electroCore Inc

Notes to Condensed Consolidated Financial Statements

Note 1. The Company

electroCore, Inc. and its subsidiaries (“electroCore” or the “Company”) is a commercial stage bioelectronic medicine and wellness company dedicated to improving health through its non-invasive vagus nerve stimulation (“nVNS”) technology platform. The Company’s focus is the commercialization of medical devices for the management and treatment of certain medical conditions and consumer product offerings utilizing nVNS to promote general wellness and human performance in the United States and select overseas markets.

electroCore, headquartered in Rockaway, NJ, hastwo wholly owned subsidiaries: electroCore UK Ltd and electroCore Germany GmbH. The Company has paused operations in Germany, with sales into the country and the rest of Europe being managed by electroCore UK Ltd.

Note 2. Summary of Significant Accounting Policies

The accompanying condensed consolidated financial statements were prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and with instructions to Form 10-Q and Article 10 of Regulation S-X under the Securities Exchange Act of 1934, as amended. 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 condensed 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 condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes for the year ended December 31, 2023, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 13, 2024. The results for thethree and nine months ended September 30, 2024, are not necessarily indicative of the results to be expected for a full year, any other interim periods or any future year or period.

The accompanying condensed consolidated financial statements include the accounts of electroCore and its wholly owned subsidiaries. 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 the condensed 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 sales returns, valuation of inventory, estimated useful life of licensed products, stock compensation, and contingencies.

The following table provides a reconciliation of cash, cash equivalents and restricted cash to the balance reflected on the Condensed Consolidated Statement of Cash Flows at September 30, 2024 and 2023:

As of September 30, 2024, cash equivalents represented funds held in an interest-bearing demand deposit account, U.S. treasury bills, and a money market account.

The Company's restricted cash consists of cash that the Company is contractually obligated to maintain in accordance with the terms of its corporate credit card arrangement with Citibank, N.A. established in April 2022.

Marketable securities are carried at fair value, with unrealized gains and losses reported as accumulated other comprehensive income, except for losses from impairments which are determined to be other than temporary. Realized gains and losses and declines in value judged to be other-than-temporary are included in the determination of net loss and are included in interest and other income net. Fair values are based on quoted market prices at the reporting date. Interest and dividends on available-for-sale securities are included in Interest and other income. As of September 30, 2024, marketable securities amounted to $8.0 million and consist of U.S. treasury bills. The Company heldno marketable securities at December 31, 2023.

The Company licenses a portion of its devices through its cash pay channels. The cost of these licensed devices is capitalized and included in Other Assets in the accompanying Condensed Consolidated Balance Sheets at September 30, 2024 and December 31, 2023, and is being recognized as cost of goods sold on the straight-line method over the estimated 12-36 month useful life of the devices. If certain licensed devices are returned and no longer meet quality specifications or the carrying amount of certain licensed devices are no longer deemed to be recoverable, the Company records a charge to cost of goods sold to write down such licensed devices tozero. The net book value of these licensed devices at September 30, 2024 and December 31, 2023 was $312,000 and $494,000, respectively. Changes in the value of these licensed devices in Other Assets are captured on the Statement of Cash Flows under the captions inventories and inventory reserve charge.

In November 2023, the FASB issued Accounting Standards Update (ASU) No.2023-07, Segment Reporting (Topic 280), Improvements to Reportable Segment Disclosures which will require companies to disclose significant segment expenses that are regularly provided to the chief operating decision maker (“CODM”). The pronouncement is effective for annual filings for the year ended December 31, 2024. The Company is still assessing the impact of the adoption of this standard on its results of operations, financial position or cash flows.

In December 2023, the FASB issued Accounting Standards Update (ASU) No.2023-09,Income Taxes (Topic 740),Improvements to Income Tax Disclosures which will require companies to make additional income tax disclosures. The pronouncement is effective for annual filings for the year ended December 31, 2025. The*** ***Company is still assessing the impact of the adoption of this standard but does not expect it to have a material impact on its results of operations, financial position or cash flows.

Note 3. Liquidity, Significant Risks and Uncertainties

Liquidity

The Company has experienced significant net losses, and it expects to continue to incur net losses for the near future as it works to increase market acceptance of its gammaCore therapy and general wellness and human performance products. The Company has never been profitable and has incurred net losses and negative cash used in operations each year since its inception. The Company incurred net losses of $8.7 million and $14.8 million and used cash in its operations of $5.7 million and $11.5 million for thenine months ended September 30, 2024 and 2023, respectively. These conditions have raised substantial doubt about the Company’s ability to continue as a going concern.

The Company has historically funded its operations from the sale of its securities. During thenine months ended September 30, 2024, the Company received net proceeds of approximately $9.0 million from such sales and as of September 30, 2024, the Company’s cash, cash equivalents and marketable securities totaled $13.2 million (“Cash Position”).

Based on its current assessment, the Company believes its Cash Position will enable it to fund its operating expenses and capital expenditure requirements, as currently planned, for at least the next 12 months from the date the accompanying financial statements are issued. The Company therefore believes that the previously disclosed substantial doubt about its ability to continue as a going concern is alleviated. There remain significant risks and uncertainties regarding the Company's business, financial condition and results of operations. The Company’s future capital requirements are difficult to forecast and will depend on many factors that are out of its control. If the Company is unable to achieve its planned operating results or maintain sufficient financial resources, including through potential positive cash flow from operations or supplemental access to third-party debt, equity or hybrid capital, its business, financial condition and results of operations may be materially and adversely affected.

Concentration of Revenue Risks

The Company earns a significant amount of its revenue in the United States from the VA/DoD pursuant to its qualifying contract under the Federal Supply Schedule, or FSS, and open market sales to individual VA facilities. For the three months ended September 30, 2024 and 2023, the VA/DoD accounted for 72.9% and 60.7% of net sales, respectively. For thenine months ended September 30, 2024 and 2023, the VA/DoD accounted for 72.9% and 60.2% of net sales, respectively.

For the three andnine months ended September 30, 2024, Lovell accounted for more than 10% of our VA/DoD net sales. During the three months and nine months ended September 30, 2024, sales associated withone facility accounted for more than 10% of the total VA/DoD net sales. No facility accounted for more than 10% of the total VA/DoD net sales in the three and nine months ended September 30, 2023. During the three and nine months ended September 30, 2024 and 2023, one facility accounted for more than 10% of net sales from the National Health Service ("NHS").

Foreign Currency Exchange

The Company has foreign currency exchange risks 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 the functional currency values of its assets, liabilities, and cash flows denominated inforeign currencies.

Note 4. Revenue

The following tables present product net sales disaggregated by Channel and Geographic Market (in thousands):

The Company generally invoices the customer and recognizes revenue once its performance obligations are satisfied, at which point payment is unconditional. Agreed upon payment terms with customers are within 30 days of shipment. Accordingly, contracts with customers do not include a significant financing component.

Note 5. Cash, Cash Equivalents, Restricted Cash and Marketable Securities

The following tables summarize the Company’s cash, cash equivalents and marketable securities as of September 30, 2024 and December 31, 2023.

Note 6. Fair Value Measurements****

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

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

As of September 30, 2024, the Company's Marketable securities in the amount of $8.0 million were carried at fair value in accordance with Level 1 as described above. The Company hadno financial assets or liabilities as of December 31, 2023 that required valuation in accordance with the levels described above. The Company recognizes transfers between levels of the fair value hierarchy as of the end of the reporting period. There wereno transfers within the hierarchy during thenine months ended September 30, 2024, and year ended December 31, 2023. The carrying amount of the Company’s receivables and payables approximate their fair value due to their maturity.

Note 7. Inventories

As of September 30, 2024 and December 31, 2023, inventories consisted of the following:

The reserve for obsolete inventory was $0.6 million and $0.7 million as of September 30, 2024 and December 31, 2023, respectively. The Company records charges for obsolete inventory in cost of goods sold. As of December 31, 2023, noncurrent inventory was comprised of approximately$0.5 million in raw materials and $0.1 million of work in process, respectively. Inventory classified under the category “Work in process” consists of prefabricated assembled product.

Note 8. Leases

For thethree and nine months ended September 30, 2024, the Company recognized lease expenses of$178,000 and $357,000, respectively. For thethree andnine months ended September 30, 2023, the Company recognized lease expenses of $38,000 and $114,000, 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.

On February 6, 2024, the Company entered into The First Amendment to Lease Agreement (the “Rockaway Amendment”) to extend its Rockaway, New Jersey lease for an additional 10 years. The Rockaway Amendment was effective May 1, 2024, and expires on July 31, 2034, with a tenant option to renew for an additional five years. The increase in the term of the lease for the existing leased property was accounted for as a lease modification, therefore, the associated operating lease right of use assets and operating lease liabilities for the existing space were remeasured as of February 6, 2024. The Rockaway Amendment also includes the expansion of leased property from 13,643 square feet to 22,557 square feet. The Company has accounted for the expansion space as an increase in lease right of use assets effective with the Rockaway Amendment commencement date of June 1, 2024.

Supplemental Balance Sheet Information for Operating Leases:

Future lease payments as of September 30, 2024:

Note 9. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities as of September 30, 2024 and December 31, 2023 consisted of the following:

Finance and Security Agreement

On July 2, 2024, the Company entered into a Commercial Insurance Premium Finance and Security Agreement (the "2024 Agreement"). The 2024 Agreement provides for a single borrowing of approximately $493,000 with aten-month term and an annual interest rate of 8.75%. The proceeds from this transaction were used to partially fund the premiums due under certain of the Company's insurance policies. The amounts payable are secured by the Company's rights under such policies. Beginning July 2024, the Company began paying monthly installments of approximately $51,000.

During the three and nine months ended September 30, 2024, the Company recognized $5,000 and $13,000 in aggregate interest expense related to the Company's 2024 and 2023 insurance premium financing, respectively.

Note 10. Shareholders' Equity

Securities Purchase Agreements

On June 3, 2024, the Company entered into a securities purchase agreement (the “Registered Direct Purchase Agreement”) with an institutional accredited investor (the “Purchaser”) for the sale (the “Registered Direct Offering”) by the Company of pre-funded warrants (the “RD Pre-funded Warrants”) to purchase up to 225,000 shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”) (the “RD Pre-funded Warrant Shares”). In a concurrent private placement, the Company issued and sold to the Purchaser unregistered warrants to purchase up to 112,500 shares of Common Stock (the “PIPE Warrants” and shares of Common Stock underlying the PIPE Warrants, the “PIPE Warrant Shares”). Each RD Pre-funded Warrant in the Registered Direct Offering was sold together withone-half ofone PIPE Warrant at a combined effective offering price of $6.4925 per share. The PIPE Warrants became exercisable after the date of issuance at a price of $6.43 per share and will expire on June 5, 2029.

In a separate private placement, on May 31, 2024, the Company entered into securities purchase agreements with certain institutional and accredited investors and directors of the Company (the “Private Agreements”), which collectively provided for the sale by the Company of (i)438,191 shares of Common Stock (the “Private Shares”), (ii) pre-funded warrants (the “Private Pre-funded Warrants”) to purchase up to 770,119 shares of Common Stock and (iii) warrants (the “Private Warrants” and together with the PIPE Warrants, the “Warrants”) to purchase up to 604,150 shares of Common Stock (the “Private Warrant Shares”). Each share of Common Stock (or Private Pre-funded Warrant) in this private placement was sold together withone-half ofone Private Warrant at a combined effective offering price of $6.4925 per share. The Private Warrants will have the same terms as the PIPE Warrants sold to the Purchaser.

The Private Shares were sold at a purchase price of $6.43 per share. The RD Pre-funded Warrants and Private Pre-funded Warrants were sold at a purchase price of $6.43 minus $0.001 per Pre-Funded Warrant, and are exercisable immediately at an exercise price of $0.001 per share. The PIPE Warrants and Private Warrants are only exercisable for whole shares of Common Stock.

The net proceeds to the Company resulting in the sale of securities described above was approximately $9.0 million, after deducting other offering expenses payable by the Company, and excluding the proceeds, if any, from the exercise of the warrants. Of the net proceeds, $1 million came from the issuance of securities to the Company’s legal counsel. Upon issuance of the shares, certain of the Company’s financial obligations to its legal counsel were deemed paid and satisfied in full.

The Company accounts for common stock warrants in accordance with applicable accounting guidance provided in ASC Topic 815-40, Derivatives and Hedging – Contracts in Entity’s Own Equity, or ASC Topic 815-40, as either derivative liabilities or equity instruments depending on the specific terms of the warrant. The Company determined that the warrants associated this financing qualified for equity classification.

Stock Purchase Warrants

The following table presents a summary of stock purchase warrants outstanding as of September 30, 2024.

A total of 1,608,433 pre-funded warrants were excluded from this table of which 995,119 were issued during thenine months ended September 30, 2024.

Note 11. Net Loss Per Share

Basic net loss per share is computed by dividing net loss by the weighted-average number of shares of common stock outstanding during the period. Diluted loss per share is computed by dividing net loss by the weighted-average number of shares of common stock outstanding adjusted to give effect to potentially dilutive securities. Due to their nominal exercise price of $0.001 per share,1,608,433 pre-funded warrants are considered common stock equivalents and are included in weighted average shares outstanding in the accompanying condensed consolidated statement of operations as of the applicable purchase date. Stock unit awards, stock options, and warrants (other than the pre-funded warrants) have not been included in the diluted loss per share calculation as their inclusion would have had an anti-dilutive effect.

The potential common stock equivalents that have been excluded from the computation of diluted loss per share consist ofthe following:

Note 12. Income Taxes

The Company may be eligible, from time to time, to receive cash from the sale of its net operating losses under New Jersey's Department of the Treasury - Division of Taxation NOL Transfer Program. For thenine months ended September 30, 2024 and 2023, the Company received net cash payments of $122,000 and $211,000, respectively from the sale of its New Jersey state net operating losses.

Note 13. Stock Based Compensation

The following table presents a summary of activity related to stock options during thenine months ended September 30, 2024:

The intrinsic value is calculated as the difference between the fair market value at September 30, 2024 and the exercise price per share of the stock option. The options granted to employees generally vest over athree-year period.

The following table presents a summary of activity related to restricted and deferred stock units (“Stock Units”) granted during thenine months ended September 30, 2024:

In general, Stock Units granted to employees vest overtwo tofour-year periods.

Immediately following the Company’s annual meeting of stockholders, the Company generally grants each non-employee director an equity award that vests over a 12-month period. Upon a non-employee director’s initial appointment or election to the board of directors, the Company grants such non-employee director an equity award subject to vesting as determined by the board of directors.

The Company recognized stock compensation expense for its equity awards as follows:

Total unrecognized compensation cost related to unvested awards as of September 30, 2024 was $2.5 million and is expected to be recognized over the next 1.6 years.

Valuation Information for Stock-Based Compensation

The Company uses the Black-Scholes model toestimate thegrant date fair value of each stock option awarded. Effective July 1, 2023, expected volatility was based 100% on the Company's historical common stock volatility. For the period presented below, the expected volatility was based on a composite comprising of 50% of the Company's historical common stock volatility; the remaining 50% was based on historical volatility of its peers. The risk-free interest rate was based on the average U.S. Treasury rate that most closely resembled the expected life of the related award. The expected term of the award was calculated using the simplified method. No dividend was assumed as the Company does not pay regular dividends on its common stock and does not anticipate paying any dividends in the foreseeable future.

The weighted average assumptions used in the Black-Scholes option pricing model in valuing stock options granted during thenine months ended September 30, 2024 and 2023, are summarized in the table below.

The fair value of each Stock Unit is the market close price of the Company’s common stock on the trading day immediately preceding the date of grant.

Note 14. Contingencies

Stockholders Litigation

On September 26, 2019, and October 31, 2019, purported stockholders of the Company served putative class action lawsuits in the United States District Court for the District of New Jersey captionedAllyn Turnofsky vs. electroCore, Inc., et al., Case 3:19-cv-18400, andPriewe vs. electroCore, Inc., et al., Case 1:19-cv-19653, respectively. In addition to the Company, the defendants include present and past directors and officers, and Evercore Group L.L.C., Cantor Fitzgerald & Co., JMP Securities LLC and BTIG, LLC, the underwriters for the initial public offering (IPO). The plaintiffs each seek to represent a class of stockholders who (i) purchased the Company’s common stock in the IPO or whose purchases are traceable to the IPO, or (ii) who purchased common stock between the IPO and September 25, 2019. The complaints each alleged that the defendants violated Sections 11 and 15 of the Securities Act and Sections 10(b) and 20(a) of the Exchange Act, with respect to (i) the registration statement and related prospectus for the IPO, and (ii) certain post-IPO disclosures filed with the SEC. The complaints sought unspecified compensatory damages, interest, costs and attorneys’ fees. ThePriewe case was voluntarily dismissed on February 19, 2020.

In theTurnofsky case, on November 25, 2019, several plaintiffs and their counsel moved to be selected as lead plaintiff and lead plaintiff’s counsel. On April 24, 2020, the Court granted the motion of Carole Tibbs and the firm Bragar, Eagel & Squire, P.C. On July 17, 2020, the plaintiffs filed an amended complaint inTurnofsky. In addition to the prior claims, the amended complaint added an additional director defendant andtwo investors as defendants, and added a claim against the Company and the underwriters for violating Section 12(a)(2) of the Securities Act.

On September 15, 2020, the Company and the other defendants filed a motion to dismiss the amended complaint for failure to state a claim. On November 6, 2020, the plaintiffs filed their opposition to the motion to dismiss. The Company and the other defendants filed reply papers in support of the motion on December 7, 2020. Argument of the motion to dismiss occurred on June 18, 2021. On August 13, 2021, the Court dismissed the amended complaint with leave to re-plead. On October 4, 2021, the plaintiffs filed a second amended complaint in theTurnofsky case. The defendants moved to dismiss, and briefing on the motion was complete on January 7, 2022. On July 13, 2023, the court dismissed the second amended complaint with leave to re-plead. The plaintiffs did not file a third amended complaint. On August 23, 2023, the plaintiffs provided the court with an order of dismissal, and the court entered the order on August 24, 2023. On September 8, 2023, plaintiff Carole Tibbs filed a notice of appeal to the United States Court of Appeals for the Third Circuit. The appeal has been docketed as number 23-2655. The principal brief of appellant and appendix were filed on January 5, 2024. The appellees’ brief was filed on February 15, 2024, and the appellant’s reply brief was filed on March 15, 2024. On October 9, 2024, the court advised that it will decide the appeal on the papers and will not hear oral argument.

The Company intends to continue to vigorously defend itself in these matters. However, in light of, among other things, the preliminary stage of these litigation matters, the Company is unable to determine the reasonable probability of loss or a range of potential loss. Accordingly, the Company has not established an accrual for potential losses, if any, that could result from any unfavorable outcome, and there can be no assurance that these litigation matters will not result in substantial defense costs and/or judgments or settlements that could adversely affect the Company’s financial condition.

The Company is subject to various claims, complaints and legal actions in the normal course of business from time to time. The Company is not aware of any further currently pending litigation for which it believes the outcome could have a material adverse effect on its operations or financial position. The Company expenses associated legal fees including those relating to the stockholder litigation described in this Note 14 in the period they are incurred.

Note 15. Related Party Transactions

Consulting Agreements

On October 4, 2024, the Companyand a former executive entered into a consulting agreement pursuant to which the former executive will provide financial and accounting consulting services to the Company on an hourly basis for 12 months after the effective date of his retirement, subject to potential extension upon mutual agreement.

On July 11, 2024, the Company and a member of its board of directors entered into a consulting agreement pursuant to which the board member is expected to begin providing consulting and advisory services to the Company’s Chief Executive Officer for aone-year term as of the completion of his service on the Board, effective as of immediately prior to the Company’s 2025 Annual Meeting of Stockholders. The director will be paid an hourly or per diem fee for such services rendered, if any, and was granted a stock option to purchase 50,000 shares of common stock of the Company at an exercise price of $6.43 per share, which shall vest and be exercisable in 12 equal monthly installments, subject to full vesting, if earlier, immediately prior to the 2025 Annual Meeting of Stockholders or a Change of Control so long as the director remains in continuous service to the Company through such date.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations