10-Q 1 ecor-10q_20190331.htm 10-Q ecor-10q_20190331.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2019

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE TRANSITION PERIOD FROM ______________ TO ______________

 

Commission File Number 001-38538

 

electroCore, Inc.

(Exact name of Registrant as specified in its charter)

 

 

Delaware

 

20-3454976

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

150 Allen Road, Suite 201, Basking Ridge, NJ 07920

(Address of principal executive offices, including zip code)

 

(973) 290-0097

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common Stock, par value $0.001 per share

 

ECOR

 

The Nasdaq Global Select Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

 

Accelerated filer

Non-accelerated filer

 

 

Smaller reporting company

Emerging growth company 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.        

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes No

As of May 8, 2019, the registrant had 29,628,793 shares of common stock outstanding. 

 

 


 

PART I. FINANCIAL INFORMATION

 

Page

 

 

 

 

 

Cautionary Note Regarding Forward-Looking Statements

 

3

Item 1.

Financial Statements

 

 

 

Consolidated Balance Sheets as of March 31, 2019 (unaudited) and December 31, 2018

 

 

4

 

Consolidated Statements of Operations for the Three Months Ended March 31, 2019 and 2018 (Unaudited)

 

 

5

 

Consolidated Statements of Comprehensive Loss for the Three Months Ended March 31, 2019 and 2018 (Unaudited)

 

 

6

 

Consolidated Statements of Changes in Convertible Preferred Units, Members’ (Deficit) and Stockholders’ Equity for the Three Months Ended March 31, 2018 and March 31, 2019 (Unaudited)

 

 

7

 

Consolidated Statements of Cash Flow for the Three Months Ended March 31, 2019 and 2018 (Unaudited)

 

 

8

 

Notes to Consolidated Financial Statements (Unaudited)

 

 

9

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

22

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

 

29

Item 4.

Controls and Procedures

 

 

29

 

PART II. OTHER INFORMATION

 

 

 

Item 1.

Legal Proceedings

 

 

31

Item 1A.

Risk Factors

 

 

31

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

 

31

Item 3.

Defaults Upon Senior Securities

 

 

31

Item 4.

Mine Safety Disclosures

 

 

31

Item 5.

Other Information

 

 

31

Item 6.

Exhibits

 

 

32

 

Signatures

 

 

33

 

2


 

REFERENCES TO ELECTROCORE

In this Quarterly Report on Form 10-Q, unless otherwise stated or the context otherwise requires references to the “Company,” “electroCore,” “we,” “us” and “our” following the date of the Corporate Conversion (June 21, 2018) refer to electroCore, Inc. a Delaware corporation, and its subsidiaries and affiliate; references to the “Company,” “electroCore,” “we,” “us” and “our” prior to the date of the Corporate Conversion refer to ElectroCore, LLC, a Delaware limited liability company, and its subsidiaries and affiliate; and references to the “Corporate Conversion” or “corporate conversion” refer to all of the transactions related to the statutory conversion of ElectroCore, LLC from a Delaware limited liability company to a Delaware corporation and the change of its name to electroCore, Inc., effected on June 21, 2018.  

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed in the forward-looking statements. The statements contained in this report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements are often identified by the use of words such as, but not limited to, “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “seek,” “should,” “strategy,” “target,” “will,” “would” and similar expressions or variations intended to identify forward-looking statements. These statements are based on the beliefs and assumptions of our management based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those included in our Annual Report on Form 10-K dated December 31, 2018, filed with the SEC described under “Risk Factors” and in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Quarterly Report and elsewhere in this Quarterly Report on Form 10-Q. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

The electroCore logo, gammaCore and other trademarks of electroCore, Inc. appearing in this Quarterly Report on Form 10-Q are the property of electroCore, Inc. All other trademarks, service marks and trade names in this Quarterly Report on Form 10-Q are the property of their respective owners. We have omitted the ® and ™ designations, as applicable, for the trademarks used in this Quarterly Report on Form 10-Q.

 

3


 

ELECTROCORE, INC., SUBSIDIARIES AND AFFILIATE

Consolidated Balance Sheets

 

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

 

 

(Unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

6,953,786

 

 

$

7,600,284

 

Marketable securities

 

 

45,412,948

 

 

 

60,963,087

 

Accounts receivable

 

 

288,335

 

 

 

267,599

 

Inventories

 

 

3,589,264

 

 

 

1,949,402

 

Prepaid expenses and other current assets

 

 

994,497

 

 

 

1,918,164

 

Total current assets

 

 

57,238,830

 

 

 

72,698,536

 

Property and equipment – net

 

 

392,029

 

 

 

380,904

 

Operating lease right of use assets

 

 

3,884,803

 

 

 

 

Other assets

 

 

983,955

 

 

 

424,896

 

Total assets

 

$

62,499,617

 

 

$

73,504,336

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,859,586

 

 

$

2,698,902

 

Accrued expenses

 

 

3,256,308

 

 

 

4,374,101

 

Current portion of operating lease liabilities

 

 

213,897

 

 

 

 

Total current liabilities

 

 

5,329,791

 

 

 

7,073,003

 

Noncurrent liabilities:

 

 

 

 

 

 

 

 

Deferred rent

 

 

 

 

 

245,632

 

Operating lease liabilities

 

 

4,001,218

 

 

 

 

Total liabilities

 

 

9,331,009

 

 

 

7,318,635

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Preferred Stock, par value $0.001 per share; 10,000,000 shares authorized at

   March 31, 2019 and December 31, 2018; 0 shares issued and outstanding at

   March 31, 2019 and December 31, 2018

 

 

 

 

 

 

Common Stock, par value $0.001 per share; 500,000,000 shares authorized at

   March 31, 2019 and December 31, 2018; 29,633,240 issued and outstanding

   at March 31, 2019 and 29,450,035 shares issued and outstanding at

   December 31, 2018

 

 

29,633

 

 

 

29,450

 

Additional paid-in capital

 

 

104,551,554

 

 

 

103,791,013

 

Accumulated deficit

 

 

(52,192,745

)

 

 

(38,331,215

)

Accumulated other comprehensive income

 

 

144,556

 

 

 

60,843

 

Total stockholders' equity

 

 

52,532,998

 

 

 

65,550,091

 

Noncontrolling interest

 

 

635,610

 

 

 

635,610

 

Total equity

 

 

53,168,608

 

 

 

66,185,701

 

Total liabilities and equity

 

$

62,499,617

 

 

$

73,504,336

 

 

See accompanying notes to consolidated financial statements.

4


 

ELECTROCORE, INC., SUBSIDIARIES AND AFFILIATE

Consolidated Statements of Operations

(Unaudited)

 

 

 

Three months ended

March 31,

 

 

 

2019

 

 

2018

 

Net sales

 

$

409,601

 

 

$

81,187

 

Cost of goods sold

 

 

157,791

 

 

 

48,948

 

Gross profit

 

 

251,810

 

 

 

32,239

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

 

3,459,823

 

 

 

2,306,335

 

Selling, general and administrative

 

 

11,002,999

 

 

 

6,824,814

 

Total operating expenses

 

 

14,462,822

 

 

 

9,131,149

 

Loss from operations

 

 

(14,211,012

)

 

 

(9,098,910

)

Other income/(expense)

 

 

 

 

 

 

 

 

Change in fair value of warrant liability

 

 

 

 

 

(245,854

)

Interest and other income, net

 

 

366,174

 

 

 

109,283

 

Other expense

 

 

(16,692

)

 

 

(208,054

)

Total other income/(expense)

 

 

349,482

 

 

 

(344,625

)

Loss before income taxes

 

 

(13,861,530

)

 

 

(9,443,535

)

Provision for income taxes

 

 

 

 

 

 

Net loss from operations

 

 

(13,861,530

)

 

 

(9,443,535

)

Less: Net income attributable to noncontrolling

   interest

 

 

 

 

 

55,005

 

Total net loss attributable to Electrocore LLC and

   electroCore, Inc., subsidiaries and affiliate

 

$

(13,861,530

)

 

$

(9,498,540

)

Net loss attributable to Electrocore, LLC

   subsidiaries and affiliate

 

$

 

 

$

(9,498,540

)

Net loss attributable to electroCore, Inc.,

   subsidiaries and affiliate

 

$

(13,861,530

)

 

$

 

Net loss per share of common stock - Basic and Diluted

   (see Note 13)

 

$

(0.47

)

 

$

 

Weighted average and potential shares outstanding -

   Basic and Diluted (see Note 13)

 

 

29,319,318

 

 

 

 

 

See accompanying notes to unaudited consolidated financial statements.

5


 

ELECTROCORE, INC., SUBSIDIARIES AND AFFILIATE

Consolidated Statements of Comprehensive Loss

(Unaudited)

 

 

 

Three months ended

March 31,

 

 

 

2019

 

 

2018

 

Net loss from operations

 

$

(13,861,530

)

 

$

(9,443,535

)

Other comprehensive income/(loss):

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

43,575

 

 

 

(114,329

)

Unrealized gains/(losses) on securities, net of taxes as applicable

 

 

40,138

 

 

 

(24,932

)

Other comprehensive income/(loss)

 

 

83,713

 

 

 

(139,261

)

Comprehensive loss

 

 

(13,777,817

)

 

 

(9,582,796

)

Less: Net comprehensive income attributable to noncontrolling interest

 

 

 

 

 

5,085

 

Comprehensive loss attributable to Electrocore, LLC

   and electroCore, Inc., subsidiaries and affiliate

 

$

(13,777,817

)

 

$

(9,587,881

)

Comprehensive loss attributable to

   Electrocore, LLC subsidiaries and affiliate

 

$

 

 

$

(9,587,881

)

Comprehensive loss attributable to

   electroCore, Inc., subsidiaries and affiliate

 

$

(13,777,817

)

 

$

 

 

See accompanying notes to unaudited consolidated financial statements.

 

 

6


 

ELECTROCORE, INC., SUBSIDIARIES AND AFFILIATE

Consolidated Statements of Changes in Convertible Preferred Units, Members’ (Deficit) and Stockholders’ Equity

(Unaudited)

 

 

Convertible Preferred Units

 

 

Electrocore LLC for the three months ended March 31, 2018 and electroCore, Inc. for the three months ended March 31, 2019

 

 

Series A

 

 

Series B

 

 

Common

 

 

Common

 

 

Additional

 

 

 

 

 

 

 

Accumulated

other

 

 

(Deficit)/Equity

attributable to

Electrocore

LLC and

electroCore, Inc.,

 

 

 

 

 

 

Total

 

 

Preferred Units

 

 

Preferred Units

 

 

Units

 

 

Stock

 

 

paid-in

 

 

 

Accumulated

 

 

comprehensive

 

 

subsidiaries

 

 

Noncontrolling

 

 

equity/

 

 

Units

 

 

Amount

 

 

Units

 

 

Amount

 

 

Units

 

 

Amount

 

 

Shares

 

 

Amount

 

 

capital

 

 

 

deficit

 

 

income

 

 

and affiliate

 

 

interest

 

 

(deficit)

 

Balances as of December 31, 2017

 

70,918,506

 

 

$

53,518,463

 

 

 

105,186,020

 

 

$

68,755,544

 

 

 

218,982,140

 

 

$

40,180,619

 

 

 

 

 

$

 

 

$

22,596,485

 

 

 

$

(152,928,928

)

 

$

80,213

 

 

$

(90,071,611

)

 

$

604,055

 

 

$

(89,467,556

)

Net loss attributable to Electrocore, LLC

   subsidiaries and affiliate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(9,498,540

)

 

 

 

 

 

(9,498,540

)

 

 

55,005

 

 

 

(9,443,535

)

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(139,261

)

 

 

(139,261

)

 

 

 

 

 

 

(139,261

)

Noncontrolling interest distributions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(49,920

)

 

 

(49,920

)

Unit-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

267,145

 

 

 

 

 

 

 

 

 

 

267,145

 

 

 

 

 

 

267,145

 

Balances as of March 31, 2018

 

70,918,506

 

 

$

53,518,463

 

 

 

105,186,020

 

 

$

68,755,544

 

 

 

218,982,140

 

 

$

40,180,619

 

 

 

 

 

$

 

 

$

22,863,630

 

 

 

$

(162,427,468

)

 

$

(59,048

)

 

$

(99,442,267

)

 

$

609,140

 

 

$

(98,833,127

)

Balance as of December 31, 2018

 

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

29,450,035

 

 

$

29,450

 

 

$

103,791,013

 

 

 

$

(38,331,215

)

 

$

60,843

 

 

$

65,550,091

 

 

$

635,610

 

 

$

66,185,701

 

Net loss attributable to electroCore, Inc.,

   subsidiaries and affiliate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(13,861,530

)

 

 

 

 

 

(13,861,530

)

 

 

 

 

 

(13,861,530

)

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

83,713

 

 

 

83,713

 

 

 

 

 

 

83,713

 

Issuance of warrants in settlement of lawsuit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

16,692

 

 

 

 

 

 

 

 

 

 

16,692

 

 

 

 

 

 

16,692

 

Stock based compensation (net of forfeitures)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

183,205

 

 

 

183

 

 

 

743,849

 

 

 

 

 

 

 

 

 

 

744,032

 

 

 

 

 

 

744,032

 

Balances as of March 31, 2019

 

 

 

$

 

 

 

 

 

$

 

 

 

 

 

$

 

 

 

29,633,240

 

 

$

29,633

 

 

$

104,551,554

 

 

 

$

(52,192,745

)

 

$

144,556

 

 

$

52,532,998

 

 

$

635,610

 

 

$

53,168,608

 

 

 

See accompanying notes to unaudited consolidated financial statements

7


 

ELECTROCORE, INC., SUBSIDIARIES AND AFFILIATE

Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

Three months ended

March 31,

 

 

 

2019

 

 

2018

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss from operations

 

$

(13,861,530

)

 

$

(9,443,535

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Change in fair value of warrants and embedded derivative

 

 

 

 

 

245,854

 

Stock/unit-based compensation

 

 

744,032

 

 

 

267,145

 

Depreciation and amortization

 

 

25,522

 

 

 

7,212

 

Amortization of marketable securities discount

 

 

(200,302

)

 

 

 

Cloud computing arrangement implementation costs

 

 

(618,044

)

 

 

 

Net noncash lease expense

 

 

117,579

 

 

 

 

Noncash portion of litigation settlement

 

 

16,692

 

 

 

 

Other

 

 

43,343

 

 

 

(68,468

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

(20,736

)

 

 

(152,653

)

Inventories

 

 

(1,639,862

)

 

 

6,600

 

Prepaid expenses and other current assets

 

 

830,406

 

 

 

(774,874

)

Accounts payable

 

 

(719,463

)

 

 

249,151

 

Accrued expense and other current liabilities

 

 

(1,117,793

)

 

 

 

Deferred rent

 

 

 

 

 

(13,762

)

Net cash used in operating activities

 

 

(16,400,156

)

 

 

(9,677,330

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchase of marketable securities

 

 

(12,110,420

)

 

 

(10,431,839

)

Proceeds from maturities of marketable securities

 

 

27,901,000

 

 

 

9,190,000

 

Purchases of property and equipment

 

 

(37,318

)

 

 

(144,999

)

Net cash provided by/(used in) investing activities

 

 

15,753,262

 

 

 

(1,386,838

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Deferred financing fees

 

 

 

 

 

(525,231

)

Net cash used in financing activities

 

 

 

 

 

(525,231

)

Effect of changes in exchange rates on cash and cash equivalents

 

 

396

 

 

 

(114,329

)

Net decrease in cash and cash equivalents

 

 

(646,498

)

 

 

(11,703,728

)

Cash and cash equivalents – beginning of period

 

 

7,600,284

 

 

 

13,224,194

 

Cash and cash equivalents – end of period

 

$

6,953,786

 

 

$

1,520,466

 

 

 

 

 

 

 

 

 

 

Supplemental schedule of noncash activity:

 

 

 

 

 

 

 

 

Deferred financing costs included in accounts payable and accrued expenses

 

$

 

 

$

926,349

 

Prepaid lease payments included in right of use assets

 

$

93,261

 

 

 

 

 

Capitalized cloud computing arrangement costs included in accrued expenses and other liabilities

 

$

167,798

 

 

$

 

 

See accompanying notes to consolidated financial statements.

 

8


 

ELECTROCORE, INC., SUBSIDIARIES AND AFFILIATE

Notes to Consolidated Financial Statements

(Unaudited)

Note 1.  Corporate Organization and Company Overview

Company Overview

electroCore, Inc. is a commercial-stage bioelectronic medicine company, engaged in the commercialization and development of a range of patient-administered non-invasive Vagus Nerve Stimulation (“nVNS”) therapies initially focused on the treatment of multiple conditions in neurology and rheumatology. electroCore was founded in 2005 and its focus currently is on primary headache conditions (migraine and cluster headache), with trials continuing in other neurological and inflammatory disorders.

electroCore, headquartered in New Jersey, has wholly owned subsidiaries that include: electroCore Bermuda, Ltd. (see Note 20), electroCore Germany GmbH, and electroCore UK Ltd. In addition, an inactive affiliate, electroCore (Aust) Pty Limited, is subject to electroCore’s control on basis other than voting interests and is a variable interest entity (“VIE”), for which electroCore is the primary beneficiary.

In January 2018, the U.S. Food and Drug Administration ("FDA") released the use of gammaCore, the Company's first generation disposable non-invasive vagus nerve stimulator therapy for the acute treatment of pain associated with migraine headache in adult patients. Previously in April 2017, the FDA released the use of gammaCore for the acute treatment of pain associated with episodic cluster headache in adult patients.  In December 2017, gammaCore Sapphire, was FDA released.  gammaCore Sapphire is a rechargeable and reloadable version of the product for multi-year use.  Effective August 1, 2018, the Company announced gammaCore Sapphire was available in the United States.  

In November 2018, the FDA provided 501(k) clearance for an expanded label for gammaCore nVNS therapy for adjunctive use for the preventive treatment of cluster headache in adult patients. This milestone marks the first and only product FDA cleared for the prevention of cluster headache. There are no other FDA-approved pharmacologic treatments for the prevention of cluster headache.

Corporate Conversion and Initial Public Offering

Effective June 21, 2018, the Company converted into a Delaware corporation pursuant to a statutory conversion and changed its name to electroCore, Inc.  Previously, the Company operated as a Delaware limited liability company under the name Electrocore, LLC.  As a result of the corporate conversion, the holders of the different series of units of Electrocore, LLC, or Units, became holders of common stock and options to purchase common stock of electroCore, Inc. Warrants to purchase Units were converted to warrants to purchase common stock of electroCore, Inc. The number of shares of common stock, options to purchase common stock, and warrants to purchase common stock that holders of Units and warrants to purchase Units were entitled to receive in the corporate conversion was determined in accordance with a plan of conversion that was based upon the terms of the Company’s Third Amended and Restated Limited Liability Company Agreement, dated November 21, 2017 (the “Operating Agreement”), and varied depending on which class and series of Units a holder owned, and the terms of the applicable warrants.  See Note 14 - Corporate Conversion and Equity.

In June 2018, the Company completed its initial public offering ("IPO") and issued 5,980,000 shares of common stock, including the underwriter’s exercise of their right to purchase additional shares, at an initial offering price to the public of $15.00. The Company received net proceeds from the IPO of approximately $77.5 million, after deducting underwriting discounts and commissions and offering costs of approximately $12.2 million.

Note 2.  Basis of Presentation

The accompanying unaudited consolidated financial statements were prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) and with Article 10 of Regulation S-X for interim financial reporting. In compliance with those rules, certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. These consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and related notes for the fiscal year ended December 31, 2018 included in the Annual Report on Form 10-K filed with the SEC.  In the opinion of management, all

9


 

adjustments (consisting of normal recurring adjustments) considered necessary for a fair statement of the results of interim periods have been included.  The results of operations and cash flows reported in these consolidated financial statements should not be regarded as necessarily indicative of results that may be expected for the entire fiscal year.

Note 3.  Summary of Significant Accounting Policies

(a)

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of electroCore and its wholly owned subsidiaries.  In addition, an inactive affiliate, electroCore (Aust) Pty Limited, a variable interest entity (“VIE”) for which electroCore is the primary beneficiary, is also consolidated with the non-controlled equity presented as non-controlling interest. All intercompany balances and transactions have been eliminated in consolidation.

(b)

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of these consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include the useful lives of fixed assets, allowances for doubtful accounts, and sales returns; valuation of inventory, stock compensation, and contingencies.

(c)

Leases

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires lessees to recognize most leases on the balance sheet. We have elected not to reassess whether the expired or existing contracts contain leases, nor did we reassess the classification of existing leases as of the adoption date.  We did not use hindsight in our assessment.  The provisions of this guidance were effective for annual periods beginning after December 15, 2018, and interim periods within those years, with early adoption permitted.  We adopted this guidance as of January 1, 2019, the required effective date, using the effective date transition method.  

The Company is a lessee under several noncancelable operating leases, primarily for office and warehouse space and office equipment.  The Company accounts for leases in accordance with ASC Topic 842, Leases.  At contract inception the Company reviews its agreements and determines if an arrangement is or contains a lease and at that time recognizes a right of use (ROU) asset and a lease liability.  The Company only has operating leases which are measured initially at the present value of the unpaid lease payments at the lease commencement date.  

The incremental borrowing rate the Company uses represents the rate of interest that the Company would expect to pay to borrow an amount equal to the lease payments under similar terms.  As the Company does not borrow on a collateralized basis, our non-collateralized borrowing rate is used as an input in deriving the incremental borrowing rate. The discount rate used to determine the net present value of the leases at inception was 9.75%.  The Company determined the lease term of the noncancelable leases to include periods covered by options to extend the lease for leases that it is reasonably certain to exercise.  

Lease payments included in the measurement of the lease liability include only fixed payments that the Company owes on the lease.  The ROU asset is initially and subsequently measured as the lease liability less any lease incentive plus any prepaid lease payments made at or before lease commencement, plus any indirect costs incurred.

The Company monitors events or changes in circumstances that may require a reassessment of its leases.  If a reassessment results in the remeasurement of the lease liability, a corresponding adjustment will be made to its ROU assets.  The Company also reviews its leases to determine if any impairment loss should be recognized.

Operating lease ROU assets are presented as operating lease right of use assets on the consolidated financial statements.  The current portion of the operating lease liabilities is included in other current liabilities and the long-term portion is presented separately as operating lease liabilities on the consolidated balance sheet.

10


 

The Company has elected not to recognize right of use assets and lease liabilities for short term leases, i.e., leases with a noncancelable period of 12 months or less.  The Company recognizes any expense for these short term leases on a straight line basis over the lease term.  The Company’s leases generally do not include nonlease maintenance and other expenses.  The Company elected the practical expedient not to account for nonlease expense components as a single lease component.  The Company recognizes the nonlease expenses in the respective expense accounts.  (See Note 10. Leases.)

(d)

Recent Accounting Pronouncements Not Yet Adopted

The Company reviewed all recently issued accounting pronouncements and concluded that they were either not applicable or not expected to have a material impact on the financial statements.

Note 4. Risks and Uncertainties

The Company’s cash requirements for 2019 and beyond include expenses related to the commercialization of its products, as well as the continuing development and clinical evaluation of its products and therapies. As of March 31, 2019 and December 31, 2018, the Company had working capital (current assets less current liabilities) of $51.9 million and $65.6 million, respectively.

On June 21, 2018, the Company closed the IPO of 5,980,000 shares of common stock at a price of $15.00 per share with net proceeds of $77.5 million, net of underwriting discount and other offering expenses.  As a public company, additional future liquidity needs will include costs to comply with the requirements of being a public company.  

The Company’s expected cash requirements for 2019 and beyond are based on the commercial success of its products and the continual development and clinical evaluation of its products and therapies.  Based on the Company’s available cash resources and cash flow projections, it believes it has sufficient funds to continue operations for at least the next 12 months.  Until the Company can generate significant cash from its operations, the Company expects to continue to fund its operations with its available financial resources.  To the extent additional funds are necessary to meet long-term liquidity needs as the Company continues to execute its business strategy, the Company anticipates that it will be obtained through the incurrence of indebtedness, equity financings or a combination of these potential sources of funds, although the Company can provide no assurance that these sources of funding will be available on reasonable terms.

The Company has foreign currency exchange risks related to revenue and operating expenses in currencies other than the local currencies in which they operate. The Company is exposed to currency risk from the potential changes in functional currency values of its foreign currency denominated assets, liabilities, and cash flows.

The Company primarily sells to one specialty pharmaceutical distributor in the United States. At March 31, 2019 and December 31, 2018, the accounts receivable related to this distributor was $211,600 and $195,730, respectively.

Note 5. Revenue Recognition

Performance Obligations

Revenue, net of specialty pharmaceutical distribution discounts, vouchers, rebates, and co-payment assistance is solely generated from the sales of the gammaCore products. Sales are made to a specialty pharmaceutical distributor (“customer”) and revenue is recognized when delivery of the product is completed. The Company deems control to have transferred upon the completion of delivery because that is the point in which (1) it has a present right to payment for the product, (2) it has transferred the physical possession of the product, (3) the customer has legal title to the product, (4) the customer has risks and rewards of ownership and (5) the customer has accepted the product. After the products have been delivered and control has transferred, the Company has no remaining unsatisfied performance obligations.

Revenue is measured based on the consideration that the Company expects to receive in exchange for gammaCore, which represents the transaction price. The transaction price includes the fixed per-unit price of the product and variable consideration in the form of trade credits, vouchers, rebates, and co-payment assistance. The per-unit price is based on the Company established wholesale acquisition cost less a contractually agreed upon distributor discount with the customer. Our revenue only reflects sales of gammaCore units exclusive of trade credits, vouchers, rebates, and co-payment assistance.  

11


 

Trade credits are discounts that are contingent upon a timely remittance of payment and are estimated based on historical experience.

From February 2018 to mid-July 2018 vouchers were used by physicians to provide new patients with free therapy (i.e., one gammaCore device) by delivering non-voucher units for the free therapy.  The transaction price of the non-voucher units redeemed and estimated to be redeemed was recognized as contra-revenue.  The costs to produce these units, in addition to any processing fees, are included as promotional expenses in selling, general and administrative expense.  After mid-July 2018, the Company modified its voucher program to provide its distributor with gammaCore and gammaCore Sapphire promotional units at no charge (“voucher units”).  The voucher units have a distinct product item number to be used for the voucher program.  The costs to produce these voucher units given to patients under the voucher program are recognized in promotional expense.

In October 2018, the Company launched its Partners for Coverage program that allows eligible commercial insurance patients uninterrupted access to gammaCore for up to two months while insurance coverage is being pursued.  In February 2019, this program was modified to provide therapy to patients for up to 12 months while insurance coverage is being pursued.  Patients receive voucher units during this period.  For the three months ended March 31, 2019, voucher units equivalent to $1.6 million in sales of gammaCore Sapphire and gammaCore Sapphire refill kits were dispensed that are not reflected in net sales. For the three months ended March 31, 2018, voucher units equivalent to $0.2 million in sales of gammaCore were dispensed that are not reflected in net sales.

In addition, reimbursement for co-payments made by patients under the co-payment assistance program is also considered variable consideration. Beginning in February 2019, eligible patients could receive a reduction of up to $300 from the cost of the first month of therapy and a reduction of up to $250 from the cost of each refill for a maximum of 12 months.  For the three months ended March 31, 2019 and 2018, net product sales reflect a reduction of $14,040 and $29,207, respectively, for the reduction from the cost of therapy under the co-payment assistance program.

In accordance with Company policy, no allowance for product returns has been provided. Damaged or defective products are replaced at no charge under the Company’s standard warranty. For the three months ended March 31, 2019 and 2018, the replacement costs were immaterial.

Contract Balances

The Company generally invoices the customer and recognizes revenue once its performance obligations are satisfied, at which point payment is unconditional. Accordingly, under ASC 606, the contracts with customers do not give rise to contract assets or liabilities.

Payment for products is due in accordance with the terms agreed upon with customers, generally within 31 days of shipment to the customer. Accordingly, contracts with customers do not include a significant financing component.

Disaggregation of Net Sales

The following table provides additional information pertaining to net sales disaggregated by geographic market for the three months ended March 31, 2019 and 2018:  

 

 

For the three months ended

March 31,

 

 

2019

 

 

2018

 

Geographic Market

 

 

 

 

 

 

 

United States

$

276,465

 

 

$

9,606

 

United Kingdom

 

90,584

 

 

 

64,982

 

Germany

 

35,836

 

 

 

805

 

Other

 

6,716

 

 

 

5,794

 

Total Net Sales

$

409,601

 

 

$

81,187

 

 

12


 

Note 6.  Cash, Cash Equivalents and Marketable Securities

The following tables summarizes the Company’s cash, cash equivalents and marketable securities as of March 31, 2019 and December 31, 2018.

 

As of March 31, 2019

 

 

 

Amortized

Cost

 

 

Unrealized

Gain

 

 

Unrealized (Loss)

 

 

Fair

Value

 

Cash and cash equivalents

 

$

6,953,786

 

 

$

 

 

$

 

 

$

6,953,786

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate Debt Securities

 

$

13,583,493

 

 

$

2,325

 

 

$

(2,058

)

 

$

13,583,760

 

Commercial Paper

 

 

4,957,115

 

 

 

 

 

 

(2,055

)

 

 

4,955,060

 

U.S. Treasury Bonds

 

 

26,875,131

 

 

 

1,858

 

 

 

(2,861

)

 

 

26,874,128

 

Total marketable securities

 

$

45,415,739

 

 

$

4,183

 

 

$

(6,974

)

 

$

45,412,948

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total cash, cash equivalents, and marketable securities

 

$

52,369,525

 

 

$

4,183

 

 

$

(6,974

)

 

$

52,366,734

 

 

As of December 31, 2018

 

 

 

Amortized

Cost

 

 

Unrealized

Gain

 

 

Unrealized (Loss)

 

 

Fair

Value

 

Cash and cash equivalents

 

$

7,600,284

 

 

$

 

 

$

 

 

$

7,600,284

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate Debt Securities

 

$

18,961,145

 

 

$

 

 

$

(25,888

)

 

$

18,935,257

 

Commercial Paper

 

 

6,970,867

 

 

 

 

 

 

(4,927

)

 

 

6,965,940

 

U.S. Treasury Bonds

 

 

35,074,005

 

 

 

 

 

 

(12,115

)

 

 

35,061,890

 

Total marketable securities

 

$

61,006,017

 

 

$

 

 

$

(42,930

)

 

$

60,963,087

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total cash, cash equivalents, and marketable

   securities

 

$

68,606,301

 

 

$

 

 

$

(42,930

)

 

$

68,563,371

 

 

The Company’s commercial paper, corporate debt securities and U.S. treasury bonds all mature within one year.

 

Note 7.  Fair Value Measurements

Certain assets and liabilities are reported on a recurring basis at fair value. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three levels of the fair value hierarchy, of which the first two are considered observable and the last is considered unobservable:

Level 1—Quoted prices in active markets for identical assets or liabilities.

Level 2—Observable inputs (other than Level 1 quoted prices), such as quoted prices in active markets for similar assets or liabilities, quoted prices in markets that are not active for identical or similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data.

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to determining the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques.

13


 

A summary of the assets and liabilities carried at fair value in accordance with the hierarchy defined above is as follows:

 

 

 

 

 

 

 

Fair Value Hierarchy

 

March 31, 2019

 

Total

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

6,953,786

 

 

$

6,953,786

 

 

$

 

 

$

 

Marketable Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate Debt Securities

 

 

13,583,760

 

 

 

13,583,760

 

 

 

 

 

 

 

Commercial Paper

 

 

4,955,060

 

 

 

4,955,060

 

 

 

 

 

 

 

U.S. Treasury Bonds

 

 

26,874,128

 

 

 

26,874,128

 

 

 

 

 

 

 

Total

 

$

52,366,734

 

 

$

52,366,734

 

 

$

 

 

$

 

 

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets