What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-03-11 compared with 2020-03-30 · 180 added, 126 removed, 106 unchanged (74% of the section changed)

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“Risk Factors” and under “Forward-Looking Statements” in this Annual Report.

We are a commercial stage medical device company with a proprietary non-invasive vagus nerve stimulation, or nVNS.

We are a commercial-stage medical device company with a proprietary non-invasive vagus nerve stimulation, or nVNS, therapy.

nVNS is a platform bioelectronic medical therapy that modulates neurotransmitters and immune function through its effects on both the peripheral and central nervous systems.

We are initially focused on neurology, and our therapy, gammaCore, is cleared by the FDA for use by adults for the following four neurology indications:

the acute treatment of pain associated with each of migraine and eCH, the preventive treatment of migraine headache and adjunctive use for the preventive treatment of CH.

We are considering the potential for several new indications for our nVNS technology, which is being studied in a number of investigator-initiated studies.

the acute treatment of pain associated with each of migraine and eCH, the preventive treatment of migraine headache and adjunctive use for the preventive treatment of cluster headaches, or CH.

Recently, the FDA cleared the use of gammaCore for acute and preventive treatment of migraine in adolescents.

We are also considering the potential for several additional indications for our nVNS technology, which is being studied through a number of investigator-initiated studies.

These indications include COVID-19 respiratory symptoms, stroke, mild traumatic brain injury, post-traumatic stress disorder, opioid use disorders and ileus.

Following our initial FDA clearance in early 2017, our commercial strategy was to establish gammaCore as a first-line treatment option for the acute treatment of episodic CH in adult patients, who have few alternative treatment options available to them.

This strategy was supported by a product registry conducted from July 2017 through June 2018 to build advocacy among key opinion leaders in leading headache centers in the United States, and to generate patient demand in the form of prescriptions submitted to payers.

With an earlier-than-anticipated FDA clearance for our acute treatment of migraine indication, we leveraged this advocacy during the registry period as we expanded into migraine, and prepared for a full commercial launch of gammaCore and gammaCore Sapphire for the acute treatment of pain associated with episodic CH and migraine in adult patients, which was accomplished in the third quarter of 2018.

With an earlier-than-anticipated FDA clearance for our acute treatment of migraine indication, we leveraged this advocacy during the registry period as we expanded into migraine and prepared for a full commercial launch of gammaCore and gammaCore Sapphire for the acute treatment of pain associated with eCH and migraine in adult patients, which was accomplished in the third quarter of 2018.

With the clearance of adjunctive use for the prevention of CH in December 2018, we continued to build upon our existing base of advocacy and patient support.

In March 2020, the FDA cleared gammaCore for the preventive treatment of migraine headache in adult patients.

Recent Developments

In May 2019, we announced significant adjustments to the deployment of personnel and resources across our organization.

We reduced the size of our organization, including our field sales force and clinical operations in order to reduce expenses.

We are currently focusing our resources on channels that are currently generating revenue, including the following:

the Veterans Administration, or VA, and the Department of Defense, or DoD, which includes sales that are being made pursuant to our qualifying contract under the Federal Supply Schedule, or FSS, which was secured by us in December 2018 and open market sales to individual VA facilities .

According to a presentation at the annual Scientific Meeting of the American Headache Society, approximately 400,000 patients saw a VA healthcare provider in 2018, for headache and we believe they can benefit from gammaCore therapy.

The VA/DoD has become our primary source of US revenue and, accordingly, we have redeployed substantially all of our sales function to generating sales of our gammaCore and gammaCore Sapphire products to this channel.

the United Kingdom, where a recent award from the Innovation Technology Payment Program of the NHS and evidence-based recommendations published in December 2019 by NICE, offers the potential for us to generate revenue from the treatment of CH.

In its final evidence-based recommendation, NICE affirmed that gammaCore, when used with the appropriate standard of care, can save an average of £450 per patient in the first year of treatment through a reduction in acute rescue medications use, and with us offering no cost evaluations for all patients.

Additionally, NHS has indicated to us that it is extending the previously announced Innovation Technology Payment Program through April 2021 and that it has identified gammaCore as being eligible for the new MedTech Funding Mandate mechanism, which, if confirmed, could potentially provide a basis for the long-term, sustainable reimbursement of gammaCore in the United Kingdom, and

other potential revenue opportunities, such as in workers compensation and personal injury claims through our distribution agreement with Doctor’s Medical, LLC announced in August 2019, as well as other potential distribution arrangements for our products, which may include exploration of international distributors, the direct-to-consumer and private pay markets.

In order to focus our resources on channels that are currently generating revenue and further reduce operating costs, we have also postponed certain clinical trials in indicati ons that are more exploratory in nature.

In February 2020, we paused patient enrollment in our Premium II study for migraine prevention.

Given the recent FDA clearance for migraine prevention in adults, and challenges to study protocols, related datasets, and our business arising out of the novel coronavirus pandemic , we may also choose to terminate the Premium II study and take other actions to further reduce operating costs including reductions in our workforce.

We have never been profitable and have incurred net losses in each year since our inception.

In February 2021, gammaCore was cleared by the FDA for the acute and preventive treatment of migraine in adolescents between 12 and 17 years of age.

Recently, we have focused our sales efforts in two channels, the U.S.

Department of Veterans Affairs and U.S.

Department of Defense, and the United Kingdom.

We continue to evaluate strategies to expand commercial adoption of gammaCore, including the potential use of telemedicine and cash pay, direct to consumer approaches.

We incurred net losses of $23.5 million and $45.1 million for the years ended December 31, 2020 and 2019, respectively.

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If we fail to become profitable or are unable to sustain profitability, then we may be unable to continue our operations at planned levels and be forced to reduce or terminate our operations.

Our expected cash requirements for 2020 and beyond are based on the commercialization success of our products and our ability to reduce operating expenses.

There are significant risks and uncertainties as to our ability to achieve these operating results, including as a result of the adverse impact on our business from the COVID-19 pandemic.

Due to these risks and uncertainties, we may need to reduce our activities significantly more than our current operating plan and cash flow projections assume in order to fund operations to the end of 2020.

Our expected cash requirements for the next 12 months and beyond are based on the commercialization success of our products and our ability to control operating expenses.

There are significant risks and uncertainties as to our ability to achieve these operating results, including as a result of the potential adverse impact on our business from the ongoing COVID-19 pandemic, Due to these risks and uncertainties, we may need to reduce our activities significantly more than our current operating plan and cash flow projections assume in order to fund operations for the next 12 months.

There can be no assurance that we will have sufficient cash flow and liquidity to fund our planned activities, which could force us to significantly reduce or curtail our activities and, ultimately, potentially cease operations.

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See “-Liquidity and Capital Resources.”

Stock Purchase Agreement with Lincoln Park

On March 27, 2020, we entered into a purchase agreement, or Purchase Agreement, and a registration rights agreement, or Registration Rights Agreement, with Lincoln Park Capital Fund, LLC (“ Lincoln Park ”), pursuant to which we have the right to sell to Lincoln Park shares, or Purchase Shares, of our common stock having an aggregate value of up to $25,000,000, subject to certain significant limitations of the amount and timing of any such sales due to terms and conditions set forth in the Purchase Agreement.

Over the 36-month term of the Purchase Agreement, for up to an aggregate amount of $25,000,000 of shares of common stock (subject to certain limitations and conditions), we have the right, but not the obligation, from time to time, in our sole discretion, to direct Lincoln Park to purchase up to 200,000 shares, or the Regular Purchase Share Limit, of the common stock (each such purchase, a Regular Purchase).

The Regular Purchase Share Limit will increase to 250,000 shares if the closing price of the common stock on the applicable purchase date is not below $1.00 per share and will further increase to 300,000 shares if the closing price of the common stock on the applicable purchase date is not below $1.50 per share.

In any case, Lincoln Park’s maximum obligation under any single Regular Purchase will not exceed $1,000,000, unless we and Lincoln Park mutually agree to increase the maximum amount of such Regular Purchase.

The purchase price for shares of common stock to be purchased by Lincoln Park under a Regular Purchase will be equal to the lower of (in each case, subject to the adjustments described in the Purchase Agreement):

(i) the lowest sale price for the common stock on the applicable purchase date and (ii) the arithmetic average of the three lowest sales prices for the common stock during the 10 consecutive trading days prior to the purchase date.

If we direct Lincoln Park to purchase the maximum number of shares of common stock that we may sell in a Regular Purchase, then in addition to such Regular Purchase, and subject to certain conditions and limitations in the Purchase Agreement, we may direct Lincoln Park to make an “accelerated purchase” of an additional number of shares of common stock which may not exceed the lesser of:

(i) 300% of the number of shares purchased pursuant to the corresponding Regular Purchase and (ii) 30% of the total number of shares of the common stock traded during a specified period on the applicable

purchase date as set forth in the Purchase Agreement.

The purchase price for such shares will be the lesser of 97% of the volume weighted average price of the common s tock over a certain portion of the date of sale as set forth in the Purchase Agreement and (ii) the closing sale price of the common stock on the date of sale .

Under certain circumstances and in accordance with the Purchase Agreement, we may direct Lincoln Park to purchase shares in multiple “a ccelerated p urchases ” on the same trading day.

In addition to the Regular Purchases and “accelerated purchases” described above, we may deliver to Lincoln Park, after the 30-day anniversary of the commencement date of the Purchase Agreement, a “tranche purchase notice” in accordance with the terms of the Purchase Agreement, whereby we may direct Lincoln Park to purchase up to 1,000,000 Purchase Shares at a purchase price equal to 95% of the lower of:

(i) the lowest sale price of the common stock on that purchase date and (ii) the arithmetic average of the three lowest sales prices for the common stock during the 10 consecutive trading days prior to the purchase date.

We may only deliver a tranche purchase notice to Lincoln Park if at least 30 business days have passed since the most recent tranche purchase.

We may only deliver a total of four tranche purchase notices under the Purchase Agreement, and Lincoln Park shall not be obligated to purchase more than $1,000,000 of common stock in any individual tranche purchase.

The Purchase Agreement also prohibits us from directing Lincoln Park to purchase any shares of common stock if those shares, when aggregated with all other shares of common stock then beneficially owned by Lincoln Park and its affiliates, would result in Lincoln Park and its affiliates having beneficial ownership, at any single point in time, of more than 4.99% of the then total outstanding shares of common stock as calculated pursuant to Section 13(d) of the Exchange Act, and Rule 13d-3 thereunder.

Under applicable rules of Nasdaq, we may not issue or sell to Lincoln Park under the Purchase Agreement more than 19.99% of the shares of the common stock outstanding immediately prior to the execution of the Purchase Agreement (or 5,991,912 shares, based on 29,959,565 shares outstanding immediately prior to the execution of the Purchase Agreement), unless (i) stockholder approval is obtained or (ii) the issuances and sales of common stock pursuant to the Purchase Agreement are not deemed to be “below market” in accordance with the applicable rules of Nasdaq.

The Purchase Agreement does not limit our ability to raise capital from other sources at its sole discretion, except that, subject to certain exceptions, we may not enter into any Variable Rate Transaction unless such Variable Rate Transaction qualifies as an Exempt Issuance (as each such term is defined in the Purchase Agreement) during the 36 months after the commencement date of the Purchase Agreement.

In consideration for entering into the Purchase Agreement, we issued an aggregate of 461,676 of initial shares of our common stock to Lincoln Park as a commitment fee.

In addition, we shall issue to Lincoln Park up to an aggregate of 230,838 additional commitment shares of our common stock based on a pro-rata percentage of the first $5,000,000 of Purchase Shares issued to Lincoln Park under the Purchase Agreement.

We will not receive any cash proceeds from the issuance of any of these commitment shares.

The net proceeds under the Purchase Agreement to us will depend on the frequency and prices at which shares of common stock are sold to Lincoln Park.

Actual sales of shares of common stock to Lincoln Park under the Purchase Agreement and the amount of such net proceeds will depend on a variety of factors, including market conditions, the trading price of the common stock and determinations by us, as to other available and appropriate sources of funding for us.

We expect to use the proceeds from the offering of shares of our common stock pursuant to the Purchase Agreement for general corporate purposes and working capital.

Changes to Board of Directors

On March 26, 2020, we announced the appointments of three new independent members to our Board of Directors effective April 2, 2020.

The newly appointed board members are John Gandolfo, Thomas Patton and Peter Cuneo.

We also announced that current Board members Nick Colucci and Jim Tullis will be stepping down from the Board prior to our annual meeting of stockholders that is expected to be held in June 2020.

Chairman Carrie S.

Cox is stepping down from the Board on April 1, 2020 and will be succeeded in that role by independent Board member Michael G.

Funding Activities

During the year ended December 31, 2020, we received aggregate proceeds of approximately $15.5 million through the sales of our common stock to Lincoln Park Capital Fund, LLC, or Lincoln Park.

During the year ended December 31, 2020, we received aggregate procee ds of $ 2.2 million through sale of our common stock in private placement transactions to certain affiliates and existing shareholders of the Company, including certain members of our board of directors.

In May 2020, we received approximately $1.4 million pursuant to a loan under the Paycheck Protection Program.

On May 6, 2020, we received a net cash amount of approximately $1.2 million from the sale of our New Jersey state net operating losses and research and development tax credits for the year ended December 31, 2018.

On May 14, 2020, we entered into a Securities Purchase Agreement with our legal counsel pursuant to which we issued 1,564,345 shares of common stock.

Upon issuance of the shares, certain of our outstanding financial obligations to our legal counsel were deemed paid and satisfied in full.

On July 1, 2020, we entered into a Commercial Insurance Premium Finance and Security Agreement, or the Financing Agreement.

The Financing Agreement provides for a single borrowing by us of $1.2 million, with a seven-month term, and an annual interest rate of 2.18%.

The proceeds from this transaction were used to partially fund the premiums due under some of the Company’s insurance policies.

The amounts payable are secured by the Company’s rights under such policies.

As of December 31, 2020, the remaining balance is $164,832.

Research and Development

In April 2020, we terminated early our PREMIUM II clinical trial that was being conducted to further support our label expansion into migraine prevention.

In December 2020, we announced positive top-line results from this study.

In February 2021, gammaCore received clearance by the FDA for the acute and preventive treatment of migraine in adolescents between 12 and 17 years of age.

In the second quarter of 2020, two IITs of gammaCore Sapphire CV were launched to study hospitalized patients with a confirmed diagnosis of, or presumed to be, COVID-19, one in Valencia, Spain (referred to as SAVIOR-1) and the other in Pittsburgh, Pennsylvania (referred to as SAVIOR-2).

These trials are continuing to enroll patients.

Enrollment is SAVIOR-1 is complete and enrollment is ongoing in SAVIOR-2.

Outside the US

In the United Kingdom, NHS England has provided a reimbursement pathway since April 2019 by awarding gammaCore a place on the ITPP, for use in patients with refractory cluster headache.

In October 2020, we announced that the ITPP was extended through March 2021.

Effective April 1, 2021 gammaCore Sapphire will be included in a new long-term reimbursement policy titled the MedTech Funding Mandate Policy 2021/22, or MTFM, which supports commissioners and providers in the use of selected NICE-approved, clinically effective and cost-saving medical devices, diagnostics and digital technologies that will improve patient outcomes.

In December 2019, NICE published a Medical Technology Guidance document recommending the use of gammaCore for CH within the NHS.

In January 2021, NHS Scotland adopted the NICE recommendation and recommended gammaCore for use in treatment of CH in NHS Scotland.

We recently entered into distribution agreements in Eastern Europe, Canada, and Australia.

Impact of COVID-19

We are closely monitoring the impact of the COVID-19 pandemic on all aspects of our business and geographies, including how it will impact business partners.

In particular, the pandemic has resulted in a significant reduction in non-essential contact between patients and healthcare providers, shifting of focus by healthcare providers to the acute treatment of COVID-19 related illness regardless of specialty.

We believe these restrictions have limited our sales force’s ability to generate additional interest in the Company’s products.

While we began to experience disruptions from the COVID-19 pandemic during the three months ended March 31, 2020, we are unable to predict the impact that the COVID-19 pandemic may have on our 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, the development, rollout and availability of effective treatments and vaccines, 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.

The global impact of the outbreak has been rapidly evolving and many countries have reacted by instituting quarantines, mandating business and school closures and restricting travel.

Certain states and cities, including those where our principal place of business is located and sales force seeks to operate, have also reacted by instituting quarantines, restrictions on travel, “shelter in place” rules, and restrictions on types of business that may continue to operate.

We cannot predict if additional states and cities will implement similar restrictions or when restrictions currently in place will expire.

As a result, the COVID-19 pandemic is negatively impacting almost every industry directly or indirectly, including industries in which we operate.

Further, the impacts of a potential worsening of global economic conditions and the continued disruptions to, and volatility in, the credit and financial markets, consumer spending as well as other unanticipated consequences remain unknown.

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 announced a reduction in our activities, and adjusted our cash runway expectations in response to the potential adverse impact caused by the COVID-19 pandemic.

Compared to our earlier expectations, we believe that our results for the year ended December 31, 2020 reflect a negative impact from, among other things, the global pandemic.

Moreover, our expectations for at least the beginning of 2021 have also been adversely affected by both the uncertainty and potential negative impact of the global pandemic.

Depending upon the duration and severity of the pandemic, the continuing effect on our results and outlook over the long term remains uncertain.

In July 2020, the Company received an EUA for use of its gammaCore Sapphire CV nVNS therapy for the acute treatment of asthma exacerbations in known or suspected COVID-19 patients.

This EUA is expected to remain in effect for the duration of the COVID-19 pandemic justifying emergency use of these devices unless terminated or revoked by the FDA (after which products may no longer be used).

The length of the effective period of this EUA is uncertain and the Company may have to incur significant marketing and other expenditures to achieve sales of the gammaCore Sapphire CV.

We did not recognize material revenue from the sales of gammaCore Sapphire CV during the year ended December 31, 2020.

There can be no assurance as to what impact the EUA and potential sales of gammaCore Sapphire CV will have on us, our business operations and financial condition.

Critical Accounting Policies and Estimates

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While we believe our estimates, assumptions and judgments are reasonable, they are based on information presently available.

Actual results may differ significantly from these estimates due to changes in judgments, a ssumptions and conditions as a result of unforeseen events or otherwise, which could have a material impact on our financial position and results of operations.

Actual results may differ significantly from these estimates due to changes in judgments, assumptions and conditions as a result of unforeseen events or otherwise, which could have a material impact on our financial position and results of operations.

We believe the judgements estimates and assumptions associated with the following critical accounting policies have the greatest potential impact on the consolidated financial statements:

Revenue recognition

Stock-based and unit-based compensation

Research and development

Stock-based compensation

Loss contingencies

Revenue Recognition

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In many cases, these amounts are fixed at the time of sale and the transaction price is reduced accordingly.

Commercial Revenue Outside of Federal Supply Schedule Channel

We instituted a voucher program, in February 2018, whereby new patients could acquire one-month of gammaCore therapy at no cost from our specialty pharmacy if their insurance provider failed to reimburse for our therapy.

Under this program, therapy being dispensed to patients by our specialty pharmacy were commercial goods that had been sold by us to our distributor and in turn re-sold to the specialty pharmacy.

We reimbursed the specialty pharmacy an amount equal to the amount the specialty pharmacy would have received had a commercial payer reimbursed for this unit, inclusive of any co-payment requirement and the contracted dispensing fee.

The amount we received from the original sale of our therapy to our distributor was recognized as revenue by us at the time of the sale, however, as a result of our reimbursement for a unit to the specialty pharmacy, under our voucher program, the amount we received from the distributor for that unit was classified as contra revenue and therefore not recognized.

The difference of the amount reimbursed by us to the specialty pharmacy and received by us for the sale of the unit to the distributor was recognized as promotional expense within selling, general and administrative expense.

The vouchers issued under our voucher program, which was modified in mid-July 2018, represented consideration payable to our specialty pharmacy.

The vouchers were accounted for as a reduction in transaction price to be paid by the specialty pharmacy.

Accordingly, we excluded from revenue both the number of vouchers actually redeemed in the period, and an estimate of the number of vouchers to be redeemed from product already sold to the distributor but not yet dispensed to a patient.

The balance of the reimbursement amount paid by us associated with the vouchers was recorded as a promotional expense within selling, general and administrative expenses.

Variable consideration estimates were made using the expected value amount method, which is appropriate when there are limited outcomes of variable consideration.

In this case, vouchers are either redeemed, or they are not redeemed.

After mid-July 2018, we modified our voucher program to provide gammaCore and gammaCore Sapphire promotional units, or “free voucher units,” to our distributor at no charge.

These free voucher units have a distinct product item number that enables ease of tracking and allows the product to be dispensed to the patient at no cost to the specialty pharmacy.

In this way, the voucher program is more like a standard sample program where free voucher units, which provide 31-days of therapy, are issued to the patient, rather than being sold and subject to specialty pharmacy reimbursement and therefore recognized as contra-revenue.

The cost to produce the free voucher units given to patients under this modified voucher program are now recognized as promotional expense.

Our net sales reflect only gammaCore and gammaCore Sapphire units

sol d either for new patients, or existing patients’ refills, and none of the gammaCore and gammaCore Sapphire units prescribed and dispensed through our voucher program.

Our voucher program was terminated in December 2019.

United States Commercial Revenue Outside of Federal Supply Schedule Channel

Managed care rebates represent our estimated obligations to pharmacy benefit managers.

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The calculation of the accrual is based on an estimate of claims and the cost per claim that we expect to incur associated with inventory that exists in the distribution channel at period end.

Effective March 1, 2020, the mount of monthly co-payment assistance has been reduced to a maximum of $100 per prescription.

We expense the cost, as incurred, of product damaged as a result of shipping to our specialty pharmaceutical distributor.

Effective March 1, 2020, the amount of monthly co-payment assistance has been reduced to a maximum of $ 100 per prescription.

For most of 2019 we had a voucher program to provide gammaCore and gammaCore Sapphire promotional units, or “free voucher units,” to our distributor at no charge.

These free voucher units had a distinct product item number that enabled ease of tracking and allowed the product to be dispensed to the patient at no cost to the specialty pharmacy.

In this way, the voucher program was more like a standard sample program where free voucher units, which provide 31-days of therapy, were issued to the patient, rather than being sold and subject to specialty pharmacy reimbursement and therefore recognized as contra-revenue.

The cost to produce the free voucher units given to patients under this modified voucher program was recognized as promotional expense.

Our net sales reflect only gammaCore and gammaCore Sapphire units sold either for new patients, or existing patients’ refills, and none of the gammaCore and gammaCore Sapphire units prescribed and dispensed through our voucher program.

Our voucher program was terminated in December 2019.

We expense the cost, as incurred, of product damaged as a result of shipping.

This expense, historically, has been immaterial.

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Revenue from the Veterans Administration and the Department of Defense

Revenue from sales of our products are recognized under terms of the Federal Supply Schedule, or FSS, and purchase orders from individual VA sites and a distributor who purchases our products on behalf of the DoD.

Revenue from sales of our products is recognized under terms of the Federal Supply Schedule, or FSS, and purchase orders from individual VA sites and a distributor who purchases our products on behalf of the DoD.

Revenue from the VA includes sales of therapy for up to 93 days.

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United Kingdom Revenue

In the United Kingdom, a recent award from the Innovation Technology Payment program of the NHS and evidence-based recommendations published in December 2019 by NICE offer the potential for us to generate revenue from the treatment of CH.

In the United Kingdom, an award from the Innovation Technology Payment program of the NHS and evidence-based recommendations published in December 2020 by NICE offer the potential for us to generate revenue from the treatment of CH.

This is the primary commercial channel from which our United Kingdom revenue is derived.

Sales in the U.K.

are primarily in increments of 93-day therapy at a fixed price and are paid within 30 days.

The first 93 days of therapy is free under this program.

The cost to produce the free therapy in the 93-day period is recorded as promotional expense within selling, general and administrative expenses.

Effective April 1, 2021, gammaCore Sapphire will be included in the new MTFM long-term reimbursement policy which supports commissioners and providers in the use of selected NICE approved, clinically effective and cost-saving medical devices, diagnostics and digital technologies that will improve patient outcomes.

Sales in the United Kingdom are primarily in increments of 93-day therapy at a fixed price and are paid within 30 days.

We value inventory at the lower of cost or net realizable value.

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If our actual demand is less than our forecast demand, we may be required to take additional excess inventory charges, which would decrease gross margin and adversely impact net operating results in the future.

We assess whether a valuation allowance should be established against our deferred tax assets based on consideration of all available evidence, both positive and negative, using a more likely than not standard.

This assessment considers, among other matters, the nature, frequency and severity of recent losses;

a forecast of future profitability;

the duration of statutory carryback and carryforward periods;

our experience with tax attributes expiring unused;

and tax planning alternatives.

Stock-based compensation

We recognize compensation expense associated with the issuance of equity instruments to employees and non-employees for their services.

Based on the type of equity instrument, the fair value is estimated on the date of grant using the Black-Scholes option valuation model and is expensed in the consolidated financial statements over the service period.

The input assumptions used in determining fair value are expected life, expected volatility, risk-free rate and expected dividend yield.

Loss contingencies

We are subject to claims and lawsuits in the ordinary course of business, including claims by employees or former employees, with respect to our products and involving commercial disputes, or shareholder actions.

We accrue for loss contingencies when it is deemed probable that a loss has been incurred and the loss is estimable.

The amounts accrued are based on the full amount of the estimated loss considering insurance proceeds, if applicable, and do not include legal fees expected to be incurred in connection with the loss contingency.

Our consolidated financial statements do not reflect any material amounts related to unfavorable outcomes of claims and lawsuits to which we are currently a party because we currently believe that such claims and lawsuits are not expected to result in a material adverse effect on our financial condition.

However, it is possible that these contingencies could materially affect our results of operations, financial position and cash flows in a particular period if we change our assessment of the likely outcome of these claims and lawsuits to which we are currently a party.

Emerging Growth Company Status

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We have irrevocably elected to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards when they are required to be adopted by public companies that are not emerging growth companies.

In addition, as a n emerging growth company, we are not be required to provide an auditor’s attestation report on our internal control over financial reporting in future annual reports on Form 10-K.

We will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the completion of our IPO, (b) in which we have total annual gross revenue of at least $1.07 billion, or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeds $700 million as of the prior June 30, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period.

In addition, as an emerging growth company, we are not required to provide an auditor’s attestation report on our internal control over financial reporting in future annual reports on Form 10-K.

We will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the completion of our IPO (December 31, 2023), (b) in which we have total annual gross revenue of at least $1.07 billion, or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeds $700 million as of the prior June 30, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period.

Results of Operations

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Loss from operations

Other expenses/(income):

Change in fair value of warrant liability

Interest and other income, net

Total other (income) loss

Other (income) expense:

Interest and other income

Other expense

Total other (income) expense

Loss before income taxes

Provision for income taxes

Net loss from operations

Net income/(loss) attributable to noncontrolling interest

Total net loss attributable to Electrocore LLC and electroCore,

Net sales increase of $1.4 million reflects an increase in U.S.

sales of $1.0 million, primarily the result of increased VA sales of $0.7 million, and an increase in U.K.

sales of $0.4 million.

Costs of Goods Sold

Cost of goods sold increased $0.6 million as the result of increased sales of both devices and refill cards.

Benefit (provision) for income taxes

Net sales for the year ended December 31, 2020 increased 46% as compared to 2019.

The increase of $ 1.1 million is due to increased sales to the Department of Veterans Affairs and in the United Kingdom.

This increase was partially offset by reduced sales in the U.S.

commercial channel.

We expect revenue from the Department of Veterans Affairs and United Kingdom to continue to be a majority of our revenue for the year ending December 31, 2021.

We expect our revenue to increase during the year ending December 31, 2021.

Gross profit increased $0.5 million for the year ended December 31, 2020 compared to 2019.

This increase was due to the increase in net sales along with the cost of goods sold activity described immediately below.

Gross margin was 50% and 52% for the years ended December 31 , 2020 and 2019 , respectively.

This de crease in gross margin was primarily due to an inventory charge of $0.4 million recorded in 2020, which was the result of a book value adjustment of certain inventory components to net realizable value.

Excluding the 2020 inventory charge, gross margin for the year ended December 31, 2020 was 63%.

The increase in gross margin, excluding the 2020 inventory charge, was largely due to the more favorable absorption of labor and overhead costs, and product mix.

We expect revenue to increase in 2021, which would result in a further increase in our gross margin.

Our gross margin will also be impacted by product mix.

Research and Development

Research and development expenses decreased by $2.6 million primarily due to decreased personnel costs of $3.3 million as a result of our June 2019 reduction in force, offset by increased costs of physician studies of $0.7 million.

Research and development expenses of $4.2 million for the year ended December 31, 2020 decreased by $5.7 million, or 58%, as compared to 2019.

This reduction was primarily due to significant reductions in near-term investment in research and development, including the early termination of our PREMIUM II clinical trial.

We do not expect a material change in our research and development expense for the year ending December 31, 2021.

Savings from the 2020 termination of our PREMIUM II clinical trial, may be partially offset, by the targeted expenditures to support research and development activities in other therapeutic indications.

Selling, General and Administrative

Selling, general and administrative expense decreased by $7.1 million, primarily as a result of decreased personnel costs of $1.0 million, decreased commercial consulting costs of $9.1 million, decreased costs for meetings and tradeshows of $1.2

million and decreased insurance costs of $0.6 million.

These costs were offset by increased advertising costs of $1.

7 million , increased shipping and dist ribution costs of $0.

9 million , increased sales force automation and payor management costs $0.

8 million, increased legal fees of $0.

9 million and increased sample and voucher unit costs of $0.

Selling, general and administrative expense of $21.8 million for the year ended December 31, 2020 decreased by $13.6 million, or 38 %, as compared to 2019.

This decrease in expenses was primarily driven by reductions of $5.3 million in personnel costs and $8.7 million in non-personnel costs for sales and marketing activities, partially offset by a $0.6 million write-off of an operating lease right of use asset in 2020.

We do not expect a material increase in our selling, general, and administrative expense for the year ending December 31, 2021, however, we may make targeted expenditures to support our commercial efforts.

Restructuring and Other Severance Related Expenses

Restructuring and other severance related costs for the year ended December 31, 2019 consists of severance related expenses.

There was no such expense for the year ended December 31, 2018.

Change in Fair Value of Warrant Liability and Derivative Instrument related to Convertible Bridge Notes

The change in fair value of the warrant liability and derivative instrument is based on revaluation of those instruments occurring during the year ended December 31, 2018.

Interest and Other Income, Net

The decrease of $35.7 thousand reflects the decreases of marketable securities balances as a result of their conversion to cash.

Restructuring and other severance related costs of $464,606 for the year ended December 31, 2020 primarily consist of severance related expenses in connection with personnel changes in the position of Chief Medical Officer.

Restructuring and other related charges for the year ended December 31, 2019 of $ 1,997,300 were due to our restructuring plan announced on May 29, 2019, and expenses incurred in connection with separation agreements with two of our former officers.

Interest and Other Income

Interest and other income of $84,327 and $970,594 for the years ended December 31, 2020 and 2019, respectively, primarily consisted of interest earned on cash, cash equivalents and marketable securities.

Interest income was slightly offset by interest expense related to our loan under the PPP and financing certain of our insurance premiums.

Liquidity and Capital Resources

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Operating Activities

Cash used in operating activities is net loss adjusted for certain non-cash items and change in assets and liabilities.

For 2019 compared to 2018, the $2.0 million decrease in cash used in operating activities was primarily attributable to our decreased net loss with minimal change in working capital.

The reduction in loss was primarily due to the reduction in force and cost control efforts in 2019 which resulted in a significant decrease in salaries and wages as well as other costs.

Increases in our inventory were offset by similar increases in our accounts payable and accrued expenses.

Net cash used in operating activities was $20.1 million and $45.1 million for the years ended December 31, 2020 and 2019, respectively.

This decrease is primarily due to (i) a decrease in our net loss from operations, (ii) less cash being used for working capital components such as inventory and accrued bonuses, and (ii) the sale of our state NOLs, and research and development tax credits for the year ended December 31, 2018 for which we received a net cash amount of approximately $1.2 million in 2020.

Investing Activities

Investing cash flows consist primarily of the purchases and maturity of our marketable securities.

For 2019 compared to 2018, cash provided by investing activities increased as a result of the increase in proceeds from maturities of marketable securities with a reduction in the amount of purchases of marketable securities.

Net cash used in investing activities was $8.0 million and $51.0 million for the years ended December 31, 2020 and 2019, respectively.

This decrease reflects the decline in funds received from the maturity of marketable securities, partially offset by a decrease in our purchase of marketable securities.

Financing Activities

For 2019 compared to 2018, cash provided by financing activities primarily decreased as a result of the issuance of common stock in our 2018 IPO.

The 2019 issuance and partial repayment of short-term debt slightly offset this decrease.

Net cash provided by financing activities was $19.0 million for the year ended December 31, 2020, primarily representing cash proceeds of $17.7 million from the issuance of common stock, $1.4 million from our loan under the PPP, and $1.2 million from a debt financing of certain of our insurance premiums.

These positive cash flows were slightly offset by $1.1 million in repayments related to the financing of our insurance premiums.

During the year ended December 31, 2019, we received proceeds of $0.8 million from the Financing Agreement to fund certain of our insurance premiums of which $0.7 million was repaid as of December 31, 2019.

Liquidity Outlook

Because we have had recurring losses, negative cash flows from operating activities, limited cash on hand and expect to continue to incur losses for the near future, the report of our independent auditors with respect to our financial statements as of December 31, 2019 and for the year ended December 31, 2019 contains an explanatory paragraph as to the factors that raise substantial doubt about the Company’s ability to continue as a going concern.

Our financial statements have been prepared as suming we will continue as a going concern.

Because we have had recurring losses, negative cash flows from operating activities, limited cash on hand and expect to continue to incur losses for the near future, the report of our independent auditors with respect to our financial statements as of December 31, 2020 and for the year ended December 31, 2020 contain an explanatory paragraph as to the factors that raise substantial doubt about the Company’s ability to continue as a going concern.

Our financial statements have been prepared assuming we will continue as a going concern.

We have experienced recurring losses since our inception.

We incurred a net loss of $ 45.1 million and used $ 45.1 million in cash from operations for the year ended December 31, 2019 and had an accumulated deficit of $ 83.

5 million as of December 31, 2019.

At December 31, 2019, we had approximately $ 13.6 million of cash and cash equivalents and $1 0.5 million of marketable securities.

Our expected cash requirements for 2020 and beyond are based on the commercialization success of our products and our ability to reduce operating expenses.

We incurred net losses of $23.5 million and $45.1 million for the years ended December 31, 2020 and 2019, respectively.

As of December 31, 2020, our accumulated deficit was $107.0 million.

As of December 31, 2020, our cash, cash equivalents and marketable securities totaled $22.6 million.

Lincoln Park Purchase Agreement

On March 27, 2020, we entered into a Purchase Agreement with Lincoln Park giving us 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 of the amount and timing of any such sales due to terms and conditions set forth in the Purchase Agreement.

During 2020, we sold 10,179,676 shares of common stock under the Purchase Agreement, resulting in aggregate proceeds of approximately $15.5 million to the Company.

As of December 31, 2020, we had the right to sell under the Purchase Agreement approximately $9.5 million of additional shares of common stock.

In January 2021, we sold an additional 2,750,000 shares of common stock under the Purchase Agreement, resulting in aggregate proceeds of approximately $6.9 million to the Company.

We terminated the agreement on March 11, 2021.

Paycheck Protection Program Loan (PPP)

In May 2020, we entered into a promissory note, or the Note with Citibank, N.A., or the Lender, evidencing an unsecured loan, or the Loan, in the amount of $1.4 million made to us under the PPP.

The loan cash proceeds in this amount were received by us in May 2020.

The PPP is a program of the U.S.

Small Business Administration or the SBA, established under the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act.

Under the PPP, the proceeds of the Loan may be used to pay payroll and make certain covered interest payments, lease payments and utility payments, or Qualifying Expenses.

We used the entire Loan amount for Qualifying Expenses under the PPP.

The interest rate on the Loan is 1.0% per annum.

The Note matures on February 2, 2023.

On September 2, 2021, or the First Payment Date, we are required to pay all accrued interest under the Loan that is not forgiven in accordance with the terms of the PPP.

Additionally, on the First Payment Date and on the second day of each month thereafter until February 2, 2023, we must make equal monthly payments of the amount of principal under the Loan that is not forgiven in accordance with the terms of the PPP and related accrued interest thereon.

We intend to apply for loan forgiveness under the guidelines set out by the SBA, which would result in a delay or elimination of the repayment period, if accepted in whole or in part by the Lender and SBA.

The Note contains events of default and other conditions customary for a Note of this type.

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 Qualifying Expenses, and provided certain payroll thresholds are maintained.

The terms of any forgiveness also may be subject to further requirements in any regulations and guidelines the SBA may adopt.

No assurance can be provided that we 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 our good-faith belief that we 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 we will not become subject to regulatory or other scrutiny and a request for repayment of some or all of the loan.

Sale of Net Operating Losses

We may be eligible, from time to time, to receive cash from the sale of our Net Operating Losses under the State of New Jersey’s NOL Transfer Program.

On May 6, 2020 we received a net cash amount of approximately $1.2 million from the sale of our state NOLs and research and development tax credits for the year ended December 31, 2018.

We expect to continue to incur substantial negative cash flows from operations for at least the next several years as we commercialize gammaCore.

We intend to continue to make targeted investments in building our commercial infrastructure and research and development.

In July 2020, we received an EUA for use of its gammaCore Sapphire CV nVNS therapy for the acute treatment of asthma exacerbations in known or suspected COVID-19 patients.

The length of the effective period of this EUA is uncertain and the Company may have to incur significant expenditures to achieve sales of gammaCore Sapphire CV.

There can be no assurance as to what impact the EUA and potential sales of gammaCore Sapphire CV will have on us, our business operations and financial condition and gammaCore Sapphire CV has not yet generated significant revenue .

Although we expect that our existing capital resources, will enable us to fund our operating expenses and capital expenditure requirements for at least the next 12 months, this estimate is based on assumptions that may prove to be wrong, and could exhaust our available capital resources sooner than we expect.

Changes, including those relating to the payer and competitive landscape, our commercialization strategy, our development activities and regulatory matters, may occur beyond our control that would cause us to consume our available capital more quickly.

We may need to reduce our activities significantly more than our current operating plan and cash flow projections assume in order to fund operations for at least the next 12 months.

There is no assurance that we will generate sufficient cash flow and funding through our operating results or the sale of securities or from a strategic transaction or otherwise, raising substantial doubt about our ability to continue as a going concern within one year of the date the accompanying financial statements are issued.

The inability to generate sufficient cash flow or raise funds through the sources discussed above could have a material adverse effect on our business, results of operations, and financial condition, and could require us to reduce or curtail activities, or cease operations.

Our expected cash requirements for the next 12 months and beyond are based on the commercialization success of our products and our ability to reduce operating expenses.

These conditions raise substantial doubt about our ability to continue as a going concern.

Even if we are not required to curtail our activities sooner, our ability to execute our operating plan beyond 2020 depends on our 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.

Even if we are not required to curtail our activities sooner, our ability to execute our operating plan beyond the next 12 months depends on our 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.

However, these alternatives may not be available to us on attractive terms, or at all.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis