 

 

 

 

 

 


 

 

 

 

 

 


 

 

Share based compensation

 

 

 

 

 

 

 

838

 

 

 

 

 

 


 

 

838

 

 

 

 


 

838

 

Balances as of June 30, 2021

 

48,690



$

48

 

 

$

139,303

 

 

$

(115,268

)

 

$

(102 )

 

$

23,981

 

 

$

635

 


$

24,616

 

   Net loss









(3,993 )




(3,993 )




(3,993 )
   Other comprehensive income












(23 )

(23 )




(23 )

Issuance of stock, net of related expenses


20,700


21


18,744








18,765





18,765

Issuance of stock to satisfy legal fee obligation


952


1


989








990





990

Issuance of stock related to employee compensation plan, net of forfeitures


100




















Share based compensation








761








761





761
Balances as of September 30, 2021
70,442

$ 70

$ 159,797

$ (119,261 )
$ (125 )
$ 40,481

$ 635

$ 41,116


8


ELECTROCORE, INC. AND SUBSIDIARIES

(unaudited)

(in thousands)

  

 

 

Nine months ended

September 30,

 

 

 

2022

 

 

2021

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(16,372

)

 

$

(12,271

)  

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

2,095

 

 

 

2,541

 

Depreciation and amortization

 

 

400

 

 

 

287

 

Amortization of marketable securities discount

 

 

 

 

141

           Gain on extinguishment of debt




(1,422 )

Gain on legal fee obligation settled with stock







(10 )

Net noncash lease expense

 

 

34

 

 

56

           Inventory reserve charge




39

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

74

 

 

(59

)

Inventories

 

 

654

 

 

271

Prepaid expenses and other current assets

 

 

(22

)

 

 

703

Accounts payable

 

 

963

 

 

172

Accrued expenses and other current liabilities

 

 

184

 

 

325

Right of use operating leases






(79 )

Operating lease liabilities



(45 )

33

Other assets



(596 )


Net cash used in operating activities

 

 

(12,631

)

 

 

(9,273

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchase of marketable securities

 

 

 

 

(5,083

)

Proceeds from maturities of marketable securities

 

 

 

 

 

22,300

 

Net cash provided by investing activities

 

 

 

 

17,217

Cash flows from financing activities:

 

 

 

 

 

 

 

 

                      Shares issued






25,685

Net cash provided by financing activities 

 

 

 

 

 

25,685

Effect of changes in exchange rates on cash and cash equivalents

 

 

(163

)

 

 

124

Net (decrease) increase in cash and cash equivalents and restricted cash

 

 

(12,794

)

 

 

33,753

Cash and cash equivalents – beginning of period

 

 

34,689

 

 

 

4,242

 

Cash and cash equivalents and restricted cash – end of period

 

$

21,895

 

$

37,995

 

Supplemental cash flows disclosures:

 

 

 

 

 

 

 

 

      Proceeds from sale of state net operating losses
$ 445

$ 1,426

Interest paid

  

$

6

 

 

$

5

 

      Income taxes paid
$

$ 39
Supplemental schedule of noncash activity:







      Insurance premium financing
$ 522

$

874


     Accounts payable paid through issuance of common stock
$




$

1,000


      2020 Accrued bonus awarded in equity
$

$

400


 

See accompanying notes to unaudited condensed consolidated financial statements. 


9


ELECTROCORE, INC. AND SUBSIDIARIES

(unaudited)

 

Note 1. The Company

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. 

electroCore is headquartered in Rockaway, New Jersey, has two wholly owned subsidiaries: electroCore UK Ltd. and electroCore Germany GmbH.  The Company has paused operations in Germany, with sales into the country and the rest of Europe being managed by electroCore UK Ltd.

 

Note 2Summary of Significant Accounting Policies


(a)

Basis of Presentation

The accompanying condensed consolidated financial statements were prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) and with instructions to Form 10-Q and Article 10 of Regulation S-X under the Securities Exchange Act of 1934, as amended. In the opinion of management, the Company has made all necessary adjustments, which include normal recurring adjustments necessary for a fair presentation of the Company’s condensed consolidated financial position and results of operations for the interim periods presented. Certain information and disclosures normally included in the annual consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. These interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes for the year ended December 31, 2021 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 10, 2022. The results for the three and nine months ended September 30, 2022 are not necessarily indicative of the results to be expected for a full year, any other interim periods or any future year or period.    


(b)

Principles of Consolidation

The accompanying condensed consolidated financial statements include the accounts of electroCore and its wholly owned subsidiaries. electroCore Australia was consolidated with the non-controlled equity presented as non-controlling interest in the Company's Condensed Consolidated Statement of Equity for the three and nine months ended September 30, 2021. The Company terminated its affiliation with electroCore Australia on November 2, 2021 and, as such, this dormant entity was not included in the Company's Condensed Consolidated Statement of Equity for the nine months ended September 30, 2022. All intercompany balances and transactions have been eliminated in consolidation. 


(c)

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include allowances for doubtful accounts, trade credits, rebates, co-payment assistance and sales returns, valuation of inventory, estimated useful life of licensed devices, stock compensation, incremental borrowing rate and contingencies. 

 

(d)

Cash, Cash Equivalents and Restricted Cash

The following table provides a reconciliation of cash, cash equivalents and restricted cash to the balance reflected on the Condensed Consolidated Statement of Cash Flows for the nine months ended September 30, 2022:


(in thousands)

Nine Months Ended September 30, 2022

Cash and cash equivalents

$

21,645


Restricted cash

250


Total cash, cash equivalents and restricted cash

$ 21,895


(e)

Restricted Cash

The Company's restricted cash consists of cash that the Company is contractually obligated to maintain in accordance with the terms of its new corporate credit card arrangement with Citibank.   


10


 

(f)

Licensed Products

The Company licenses a portion of its devices through its cash pay channels. The cost of these licensed devices is capitalized and included in Other Assets in the accompanying Condensed Balance Sheet at September 30, 2022, and is being recognized as cost of goods sold over the estimated useful life of the device. 

  

(g)

Reclassification of Balance Sheet Item

Certain accounts payable amounts reported at December 31, 2021 have been reclassified to conform to current period presentation. A total of approximately $605,000 of legal fees accrued at December 31, 2021 were reported on the line Accrued expenses and other current liabilities in the accompanying Condensed Consolidated Balance Sheet at December 31, 2021. See Note 7. Accrued Expenses and Other Current Liabilities.

 

Note 3Significant Risks and Uncertainties

Liquidity

The Company has experienced significant net losses and cash used in operations, and it expects to continue to incur net losses and cash used in operations for the near future as it works to increase market acceptance of its gammaCore therapy. The Company has never been profitable and has incurred net losses and cash used in operations in each year since its inception. 

The Company’s expected cash requirements for the next 12 months and beyond are largely based on the commercial success of its products. There are significant risks and uncertainties as to its ability to achieve these operating results. The Company believes its cash and cash equivalents on hand will enable it to fund its operating expenses and capital expenditure requirements, for at least the next 12 months from the date the accompanying financial statements in this quarterly report are issued.

Concentration of Revenue Risks 

The Company earns a significant amount of its revenue (i) in the United States from the Department of Veterans Affairs and Department of Defense ("VA/DoD") pursuant to its qualifying contract under the Federal Supply Schedule and open market sales to individual Department of Veterans Affairs facilities, and (ii) in the United Kingdom from the National Health Service. The VA/DoD and National Health Service were the Company’s sole customers accounting for 10% or more of total net sales during the three and nine months ended September 30, 2022 and 2021. The following table reflects the respective concentration as a percentage of the Company's net sales: 


 

Three months ended September 30,



Nine months ended September 30,



 


2022

2021

2022

2021

Revenue channel:














    VA/DoD


58.1 %
63.6 %
59.7 %
60.7 %

    National Health Service


17.6 %
24.1 %
16.1 %
25.6 %


During the three months ended September 30, 2022 and 2021, two facilities accounted for more than 10% of total VA/DOD net sales, and three and four VA/DOD facilities accounted for more than 10% during the nine months ended September 30, 2022 and 2021, respectively. During the three and nine months ended September 30, 2022 and 2021, one facility accounted for more than 10% of net sales from the National Health Service. 
Foreign Currency Exchange 

The Company has foreign currency exchange risk related to revenue and operating expenses in currencies other than the local currencies in which it operates. The Company is exposed to currency risk from the potential changes in functional currency values of its assets, liabilities, and cash flows denominated in foreign currencies.   

COVID-19 Risks and Uncertainties

The Company continues to monitor the impact of the coronavirus pandemic on all aspects of its business and geographies, including how it will impact business partners, customers, and the global supply chain. While the Company experienced disruptions during the three and nine months ended September 30, 2022 and 2021 from the coronavirus pandemic, it is unable to predict the full impact that the coronavirus pandemic may have on its financial condition, results of operations and cash flows due to numerous uncertainties. These uncertainties include the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact and the direct and indirect economic effects of the pandemic and containment measures, the emergence of new viral strains that are not responsive to the vaccines, among others. The coronavirus pandemic has significantly adversely impacted global economic activity and has contributed to significant volatility and negative pressure in financial markets. Depending upon the duration and severity of the pandemic, the continuing effect on the Company's results and outlook over the long term remains uncertain.  


11


Note 4. Revenue 

Geographical Net Sales

The following table presents net sales disaggregated by geographic market:  


 

Three months ended September 30,

Nine months ended September 30,

(in thousands)


2022


2021


2022


2021

Product revenue
















United States

$ 1,559

$ 1,104

$ 4,843
$ 2,810
United Kingdom
347


367


968


1,038
Other
25


16


128


112
License revenue














Japan
45





93



Total Net Sales

$ 1,976

$ 1,487

$ 6,032

$ 3,960


Performance Obligations

The Company’s net revenue represents total revenue, net of discounts, vouchers, rebates, returns, co-payment assistance, and certain fees for services related to its e-commerce platform. These adjustments represent variable consideration and are recorded for the Company’s estimate of cash consideration expected to be given by the Company to a customer that is presumed to be a reduction of the transaction price of the Company’s products and, therefore, are characterized as a reduction of revenue. These adjustments are established by management as its best estimate of available information and will be adjusted to reflect known changes in the factors that impact such allowances. Adjustments for variable consideration are determined based on the contractual terms with customers, historical trends, the levels of inventory remaining in the distribution channel, as well as expectations about the market for the product.  

Revenue is recognized when delivery of the product is completed. The Company deems control to have transferred upon the completion of delivery because that is the point in which (1) it has a present right to payment for the product, (2) it has transferred the physical possession of the product, (3) the customer has legal title to the product, (4) the customer has risks and rewards of ownership and (5) the customer has accepted the product. After the products have been delivered and control has transferred, the Company has no remaining unsatisfied performance obligations.

Trade credits are discounts that are contingent upon a timely remittance of payment and are estimated based on historical experience. For the three and nine months ended September 30, 2022 and 2021, the trade credits and discounts were immaterial.

Contract Balances

The Company generally invoices the customer and recognizes revenue once its performance obligations are satisfied, at which point payment is unconditional. Accordingly, under ASC 606, the Company’s contracts with customers did not give rise to contract assets or liabilities during the three and nine months ended September 30, 2022 and 2021.

Agreed upon payment terms with customers are within generally within 30 days of shipment. Accordingly, contracts with customers do not include a significant financing component. 

License Agreement with Teijin Limited

Effective March 29, 2022, the Company 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, the Company received a non-refundable, upfront payment for the licenses and rights granted to Teijin. 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. The Company also will 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. The Company began to recognize revenue from the non-refundable upfront payment over the 12-month period from the effective date due to the Company's continuing requirement to supply data under the agreement.

12


Note 5Inventories

As of September 30, 2022 and December 31, 2021, inventories consisted of the following:  


(in thousands)

 

September 30, 2022

 

 

December 31, 2021

 

Raw materials

 

$

897

 

 

$

769

 

Work in process

 

 

3,139

 

 

 

4,072

 

Finished goods

 

 

612

 

 

 

461

 

     Total inventories, net

 

 

4,648

 

 

 

5,302

 

Less: noncurrent inventories 

 

 

2,674

 

 

3,941

     Current inventories

 

$

1,974

 

 

$

1,361

 

The reserve for obsolete inventory was $711,000 and $821,000 as of September 30, 2022 and December 31, 2021, respectively. The decrease in the reserve for obsolete inventory was due to the disposal of previously reserved inventory. The Company records charges for obsolete inventory in cost of goods sold. As of September 30, 2022 and December 31, 2021, noncurrent inventory was comprised of approximately $0.9 million in raw materials for both periods and $1.8 million and $3.0 million of work in process, respectively. Inventory classified under the category work in process consists of prefabricated assembled product.


Note 6Leases

For the three and nine months ended September 30, 2022 the Company recognized lease expense of $38,000 and $114,000, respectively, and $52,000 and $140,000, for the three and nine months ended September 30, 2021 respectively. This expense does not include non-lease components associated with the lease agreements as the Company elected not to include such charges as part of the lease expense. 

Supplemental Balance Sheet Information for Operating Leases: 


(in thousands)


September 30, 2022

 

 

December 31, 2021

 

Operating leases:

 

 

 

 

 

 

 

 

Operating lease right of use assets


$

579

 

 

$

613

 

Operating lease liabilities:


 

 

 

 

 

 

 

Current portion of operating lease liabilities 

 

 

71