Electrocore, Inc. 10-Q Summary
Business Context and Reporting Period
Electrocore is a commercial-stage medical device company developing and selling gammaCore, a non-invasive vagus nerve stimulation therapy for migraine and cluster headache indications. The filing covers the three and six months ended June 30, 2021, compared with the same periods in 2020.
Commercial activity is concentrated in the U.S. Department of Veterans Affairs and Department of Defense channels and the U.K. National Health Service. These channels represented 59.0% and 26.4%, respectively, of six-month 2021 sales.
Financial Highlights
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Net sales | $1.27 million, up 69% | $2.47 million, up 66% |
| Gross profit | $895,000 | $1.74 million |
| Gross margin | 71%, versus 64% | 70%, versus 62% |
| Loss from operations | $5.20 million | $10.59 million |
| Net loss | $2.89 million, or $0.06 per share | $8.28 million, or $0.17 per share |
| Operating cash flow | Not separately reported | $(5.83) million |
- Cash, cash equivalents and marketable securities totaled $23.7 million at June 30, 2021, including $14.7 million of cash and $9.0 million of U.S. Treasury securities.
- Total assets were $31.3 million and total liabilities were $6.7 million. The company had no notes payable outstanding; operating lease liabilities totaled $1.5 million.
- Inventory totaled $5.5 million, including $4.5 million classified as noncurrent. The inventory obsolescence reserve was $761,000.
- Investing activities provided $9.2 million, primarily from maturities of marketable securities. Financing activities provided $6.9 million from common-stock sales.
Material Changes Versus the Prior Comparable Period
- Revenue increased by $516,500 in the second quarter and $986,600 for the first six months, reflecting higher sales across commercial, VA/DoD, U.K. and new international distributor channels.
- Gross margin improved primarily from better absorption of labor and overhead costs and favorable product mix.
- Research and development expense declined 20% in the quarter and 48% year to date, primarily due to reduced near-term investment and early termination of the Premium II clinical trial.
- Selling, general and administrative expense was essentially flat in the quarter and declined 7% year to date.
- No restructuring or severance charges were recorded in 2021, compared with $99,600 in the second quarter and $464,600 for the first six months of 2020.
- Net loss improved from $4.74 million to $2.89 million in the quarter and from $12.70 million to $8.28 million year to date. The improvement includes a $1.42 million gain from forgiveness of the company’s PPP loan.
- The company issued 2.75 million shares under its Lincoln Park equity facility for approximately $6.9 million during the first six months. The facility was terminated in March 2021.
Guidance, Outlook, Risks and Unusual Items
- Management expects VA/DoD and U.K. revenue to remain the majority of sales for the remainder of 2021. It does not expect a material increase in SG&A, although targeted commercial expenditures may occur.
- The company expects substantial operating losses and negative operating cash flow for at least the next several years while it seeks broader market acceptance of gammaCore.
- The filing states that recurring losses and dependence on product commercialization initially raised substantial doubt about going-concern status. Management believes this doubt was alleviated by subsequent financing and expects available cash and securities to fund planned operations for at least 12 months from issuance of the financial statements.
- On July 2, 2021, after quarter-end, the company completed a 20.7 million-share public offering for approximately $18.8 million of net proceeds. It also entered into a $1.2 million, ten-month insurance premium financing agreement at 1.55% interest.
- COVID-19 continued to restrict access to prescribing physicians and headache patients and created uncertainty regarding sales, supply chains, operations and liquidity. The company did not recognize material revenue from its COVID-19 emergency-use-authorized product and does not expect material revenue generally from that product.
- Revenue concentration is significant: VA/DoD and U.K. National Health Service channels accounted for 85.4% of six-month 2021 sales. Specific VA/DoD facilities also represented a substantial portion of channel revenue.
- Pending securities class-action and derivative litigation related principally to the IPO and post-IPO disclosures remains unresolved. The company has not accrued a loss because the probability and range of potential loss cannot reasonably be determined.
- The company received approximately $1.4 million from selling New Jersey net operating losses and tax credits and recorded an approximately $885,000 tax benefit.
Important Facts for Investors to Verify
- Assess whether the July 2021 equity offering provides sufficient runway given the six-month operating cash burn of $5.8 million and expected continuing losses.
- Monitor quarterly revenue growth, gross-margin sustainability and dependence on VA/DoD and U.K. government reimbursement channels.
- Evaluate the commercial impact of COVID-19, physician access restrictions and the company’s limited diversification of revenue sources.
- Track the status and potential exposure from the Turnofsky securities litigation, related New Jersey appeal and stayed derivative actions.
- Review dilution from the July offering, prior equity financing, outstanding options, restricted awards and 216,944 remaining warrants.
- Confirm the timing and accounting impact of the PPP forgiveness gain, New Jersey tax-credit proceeds and other nonrecurring items when assessing operating performance.