ElectroCore, Inc. 2018 Q2 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 is FDA-cleared for the acute treatment of migraine and episodic cluster headache pain in adults. The filing covers the three and six months ended June 30, 2018.
On June 21, 2018, ElectroCore converted from a Delaware limited liability company to a corporation and completed its initial public offering. Its common stock began trading on Nasdaq under the symbol ECOR. The company expects a full U.S. commercial launch of gammaCore and gammaCore Sapphire in the third quarter of 2018.
Key Financial Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Net sales | $393,226 vs. $176,555 in 2017 | $474,413 vs. $293,488 in 2017 |
| Gross profit | $152,738 vs. $137,806 | $184,978 vs. $181,993 |
| Gross margin | 38.8% vs. 78.0% | 39.0% vs. 62.0% |
| Operating loss | $(16.2) million vs. $(7.4) million | $(25.3) million vs. $(12.2) million |
| Net loss | $(17.8) million vs. $(11.6) million | $(27.2) million vs. $(17.9) million |
| Operating cash flow | Not separately disclosed for the quarter | $(21.0) million vs. $(10.7) million |
Research and development expense increased to $4.4 million in the quarter and $6.7 million for the six-month period. Selling, general and administrative expense increased to $12.0 million in the quarter and $18.8 million for the six-month period, primarily reflecting commercial preparation, personnel, marketing, professional fees and stock-based compensation.
At June 30, 2018, the company had $88.4 million of cash and cash equivalents, $7.5 million of available-for-sale debt securities and $95.8 million of combined cash and investments. Working capital was $92.8 million. The company reported no outstanding debt.
Material Changes Versus the Prior Comparable Period
- Second-quarter sales increased 123% year over year, while six-month sales increased 62%.
- U.S. sales increased substantially following FDA clearances and expanded selling activity, partially offset by lower German sales after discontinuing a distributor.
- Gross margin declined substantially because of higher cost of goods sold, low production volumes and approximately $167,000 of stock-based compensation included in cost of goods sold.
- Operating losses increased by $8.8 million in the quarter and $13.1 million for the six-month period as commercial infrastructure and research and development spending expanded.
- The company raised approximately $77.7 million in net IPO proceeds from the sale of 5.98 million shares at $15.00 per share.
- Former preferred units and common units were converted into common stock and options. The accumulated deficit was reclassified to additional paid-in capital as part of the corporate conversion.
- Bridge notes had previously been converted into preferred units; the company had no debt outstanding during the quarter. Warrant liabilities were remeasured and reclassified to equity upon the IPO.
Outlook, Risks and Unusual Items
Management expects continued substantial net losses and negative operating cash flow for at least the next several years while it builds its U.S. sales infrastructure, expands marketing and pursues additional clinical and regulatory indications. Management believes existing cash and investments are sufficient to fund operating, investing and financing needs for at least the next twelve months, but anticipates that additional long-term funding may be required through debt, equity or a combination of financing sources.
- Planned activities include hiring territory business managers, expanding marketing, developing a specialty distribution channel and supporting the gammaCore Sapphire launch.
- Potential future indications include migraine prevention, adolescent migraine, post-traumatic headache, Sjögren’s syndrome and rheumatoid arthritis; additional FDA approvals would require substantial time, cost and funding.
- Revenue is concentrated through a specialty pharmaceutical distributor. Accounts receivable from that distributor represented $185,150 at June 30, 2018.
- Voucher, rebate and co-payment programs reduced revenue. Voucher-related contra-revenue and promotional expenses totaled $939,780 in the quarter and $1.3 million for the six-month period.
- Stock-based compensation related to the corporate conversion was a significant unusual expense, including $5.2 million across research and development, selling, general and administrative expense and cost of goods sold during the quarter.
- A former financial advisor sued the company seeking $575,000 plus additional warrants. The company disputes the claim, has asserted counterclaims and has recorded a legal reserve; management does not expect a material adverse effect, although the outcome is uncertain.
- Management disclosed a material weakness related to accounting for complex transactions and expects remediation by year-end 2018. Disclosure controls were deemed effective, but management was not yet required to assess internal control over financial reporting for this quarterly filing.
- No formal financial guidance was provided. The filing emphasizes risks involving market acceptance, reimbursement, commercialization execution, regulatory approvals, competition, future financing and the company’s ability to achieve profitability.
Important Facts for Investors to Verify
- Whether the planned third-quarter 2018 commercial launch of gammaCore Sapphire achieved expected distribution, prescription volume and reimbursement traction.
- Whether revenue growth can offset the company’s substantially higher operating expenses and declining gross margins.
- The pace of operating cash burn relative to the approximately $95.8 million of cash and investments available at June 30, 2018.
- Progress in remediating the material weakness involving complex transaction accounting.
- The resolution and potential financial impact of the Madison Global Partners litigation.
- The effect of voucher, rebate and co-payment programs on reported revenue, gross margin and customer demand.
- Future FDA decisions, clinical results and reimbursement outcomes for current and proposed indications.