ElectroCore, Inc. 2018 Q3 Form 10-Q Summary
Business context and reporting period
ElectroCore is a commercial-stage bioelectronic medicine company developing and commercializing gammaCore, a non-invasive vagus nerve stimulation therapy. The product was FDA-cleared for acute treatment of pain associated with episodic cluster headache and migraine in adults. The Company completed its corporate conversion from Electrocore, LLC to electroCore, Inc. and its initial public offering on June 21, 2018. This Form 10-Q covers the three and nine months ended September 30, 2018; year-over-year comparisons are affected by the conversion and IPO.
GammaCore Sapphire became available in the United States on August 1, 2018. Management reported a full U.S. commercial launch during the third quarter, 4,516 third-quarter prescriptions, 33% sequential prescription growth, approximately 1,500 unique prescribers at quarter-end, and more than 11,000 patients prescribed gammaCore during 2018.
Key financial metrics
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Net sales | $151.0 thousand | $283.2 thousand | $625.4 thousand | $576.7 thousand |
| Gross profit | $53.9 thousand | $154.9 thousand | $238.9 thousand | $336.9 thousand |
| Gross margin | 35.7% | 54.7% | 38.2% | 58.4% |
| Operating loss | $13.6 million | $6.0 million | $38.9 million | $18.2 million |
| Net loss attributable to the Company | $13.2 million | $12.4 million | $40.5 million | $30.3 million |
| Net loss per share | $0.45 | Not presented | $0.66 | Not presented |
- Research and development expense increased 24% to $2.3 million in Q3 and 41% to $9.0 million for the first nine months.
- Selling, general and administrative expense increased 165% to $11.3 million in Q3 and 148% to $30.1 million for the first nine months, driven by commercial hiring, marketing, professional fees, stock compensation, and voucher-related activity.
- Net cash used in operating activities was $34.9 million for the first nine months, compared with $17.3 million in the prior-year period.
- Net cash used in investing activities was $30.4 million, primarily reflecting purchases of short-term debt securities and other investments.
- Financing activities provided $78.4 million from the IPO, resulting in a $13.0 million increase in cash and cash equivalents during the first nine months.
Balance sheet, debt and liquidity
- At September 30, 2018, cash and cash equivalents were $26.3 million, and debt securities and other investments available for sale were $54.2 million, for total cash, cash equivalents and investments of $80.5 million.
- Working capital was approximately $80.2 million, compared with $32.9 million at December 31, 2017.
- The Company had no outstanding debt at September 30, 2018. Prior bridge notes had previously converted into Series B preferred units.
- The June IPO issued 5.98 million shares at $15.00 per share and generated approximately $77.5 million of net proceeds. The proceeds were invested in cash equivalents, debt securities and other investments.
- Management believes existing liquidity is sufficient to fund operating, investing and financing needs for at least the next 12 months, but expects continuing operating losses and negative operating cash flow for at least the next several years.
Material changes versus the prior comparable period
- Q3 sales declined $132.2 thousand, or approximately 47%, primarily because U.S. voucher units were provided free of charge and therefore were not recognized as revenue. Nine-month sales increased $48.7 thousand, or approximately 8%.
- Gross margins declined because of lower sales, product mix, promotional activity and relatively high fixed manufacturing overhead at low production volumes.
- Operating expenses rose substantially as the Company expanded its U.S. sales force, marketing programs, clinical development and public-company infrastructure.
- Q3 net loss increased $0.8 million despite the absence of prior-year debt extinguishment, interest and debt issuance-cost expenses. Nine-month net loss increased $10.2 million, primarily reflecting higher operating expenses.
- Debt-related expenses largely disappeared after the 2017 conversion of bridge notes, while interest and other income increased to $579.8 thousand for the first nine months because of the larger investment portfolio.
- The corporate conversion eliminated convertible preferred units and LLC common units from the balance sheet and resulted in 29.45 million common shares outstanding at September 30, 2018. It also reclassified the accumulated deficit and warrant liability into equity-related accounts.
Guidance, outlook, commentary and risks
- Management expects sales to increase as U.S. reimbursement expands, commercial capabilities grow, and additional FDA clearances are obtained. Contracts with several commercial payers were expected to provide coverage for approximately 35 million lives beginning in the first quarter of 2019; negotiations for up to an additional 90 million lives were ongoing.
- The Company submitted a 510(k) application to expand gammaCore labeling to prevention of cluster headache. The FDA accepted the submission, and the review entered interactive review on October 30, 2018.
- Management expects continued significant investment in commercialization, salesforce expansion, research and development, clinical trials and potential label expansions, including additional headache and rheumatology indications.
- Key risks include limited operating history, recurring losses and negative cash flow, uncertain market acceptance and reimbursement, dependence on a specialty pharmaceutical distributor, reliance on a small number of products and indications, regulatory and clinical-development uncertainty, the need for additional capital over the longer term, foreign-currency exposure, and potential dilution or restrictions from future financing.
- Inventory included a $147,450 obsolescence reserve in Q3 due to development of new product technology. Stock-based compensation was $3.4 million in selling, general and administrative expense and $2.7 million in research and development expense for the first nine months.
- A former financial advisor sued the Company seeking $575,000 plus additional warrants. The Company filed counterclaims, maintains it has substantial defenses, and has established a legal reserve. The filing states that the outcome is difficult to predict and quantify.
- Management stated that disclosure controls were effective as of September 30, 2018. A previously disclosed material weakness involving accounting for complex transactions was still being remediated, with full remediation expected by year-end 2018.
Most important facts for investors to verify
- Whether prescription growth converts into paid refills and materially higher reported revenue after voucher activity declines and payer coverage expands.
- The sustainability and economic impact of payer contracts, rebates, copayment assistance and free-product programs.
- Cash burn, operating expense growth and the timing of any need for additional equity or debt financing.
- Progress and outcomes of the FDA review for prevention of cluster headache and other planned label expansions.
- Resolution and ultimate financial exposure from the Madison Global litigation.
- Remediation of the material weakness and the Company’s first annual assessment of internal control over financial reporting.