ElectroCore, Inc. 10-Q Summary
Business context and reporting period
ElectroCore is a commercial-stage bioelectronic medicine company developing and selling non-invasive vagus nerve stimulation products, primarily gammaCore and gammaCore Sapphire, for migraine and cluster headache indications. This unaudited report covers the three and six months ended June 30, 2019, compared with the respective 2018 periods. The company completed its corporate conversion and initial public offering in June 2018.
Key financial metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $0.623 million | $0.393 million | $1.032 million | $0.474 million |
| Gross profit | $0.368 million | $0.153 million | $0.620 million | $0.185 million |
| Gross margin | 59.1% | 38.8% | 60.1% | 39.0% |
| Operating loss | $12.380 million | $16.222 million | $26.591 million | $25.320 million |
| Net loss attributable to the company | $12.101 million | $17.782 million | $25.962 million | $27.281 million |
| Basic and diluted loss per share | $0.41 | $0.21 | $0.89 | $0.21 |
| Net cash used in operating activities | Not separately provided | Not separately provided | $27.716 million | $20.969 million |
At June 30, 2019, cash and cash equivalents were $8.7 million, marketable securities were $32.4 million, and total cash, cash equivalents and marketable securities were $41.1 million, versus $68.6 million at December 31, 2018. Working capital was approximately $40.1 million. The company reported no outstanding debt at June 30, 2019. Total liabilities were $8.8 million, including $2.1 million of operating lease liabilities.
Total assets declined to $50.5 million from $73.5 million at year-end 2018, primarily reflecting the use of cash and marketable securities to fund operations. Inventory increased to $5.0 million from $1.9 million. Accumulated deficit was $64.3 million.
Material changes versus the prior comparable period
- Second-quarter sales increased 58% to $622,743; six-month sales increased 118% to $1.032 million. Growth reflected the 2018 commercial launch and increased sales in the United States, United Kingdom and Germany.
- Gross margin improved materially, principally because of increased sales of lower-cost refill kits.
- Six-month operating loss increased by $1.3 million despite higher sales, as selling, general and administrative expense rose $1.6 million and the company recorded $849,792 of restructuring charges.
- Research and development expense decreased $0.7 million for the six-month period, while selling, general and administrative expense increased $1.6 million.
- Net loss improved from $27.3 million to $26.0 million for the six months, partly because 2018 included nonrecurring warrant fair-value expense and the company earned more investment income.
- Operating cash use increased to $27.7 million from $21.0 million. Investing activities provided $28.9 million, largely from maturities of marketable securities, offsetting much of the operating cash burn.
Guidance, outlook, management commentary and unusual items
- Management stated that available resources and cash-flow projections were expected to fund operations for at least the next 12 months and, at that time, anticipated adequate resources into the beginning of 2021. The filing does not provide formal revenue or earnings guidance.
- On May 29, 2019, the company announced a comprehensive redeployment and cost-reduction plan focused on near-term revenue opportunities and clinical programs supporting gammaCore label expansion. Approximately 31 employees were terminated during the quarter; the filing also describes an overall June reduction in force affecting approximately 36 employees.
- Restructuring charges were approximately $850,000, with $695,000 of related unpaid obligations accrued at June 30, 2019. The company also recorded $143,000 of CEO separation-related expense and expects an $800,000 severance payment when the CEO ultimately separates, subject to the agreement.
- Frank Amato resigned as CEO on June 10, 2019, but was expected to remain CEO and a director until the earlier of the hiring of a successor and September 30, 2019, subject to extension.
- The company postponed certain exploratory clinical trials and concentrated resources on migraine-prevention label expansion. The FDA accepted the migraine-prevention 510(k) submission for review in July 2019; management expected a decision by year-end 2019 and expected to complete Premium 2 enrollment in the first half of 2020.
- Free-product programs were significant: no-charge units represented approximately $2.1 million of potential sales in the second quarter and $3.7 million for the six months, none of which was recorded as net sales. Management noted that payer coverage had expanded but reimbursement remained complex and slow to convert into revenue.
- The company primarily sells through one U.S. specialty pharmaceutical distributor. Accounts receivable from that distributor were $343,850 at June 30, 2019.
- Pending matters include putative IPO-related securities class actions, for which no loss estimate or accrual was recorded, and a disputed claim from Lifehealthcare Pty Ltd. The company settled a former-advisor dispute for $325,000 and issued warrants covering 62,181 shares.
- On July 1, 2019, the company entered into an $807,346, seven-month insurance-premium financing arrangement at a 2.99% annual interest rate. It also filed a Form S-3 shelf registration statement for potential offerings of up to $50 million, subject to effectiveness and market conditions.
Most important facts for investors to verify
- Whether payer coverage and covered lives translate into paid prescriptions and materially higher revenue, rather than continued reliance on free-product programs.
- The cash-burn rate, inventory commitments and the timing and terms of any future equity or debt financing.
- Progress and FDA outcomes for the migraine-prevention indication, including Premium 2 enrollment and clinical results.
- Execution risks following the reduction in force, sales-force reduction, postponed trials and CEO transition.
- The potential financial and reputational impact of the IPO-related litigation and other contingencies.
- Reliance on a single U.S. specialty distributor and third-party manufacturers and suppliers.
- Whether management’s projected liquidity runway remains valid as operating losses and negative cash flows continue.