Electrocore, Inc. — Q3 2020 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. In July 2020, the FDA granted an Emergency Use Authorization (EUA) for gammaCore Sapphire CV to acutely treat asthma exacerbations in certain known or suspected COVID-19 patients. The filing covers the three and nine months ended September 30, 2020 and was filed November 12, 2020.
Financial results and key metrics
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $1.08 million | $0.68 million | $2.57 million | $1.72 million |
| Gross profit | $0.73 million | $0.33 million | $1.65 million | $0.95 million |
| Gross margin | 68% | 48% | 64% | 55% |
| Loss from operations | $(4.49) million | $(10.89) million | $(18.43) million | $(37.48) million |
| Net loss | $(4.49) million | $(10.69) million | $(17.19) million | $(36.65) million |
| Net loss per share | $(0.10) | $(0.36) | $(0.47) | $(1.25) |
Q3 sales increased 58%, primarily from higher sales to the Department of Veterans Affairs, the United Kingdom and U.S. commercial channels. Nine-month sales increased 50%, driven by the VA and United Kingdom, partially offset by lower U.S. commercial sales. Q3 included an approximately $98,000 VA facility order expected to be dispensed over 12 months.
Research and development expense declined 72% to $0.63 million in Q3 and 62% to $3.18 million for the nine-month period, reflecting reduced near-term investment and termination of the Premium II migraine-prevention trial. Selling, general and administrative expense declined 44% in Q3 and 42% year to date as a result of sales, marketing and other cost reductions. No restructuring charges were recorded in Q3; nine-month restructuring charges were $0.46 million versus $2.00 million in the prior-year period.
Net cash used in operating activities was $17.01 million for the nine months ended September 30, 2020, compared with $35.95 million in the prior-year period. Investing activities used $11.67 million, principally for purchases of marketable securities. Financing activities provided $19.09 million, including equity proceeds and borrowings. Cash and cash equivalents declined to $3.83 million from $13.56 million at December 31, 2019, while marketable securities increased to $22.14 million from $10.50 million. Total cash, cash equivalents and marketable securities were $25.97 million.
At September 30, 2020, total notes payable were approximately $2.06 million, comprising $732,305 current and $1.33 million noncurrent. This included the $1.4 million PPP loan and an insurance-premium financing balance of $654,563. Operating lease liabilities totaled $1.55 million. Accumulated deficit was $100.67 million.
Material changes versus the prior comparable period
- Revenue and gross profit increased substantially, with gross margin improving from 48% to 68% in Q3 and from 55% to 64% for the nine-month period.
- Operating losses narrowed because of lower research and development, selling and marketing, and restructuring expenses.
- Despite improved results, the company continued to generate significant operating cash burn and remained unprofitable.
- The company raised approximately $15.1 million through sales of common stock to Lincoln Park and approximately $2.2 million through private placements during the nine-month period. Shares outstanding increased to 45.2 million at September 30, 2020 from 29.8 million at December 31, 2019, creating meaningful dilution risk.
- COVID-19 materially disrupted access to prescribing physicians and headache patients. The company suspended its prior full-year revenue guidance on March 23, 2020.
Guidance, outlook, risks and unusual items
Management expects substantial negative operating cash flow for at least the next several years while commercializing gammaCore and making targeted investments in its commercial infrastructure. Management stated that existing capital resources are expected to fund the current operating plan for at least the next 12 months, but acknowledged that this estimate depends on assumptions that may prove incorrect.
The financial statements state that substantial doubt exists regarding the company’s ability to continue as a going concern within one year of issuance. The company may need to reduce or curtail activities or obtain additional financing. Approximately $9.9 million remained available under the Lincoln Park equity facility at September 30, 2020, subject to contractual and market limitations.
The EUA did not contribute materially to Q3 revenue. The related SAVIOR 1 and SAVIOR 2 investigator-initiated trials continued enrolling, but enrollment was more difficult than expected. The EUA may be terminated or revoked, and commercialization may require significant marketing, distribution, telehealth and research investment.
Revenue concentration increased: the VA/DoD and United Kingdom channels represented 84.0% of Q3 revenue and 87.2% of nine-month revenue, compared with 63.4% and 47.5%, respectively, in the prior-year periods. The company also holds approximately $6.9 million of inventory, which management states significantly exceeds current demand and may be exposed to obsolescence risk.
Pending securities class-action litigation remains unresolved. The New Jersey state action was dismissed with prejudice but is on appeal; the federal Turnofsky action remains pending. The company has not accrued a loss because it cannot estimate the probability or range of potential loss. The PPP loan may be subject to regulatory scrutiny, and forgiveness is not assured.
Most important facts for investors to verify
- Whether sales growth is sustainable after the reported VA order and whether commercial-channel revenue recovers from COVID-19 disruption.
- The company’s actual cash runway, operating cash burn and need for additional equity or debt financing.
- The status and potential dilution from the remaining Lincoln Park equity facility and other equity issuances.
- Whether the PPP loan receives full or partial forgiveness or must be repaid.
- Commercial adoption, reimbursement and revenue contribution from gammaCore Sapphire CV under the EUA.
- Inventory utilization, potential obsolescence charges and adequacy of inventory reserves.
- Developments and potential costs or settlements related to the pending securities litigation.
- Whether management can resolve the disclosed going-concern uncertainty while achieving sustained profitability.