ElectroCore, Inc. 2022 Q2 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 primary headache conditions. The company’s principal sales channels are the U.S. Department of Veterans Affairs/Department of Defense and the United Kingdom’s National Health Service, with growing cash-pay, direct-to-consumer, direct-to-physician, distributor, and licensing initiatives.
This unaudited Form 10-Q covers the three and six months ended June 30, 2022, compared with the corresponding 2021 periods. The company filed the report on August 4, 2022.
Financial performance and liquidity
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Net sales | $2.157 million, versus $1.269 million | $4.056 million, versus $2.473 million |
| Gross profit | $1.799 million, versus $0.895 million | $3.338 million, versus $1.735 million |
| Gross margin | 83%, versus 71% | 82%, versus 70% |
| Operating loss | $5.820 million, versus $5.202 million | $11.401 million, versus $10.586 million |
| Net loss | $5.337 million, versus $2.894 million | $10.919 million, versus $8.278 million |
| Net loss per share | $0.08, versus $0.06 | $0.15, versus $0.17 |
| Net cash used in operating activities | Not separately provided | $8.024 million, versus $5.826 million |
Six-month sales increased 64%, while second-quarter sales increased 70%. Gross margin benefited from product mix, higher average selling prices, increased refill-kit sales, licensing revenue with no associated cost of goods sold, favorable labor and overhead absorption, and capitalization of certain licensed starter-device costs over their estimated useful lives.
Research and development expense increased to $2.275 million for the six months, from $1.324 million. Selling, general and administrative expense increased to $12.464 million, from $10.997 million, reflecting targeted investments in future therapy platforms and commercial activities.
Cash and cash equivalents were $26.330 million at June 30, 2022; including $0.250 million of restricted cash, total cash, cash equivalents, and restricted cash was $26.580 million. Total assets were $33.481 million, compared with $42.833 million at December 31, 2021. Total liabilities were $6.308 million, substantially consisting of operating lease liabilities and current operating obligations.
The company reported no outstanding borrowings at June 30, 2022; borrowings under its prior insurance-premium finance agreement had been repaid. On July 5, 2022, it entered into a new insurance-premium finance agreement, but the filing text describes the principal ambiguously as approximately “$783,000 thousand.”
Material changes versus the prior comparable period
- Sales increased by $0.888 million in the second quarter and $1.583 million for the six-month period.
- U.S. revenue increased substantially, while United Kingdom revenue declined for the six-month period, principally reflecting COVID-19 effects on the NHS channel and currency movements.
- The company recognized $48,000 of Teijin license revenue in both the second quarter and six-month period; there was no comparable license revenue in 2021.
- Gross margin improved by 12 percentage points for both the quarter and six-month period.
- Operating losses widened despite higher gross profit because operating expenses increased by $1.522 million in the quarter and $2.418 million for the six months.
- The prior-year results included a $1.422 million gain from forgiveness of a Paycheck Protection Program loan; there was no comparable gain in 2022.
- Cash declined by $8.109 million during the first six months of 2022, compared with a $10.457 million increase in the prior-year period, which benefited from marketable-security maturities and common-stock issuance.
- Common shares outstanding increased to approximately 71.119 million at June 30, 2022, from 70.704 million at December 31, 2021.
Guidance, outlook, risks, contingencies, and unusual items
Management expects most remaining 2022 revenue to continue coming from the VA/DoD and NHS channels, while pursuing growth through cash-pay models, online stores, direct-to-physician sales, distributors, and the Teijin Japan license. The company does not provide formal revenue or earnings guidance in the filing.
Management expects continuing operating losses and negative operating cash flow for the foreseeable future. It believes existing cash will fund planned operating expenses and capital requirements for at least the next 12 months from issuance of the financial statements, but states that additional funding will likely be needed beyond that period or that it may need to curtail commercialization, research, and development activities.
- Revenue is concentrated: VA/DoD represented 60.4% of six-month 2022 sales and NHS represented 15.3%. Customer and facility concentration creates material revenue risk.
- COVID-19 disruptions, supply-chain conditions, currency fluctuations, payer coverage, market acceptance, competition, and regulatory developments could affect results.
- On June 23, 2022, the common stock transferred from the Nasdaq Global Select Market to the Nasdaq Capital Market. The company received until December 19, 2022, to regain compliance with the $1.00 minimum bid-price requirement and indicated that a reverse stock split could be used if necessary.
- The company has an effective $75 million shelf registration statement that could support future capital raising, subject to applicable limitations and market conditions.
- Stockholder securities and derivative litigation remains pending. The company has not accrued a loss because it cannot determine the probability or range of potential loss; adverse outcomes could result in significant defense costs, settlements, or judgments.
- The company received $445,000 from the sale of New Jersey net operating losses and tax credits, recorded as an income-tax benefit.
- Teijin’s Japan license includes potential milestone payments, annual license fees, and a possible future commercial supply arrangement, but timing and amounts remain uncertain.
Most important facts for investors to verify
- Whether sales growth and improved gross margins are sustainable after separating the $48,000 Teijin license revenue and favorable product-mix effects.
- The pace of cash burn and whether $26.6 million of cash and restricted cash is sufficient to reach operating breakeven or whether additional equity or other financing will be required.
- Progress in diversifying beyond VA/DoD and NHS customers and in scaling cash-pay and direct-to-consumer channels.
- Compliance with Nasdaq’s $1.00 minimum bid-price requirement and any resulting reverse stock split or delisting action.
- The status and potential financial exposure of the pending stockholder litigation.
- The precise amount and terms of the July 5, 2022 insurance-premium financing, because the filing’s stated principal amount is unclear.
- Teijin’s payment of the upfront license amount, recognition period, regulatory progress in Japan, and potential milestone economics.