Notes to Consolidated Financial Statements
(Unaudited)
Note 1. Corporate Organization and Company Overview
Company Overview
electroCore, Inc. is
a
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,
rheumatology
and
other
fields.
electroCore
was
founded
in
2005
and
its
focus
currently
is
on
primary
headache
(migraine
and
cluster
headache),
with
trials
continuing
in
other neurological
and
inflammatory
disorders.
electroCore, headquartered in New Jersey, has wholly owned subsidiaries which include: electroCore Bermuda, Ltd., electroCore Germany GmbH, and electroCore UK Ltd. In addition, an affiliate, electroCore (Aust) Pty Limited, is subject to electroCore’s control on bases 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 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’s successor, Sapphire was FDA released. gammaCore Sapphire is a rechargeable and reloadable version of our product for multi-year use. Effective August 1, 2018, the Company announced gammaCore Sapphire was available in the United States. In general, the Company will no longer market the disposable version of gammaCore in markets where the gammaCore Sapphire has launched.
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, which was based upon the terms of the 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 “Corporate Conversion and Equity, Note 12.”
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. We received net proceeds from the IPO of approximately $77.7 million, after deducting underwriting discounts and commissions and offering costs of approximately $12.0 million. The underwriters were Evercore Group L.L.C., Cantor Fitzgerald & Co., JMP Securities. LLC, and BTIG, LLC.
Shares of common stock began trading on the Nasdaq Global Market on June 22, 2018, and began trading on the Nasdaq Global Select Market on June 25, 2018, under the symbol "ECOR". The shares were registered under the Securities Act, on a registration statement on Form S-1, which was declared effective by the Securities and Exchange Commission ("SEC"), on June 21, 2018.
The Company expects to use the proceeds from the IPO (i) to hire additional territory business managers and expand marketing programs to prepare for the full commercial launch of the gammaCore products; (ii) to fund the research and development of gammaCore products for other indications in headache and rheumatology; (iii) to fund the build out of a specialty distribution channel for the launch of gammaCore Sapphire in the third quarter of 2018; and (iv) the remainder to fund working capital and general corporate purposes.
9
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, 2017 included in our prospectus dated June 21, 2018 filed with the SEC, pursuant to Rule 424(b) under the Securities Act. In the opinion of management, all 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, Inc. and its wholly owned subsidiaries. electroCore (Aust) Pty Limited, a 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.
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, valuation of inventory, warrants, stock compensation, vouchers for gammaCore, valuation of deferred taxes, and contingencies.
(c
)
|
Recently Adopted Accounting Pronouncements
|
In May 2014, the FASB issued Accounting Standard Update (ASU) 2014-09, Revenue from Contracts with Customers (“ASC 606”). ASC 606 provides a comprehensive framework under which revenue is recognized when an entity transfers promised goods and services to a customer in an amount that reflects the consideration an entity is entitled to receive in exchange for those goods and services. Furthermore, ASC 606 contains expanded disclosure requirements to enable users of the financial statements to better understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.
The Company adopted ASC 606 effective January 1, 2018, using the full retrospective method. The adoption of ASC 606 did not have a material impact on the consolidated balance sheet, statements of operations, or cash flows for the three and six months ended June 30, 2017. The primary impact of adoption related to the enhancement of the disclosures is provided in Note 5 – Revenue Recognition.
In June 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation, Topic 718. The amendments in this Update expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The Company adopted this guidance in the second quarter of 2018, which had no material impact on the balance sheet, statement of operations or cash flows.
In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (Subtopic 825-10). The ASU revises the measurement and presentation of investments in certain financial assets and liabilities and enhances disclosures about those investments. The Company adopted this guidance on January 1, 2018, which had no material impact on the balance sheet, statement of operations or cash flows.
10
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and
Cash Payments, (Topic 230). This ASU makes eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. The Company adopted this guidance on January 1, 2018, which had no material impact on the
statement of cash flows.
(d)
|
Recent Accounting Pronouncements Not Yet Adopted
|
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires lessees to recognize most leases on the balance sheet. The provisions of this guidance are effective for annual periods beginning after December 15, 2018, and interim periods within those years, with early adoption permitted. The Company is assessing ASU No. 2016-02’s impact and will adopt it when effective.
The Company reviewed all other 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 budgeted cash requirements for 2018 and beyond include expenses related to continuing development and clinical evaluation of its products and therapies, as well as preparing for related commercialization of our products.
As of June 30, 2018 and December 31, 2017, we had working capital (current assets less current liabilities) of $92.8 million and $32.9 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 $77.7 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 a public company and tax payments to Federal and State governments.
The Company believes that its sales and cash on hand are adequate to meet its operating, investing, and financing needs for at least the next twelve months. 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 they 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.
In addition to the FDA release received by the Company for two indications (see Note 1), the Company is seeking approvals and clearances by the FDA for additional indications. In connection therewith, the Company will incur additional time and costs and will require additional funding to obtain such approvals and clearances. The additional time, costs, and funding is expected to be substantial.
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 their foreign currency denominated assets, liabilities, and cash flows.
The Company deals primarily with one specialty pharmaceutical distributor in the United States. At June 30, 2018 and December 31, 2017, the accounts receivable related to this distributor was $185,150 and $31,740, respectively.
Note 5. Revenue Recognition
Performance Obligations
Revenue, net of specialty pharmaceutical distribution discounts, vouchers, rebates, and co-payments assistance is solely generated from the sales of the gammaCore product. 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
11
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 disc
ount with the customer. Trade credits are discounts that are contingent upon a timely remittance of payment and is estimated based on historical experience.
Vouchers are redeemable by select new patients for an initial 31-day therapy (i.e. one gammaCore de
vice) free of charge.
For the three months ended June 30, 2018, the Company recognized actual vouchers redeemed as contra-revenue.
The transaction price of the devices estimated to be redeemed through vouchers was
also
recognized as contra-revenue. All o
ther costs for units related to the voucher program and any other redemption costs due to the specialty pharmacy were included as promotional expenses in selling, general and administrative expense. Subsequent to June 30, 2018,
units designated for the vou
cher program are provided to the distributor at no cost
and
we
will not recognize revenue for the free product.
Any vouchers redeemed after June 30, 2018 will utilize inventory designated for voucher redemption.
All costs for the free units, including any processing fees, will be included as promotional expenses in selling, general and administrative expense.
For the three and six months ended June 30, 2018, contra-revenue and promotional expenses related to the vouchers redeemed and estimated to be redeemed were $939,780 and $1,263,780, respectively. In addition, reimbursement for co-payments made by patients is also considered variable consideration. For the three and six months ended June 30, 2018, net sales reflect a reduction of $10,518 and $39,725 for payments made in conjunction with the co-payment program. For the three and six months periods ended June 30, 2017, the reimbursement for co-payments was not considered material.
In accordance with Company policy, 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 and six months ended June 30, 2018 and 2017, the replacement costs were immaterial.
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 and six months ended June 30, 2018 and 2017:
|
For the three months ended
June 30,
|
|
|
For the six months ended
June 30,
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Geographic Market
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
$
|
320,242
|
|
|
$
|
1,580
|
|
|
$
|
329,848
|
|
|
$
|
3,795
|
|
United Kingdom
|
|
50,781
|
|
|
|
57,350
|
|
|
|
115,763
|
|
|
|
122,306
|
|
Germany
|
|
16,654
|
|
|
|
108,036
|
|
|
|
17,459
|
|
|
|
152,459
|
|
Other
|
|
5,549
|
|
|
|
9,589
|
|
|
|
11,343
|
|
|
|
14,928
|
|
Total Net Sales
|
$
|
393,226
|
|
|
$
|
176,555
|
|
|
$
|
474,413
|
|
|
$
|
293,488
|
|
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 do not give rise to contract assets or liabilities.
12
Note 6. Cash, Cash Equivalents, Debt Securi
ties and other Investments Available for Sale
The following tables summarizes the Company’s cash, cash equivalents and debt securities and other investments available for sale as of June 30, 2018 and December 31, 2017.
As of June 30, 2018
|
|
|
|
Amortized
Cost
|
|
|
Unrealized
Gain
|
|
|
Unrealized (Loss)
|
|
|
Fair
Value
|
|
Cash and cash equivalents
|
|
$
|
88,357,844
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
88,357,844
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate Debt Securities
|
|
$
|
1,499,091
|
|
|
$
|
—
|
|
|
$
|
(1,101
|
)
|
|
$
|
1,497,990
|
|
Commercial Paper
|
|
|
1,982,833
|
|
|
|
—
|
|
|
|
(2,343
|
)
|
|
|
1,980,490
|
|
U.S. Government Sponsored Agencies
|
|
|
2,995,715
|
|
|
|
—
|
|
|
|
(2,265
|
)
|
|
|
2,993,450
|
|
U.S. Treasury Bonds
|
|
|
997,196
|
|
|
|
—
|
|
|
|
(416
|
)
|
|
|
996,780
|
|
Total debt securities and other investments
available for sale
|
|
$
|
7,474,835
|
|
|
$
|
—
|
|
|
$
|
(6,125
|
)
|
|
$
|
7,468,710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash, cash equivalents, debt securities
and other investments available
for sale
|
|
$
|
95,832,679
|
|
|
$
|
—
|
|
|
$
|
(6,125
|
)
|
|
$
|
95,826,554
|
|
As of December 31, 2017
|
|
|
|
Amortized
Cost
|
|
|
Unrealized
Gain
|
|
|
Unrealized (Loss)
|
|
|
Fair
Value
|
|
Cash and cash equivalents
|
|
$
|
13,224,280
|
|
|
$
|
—
|
|
|
$
|
(86
|
)
|
|
$
|
13,224,194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate Debt Securities
|
|
$
|
19,014,590
|
|
|
$
|
923
|
|
|
$
|
(17,827
|
)
|
|
$
|
18,997,686
|
|
Commercial Paper
|
|
|
2,979,367
|
|
|
|
—
|
|
|
|
(1,227
|
)
|
|
|
2,978,140
|
|
U.S. Government Sponsored Agencies
|
|
|
1,496,824
|
|
|
|
—
|
|
|
|
(2,029
|
)
|
|
|
1,494,795
|
|
Certificate of Deposits
|
|
|
480,000
|
|
|
|
—
|
|
|
|
(55
|
)
|
|
|
479,945
|
|
Total debt securities and other investments
available for sale
|
|
$
|
23,970,781
|
|
|
$
|
923
|
|
|
$
|
(21,138
|
)
|
|
$
|
23,950,566
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash, cash equivalents, debt securities
and other investments available for sale
|
|
$
|
37,195,061
|
|
|
$
|
923
|
|
|
$
|
(21,224
|
)
|
|
$
|
37,174,760
|
|
The Company’s debt securities, commercial paper, corporate debt securities and U.S. government sponsored agency securities have the following maturities:
|
Fair Value At
|
|
|
June 30,
|
|
|
December 31,
|
|
|
2018
|
|
|
2017
|
|
Due within one year
|
$
|
7,468,710
|
|
|
$
|
23,950,566
|
|
Due after one year through five years
|
|
—
|
|
|
|
—
|
|
|
$
|
7,468,710
|
|
|
$
|
23,950,566
|
|
13
Note 7. Fair Va
lue 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.
|
A summary of the assets and liabilities carried at fair value in accordance with the hierarchy defined above is as follows:
|
|
|
|
|
|
Fair Value Hierarchy
|
|
June 30, 2018
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
88,357,844
|
|
|
$
|
88,357,844
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Debt Securities and other Investments Available for
Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate Debt Securities
|
|
|
1,497,990
|
|
|
|
1,497,990
|
|
|
|
—
|
|
|
|
—
|
|
Commercial Paper
|
|
|
1,980,490
|
|
|
|
1,980,490
|
|
|
|
—
|
|
|
|
—
|
|
U.S. Government Sponsored Agencies
|
|
|
2,993,450
|
|
|
|
2,993,450
|
|
|
|
—
|
|
|
|
—
|
|
U.S. Treasury Bonds
|
|
|
996,780
|
|
|
|
996,780
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
95,826,554
|
|
|
$
|
95,826,554
|
|
|
$
|
—
|
|
|
$
|
—
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
13,224,194
|
|
|
$
|
13,224,194
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Debt Securities and other Investments Available for
Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate Debt Securities
|
|
|
18,997,686
|
|
|
|
18,997,686
|
|
|
|
—
|
|
|
|
—
|
|
Commercial Paper
|
|
|
2,978,140
|
|
|
|
2,978,140
|
|
|
|
—
|
|
|
|
—
|
|
U.S. Government Sponsored Agencies
|
|
|
1,494,795
|
|
|
|
1,494,795
|
|
|
|
—
|
|
|
|
—
|
|
Certificate of Deposits
|
|
|
479,945
|
|
|
|
479,945
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
37,174,760
|
|
|
$
|
37,174,760
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liabilities
|
|
$
|
2,239,544
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,239,544
|
|
During the periods ended June 30, 2018 and December 31, 2017, the Company has not changed the manner in which it values assets and liabilities that are measured at fair value using Level 3 inputs. The Company recognizes transfers between levels of the fair value hierarchy as of the end of the reporting period. There were no transfers within the hierarchy during the six months ended June 30, 2018 and 2017.
Cash and cash equivalents consisted of cash in bank checking and savings accounts, money market funds and U.S. treasury notes and are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices in active markets.
14
Marketable securities classified as debt securities available for sale consist of investments in cor
porate debt securities, commercial paper, U.S. government sponsored agencies and certificate of deposits. The Company’s marketable securities are valued using quoted prices in active markets and therefore these securities were classified as Level 1.
The warrant liability was recorded at fair value until the initial public offering on June 21, 2018 at which time it was determined that the warrant should be reclassified to equity as the warrant no longer met the criterion to be recognized as a liability. Until June 20, 2018, the Company determined the fair value of the liability by using the probability weighted expected return method and option pricing models. This method of valuation involved using inputs such as the fair value of the Company’s Common Units, unit price volatility, the contractual term of the warrant, risk free interest rates and dividend yields. Due to the nature of these inputs, the valuation of the warrant liability was considered a Level 3 measurement.
As of June 20, 2018 and December 31, 2017, the estimated fair values of the warrant liability were computed using the following assumptions:
|
|
June 20,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Stock price volatility
|
|
67.8%
|
|
|
65.3%
|
|
Risk-free interest rates
|
|
2.68%
|
|
|
1.59%
|
|
Annual dividend yield
|
|
0%
|
|
|
0%
|
|
Expected life (years)
|
|
|
3.09
|
|
|
|
0.65
|
|
A roll-forward of the recurring fair value measurements of the liabilities categorized with Level 3 inputs are as follows:
|
|
Warrant
liabilities
|
|
Opening Balance as of January 1, 2017
|
|
$
|
480,636
|
|
Additions
|
|
|
2,620,681
|
|
Settlements
|
|
—
|
|
Changes in fair value recognized
|
|
|
(861,773
|
)
|
Closing Balance as of December 31, 2017
|
|
|
2,239,544
|
|
Additions
|
|
|
—
|
|
Settlements
|
|
—
|
|
Changes in fair value recognized
|
|
|
1,870,923
|
|
Reclassed to equity
|
|
|
(4,110,467
|
)
|
Closing Balance as of June 30, 2018
|
|
$
|
—
|
|
During the period ended June 30, 2018, the warrant liability increased due to the change in fair value of the warrants and was subsequently reclassed to equity as addressed above.
The carrying amount of the Company’s receivables and payables approximate their fair values due to their short maturities.
Note 8. Inventories
Inventories are stated at the lower of cost or net realizable value. Cost is determined on a first-in first-out basis.
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Raw materials
|
|
$
|
407,637
|
|
|
$
|
116,909
|
|
Work in process
|
|
|
21,277
|
|
|
|
17,115
|
|
Finished goods
|
|
|
323,035
|
|
|
|
193,763
|
|
|
|
$
|
751,949
|
|
|
$
|
327,787
|
|
15
Note 9. Property
and Equipment – Net
Property and equipment, net as of June 30, 2018 and December 31, 2017 consisted of the following:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Machinery and equipment
|
|
$
|
489,499
|
|
|
$
|
452,614
|
|
Furniture and fixture
|
|
|
268,460
|
|
|
|
156,512
|
|
Computer equipment
|
|
|
112,588
|
|
|
|
138,534
|
|
Construction in process
|
|
|
79,684
|
|
|
|
—
|
|
Property and equipment - gross
|
|
|
950,231
|
|
|
|
747,660
|
|
Less accumulated depreciation and amortization
|
|
|
(572,874
|
)
|
|
|
(579,014
|
)
|
Property and equipment - net
|
|
$
|
377,357
|
|
|
$
|
168,646
|
|
During the six months ended June 30, 2018, there was a write-off of $27,204 for fully depreciated assets in the Company’s Bermuda and Australian subsidiaries.
Depreciation and amortization expense for the three months ended June 30, 2018 and 2017 was $10,668 and $8,098, respectively. Depreciation and amortization expense for the six months ended June 30, 2018 and June 30, 2017 were $21,064 and $14,718, respectively.
Note 10. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses as of June 30, 2018 and December 31, 2017 consisted of the following:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Accounts payable
|
|
$
|
1,686,959
|
|
|
$
|
840,383
|
|
Accrued professional fees
|
|
|
2,843,957
|
|
|
|
2,288,020
|
|
Promotional expenses
|
|
|
1,004,859
|
|
|
|
—
|
|
Due to employees
|
|
|
923,698
|
|
|
|
659,333
|
|
Other accrued expenses
|
|
|
426,013
|
|
|
|
92,039
|
|
|
|
$
|
6,885,486
|
|
|
$
|
3,879,775
|
|
Note 11. Net Loss Per Share
Basic earnings/(loss) per share is computed by dividing net income (loss) available to electroCore, Inc. by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing net income available to electroCore, Inc. by the weighted-average number of shares of common stock outstanding adjusted to give effect to potentially dilutive securities. Stock options have not been included in the diluted earnings per share calculation as they have been determined to be anti-dilutive under the treasury stock method. As described in Note 12, Corporate Conversion and Equity, on June 21, 2018, electroCore, Inc. completed a Corporate Conversion as well as its initial public offering to, among other things, provide for a single class of common stock of electroCore Inc., in exchange for the previous Convertible Preferred Units and Common Units of the Company. This conversion changed the relative ownership of electroCore, Inc. such that retroactive application of the conversion to periods prior to the IPO for the purposes of calculating earnings (loss) per share would not be meaningful.
Prior to the Corporate Conversion, the Company’s ownership structure included several different types of LLC interests including preferred stock, common units and Profits Interests (see Note 12, Corporate Conversion and Equity). The Company analyzed the calculation of earnings per unit for periods prior to the Corporate Conversion and determined that it resulted in values that would not be meaningful to the users of these consolidated financial statements. Therefore, earnings per share information has not been presented for periods prior to the Corporate Conversion on June 21, 2018. Additionally, net loss attributable to electroCore, Inc. subsidiaries and affiliate shown below includes only the loss attributable to the period from June 21, 2018 to June 30, 2018. In addition, the basic and diluted weighted average shares outstanding calculation is based on the actual days in which the shares were outstanding from June 21, 2018 to June 30, 2018.
16
The following table sets forth the numerators and denominators used to compute basic and diluted earnings per share of the common stock:
|
For the period
from June 21 to
|
|
|
June 30,
|
|
|
2018
|
|
Numerator – Basic and Diluted
|
|
|
|
Net loss attributable to electroCore, Inc. subsidiaries and affiliate
|
$
|
(6,162,299
|
)
|
Denominator – Basic and Diluted
|
|
|
|
Weighted average shares of common stock outstanding
|
|
29,261,942
|
|
Net loss per common share, Basic and Diluted
|
$
|
(0.21
|
)
|
Note 12. Corporate Conversion and Equity
On June 21, 2018, the Company completed the Corporate Conversion. Pursuant to the certificate of incorporation effected in connection with the Corporate Conversion, the Company’s authorized capital stock consists of 500 million shares of common stock, par value $0.001 per share and 10 million shares of preferred stock, par value $0.001 per share. As of June 30, 2018, 29,450,034 and 0 shares of the common stock and preferred stock, respectively, were issued and outstanding. On June 22, 2018, the common stock began trading on the Nasdaq Global Market and on June 25, 2018 began trading on the Nasdaq Global Select Market under the symbol “ECOR”.
Prior to the
Corporate Conversion of the Company, the Operating Agreement permitted the issuance of four classes of Units - Series A Preferred Units, Series B Preferred Units, Series B-1 Preferred Units and Common Units. Each member was entitled to one vote for each Unit held and the Units of all classes and series voted together as a single class on all matters (on an as converted to Common Unit basis).
Upon the Corporate Conversion, all Units were converted into an aggregate of 23,470,034 shares of our common stock and options to purchase 2,141,748 shares of common stock as follows
:
|
•
|
holders of common units, or Common Units, other than Common Units that were originally issued as “profits interests” (as such term is used for purposes of the Internal Revenue Code), or Profits Interests, received an aggregate of 12,099,280 shares of common stock;
|
|
•
|
holders of Series A Preferred Units received an aggregate of 4,181,856 shares of common stock, which included 241,939 shares of common stock as payment in full of the approximately $3.6 million accrued and unpaid preferred return that was payable in respect of the Series A Preferred Units;
|
|
•
|
holders of Series B Preferred Units received an aggregate of 5,843,668 shares of common stock;
|
|
•
|
holders of Profits Interests received an aggregate of 1,345,230 shares of common stock.
|
|
•
|
holders of Profits Interests who were employees or consultants at the time of the corporate conversion received options to purchase an aggregate of 2,141,748 shares of common stock, with an exercise price of $15.00 which was equal to the initial public offering price.
|
Additionally, upon the conversion, the accumulated deficit of Electrocore LLC, subsidiaries and affiliates was reclassed to additional paid in capital in accordance with SEC SAB Topic 4B.
Series A Preferred Units
The Series A Preferred Units were entitled to a preference on distributions, ahead of the Common Units but behind Series B Preferred Units, in the amount of $54,923,430 plus the Series A Preferred Return (as described below), as of June 20, 2018.
The Series A Preferred Units were entitled to a return in an annual non-compounded amount with respect to each outstanding Series A Preferred Unit equal to the product of the Series A Preferred Return Percentage and the Series A Unreturned Capital Value for each Unit, which accrued to the extent not paid. The Series A Preferred Return Percentage was 4% and could be reduced to 2% if certain requirements were met as outlined in the amended and restated Operating Agreement. Upon an IPO, the payment of the Series A Preferred Return was at the sole discretion of the Board of Managers. As of June 20, 2018, the Series A Preferred Return payable, following the 2017 amendments to the Operating Agreement, upon a public offering of
17
the Company’s common stock was fixed at $3,629,092. This amount was paid with the issuance of 241,939 shares
of common stock upon the IPO.
The Series A Preferred Units were convertible into common stock mandatorily upon the occurrence of an initial public offering as outlined in the amended and restated Operating Agreement, subsequent to an 18:1 stock conversion.
As of June 20, 2018, warrants issued in connection with Series A Preferred Units financing rounds have expired and no new warrants related to Series A Preferred Units were issued in 2018.
As of June 21, 2018, warrants to purchase 221,766, Series A Preferred Units issued in connection with the term loan that remain outstanding were converted to warrants to purchase common stock at an exercise price of $15.30.
Series B Preferred Units
In 2017, the Company entered into a Series B Preferred Unit Purchase Agreement with, among others, CV II, Merck GHI and AIH. Under the terms of the Purchase Agreement, as amended, through December 31, 2017, the Company received cash proceeds of $46,911,300 and converted $26,718,910 of Bridge Notes and related accrued and unpaid interest for an aggregate amount of $73,630,210 (inclusive of amounts mentioned in Note 14 related to conversion of Bridge Notes and related accrued and unpaid interest) through the sale of Series B Preferred Units at an initial closing and several additional closings.
Each Series B Preferred Unit was converted into one share of common stock mandatorily upon the occurrence of the Corporate Conversion as outlined in the amended and restated Operating Agreement, subsequent to an 18:1 stock conversion pursuant to the terms of the plan of conversion for the Corporate Conversion. In connection with all Series B Preferred Unit closings, the Company issued warrants for the purchase of 35,452,084 Common Units at an exercise price of $1.25 per Unit, which expired upon the closing of the IPO. The Company also issued warrants to advisors for the purchase of 2,724,549 common units at an exercise price of $0.70 per Unit. The Company also issued 72,000 warrants to purchase common units with an exercise price of $1.25 per Unit, which expired upon the closing of the IPO. The fair value of these warrants to purchase common units were recorded within additional-paid-in-capital. In connection with the Corporate Conversion, the 2,724,549 warrants issued to advisors were converted to warrants to purchase common stock at an exercise price of $12.60 per share of common stock.
As of June 21, 2018, the Series B warrants that were issued to purchasers of our Bridge Notes were converted to (i) warrants to purchase 429,948 shares of common stock at an exercise price of $12.60 per share (see Note 14) and (ii) the Series B Preferred warrants that were issued to financial advisors were converted to 101,119 warrants to purchase common stock at an exercise price of $12.60 per share
.
Note 13. Income Taxes
There is no provision for income taxes for the six months ended June 30, 2018 as the Company has incurred operating losses since inception. Further, prior to the corporate conversion on June 21, 2018, the Company was a limited liability company in the U.S., which is treated as a partnership for Federal and state income tax purposes. Accordingly, the Company was not subject to U.S. income taxes until its conversion.
The Company has evaluated the available evidence supporting the realization of its deferred tax assets, including the amount and timing of future taxable income, and has determined that it is more likely than not that its net deferred tax assets will not be realized in the U.S. and certain foreign jurisdictions. Due to uncertainties surrounding the realization of the deferred tax assets, the Company maintains a full valuation allowance against substantially all of its net deferred tax assets. When the Company determines that it will be able to realize some portion or all of its deferred tax assets, an adjustment to its valuation allowance on its deferred tax assets would have the effect of increasing net income in the period such determination is made.
As of June 30, 2018, the Company has adopted ASC 740 principles of accounting for uncertain tax positions and has determined that it does not have any uncertain positions that would result in a tax reserve. Accordingly, no interest or penalties related to uncertain tax positions has been accrued. The Company’s policy is to recognize interest and penalties related to uncertain tax positions in income tax expense. The Company is subject to U.S. federal tax authority and U.S. state tax authority examinations for all years with the net operating loss and credit carryforwards.
On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act, or the Act. The Act amends the Internal Revenue Code of 1986, as amended, or the Code, to reduce tax rates and modify policies, credits and
18
deductions for individuals and businesses. For businesses, the Act reduces the corporate tax rate from a maximum of 35% to a flat 21% rate. The rate reduction is effective on January 1, 2018, and thus was effe
ctive for the Company upon its corporate conversion. The Act also changes various domestic provisions beginning in 2018, which the Company has reviewed and factored into its quarterly tax provision as necessary. The overall impact of the Act on the accoun
ts is zero given the history of pass through tax treatment coupled with current period losses.
On December 22, 2017, Staff Accounting Bulletin No. 118, or SAB 118, was issued to address the application of GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Act. In accordance with SAB 118, additional analysis of the law and the impact to the Company will be performed and any impact will be recorded in the respective quarters, within the available measurement period in 2018.
Further to the Act, beginning in 2018 U.S. shareholders are subject to tax on global intangible low-taxed income (GILTI) earned by certain foreign subsidiaries. The FASB Staff Q&A, Topic 740, No. 5,
Accounting for Global Intangible Low-Taxed Income,
states that an entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or provide for the tax expense related to GILTI in the year the tax is incurred. We are still evaluating the effects of the GILTI provisions and have not yet determined our accounting policy. The impact of the policy election is not expected to have a material effect on the amounts reported for the current year.
Note 14. Convertible Bridge Notes
For the six months ended June 30, 2017, the Company issued Bridge Notes aggregating $19,965,692 including warrant coverage.
Since the Bridge Note Warrants entitled the holders to purchase securities in the Qualified Equity Round at the purchase price payable for the related equity securities, the exercise price of the warrants was undetermined at the time of their issuance. Also, because the terms of redemption of the Series B Preferred Units were unknown at the time of their issuance as well as the deemed liquidation terms discussed in Note 12, the warrants were recorded as liabilities. In connection with the Bridge Note closings, at the time of the Qualified Equity Round, the Company issued 7,739,092 Bridge Note Warrants all of which are outstanding as of June 30, 2018. At stated above, these warrants were converted to warrants to purchase common stock at an exercise price of $12.60 and were reclassified to equity upon the determination that they no longer met the criteria to be classified as liabilities.
As of December 31, 2017, all Bridge Notes were converted to Series B Preferred Units, see Note 12, Corporate Conversion and Equity.
Note 15. Stock Based Compensation and Unit‑Based Compensation
The granting of common stock and options to purchase common stock to prior holders of Profits Interests in connection with the corporate conversion is accounted for as a type-1 modification of the old awards. Under the previous LLC structure, in connection with employment and service provider agreements, the Company had awarded grantees Units that constitute profits interests for income tax purposes, subject to certain restrictions defined in each Unit forfeiture agreement. The Company maintained a Unit award account for each of the grantees. Generally, the Units vested 25% on the one-year anniversary of the employment start date or agreement date and the balance ratably per quarter thereafter over an additional three-year period. After the restrictions lapsed, the grantees became fully vested in such Units. In 2018, the Company granted 19,447,218 Profits Interests to its employees and had forfeitures of 110,354 Profits Interests.
In connection with the Corporate Conversion, the holders of 62,765,605 Common Units that were issued as "Profits Interests" that were outstanding immediately prior to the IPO were converted, in the aggregate, into (i) 1,345,230 shares of common stock, and (ii) with respect to Profits Interests that were held by current employees and consultants at the time of the conversion, options to purchase 2,141,748 shares of electroCore, Inc. common stock at an initial exercise price of $15.00 per share.
The number of shares of common stock and the number of options issued for the outstanding Profits Interests was determined based upon the appreciation in value of the company after the date of grant of the applicable Profits Interests through the completion of the IPO.
19
The number of shares of common stock issued for each Profits Interest (the "Conversion Shares") was equal to (x) the percentage of the capital account balance associated with such Profits Interest as it related to the total value of the com
pany as the IPO pre-money valuation (the "PI Capital Account Percentage"), divided by (y) the percentage interest in the company represented by such Profits Interest on a Unit basis based on the total outstanding Units in the company immediately prior to t
he IPO (the "PI Unit Percentage"), multiplied by (z) the total number of Units represented by the applicable Profits Interest. Of the shares of common stock issued for the Profits Interests, 1,157,138 vested immediately and 188,092 are subject to vesting
of 25% on January 1, 2019 and the balance over the next succeeding 10 calendar quarters.
The number of options issued in respect of each Profits Interest (the "Conversion Options") was equal to (i) the total number of Units represented by such Profits Interest prior to the corporate conversion minus (ii) the Conversion Shares issued in respect of such Profits Interest. Of the options issued for the Profit Interests, 228,954 will vest 100% on January 1, 2019 and 1,912,797 will vest 25% on January 1, 2019 and the balance will vest over the next succeeding 14 calendar quarters. The options have an exercise price of $15.00.
Stock compensation expense for the Profits Interests not recognized prior to the conversion was $2.8 million. This expense was allocated to the common stock and options to purchase common stock awards based on their relative fair value on the date of the IPO. For the common stock awards that vest at the time of issuance, the Company recognized $1.2 million immediately. For the common stock awards and the options to purchase common stock that did not vest immediately, the Company will recognize $0.2 million and $1.5 million, respectively, using graded vesting over their respective vesting periods.
The incremental stock compensation expense to be recognized was $7.8 million. This expense was allocated to the common stock and the options to purchase common stock based on their fair value on the date of the awards. For the common stock that vested at the time of issuance, the Company recognized $3.8 million. For the common stock awards and the options to purchase common stock that did not vest immediately, the Company will recognize $0.3 million and $3.7 million, respectively, over their respective vesting periods.
For the three and six months ended June 30, 2018, stock compensation expense reported as a component of selling, general and administrative was $2.7 million and $2.8 million, respectively. For the same period, stock compensation expense reported as a component of research and development expense was $2.3 million and $2.4 million, respectively. For both the three and six months ended June 30, 2018, stock compensation expense reported as a component of cost of goods sold was $0.2 million and included in inventory was $0.2 million.
The Company utilized the Black Scholes option pricing model for estimating the fair value of the options to purchase common stock. The fair value of the options was estimated on the date of the grant.
The assumptions for the determination of the fair value of the options issued upon the corporate conversion are provided in the following table:
|
|
Options vesting on
January 1, 2019
|
|
|
Options vesting 25%
on January 1, 2019,
remaining vesting over
the next 14 quarters
|
|
Valuation assumptions:
|
|
|
|
|
|
|
|
|
Expected dividend yield
|
|
0%
|
|
|
0%
|
|
Expected volatility
|
|
74.80%
|
|
|
74.30%
|
|
Expected term (years)
|
|
|
5.25
|
|
|
|
6.00
|
|
Risk-free interest rate
|
|
2.77%
|
|
|
2.82%
|
|
The risk-free interest rate is the average U.S. Treasury rate with a term that most closely resembles the expected life of the award. The expected term of the award was calculated using the simplified method. For volatility, the Company uses comparable public companies as a basis for its expected volatility. The Company does not pay regular dividends on its common stock and does not anticipate paying any dividends in the foreseeable future.
Note 16. Variable Interest Entity
As discussed in Note 1, electroCore is the primary beneficiary of electroCore (Aust) Pty Limited. electroCore has contributed certain intellectual property rights, all rights to distribute, market and sell specified products in Australia and New Zealand,
20
a
nd other rights outlined in the shareholders’ deed of electroCore (Aust) Pty Limited in return for 50% of the shares of such entity. In addition, electroCore can also appoint two of the four directors and can exercise significant influence. This along with
the fact that electroCore is electroCore (Aust) Pty Limited’s only supplier causes electroCore, for accounting purposes, to be the primary beneficiary of electroCore (Aust) Pty Limited. The activities related to electroCore (Aust) Pty Limited are not mate
rial to the consolidated financial statements.
Note 17. Commitments and Contingencies
The Company leases office space under operating leases through April 2022. For the three and six months ended June 30, 2018, rental expense related to the leases for each period was $125,102 and $247,920, respectively.
From time to time, the Company may become involved in various legal proceedings, including those that may arise in the ordinary course of business. Although the outcomes of these legal proceedings cannot be predicted with certainty, other than as set forth below, the Company is not subject to any material legal proceedings.
In May 2018, a former financial advisor to the Company filed a complaint against the Company seeking additional compensation in connection with the Company's 2017 Series B Preferred Unit financing (See Note 12). The Company believes that it has substantial legal and factual defenses to the claims in such lawsuit and intends to vigorously defend the case. Based on our best estimate of this matter, we have established a legal reserve relative to this matter. The Company does not believe resolution of this matter would have a material adverse effect on its financial position or operations.
21