Electrocore, Inc. Form 10-Q Summary
Business context and reporting period
Electrocore is a commercial-stage medical device company developing and commercializing gammaCore, a non-invasive vagus nerve stimulation therapy for migraine and cluster headache indications. The report covers the three and six months ended June 30, 2020. The company also received FDA Emergency Use Authorization in July 2020 for gammaCore Sapphire CV to acutely treat asthma-related breathing symptoms in certain adult COVID-19 patients.
Electrocore ceased operations in Germany effective April 30, 2020, while continuing to support German sales through its U.K. subsidiary. The company’s principal sales channels were the U.S. Department of Veterans Affairs and Department of Defense and the U.K. National Health Service.
Financial results and key metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $753.0 thousand | $622.7 thousand | $1.49 million | $1.03 million |
| Gross profit | $480.0 thousand | $368.3 thousand | $915.6 thousand | $620.1 thousand |
| Gross margin | 64% | 59% | 62% | 60% |
| Operating loss | $(5.92) million | $(12.38) million | $(13.94) million | $(26.59) million |
| Net loss | $(4.74) million | $(12.10) million | $(12.70) million | $(25.96) million |
| Loss per share | $(0.13) | $(0.41) | $(0.38) | $(0.89) |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $(12.40) million | $(27.72) million |
Second-quarter sales increased 21%, primarily from higher VA and U.K. sales, partly offset by lower U.S. commercial-channel sales. Six-month sales increased 44%. Research and development expense declined 59% in the quarter and 57% year to date, while selling, general and administrative expense declined 44% in the quarter and 42% year to date. Cost reductions reflected the prior-year workforce and activity reductions and termination of the Premium II migraine-prevention trial.
At June 30, 2020, cash and cash equivalents were $14.9 million, marketable securities were $4.0 million, and total cash, cash equivalents and marketable securities were $18.9 million, compared with $24.1 million at December 31, 2019. Total liabilities were $7.1 million, including $1.4 million of PPP debt and $1.7 million of operating lease liabilities. The accumulated deficit was $96.2 million.
Inventory totaled $7.0 million, including $6.2 million classified as noncurrent. Management stated that inventory significantly exceeded current demand, creating potential obsolescence risk.
Material changes versus the prior comparable period
- Revenue and gross profit increased, and gross margin improved by five percentage points in the quarter and two percentage points year to date.
- Operating and net losses narrowed substantially because of lower research, sales, marketing and restructuring costs, although the company remained materially unprofitable.
- Operating cash use decreased to $12.4 million from $27.7 million for the first six months.
- The company raised capital through approximately $3.9 million of Lincoln Park equity sales, approximately $2.2 million from private placements, and a $1.4 million PPP loan. It also received approximately $1.2 million from selling New Jersey tax attributes.
- Common shares outstanding increased to 38.8 million at June 30, 2020 from 29.8 million at December 31, 2019, resulting in substantial dilution. Subsequent July sales to Lincoln Park generated approximately $10.3 million of additional proceeds.
- The Premium II clinical trial was terminated, and management stated that no company-funded studies were then ongoing; two investigator-initiated COVID-19 studies were continuing.
Guidance, outlook, commentary and risks
The company suspended its prior full-year 2020 revenue guidance on March 23, 2020 because COVID-19 reduced access to prescribing physicians and headache patients. No replacement revenue guidance was provided.
Management expects substantial negative operating cash flow and continuing losses for at least the next several years. Although management expected existing resources to fund operations and capital expenditures for at least 12 months, it cautioned that this estimate depended on assumptions that could prove incorrect. The financial statements state that substantial doubt exists regarding the company’s ability to continue as a going concern within one year.
- COVID-19 adversely affected commercial access, physician interactions, clinical activities, supply chains and capital-market access. The duration and financial effect remained uncertain.
- The July 2020 EUA could create a new revenue opportunity, but the company has limited respiratory-product commercialization experience and may need significant marketing, distribution, telehealth and other investment. The EUA may be terminated or revoked and is not equivalent to full FDA clearance.
- The $1.4 million PPP loan was recorded as debt. Forgiveness was uncertain, and the company could face repayment, regulatory scrutiny, fines or penalties.
- Revenue was concentrated in VA/DoD and U.K. NHS channels, which represented 83.2% of second-quarter sales and 87.7% of six-month sales.
- Pending securities class-action litigation remained unresolved. The company could not estimate a probable loss or loss range and had recorded no accrual; defense costs, judgments or settlements could materially affect liquidity.
- Key additional risks include inadequate payer coverage and reimbursement, competition, dependence on third-party manufacturers and distributors, inventory obsolescence, regulatory compliance, foreign-exchange exposure, potential dilution from equity financing and Nasdaq listing requirements.
Most important facts for investors to verify
- Whether the July 2020 EUA produces meaningful sales relative to the investment required and whether it remains in effect.
- Actual cash burn and liquidity after the additional July Lincoln Park financing, including the remaining availability under the equity facility.
- Progress toward resolving the going-concern uncertainty and the timing and terms of any additional financing.
- Whether the PPP loan is forgiven in whole or in part and whether any regulatory review or repayment obligation arises.
- Demand and potential impairment risk for the approximately $7.0 million inventory balance.
- Developments in the pending securities litigation and any resulting defense costs, settlements or judgments.
- Whether revenue concentration, payer coverage limitations and COVID-19 disruptions improve or continue to constrain commercialization.