Electrocore, Inc. 2021 Q3 Form 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 headache conditions and other potential indications. The report covers the three and nine months ended September 30, 2021, with comparisons to the corresponding 2020 periods. The filing was signed November 4, 2021.
gammaCore received FDA clearance in February 2021 for acute and preventive migraine treatment in adolescents and in September 2021 for adult paroxysmal hemicrania and hemicrania continua. The company primarily sells through U.S. Department of Veterans Affairs/Department of Defense channels and the United Kingdom National Health Service.
Financial performance and liquidity
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Net sales | $1.49 million | $1.08 million | $3.96 million | $2.57 million |
| Gross profit | $1.13 million | $0.73 million | $2.87 million | $1.65 million |
| Gross margin | 76% | 68% | 72% | 64% |
| Loss from operations | $(3.99) million | $(4.49) million | $(14.57) million | $(18.43) million |
| Net loss | $(3.99) million | $(4.49) million | $(12.27) million | $(17.19) million |
| Net loss per share | $(0.06) | $(0.10) | $(0.22) | $(0.47) |
- Q3 revenue increased 38% year over year; nine-month revenue increased 54%.
- Nine-month operating expenses declined to $17.44 million from $20.07 million, primarily because of lower research and development spending, lower selling, general and administrative costs, and the absence of 2020 restructuring charges.
- Nine-month net loss benefited from a $1.42 million gain on forgiveness of the Paycheck Protection Program loan and an $0.88 million New Jersey tax benefit. These were unusual or nonrecurring items.
- Cash used in operating activities was $9.27 million for the nine months ended September 30, 2021, compared with $16.47 million in the prior-year period.
- Investing activities provided $17.22 million, principally from maturities of marketable securities. Financing activities provided $25.69 million, primarily from common-stock sales.
- At September 30, 2021, cash and cash equivalents were $38.0 million, marketable securities were $1.0 million, and total cash, cash equivalents and marketable securities were approximately $39.0 million.
- Total liabilities were $6.45 million. The company had no outstanding note payable at September 30, 2021; remaining operating lease liabilities were $0.77 million. A separate insurance-premium financing balance of $0.87 million was included in accrued expenses and other current liabilities.
- Common shares outstanding increased to 70.44 million at September 30, 2021 from 45.56 million at December 31, 2020, primarily because of equity offerings and other stock issuances.
Material changes versus the prior comparable period
- Revenue growth reflected increased sales across commercial, VA/DoD, U.K., and new international distributor channels. The company stated that VA/DoD and the U.K. would remain its principal revenue sources for the remainder of 2021.
- VA/DoD represented 63.6% of Q3 revenue and 60.7% of nine-month revenue; the U.K. NHS represented 24.1% and 25.6%, respectively. This creates meaningful customer and channel concentration.
- Gross margin expanded by eight percentage points in both the quarter and nine-month period, primarily because of better labor and overhead absorption and product mix.
- Research and development expense declined 25% in Q3 and 44% for the nine-month period. Management cited reduced investment, including early termination of the Premium II clinical trial, partially offset by targeted investigator-initiated studies and product development.
- SG&A was broadly unchanged in Q3 and declined 5% for the nine-month period. Management expected targeted commercial investments to increase SG&A during the remainder of 2021.
- On July 2, 2021, the company sold 20.7 million shares for approximately $18.8 million of net proceeds. It also issued 952,380 shares to legal counsel in August 2021 to settle certain obligations.
- The company terminated its Lincoln Park equity facility in March 2021 after receiving approximately $6.9 million from a January 2021 share sale under the facility.
- The former Basking Ridge headquarters lease was terminated. The company agreed to pay $500,000 in cash and issue 200,000 shares; the shares were issued October 4, 2021 and the remaining cash was paid October 5, 2021.
Guidance, outlook, risks and unusual items
- The company expects continued substantial operating losses and negative operating cash flow for at least the next several years while it seeks broader market acceptance of gammaCore.
- Management expects cash and marketable securities to fund planned operating and capital requirements for at least 12 months from issuance of the financial statements, but the filing states that recurring losses and dependence on product commercialization raise substantial doubt about the company’s ability to continue as a going concern.
- COVID-19 continued to restrict access to prescribing physicians and patients, disrupt sales-force activity, and create potential manufacturing, supply-chain, workforce, and distribution risks. Management stated that the longer-term impact remains uncertain.
- The company’s Federal Supply Schedule business may be affected by federal COVID-19 vaccination requirements. Loss of the contract could materially affect revenue and results.
- The company did not recognize material revenue from gammaCore Sapphire CV under its COVID-19 Emergency Use Authorization and does not expect material revenue from that product generally.
- Ongoing securities class actions and derivative litigation relate primarily to the company’s IPO and post-IPO disclosures. The company has not accrued a loss because it cannot estimate the probability or range of potential loss; adverse outcomes could result in significant defense costs, settlements, or judgments.
- The filing notes foreign-currency exposure, particularly to the British pound, but estimates that a uniform 10% currency movement would have had an immaterial effect on nine-month 2021 net income.
- Disclosure controls and procedures were assessed as effective as of September 30, 2021, and no material change in internal control over financial reporting was reported.
Most important facts for investors to verify
- Whether revenue growth can continue and whether the company can reduce its dependence on VA/DoD and U.K. NHS channels.
- The pace of cash burn relative to the approximately $39.0 million of cash and marketable securities and the timing of any additional equity financing.
- The effect of increased share count and potential dilution from approximately 5.13 million outstanding stock options, 1.12 million nonvested stock units, and 216,944 warrants at September 30, 2021.
- Whether gross-margin improvements are sustainable as sales volume, product mix, and manufacturing utilization change.
- The impact of COVID-19, federal vaccination requirements, supply-chain constraints, and healthcare-provider access on sales and the VA/DoD contract.
- The status and potential financial exposure of the pending IPO-related securities and derivative litigation.
- Whether management’s 12-month liquidity assessment remains valid given continued operating losses and reliance on product adoption and capital markets.