electroCore, Inc. — FY2019 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2019. The filing is an annual report, not a standalone fourth-quarter filing. electroCore is a commercial-stage medical device company developing and selling gammaCore, a prescription, non-invasive vagus nerve stimulation therapy for migraine and cluster headache indications.
Business Context
- gammaCore products were FDA-cleared for acute migraine treatment, acute episodic cluster headache treatment, and adjunctive prevention of cluster headache during or before 2019.
- The company’s principal commercial channels were the U.S. Veterans Administration and Department of Defense, including its Federal Supply Schedule contract, and the United Kingdom’s National Health Service.
- In 2019, management reduced headcount, field sales resources, clinical operations and other spending to focus on revenue-generating channels. Thirty-two employees were terminated in connection with the restructuring.
- The company manufactures and configures products in New Jersey but relies on third parties for substantially all components and certain distribution services.
Financial Performance and Key Metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net sales | $2.39 million | $0.99 million | +$1.40 million, approximately 141% |
| Gross profit | $1.23 million | $0.41 million | +$0.82 million |
| Gross margin | Approximately 51.6% | Approximately 41.7% | Improved |
| Research and development expense | $9.90 million | $12.47 million | Down $2.56 million |
| Selling, general and administrative expense | $35.42 million | $42.50 million | Down $7.08 million |
| Restructuring and severance charges | $2.00 million | None | New in 2019 |
| Loss from operations | $46.09 million | $54.55 million | Loss reduced by $8.47 million |
| Net loss | $45.15 million | $55.82 million | Loss reduced by $10.67 million |
| Net loss per share | $1.54 | $1.19 | Higher reported loss per share |
| Net cash used in operating activities | $45.07 million | $47.11 million | Cash use reduced by $2.04 million |
Revenue increased primarily from higher U.S. sales, including approximately $0.7 million of increased VA sales, and higher U.K. sales. Geographic revenue was $1.61 million in the United States, $0.67 million in the United Kingdom, $0.10 million in Germany and $0.02 million in other markets.
The company remained substantially unprofitable: operating expenses were approximately 19.3 times gross profit, and operating loss represented approximately 1,928% of revenue. The filing does not provide a meaningful adjusted EBITDA measure.
Cash, Liquidity and Debt
- Cash and cash equivalents were $13.6 million at December 31, 2019, compared with $7.6 million at December 31, 2018.
- Marketable securities declined to $10.5 million from $61.0 million. Total cash, cash equivalents and marketable securities were approximately $24.1 million, down from $68.6 million.
- Investing cash flow was positive $51.0 million, primarily because securities maturities exceeded purchases; this was not operating cash generation.
- Total liabilities were $10.6 million, including $1.9 million of operating lease liabilities and $0.1 million of short-term note payable. The insurance-premium financing note was fully repaid in January 2020.
- Inventory increased to $6.9 million from $1.9 million, including $6.0 million classified as noncurrent. Management stated that inventory significantly exceeded current demand and recorded a $0.3 million obsolete-inventory reserve.
- The auditor included a going-concern explanatory paragraph. Management stated that existing resources might require substantially greater cost reductions to fund operations through the end of 2020 and that additional financing would likely be required to execute the operating plan beyond 2020.
Material Changes Versus 2018
- Sales increased approximately 141%, but remained small relative to the cost base and operating losses.
- Operating expenses declined approximately 14%, principally because of lower personnel, consulting, meeting and trade-show costs following the 2019 restructuring.
- Gross margin improved to approximately 51.6% from 41.7%, although the company continued to generate substantial negative operating cash flow.
- Research and development spending declined as exploratory clinical programs were postponed; Premium II migraine-prevention trial enrollment was paused in February 2020 after approximately 60% of the planned subjects had been randomized.
- The company adopted the new lease accounting standard and recognized operating lease right-of-use assets and liabilities.
- The company terminated its voucher and Partners for Coverage programs in December 2019. Beginning March 2020, monthly copayment assistance was capped at $100 per prescription.
Outlook, Commentary, Risks and Unusual Items
- Management expects continuing net losses and negative operating cash flows for the foreseeable future and has not provided quantitative revenue or profitability guidance.
- Key near-term commercial opportunities were the VA/DoD channel, U.K. NHS programs, NICE guidance for cluster headache, and a distribution arrangement involving workers’ compensation and personal-injury claims.
- COVID-19 was identified as a potentially significant adverse factor affecting facilities, suppliers, sales activity with VA/DoD, patient access, clinical studies and liquidity. The company stated that it could not reasonably estimate the impact.
- On March 26, 2020, after year-end, the FDA cleared gammaCore for preventive treatment of migraine in adults. The company subsequently paused Premium II enrollment and stated that it might terminate the study and make further workforce reductions.
- On March 27, 2020, the company entered into a purchase agreement with Lincoln Park Capital Fund allowing it, subject to conditions and limitations, to sell up to $25 million of common stock over 36 months. The arrangement includes 461,676 initial commitment shares and potential additional commitment shares, creating potential dilution.
- Putative securities class actions remained pending as of the filing date. The company had not accrued a loss because it could not estimate the probability or range of loss. A related New Jersey action was dismissed with prejudice in February 2020, but plaintiffs appealed in March 2020; another federal action was voluntarily dismissed.
- The company settled a former-advisor dispute in January 2019 for $325,000 and warrants covering 62,181 shares at exercise prices ranging from $5.68 to $12.60.
- International sales, particularly in the U.K., depend on government reimbursement programs, while U.S. adoption depends heavily on payer coverage, physician acceptance and federal contracting compliance.
Most Important Facts to Verify
- Whether VA/DoD and U.K. NHS channels can produce sustained revenue growth and whether reimbursement programs remain available.
- Actual cash burn after March 2020, the amount raised under the Lincoln Park facility and the resulting share dilution.
- Whether additional cost reductions, workforce reductions or termination of Premium II affect commercialization and development capacity.
- The recoverability of the $6.9 million inventory balance, including the $6.0 million classified as noncurrent and the potential for further inventory write-downs.
- Progress toward resolving the going-concern uncertainty and whether the company can fund operations beyond 2020 without materially unfavorable financing.
- The status and potential financial exposure of the remaining securities litigation and any related insurance coverage.
- The effect of COVID-19, U.K. regulatory changes, Brexit-related requirements and medical-device reimbursement changes on sales and supply continuity.