ElectroCore, Inc. — Form 10-Q Summary
Reporting period: Three months ended March 31, 2020; filed May 15, 2020. electroCore is a commercial-stage medical device company developing and commercializing non-invasive vagus nerve stimulation therapies, principally gammaCore for migraine and cluster headache indications.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $733,771 | $409,601 | +79% |
| Gross profit | $435,656 | $251,810 | +73% |
| Gross margin | 59% | 61% | Down 2 percentage points |
| Operating expenses | $8.45 million | $14.46 million | Down $6.01 million |
| Loss from operations | $(8.01) million | $(14.21) million | Improved $6.20 million |
| Net loss | $(7.96) million | $(13.86) million | Improved $5.90 million |
| Basic and diluted loss per share | $(0.27) | $(0.47) | Improved |
| Cash used in operating activities | $(8.38) million | $(16.40) million | Improved $8.02 million |
- Revenue growth was driven primarily by increased sales to the U.S. Department of Veterans Affairs and the United Kingdom, partly offset by lower U.S. commercial-channel sales. Sales through the VA/DoD and U.K. National Health Service channels represented 95% of Q1 2020 net sales.
- Gross margin declined because of higher unit labor and overhead after termination of the Partners For Coverage program and a lower-priced 93-day product offering.
- Research and development expense decreased 56% to $1.52 million, and selling, general and administrative expense decreased 40% to $6.56 million, reflecting reduced personnel, sales and marketing, and other operating costs.
- Q1 2020 included $365,000 of restructuring and severance charges related to personnel changes, including the Chief Medical Officer position.
- Cash and cash equivalents were $15.62 million at March 31, 2020, compared with $13.56 million at December 31, 2019. The increase primarily reflected $10.50 million of marketable-security maturities, partially offset by operating cash burn.
- Total assets were $26.36 million and total liabilities were $8.63 million at March 31, 2020. The company had no outstanding note payable after repaying $111,878 during the quarter; remaining debt-like obligations were operating lease liabilities of $1.80 million.
- Inventory totaled $6.91 million, including $6.25 million classified as noncurrent. Management disclosed that inventory significantly exceeded current demand, creating potential obsolescence risk.
- Accumulated deficit was $91.44 million. The company has never been profitable and reported losses in each year since inception.
Material changes and financing
- On March 27, 2020, electroCore entered into a Lincoln Park equity facility allowing sales of up to $25 million of common stock, subject to market, ownership and Nasdaq limitations. It issued 461,676 commitment shares without receiving cash proceeds.
- In April 2020, the company sold 3.2 million shares to Lincoln Park for approximately $3.2 million and issued an additional 149,454 commitment shares.
- On April 14, 2020, it agreed to sell 2,058,822 shares to affiliates and existing shareholders, including certain directors, for approximately $1.75 million.
- On May 4, 2020, the company received a $1.409 million Paycheck Protection Program loan at 1% interest, maturing May 2, 2022. Forgiveness is uncertain and the loan may be subject to government scrutiny or repayment.
- On May 6, 2020, electroCore received approximately $1.2 million from the sale of approximately $13.9 million of New Jersey net operating losses.
- On May 14, 2020, the company agreed to issue 1,564,345 shares to its legal counsel at $0.99 per share in settlement of certain outstanding financial obligations, subject to closing conditions.
- Effective April 30, 2020, electroCore ceased operations in Germany.
Outlook, risks and unusual items
- The company suspended its prior full-year 2020 revenue guidance on March 23, 2020 because COVID-19 reduced access to prescribing physicians and patients. No replacement revenue guidance was provided.
- COVID-19 adversely affected sales-force activity, patient access, healthcare-provider operations, supply chains and access to capital markets. The duration and financial impact remain uncertain.
- Management stated that substantial doubt exists about the company’s ability to continue as a going concern. Based on cash resources and current projections, funding may be insufficient beyond the first quarter of 2021 unless the company increases revenue, reduces expenses, or obtains additional financing.
- In April 2020, the company submitted an FDA Emergency Use Authorization application for gammaCore Sapphire in connection with respiratory symptoms associated with COVID-19. The filing states that no FDA decision had been received and that no assurance exists that authorization will be granted.
- The company terminated its Premium II clinical trial in April 2020; it stated that no company-funded studies were then ongoing.
- Two federal securities class actions remained pending, while a consolidated New Jersey state action had been dismissed with prejudice and was appealed. The company had not accrued a loss because the probability and range of potential loss could not be determined.
- Revenue is concentrated in government and institutional channels, reimbursement remains uncertain, and the company faces competition from pharmaceuticals and other neuromodulation devices.
- The company relies on third-party manufacturers, suppliers and distributors, including a specialty pharmaceutical distributor whose agreement was scheduled to expire May 31, 2020.
- Internal and disclosure controls were evaluated as effective as of March 31, 2020, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether post-quarter financing proceeds, PPP loan forgiveness and NOL-sale proceeds extend the cash runway beyond early 2021.
- The amount and pricing of additional shares issued under the Lincoln Park facility and the resulting dilution, including commitment shares.
- The status and potential financial exposure of the pending federal securities litigation and New Jersey appeal.
- The FDA’s decision on the COVID-19 EUA application and the commercial relevance of any authorization.
- Trends in VA/DoD, U.K. NHS and U.S. commercial-channel revenue, given the 95% concentration in the two institutional channels.
- Inventory utilization and any future reserves or impairment charges related to the $6.91 million inventory balance.
- The accuracy of share-count disclosures: 30,421,427 shares were outstanding at March 31, 2020, while 35,851,990 were reported outstanding as of May 13, 2020, reflecting subsequent issuances.