ElectroCore, Inc. — Q3 2022 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 primarily targeting migraine and cluster headache conditions. The report covers the three and nine months ended September 30, 2022. The company sells primarily through the U.S. Department of Veterans Affairs and Department of Defense, the United Kingdom’s National Health Service, commercial channels, cash-pay models, and international distributors.
Operations in Germany were paused, with European sales managed by the company’s U.K. subsidiary. The company entered into a March 2022 agreement with Teijin Limited granting exclusive Japanese commercialization rights for certain nVNS indications.
Financial performance and liquidity
| Metric | Three months ended September 30 | Nine months ended September 30 | ||
|---|---|---|---|---|
| 2022 | 2021 | 2022 | 2021 | |
| Net sales | $2.0 million | $1.5 million | $6.0 million | $4.0 million |
| Gross profit | $1.7 million | $1.1 million | $5.1 million | $2.9 million |
| Gross margin | 87% | 76% | 84% | 72% |
| Operating loss | $(5.6) million | $(4.0) million | $(17.0) million | $(14.6) million |
| Net loss | $(5.5) million | $(4.0) million | $(16.4) million | $(12.3) million |
| Loss per share | $(0.08) | $(0.06) | $(0.23) | $(0.22) |
Third-quarter sales increased 33%, or $489,000, year over year. Nine-month sales increased 52%, or $2.1 million. Nine-month revenue included $93,000 of Teijin licensing revenue, compared with none in the prior-year period. U.S. product revenue was $4.8 million for the nine-month period, versus $2.8 million in 2021; U.K. product revenue declined to $968,000 from $1.0 million.
Research and development expense increased to $1.6 million in the quarter and $3.9 million for the nine-month period, primarily reflecting investment in future therapy-delivery platforms, including smartphone-integrated and smartphone-connected technologies. Selling, general and administrative expense increased to $5.7 million in the quarter and $18.1 million for the nine-month period as the company invested in commercial expansion and cash-pay initiatives.
Cash and cash equivalents were $21.6 million at September 30, 2022; including $250,000 of restricted cash, total cash, cash equivalents and restricted cash was $21.9 million. Cash declined from $34.7 million at December 31, 2021. Net cash used in operating activities was $12.6 million for the first nine months of 2022, compared with $9.3 million in the prior-year period. There was no investing or financing cash flow in the 2022 period.
Total liabilities were $7.3 million, including a $521,701 remaining balance under a nine-month insurance premium financing agreement entered into in July 2022. The filing reports no conventional long-term debt. Stockholders’ equity was $22.2 million at September 30, 2022, compared with $36.6 million at December 31, 2021.
Material changes versus the prior comparable period
- Revenue grew substantially, led by higher U.S. and commercial-channel sales and the initial recognition of Teijin license revenue.
- Gross margin expanded to 87% in the third quarter and 84% year to date, partly because licensed-device costs are recognized over the devices’ estimated useful lives, as well as from product mix, refill-kit sales, Teijin revenue, and improved cost absorption.
- Despite revenue and gross-profit growth, operating and net losses widened because operating expenses increased faster than gross profit.
- The prior-year nine-month results benefited from a $1.4 million gain related to forgiveness of a Paycheck Protection Program loan; no comparable gain occurred in 2022.
- The company received approximately $445,000 from the sale of New Jersey state net operating losses in April 2022, compared with approximately $1.4 million received in 2021.
- Cash used in operations increased by approximately $3.4 million year over year, while 2021 benefited from $17.2 million of investing inflows and $25.7 million of common-stock financing proceeds.
Guidance, outlook, risks, contingencies, and unusual items
Management expects continued substantial operating losses and negative operating cash flow for at least the next several years while it seeks broader adoption of gammaCore. Management believes available cash will fund currently planned operating 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 to support commercialization, research and development, and growth initiatives.
Management plans continued targeted investment in cash-pay and direct-to-physician strategies, future therapy platforms, international distribution, and potential applications under the U.S. Air Force BOOST program. The filing does not provide quantitative revenue or earnings guidance.
Revenue is concentrated: VA/DoD represented 59.7% of nine-month 2022 sales and the U.K. National Health Service represented 16.1%. Customer concentration, dependence on government and public-health-system purchasers, market acceptance, reimbursement, competition, regulatory matters, supply-chain disruption, COVID-19 effects, inflation, and foreign-exchange movements are key risks. The company noted that a stronger U.S. dollar adversely affected international revenue.
As of the filing, the company had until December 19, 2022 to regain compliance with Nasdaq’s $1.00 minimum bid-price requirement. Failure could result in delisting and impair access to capital. The company also has pending stockholder securities and derivative litigation. It has not accrued a loss because the probability and amount of any potential loss cannot reasonably be determined; unfavorable outcomes could nevertheless result in substantial defense costs, settlements, or judgments.
The company filed an effective $75 million shelf registration statement in January 2022, permitting potential future offerings of equity, debt, warrants, rights, and units, subject to applicable offering limitations.
Important facts for investors to verify
- Whether the $21.9 million of cash, cash equivalents, and restricted cash is sufficient given the $12.6 million nine-month operating cash burn and expected continued losses.
- The sustainability of revenue growth and elevated gross margins after accounting for Teijin license revenue, licensing-related accounting, product mix, and government-customer concentration.
- Progress in expanding cash-pay, commercial, international, and BOOST-program channels beyond VA/DoD and the U.K. National Health Service.
- Whether the company regains Nasdaq’s minimum bid-price compliance and whether it needs to raise capital under the shelf registration statement.
- The status and potential financial exposure of the pending stockholder litigation, for which no loss estimate was provided.
- The effect of COVID-19, inflation, supply-chain conditions, currency movements, reimbursement changes, and competitive or regulatory developments on future sales and liquidity.