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, 2020

 

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 13, 2020, the registrant had 35,851,990 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, 2020 (unaudited) and December 31, 2019

 

 

4

 

Consolidated Statements of Operations for the Three Months Ended March 31, 2020 and 2019 (Unaudited)

 

 

5

 

Consolidated Statements of Comprehensive Loss for the Three Months Ended March 31, 2020 and 2019 (Unaudited)

 

 

6

 

Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2020 and 2019 (Unaudited)

 

 

7

 

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2020 and 2019 (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

 

 

30

Item 1A.

Risk Factors

 

 

31

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

 

79

Item 3.

Defaults Upon Senior Securities

 

 

80

Item 4.

Mine Safety Disclosures

 

 

80

Item 5.

Other Information

 

 

80

Item 6.

Exhibits

 

 

81

 

Signatures

 

 

82

 

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” refer to electroCore, Inc. a Delaware corporation, and its subsidiaries and affiliate.

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, or 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, (i) risks and uncertainties related to the impact of the COVID-19 pandemic on general political and economic conditions, including as a result of efforts by governmental authorities to mitigate the COVID-19 pandemic, such as travel bans, shelter in place orders and third-party business closures and resource allocations, manufacturing and supply chains and patient access to commercial products; our ability to execute our business continuity as well as our operational and budget plans in light of the COVID-19 pandemic, and (ii) those included in our Annual Report on Form 10-K dated December 31, 2019, filed with the SEC described under “Risk Factors” and in “Risk Factors” and “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,

 

 

 

2020

 

 

2019

 

 

 

(Unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

15,620,496

 

 

$

13,563,791

 

Marketable securities

 

 

 

 

 

10,495,350

 

Accounts receivable, net

 

 

272,044

 

 

 

496,140

 

Inventories, net

 

 

664,371

 

 

 

890,992

 

Prepaid expenses and other current assets

 

 

838,735

 

 

 

1,087,111

 

Total current assets

 

 

17,395,646

 

 

 

26,533,384

 

Inventories, non-current

 

 

6,247,439

 

 

 

6,020,180

 

Property and equipment, net

 

 

316,706

 

 

 

345,236

 

Operating lease right of use assets

 

 

1,336,508

 

 

 

1,430,641

 

Other assets

 

 

1,067,965

 

 

 

1,132,238

 

Total assets

 

$

26,364,264

 

 

$

35,461,679

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

3,646,414

 

 

$

5,208,979

 

Accrued expenses

 

 

3,186,324

 

 

 

3,337,379

 

Note payable

 

 

 

 

 

111,878

 

Current portion of operating lease liabilities

 

 

514,917

 

 

 

486,445

 

Total current liabilities

 

 

7,347,655

 

 

 

9,144,681

 

Noncurrent liabilities:

 

 

 

 

 

 

 

 

Operating lease liabilities

 

 

1,282,827

 

 

 

1,419,880

 

Total liabilities

 

 

8,630,482

 

 

 

10,564,561

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

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

   March 31, 2020 and December 31, 2019; 0 issued and outstanding

   at March 31, 2020 and December 31, 2019

 

 

 

 

 

 

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

   March 31, 2020 and December 31, 2019; 30,421,427 issued and outstanding

   at March 31, 2020 and 29,835,183 shares issued and outstanding at

   December 31, 2019

 

 

30,422

 

 

 

29,835

 

Additional paid-in capital

 

 

108,496,344

 

 

 

107,752,066

 

Accumulated deficit

 

 

(91,438,447

)

 

 

(83,479,098

)

Accumulated other comprehensive income/(loss)

 

 

9,853

 

 

 

(41,295

)

Total stockholders' equity

 

 

17,098,172

 

 

 

24,261,508

 

Noncontrolling interest

 

 

635,610

 

 

 

635,610

 

Total equity

 

 

17,733,782

 

 

 

24,897,118

 

Total liabilities and stockholders' equity

 

$

26,364,264

 

 

$

35,461,679

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to unaudited consolidated financial statements.

4


 

ELECTROCORE, INC., SUBSIDIARIES AND AFFILIATE

Consolidated Statements of Operations

(Unaudited)

 

 

 

Three months ended

March 31,

 

 

 

2020

 

 

2019

 

Net sales

 

$

733,771

 

 

$

409,601

 

Cost of goods sold

 

 

298,115

 

 

 

157,791

 

Gross profit

 

 

435,656

 

 

 

251,810

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

 

1,523,114

 

 

 

3,459,823

 

Selling, general and administrative

 

 

6,560,726

 

 

 

11,002,999

 

Restructuring and other severance related charges

 

 

365,000

 

 

 

 

Total operating expenses

 

 

8,448,840

 

 

 

14,462,822

 

Loss from operations

 

 

(8,013,184

)

 

 

(14,211,012

)

Other (income)/expense

 

 

 

 

 

 

 

 

Interest and other income, net

 

 

(62,976

)

 

 

(366,174

)

Other expense

 

 

9,141

 

 

 

16,692

 

Total other (income)/expense

 

 

(53,835

)

 

 

(349,482

)

Loss before income taxes

 

 

(7,959,349

)

 

 

(13,861,530

)

Provision for income taxes

 

 

 

 

 

 

Net loss from operations

 

$

(7,959,349

)

 

$

(13,861,530

)

Net loss per share of common stock - Basic and Diluted

   (see Note 14)

 

$

(0.27

)

 

$

(0.47

)

Weighted average common shares outstanding -

   Basic and Diluted (see Note 14)

 

 

29,774,226

 

 

 

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,

 

 

 

 

2020

 

 

2019

 

 

Net loss from operations

 

$

(7,959,349

)

 

$

(13,861,530

)

 

   Other comprehensive income:

 

 

 

 

 

 

 

 

 

   Foreign currency translation adjustment

 

 

45,322

 

 

 

43,575

 

 

   Unrealized gains on securities, net of taxes as applicable

 

 

5,826

 

 

 

40,138

 

 

   Other comprehensive income

 

 

51,148

 

 

 

83,713

 

 

Comprehensive loss

 

$

(7,908,201

)

 

$

(13,777,817

)

 

 

See accompanying notes to unaudited consolidated financial statements.

6


 

 

 

ELECTROCORE, INC., SUBSIDIARIES AND AFFILIATE

Consolidated Statements of Changes in Stockholders’ Equity

(Unaudited)

 

 

 

Common

 

 

 

Additional

 

 

 

 

 

 

Accumulated

other

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

Stock

 

 

 

paid-in

 

 

Accumulated

 

 

comprehensive

 

 

stockholders'

 

 

Noncontrolling

 

 

Total

 

 

 

Shares

 

 

Amount

 

 

 

capital

 

 

deficit

 

 

income

 

 

equity

 

 

interest

 

 

equity

 

Balances 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

 

 

 

 

 

 

 

 

 

 

 

 

(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

 

Issuance of stock related to

employee compensation plans, net of forfeitures

 

 

183,205

 

 

 

183

 

 

 

 

(183

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock based compensation

 

 

 

 

 

 

 

 

 

744,032

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances as of December 31, 2019

 

 

29,835,183

 

 

$

29,835

 

 

 

$

107,752,066

 

 

$

(83,479,098

)

 

$

(41,295

)

 

$

24,261,508

 

 

$

635,610

 

 

$

24,897,118

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

(7,959,349

)

 

 

 

 

 

(7,959,349

)

 

 

 

 

 

(7,959,349

)

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

51,148

 

 

 

51,148

 

 

 

 

 

 

51,148

 

Equity financing commitment fee*

 

 

461,676

 

 

 

462

 

 

 

 

(462

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of stock related to

    employee compensation plans, net of forfeitures

 

 

124,568

 

 

 

125

 

 

 

 

(125

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share based compensation

 

 

 

 

 

 

 

 

 

744,865

 

 

 

 

 

 

 

 

 

744,865

 

 

 

 

 

 

744,865

 

Balances as of March 31, 2020

 

 

30,421,427

 

 

$

30,422

 

 

 

$

108,496,344

 

 

$

(91,438,447

)

 

$

9,853

 

 

$

17,098,172

 

 

$

635,610

 

 

$

17,733,782

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

* Reflects commitment shares issued in accordance with the Company's equity facility purchase agreement with Lincoln Park Capital. For additional information see Note 13. Stock Purchase Agreement

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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,

 

 

 

2020

 

 

2019

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss from operations

 

$

(7,959,349

)

 

$

(13,861,530

)

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

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

744,865

 

 

 

744,032

 

Depreciation and amortization

 

 

97,419

 

 

 

25,522

 

Amortization of marketable securities discount

 

 

1,176

 

 

 

(200,302

)

Cloud computing arrangement implementation costs

 

 

 

 

 

(618,044

)

Net noncash lease expense

 

 

(21,581

)

 

 

117,579

 

Noncash portion of litigation settlement

 

 

 

 

 

16,692

 

Other

 

 

10,937

 

 

 

43,343

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

224,096

 

 

 

(20,736

)

Inventories

 

 

(638

)

 

 

(1,639,862

)

Prepaid expenses and other current assets

 

 

238,376

 

 

 

830,406

 

Accounts payable

 

 

(1,562,615

)

 

 

(719,463

)

Accrued expense and other current liabilities

 

 

(151,055

)

 

 

(1,117,793

)

Net cash used in operating activities

 

 

(8,378,369

)

 

 

(16,400,156

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchase of marketable securities

 

 

 

 

 

(12,110,420

)

Proceeds from maturities of marketable securities

 

 

10,500,000

 

 

 

27,901,000

 

Purchases of property and equipment

 

 

 

 

 

(37,318

)

Net cash provided by investing activities

 

 

10,500,000

 

 

 

15,753,262

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Repayments of note payable

 

 

(111,878

)

 

 

 

Net cash used in financing activities

 

 

(111,878

)

 

 

-

 

Effect of changes in exchange rates on cash and cash equivalents

 

 

46,952

 

 

 

396

 

Net increase/(decrease) in cash and cash equivalents

 

 

2,056,705

 

 

 

(646,498

)

Cash and cash equivalents – beginning of period

 

 

13,563,791

 

 

 

7,600,284

 

Cash and cash equivalents – end of period

 

$

15,620,496

 

 

$

6,953,786

 

 

 

 

 

 

 

 

 

 

Supplemental schedule of noncash activity:

 

 

 

 

 

 

 

 

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 unaudited consolidated financial statements.

 

8


 

ELECTROCORE, INC., SUBSIDIARIES AND AFFILIATE

Notes to Consolidated Financial Statements

(Unaudited)

Note 1. The Company

electroCore, Inc. (“electroCore” or the “Company”) is a medical device company, engaged in the commercialization and development of a range of patient administered non-invasive Vagus Nerve Stimulation (“nVNS”) therapies. electroCore was founded in 2005 and its focus currently is on primary headache conditions (migraine and cluster headache).

electroCore, headquartered in New Jersey, has two wholly owned subsidiaries: electroCore Germany GmbH, and electroCore UK Ltd. Effective April 30, 2020, the Company has ceased its operations in Germany. In addition, an affiliate, electroCore (Aust) Pty Limited, or electroCore Australia, is subject to electroCore’s control on a basis other than voting interests and is a variable interest entity, or VIE, for which electroCore is the primary beneficiary.

Note 2.  Summary of Significant Accounting Policies

(a)

Basis of Presentation

The accompanying consolidated financial statements were prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) and with instructions to Form 10-Q and Article 10 of Regulation S-X under the Securities Exchange Act of 1934. In the opinion of management, the Company has made all necessary adjustments, which include normal recurring adjustments necessary for a fair presentation of the Company’s consolidated financial position and results of operations for the interim periods presented. Certain information and disclosures normally included in the annual consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes for the year ended December 31, 2019 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 30, 2020. The results for the three months ended March 31, 2020 are not necessarily indicative of the results to be expected for a full year, any other interim periods or any future year or period.

(b)

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of electroCore and its wholly owned subsidiaries. electroCore Australia, 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.

(c)

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, trade credits, rebates, co-payment assistance and sales returns; valuation of inventory, property and equipment, stock compensation, and contingencies.

(d)

Credit Losses on Financial Instruments

In June 2016, the FASB issued guidance on the measurement of credit losses which requires measurement and recognition of expected credit losses for financial assets, including trade receivables held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The method to determine a loss is different from the existing guidance, which requires a credit loss to be recognized when it is probable. The guidance is effective beginning January 1, 2020. The Company adopted this guidance and determined the impact was immaterial on the consolidated to the financial statements.

9


 

(e)

Fair Value Measurement

In August 2018, the FASB issued guidance which modifies the disclosure requirements for fair value measurements. The guidance is effective for the year ended December 31, 2020. The Company adopted this guidance which was properly reflected in the consolidated financial statements. There were no material changes to the prior disclosure.

(f)

Recent Accounting Pronouncements Not Yet Adopted

In December 2019, the FASB issued an update to simplify the accounting for income taxes and improve consistent application by clarifying or amending existing guidance. This guidance is effective for the year ended December 31, 2021. The Company does not expect this guidance to have a material impact on its consolidated financial statements upon adoption.

Note 3. Risks and Uncertainties

Liquidity Risks

The Company is subject to risks common to emerging medical device companies, including uncertainties related to commercialization of products and failing to secure additional funding.

The Company has experienced significant net losses, and it expects to continue to incur losses for the near future as it operates its sales and marketing infrastructure, and works to increase market acceptance of its gammaCore therapy for the acute treatment of episodic cluster headache, or eCH, the prevention of cluster headache, and the preventive and acute treatment of migraine. The Company has never been profitable and has incurred net losses in each year since its inception.

The Company incurred net losses of $8.0 million and $13.9 million for the three months ended March 31, 2020 and March 31, 2019, respectively The Company incurred net losses of $45.1 million and $55.8 million for the years ended December 31, 2019 and 2018, respectively. As of March 31, 2020, its accumulated deficit was $91.4 million.

On March 27, 2020, the Company and Lincoln Park Capital Fund, LLC, or Lincoln Park, entered into an equity facility purchase agreement pursuant to which the Company has the right to sell to Lincoln Park shares of common stock having an aggregate value of up to $25,000,000, subject to certain significant limitations and conditions set forth in the purchase agreement.

In April 2020, the Company received aggregate proceeds of approximately $5.0 million from sales of common stock to Lincoln Park and a private placement transaction to certain affiliates and existing shareholders of the Company, including some members of the Company’s Board of Directors.

In May 2020, the Company entered into a loan for approximately $1.4 million under the Paycheck Protection Program (“PPP”) under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). Under the terms of the CARES Act, PPP loan recipients can be granted forgiveness for all or a portion of the loan granted under the PPP, with such forgiveness to be determined, subject to limitations, based on the use of the loan proceeds for payment of certain expenses and loan recipients maintaining their payroll levels over certain required thresholds under the PPP. The terms of any forgiveness also may be subject to further requirements in any regulations and guidelines the Small Business Administration (“SBA”) may adopt. No assurance can be provided that the Company will obtain forgiveness of the Note in whole or in part. Official guidance and interpretations of the requirements of the program have been limited and have been changing over time. Despite the Company’s good-faith belief that it properly satisfied all eligibility requirements for the PPP loan, there has been increasing scrutiny of public companies that received loans, and there can be no assurance that the Company will not become subject to regulatory or other scrutiny, including a request or requirement for re-payment of some or all of the loan.

In May 2020, the Company received proceeds of approximately $1.2 million from a sale of state tax NOLs under the New Jersey Technology Business Tax Certificate Transfer (NOL) Program.

10


 

The Company’s expected cash requirements for 2020 and beyond are based on the commercial success of its products and its ability to reduce operating expenses. There are significant risks and uncertainties as to its ability to achieve these operating results, including as a result of the adverse impact on its business from the COVID-19 pandemic. Due to these risks and uncertainties, the Company may need to reduce its activities significantly more than in its current operating plan and cash flow projections assume in order to fund its operations beyond one year of the date these financial statements are issued. There can be no assurance that the Company will have sufficient cash flow and liquidity to fund its planned activities, which could force it to significantly reduce or curtail our activities and, ultimately, potentially cease operations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.

Even if the Company is not required to curtail its activities sooner, its  ability to execute its operating plan beyond the first quarter of  2021 depends on its ability to increase revenue, reduce operating expenses and obtain additional funding through the sale of equity and or debt securities, a strategic transaction or otherwise. There is no assurance that the Company will generate sufficient funding through its operating results or sale of securities, raising substantial doubt about the Company’s ability to continue as a going concern within one year of the date these financial statements are issued. The accompanying financial statements do not include any adjustment that might result from the outcome of this uncertainty.

Concentration of Revenue Risks

The Company earns a significant amount of its revenue (i) in the U.S. from the Department of Veterans Affairs and Department of Defense pursuant to its qualifying contract under the Federal Supply Schedule and open market sales to individual Department of Veterans Affairs facilities and (ii) in the United Kingdom from the National Health Service. Net sales from these two channels represented 95% and 30% of the Company’s net sales for the three months ended March 31, 2020 and 2019, respectively.

Foreign Currency Exchange Risks

The Company has foreign currency exchange risk related to revenue and operating expenses in currencies other than the local currencies in which it operates. 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.

COVID-19 Risks and Uncertainties

The Company is monitoring the impact of the COVID-19 pandemic on all aspects of its business and geographies, including how it will impact business partners. While the Company began to experience disruptions during the three months ended March 31, 2020 from the COVID-19 pandemic, it is unable to predict the full impact that the COVID-19 pandemic may have on its financial condition, results of operations and cash flows due to numerous uncertainties. These uncertainties include the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact and the direct and indirect economic effects of the pandemic and containment measures, among others. The outbreak of COVID-19 in many countries, including the United States, has significantly adversely impacted global economic activity and has contributed to significant volatility and negative pressure in financial markets.

In addition, because the COVID-19 pandemic affected, among other things, our access to prescribing physicians and their access to headache patients, on March 23, 2020 we suspended our earlier full-year revenue guidance until we could better understand the trajectory of our business, as well as announcing a reduction in our activities, and adjusting our cash runway expectations in response to the potential adverse impact cause by the COVID-19 pandemic. Compared to our earlier expectations, we believe that our results for the quarter ended March 31, 2020 reflect a negative impact from, among other things, the global pandemic. Moreover, our expectations for the remainder of 2020 have also been adversely affected by both the uncertainty and potential negative impact of the global pandemic, which we believe may also have had an adverse effect on our access to debt and equity capital markets. Depending upon the duration and severity of the pandemic, the continuing effect on our results and outlook over the long term remains somewhat uncertain.  

11


 

Note 4. Revenue Recognition

Geographical Net Sales

The following table presents net sales disaggregated by geographic area:  

 

 

For the three months ended

March 31,

 

 

 

2020

 

 

2019

 

 

Geographic Market

 

 

 

 

 

 

 

 

United States

$

457,559

 

 

$

276,465

 

 

United Kingdom

 

245,466

 

 

 

90,584

 

 

Germany

 

30,746

 

 

 

35,836

 

 

Other

 

-

 

 

 

6,716

 

 

Total Net Sales

$

733,771

 

 

$

409,601

 

 

 

Performance Obligations

Revenue, net of distribution discounts, vouchers, rebates, returns, and co-payment assistance is solely generated from the sales of gammaCore products. 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 a 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, rebates, and co-payment assistance. The per-unit price is based on the Company’s established wholesale acquisition cost less a contractually agreed upon distributor discount with the customer.

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

Agreed upon payment terms with customers are within 120 days of shipment. Accordingly, contracts with customers do not include a significant financing component.

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 Company’s contracts with customers did not give rise to contract assets or liabilities during the three months ended March 31, 2020 and 2019.

12


 

Note 5.  Cash, Cash Equivalents and Marketable Securities

The following tables summarize the Company’s cash, cash equivalents and marketable securities as of March 31, 2020 and December 31, 2019.

 

As of March 31, 2020

 

 

 

Amortized

Cost

 

 

Unrealized

Gain

 

 

Unrealized (Loss)

 

 

Fair

Value

 

Cash and cash equivalents

 

$

15,614,320

 

 

$

6,176

 

 

$

 

 

$

15,620,496

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2019

 

 

 

Amortized

Cost

 

 

Unrealized

Gain

 

 

Unrealized (Loss)

 

 

Fair

Value

 

Cash and cash equivalents

 

$

13,564,252

 

 

$

 

 

$

(461

)

 

$

13,563,791

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury Bonds

 

$

10,494,539

 

 

$

811

 

 

$

-

 

 

$

10,495,350

 

Total marketable securities

 

$

10,494,539

 

 

$

811

 

 

$

-

 

 

$

10,495,350

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total cash, cash equivalents, and marketable

   securities

 

$

24,058,791

 

 

$

811

 

 

$

(461

)

 

$

24,059,141

 

 

Note 6.  Fair Value Measurements

Financial assets and liabilities carried at fair value are classified and disclosed in one of the following three levels of the fair value hierarchy:

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

 

March 31, 2020

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

15,620,496

 

 

$

15,620,496

 

 

$

 

 

$

 

Total

 

$

15,620,496

 

 

$

15,620,496

 

 

$

 

 

$

 

 

December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

13,563,791

 

 

$

13,563,791

 

 

$

 

 

$

 

Marketable Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasury bonds

 

 

10,495,350

 

 

 

10,495,350

 

 

 

 

 

 

 

Total

 

$

24,059,141

 

 

$

24,059,141

 

 

$

 

 

$

 

 

13


 

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 three months ended March 31, 2020 and year ended December 31, 2019. The carrying amount of the Company’s receivables and payables approximate their fair values due to their short maturities.

Note 7.  Inventories

As of March 31, 2020 and December 31, 2019, inventories consisted of the following:  

 

 

 

March 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Raw materials

 

$

1,984,532

 

 

$

1,065,345

 

Work in process

 

 

4,582,175

 

 

 

5,314,763

 

Finished goods

 

 

345,103

 

 

 

531,064

 

Total inventory

 

 

6,911,810

 

 

 

6,911,172

 

Less: noncurrent

 

 

(6,247,439

)

 

 

(6,020,180

)

Total - current

 

$

664,371

 

 

$

890,992

 

 

As of March 31, 2020 and December 31, 2019, the Company’s reserves for obsolete inventory totaled $287,544. The Company records charges for obsolete inventory in cost of goods sold. Noncurrent inventory is comprised of approximately $1.8 million of raw materials and $4.4 million of work in process.

Note 8.  Property and Equipment – Net

Property and equipment, net, as of March 31, 2020 and December 31, 2019 consisted of the following:

 

 

 

March 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Machinery and equipment

 

$

393,154

 

 

$

393,154

 

Furniture and fixture

 

 

309,190

 

 

 

310,820

 

Computer equipment

 

 

20,783

 

 

 

20,783

 

Leasehold Improvements

 

 

8,880

 

 

 

8,880

 

Property and equipment - gross

 

 

732,007

 

 

 

733,637

 

Less accumulated depreciation and amortization

 

 

(415,301

)

 

 

(388,401

)

Property and equipment - net

 

$

316,706

 

 

$

345,236

 

 

Property and equipment depreciation and amortization expense for the three months ended March 31, 2020 and 2019 was $26,900 and $25,522, respectively.

Note 9.  Leases

For the three months ended March 31, 2020 and 2019, the Company recognized lease expense of $119,650 and $199,654, respectively. This expense does not include non-lease components associated with the lease agreements as the Company elected not to include such charges as part of the lease expense.

The tables below provide the details of the right of use assets and lease liabilities:

14


 

Supplemental Balance Sheet Information for Operating Leases

 

 

 

March 31, 2020

 

 

December 31, 2019

 

Operating leases:

 

 

 

 

 

 

 

 

Operating lease right of use assets

 

$

1,336,508

 

 

$

1,430,641

 

Operating lease liabilities:

 

 

 

 

 

 

 

 

Current portion of operating lease liabilities

 

 

514,917

 

 

 

486,445

 

Noncurrent operating lease liabilities

 

 

1,282,827

 

 

 

1,419,880

 

Total operating lease liabilities

 

$

1,797,744

 

 

$

1,906,325

 

Weighted average remaining lease term (in years)

 

 

5.8

 

 

 

5.9

 

Weighted average discount rate

 

 

13.75

%

 

 

13.75

%

 

Supplemental Statement of Cash Flows Information for Operating Leases

 

 

 

Three months ended

 

 

 

March 31, 2020

 

 

March 31, 2019

 

Noncash lease expense

 

$

87,000

 

 

$

70,315

 

Change in operating lease liabilities

 

$

(108,581

)

 

$

47,264

 

 

Future minimum lease payments under non-cancellable operating leases as of March 31, 2020:

 

Remainder of 2020

 

$

487,694

 

2021

 

 

743,818

 

2022

 

 

337,254

 

2023

 

 

142,892

 

2024 and thereafter