ElectroCore, Inc. 2019 Q3 Form 10-Q Summary
Business context and reporting period
ElectroCore is a commercial-stage bioelectronic medicine company developing and commercializing gammaCore, a prescription, non-invasive vagus nerve stimulation therapy for certain migraine and cluster headache indications. The filing covers the unaudited three and nine months ended September 30, 2019, compared with the corresponding 2018 periods.
Financial performance and liquidity
| Metric | Three months ended September 30, 2019 | Three months ended September 30, 2018 | Nine months ended September 30, 2019 | Nine months ended September 30, 2018 |
|---|---|---|---|---|
| Net sales | $683.0 thousand | $151.0 thousand | $1.715 million | $625.4 thousand |
| Gross profit | $329.1 thousand | $53.9 thousand | $949.2 thousand | $238.9 thousand |
| Gross margin | 48.2% | 35.7% | 55.3% | 38.2% |
| Loss from operations | $(10.894) million | $(13.552) million | $(37.483) million | $(38.872) million |
| Net loss attributable to electroCore | $(10.688) million | $(13.204) million | $(36.650) million | $(40.485) million |
| Basic and diluted loss per share | $(0.36) | $(0.45) | $(1.25) | $(0.66) |
- U.S. sales were $491.7 thousand in the third quarter and $1.211 million for the nine-month period; United Kingdom sales were $169.5 thousand and $415.3 thousand, respectively.
- Research and development expense was $2.275 million in the third quarter and $8.279 million year to date. Selling, general and administrative expense was $8.143 million and $28.156 million, respectively.
- Restructuring and severance charges were $804.6 thousand in the third quarter and $1.997 million for the nine months, with no comparable charges in 2018.
- Net cash used in operating activities was $36.0 million for the nine months ended September 30, 2019, compared with $34.9 million in 2018.
- Investing activities provided $34.5 million, primarily from maturities of marketable securities. Financing activities provided $461.3 thousand from an insurance premium financing arrangement.
- Cash and cash equivalents were $6.5 million and marketable securities were $26.9 million at September 30, 2019, for total cash, cash equivalents and marketable securities of $33.5 million, compared with $68.6 million at December 31, 2018.
- Working capital was approximately $28.7 million at September 30, 2019, compared with $65.6 million at December 31, 2018. Accumulated deficit was $75.0 million.
- Total debt consisted principally of a $461.3 thousand current note payable at quarter-end. The company also reported $2.0 million of operating lease liabilities.
Material changes versus the prior comparable period
- Third-quarter revenue increased 352% year over year, while nine-month revenue increased 174%, reflecting increased commercialization of gammaCore after its 2018 U.S. launch.
- Gross margin improved, primarily because of increased sales of lower-cost gammaCore refill kits relative to starter kits.
- Operating and net losses narrowed year over year despite restructuring charges, primarily because of higher revenue and lower selling, general and administrative expense.
- Research and development expense declined modestly as the company reduced headcount and research activity, partially offset by higher clinical study expenses.
- The company implemented a June 2019 redeployment and cost-reduction plan, including a reduction in force affecting approximately 36 employees and a reduction in the field sales force and clinical operations. Certain exploratory clinical trials were postponed.
- Inventory increased to $5.1 million, including $2.0 million classified as noncurrent, from $1.9 million at December 31, 2018. Management disclosed an additional commitment of approximately $1.1 million for inventory purchases by the end of 2019.
- The company adopted the new lease standard on January 1, 2019 and recognized right-of-use assets and lease liabilities. It also capitalized cloud-computing implementation costs and began amortizing them in July 2019.
- Cash declined by approximately $1.1 million during the first nine months because operating cash burn exceeded cash generated by investment maturities and financing.
Guidance, outlook, commentary, risks and unusual items
- Management stated that available resources and cash-flow projections should fund operations for at least the next 12 months and are currently expected to fund operations into the beginning of 2021. This expectation depends on commercial performance and other assumptions; additional spending reductions may be required if projections are not achieved.
- The company no longer expects to achieve its prior goal of 100 million covered lives by the end of the first quarter of 2020 and will no longer disclose a covered-lives goal. Management cautioned that covered lives may not translate into revenue or profitability.
- Commercial priorities include targeted regional payers, the Veterans Administration and Department of Defense, the United Kingdom, and potential workers’ compensation and automobile-injury distribution opportunities.
- The FDA accepted the company’s 510(k) submission for migraine prevention in July 2019, requested additional information in September, and met with the company in November. Premium 2 enrollment was expected to be completed in 2020. FDA clearance was not assured because the earlier Premium 1 study did not achieve statistical significance.
- Daniel S. Goldberger became Chief Executive Officer and joined the board effective October 1, 2019, succeeding Frank Amato. The former CEO received an $800,000 separation payment on October 1, 2019; additional executive separation costs were also recorded.
- Four putative shareholder class actions were pending in New Jersey state and federal courts alleging securities-law violations concerning the IPO and later disclosures. The company had not accrued a loss because the matters were at a preliminary stage and any potential loss could not be reasonably estimated.
- The company also disclosed a disputed claim from Lifehealthcare Pty Ltd. relating to a terminated Australian joint venture; management did not expect the financial impact to be material.
- A January 2019 settlement with a former advisor involved a $325,000 cash payment and warrants to purchase 62,181 shares at exercise prices ranging from $5.68 to $12.60.
- The company filed an effective shelf registration statement permitting potential offerings of up to $50 million of common or preferred stock, debt securities, warrants, units, or combinations thereof. No assurance was provided that financing would be available on favorable terms.
- Key risks include continuing operating losses and negative cash flow, dependence on additional financing, uncertain payer coverage and reimbursement, reliance on one U.S. specialty distributor, inventory obsolescence, regulatory and clinical-trial uncertainty, competition, supply-chain dependence, litigation, foreign currency exposure, and potential Nasdaq listing compliance issues.
- Management concluded that disclosure controls were effective as of September 30, 2019 and stated that the previously reported material weakness involving complex transaction accounting had been remediated.
Most important facts for investors to verify
- Whether revenue growth and gross-margin improvement continue to offset the company’s substantial operating cash burn.
- The timing and terms of any financing under the $50 million shelf registration statement, including potential dilution or increased debt obligations.
- Whether cash resources remain sufficient into early 2021 if payer adoption, reimbursement, or sales growth falls short of projections.
- The status and outcome of the FDA review for migraine prevention and progress in the Premium 2 clinical trial.
- The renewal and performance of the company’s U.S. specialty distributor relationship, which was scheduled to expire November 30, 2019.
- Potential liabilities and defense costs from the shareholder litigation and the disputed Lifehealthcare claim.
- Inventory utilization, additional purchase commitments, and the risk of inventory impairment or obsolescence.
- The effect of the June restructuring, reduced sales force, postponed clinical trials, and CEO transition on commercialization and future revenue.