electroCore, Inc. 2020 Form 10-K Summary
Business context and reporting period
electroCore is a commercial-stage medical device company developing and selling gammaCore, a prescription, non-invasive vagus nerve stimulation therapy. The product is cleared for certain migraine and cluster headache indications and received an FDA Emergency Use Authorization in July 2020 for acute asthma exacerbations in known or suspected COVID-19 patients. This filing covers the fiscal year ended December 31, 2020, with comparative results for 2019; it is not a quarterly filing.
Management focused commercial resources primarily on U.S. Department of Veterans Affairs and Department of Defense channels and the United Kingdom National Health Service. As of March 1, 2021, the company had 45 full-time employees.
Key financial metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Net sales | $3.50 million | $2.39 million | +$1.11 million, or 46% |
| Gross profit | $1.76 million | $1.23 million | +$0.53 million |
| Gross margin | 50% | 52% | Down 2 percentage points |
| Loss from operations | $24.75 million | $46.09 million | Improved by $21.34 million |
| Net loss | $23.51 million | $45.15 million | Improved by $21.64 million |
| Basic and diluted loss per share | $0.60 | $1.54 | Improved |
| Net cash used in operating activities | $20.10 million | $45.07 million | Use decreased by $24.96 million |
| Cash, cash equivalents and marketable securities | $22.63 million | $24.06 million | Down $1.43 million |
Gross margin was reduced by a $0.4 million inventory charge. Excluding that charge, management reported a 2020 gross margin of approximately 63%. Research and development expense declined 58% to $4.2 million, and selling, general and administrative expense declined 38% to $21.8 million. The company reported a $1.17 million income tax benefit, primarily related to the sale of New Jersey net operating losses and research and development tax credits.
At December 31, 2020, total assets were $31.5 million, total liabilities were $7.9 million, and total equity was $23.6 million. Inventory totaled $5.7 million, including $4.9 million classified as noncurrent, and the company held an obsolete inventory reserve of $0.7 million. The filing states that inventory significantly exceeded current demand, creating obsolescence risk.
Debt consisted primarily of a $1.4 million unsecured PPP loan, of which $0.5 million was current and $1.1 million was noncurrent at year-end, plus a small insurance-premium financing balance. The PPP loan was subject to potential forgiveness, but no assurance was provided that forgiveness would be obtained.
Material changes versus the prior comparable period
- Sales increased 46%, driven mainly by higher revenue from VA/DoD facilities and the United Kingdom, partially offset by lower U.S. commercial-channel sales.
- VA/DoD and NHS revenue represented 86.9% of total 2020 sales, compared with 57.3% in 2019. VA/DoD represented 57.9% and NHS represented 29.0% of 2020 sales.
- Operating losses narrowed substantially as the company reduced research, sales, marketing, personnel and other operating costs.
- Operating cash burn declined materially, but remained significant relative to revenue.
- The company raised approximately $15.5 million through its Lincoln Park equity facility and approximately $2.2 million through private placements. It issued 14.3 million shares during 2020, increasing year-end shares outstanding to 45.6 million from 29.8 million.
- The company relocated its headquarters to its Rockaway, New Jersey manufacturing facility and recorded approximately $0.6 million for the write-off of the former Basking Ridge lease right-of-use asset and related assets.
- The company terminated its PREMIUM II migraine-prevention trial early in April 2020, later reporting positive topline results. The FDA subsequently cleared gammaCore for acute and preventive migraine treatment in adolescents in February 2021.
Guidance, outlook, commentary and risks
The company suspended its earlier 2020 revenue guidance in March 2020 because of COVID-19-related restrictions and uncertainty. Management stated that it expected revenue to increase in 2021, with VA/DoD and the United Kingdom continuing to represent a majority of revenue, but provided no quantified revenue or earnings guidance in the filing.
Management expects substantial operating losses and negative operating cash flow to continue for at least the next several years. The independent auditor included a going-concern explanatory paragraph, and management stated that recurring losses, negative cash flows and the need for additional financing raised substantial doubt about the company’s ability to continue as a going concern. Management believed available resources could fund the current operating plan for at least 12 months, but cautioned that this estimate could prove incorrect.
- COVID-19 reduced access to prescribing physicians and patients and adversely affected sales-force activity. The company could not reasonably estimate the pandemic’s ultimate effect.
- The gammaCore Sapphire CV EUA generated no material revenue in 2020 and may require additional sales, marketing, research and development and telehealth investment. The EUA may be terminated, revoked or become less commercially relevant as the pandemic subsides or vaccines and other treatments become available.
- Reimbursement remains a central commercial risk. The company stated that third-party payers had resisted pharmacy-benefit coverage, while Medicare and Medicaid did not then cover the product. A new CMS HCPCS code for non-invasive vagus nerve stimulators was scheduled to take effect April 1, 2021, but reimbursement rates were not established.
- Revenue concentration is significant: five VA/DoD facilities represented approximately 50% of VA/DoD revenue in 2020, with two facilities each contributing more than 10% individually.
- The company relies on third-party suppliers, specialty pharmacies, distributors and clinical-trial organizations. Supply interruptions, especially involving suppliers in China, could impair production and increase costs.
- The company faces substantial competition from pharmaceuticals and other neuromodulation devices, many from better-capitalized companies.
- Pending securities class actions and derivative litigation related to the IPO and subsequent disclosures could result in defense costs, settlements or judgments. The company had not accrued a loss because the probability and amount could not be reasonably estimated.
- The filing identifies approximately $2.3 million of noncancelable purchase obligations as of December 31, 2020 and future operating lease payments with total undiscounted payments of approximately $2.1 million.
Most important facts for investors to verify
- Whether sales growth can continue beyond concentrated VA/DoD and NHS channels and whether customer concentration decreases.
- Actual cash runway, timing and terms of additional financing, and the company’s ability to avoid further substantial equity dilution.
- Whether the going-concern uncertainty is resolved through higher revenue, lower expenses, financing or a strategic transaction.
- Reimbursement decisions and payment rates associated with the CMS HCPCS code and commercial or government payer coverage.
- Inventory utilization, future obsolescence charges and the adequacy of the $0.7 million reserve against $5.7 million of inventory.
- The status and financial exposure of the pending securities and derivative litigation.
- Whether the PPP loan is forgiven and whether any related audit, repayment, interest, penalties or reputational consequences arise.
- Clinical and regulatory outcomes for additional indications, including COVID-19 respiratory studies and migraine-prevention programs.