ElectroCore, Inc. — Q1 2023 Form 10-Q Summary
Business context and reporting period
ElectroCore is a commercial-stage bioelectronic medicine and wellness company developing and commercializing non-invasive vagus nerve stimulation products, including gammaCore, Truvaga and TAC-STIM. The filing covers the three months ended March 31, 2023, with comparative results for the three months ended March 31, 2022. The financial statements are unaudited and presented under U.S. GAAP.
The Company paused operations in Germany; European sales are managed through its U.K. subsidiary. A 1-for-15 reverse stock split became effective February 15, 2023, and all share and per-share information was retrospectively adjusted.
Key financial metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net sales | $2.780 million | $1.899 million | +$0.881 million, 46% |
| Gross profit | $2.322 million | $1.539 million | +$0.783 million |
| Gross margin | 84% | 81% | +3 percentage points |
| Operating expenses | $8.519 million | $7.120 million | +$1.399 million |
| Loss from operations | $(6.197) million | $(5.581) million | Loss increased $0.616 million |
| Net loss | $(5.867) million | $(5.582) million | Loss increased $0.285 million |
| Basic and diluted loss per share | $(1.24) | $(1.20) | Loss per share increased |
| Net cash used in operating activities | $(5.860) million | $(4.780) million | Use increased $1.080 million |
Revenue consisted of $2.370 million from the United States, $321,000 from the United Kingdom, $43,000 from other markets and $46,000 of licensing revenue from Japan. The Department of Veterans Affairs represented 64.5% of revenue, while the National Health Service represented 10.1%.
Cash and cash equivalents were $11.908 million at March 31, 2023, plus $250,000 of restricted cash, compared with cash and restricted cash of $17.962 million at December 31, 2022. Total assets were $18.300 million and total liabilities were $6.453 million. The Company had no outstanding borrowings under its insurance premium finance agreement at quarter-end; operating lease liabilities totaled $682,000.
Material changes versus the prior comparable period
- Net sales increased 46%, reflecting higher sales across the VA, U.S. commercial and international channels and $46,000 of licensing revenue not present in Q1 2022.
- Gross margin improved to 84% from 81%, aided by a greater mix of longer-duration therapy, refill kits, licensed devices and improved labor and overhead absorption.
- Research and development expense increased $875,000 to $1.809 million, primarily for next-generation therapy delivery platform development, including smartphone-integrated and smartphone-connected therapies.
- Selling, general and administrative expense increased $524,000 to $6.710 million, including $332,000 of severance charges, targeted commercial investments and lower insurance and stock-based compensation expense.
- Operating cash use increased to $5.860 million from $4.780 million, driven primarily by the higher net loss and working-capital changes.
- The Company received $211,000 from the sale of New Jersey state net operating losses.
- Inventory totaled $3.929 million at March 31, 2023, including a $738,000 obsolete-inventory reserve, compared with total inventory of $4.176 million and a $668,000 reserve at year-end 2022.
- All Series A preferred stock issued for the reverse-stock-split vote was redeemed, and the preferred-stock designation was eliminated in March 2023.
Guidance, outlook, risks and unusual items
Management expects substantial negative operating cash flow to continue during the remainder of 2023 while it invests in sales and marketing and the next generation of its therapy platform. Management expects most remaining 2023 sales to come from the VA/DoD channel, including the Federal Supply Schedule contract, while pursuing cash-pay, direct-to-physician, e-commerce, Truvaga and TAC-STIM opportunities. The filing does not provide specific revenue, earnings or cash-flow guidance.
The Federal Supply Schedule contract expires January 15, 2024. The Company intends to seek an extension, but renewal and terms are not assured. The filing states that these conditions, together with recurring losses and operating cash use, raise substantial doubt about the Company’s ability to continue as a going concern within one year of issuance of the financial statements. Management may need to obtain additional financing or materially reduce or curtail activities.
Additional risks include dependence on the VA/DoD and U.K. National Health Service channels, market acceptance and reimbursement of gammaCore, execution of the wellness and human-performance businesses, regulatory and competitive developments, foreign-currency exposure, access to capital and Nasdaq continued-listing requirements. Nasdaq confirmed compliance with its minimum bid-price requirement after the reverse stock split.
Stockholder litigation related to the Company’s IPO and post-IPO disclosures remains pending in federal and state courts. The Company has not accrued a loss because it cannot determine the reasonable probability or range of potential loss. The Company also recorded $332,000 of severance obligations for two former employees, with $301,000 payable at March 31, 2023.
Management concluded that disclosure controls and procedures were effective as of March 31, 2023, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the VA Federal Supply Schedule contract is extended beyond January 15, 2024 and on what terms.
- The Company’s ability to raise capital or reduce cash burn given $5.860 million of quarterly operating cash use and $12.158 million of cash, cash equivalents and restricted cash.
- Revenue concentration and customer-level exposure, particularly the 64.5% VA/DoD contribution.
- Progress and economics of cash-pay, Truvaga, TAC-STIM, licensing and international growth initiatives.
- Whether operating expenses and research and development investments produce sufficient revenue growth to reduce recurring losses.
- Developments in the pending stockholder litigation and any resulting defense costs, settlement or judgment.
- Potential dilution from future equity or debt financing and the effect of the reverse stock split on trading liquidity.