electroCore, Inc.

Greetings and welcome to the ElectroCorps third quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. Our question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Nicole Jones at CG Capital. Please go ahead.

Thank you all for participating in today's Electric Core earnings call. Joining me today are Dan Goldberger, Chief Executive Officer, Brian Posner, Chief Financial Officer, and Dr. Peter Stotz, Electric Core's Chief Medical Officer. Earlier today, Electric Core released results for the third quarter ended September 30th, 2022. A copy of the press release is available on the company's website. Before we begin, I'd like to remind you that management will make statements during the call that include forward-looking statements with the meaning of the federal securities laws, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that are not statements of historical fact should be deemed to be forward-looking statements. All forward-looking statements, including without limitation any guidance, outlook, or statements regarding our future financial expectations or operational activities and performance, are based upon the company's current estimates and various assumptions. These statements involve material risks and uncertainty that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements. Accordingly, we should not place undue reliance on these statements. For a list of the risks and uncertainties associated with the company's business, please see the company's filings with the Securities and Exchange Commission. Electric Core disclaims any intention or obligation except as required by law to update or revise any financial projections or forward-looking statements, whether because of new information, future events, or otherwise. This conference call contains time-sensitive information that is accurate only as of the live broadcast today November 3, 2022. And with that, I'll turn the call over to Dan.

Thank you, Nicole. Hello, everybody, and thank you for joining us on today's call. I'm pleased to report that revenue for the three months ended September 30, 2022, was almost $2 million, a healthy 33% increase over $1.5 million in the year-ago period. Revenue declined slightly sequentially, and I'll discuss some of the puts and takes on revenue later in this call. Gross margins expanded nicely to 87%, and net cash used in operations was about $4.6 million for the quarter ended September 30, 2022. Revenue from the U.S. commercial headache channel was $411,000 for the quarter ended September 30, a 160% increase from $158,000 in the third quarter of 2021. Approximately $359,000 of our U.S. commercial revenue in the third quarter came from cash pay programs. We have several initiatives in the U.S. commercial channel which have delivered mixed results. Our cash pay clinician dispense programs, GC Direct and G Concierge, have grown from 637 prescribers to 937 prescribers in the last 90 days. Revenue from those programs has exceeded our growth expectations, and the 50% increase in prescribers should be a leading indicator of future growth. On the other hand, performance of our e-commerce platform has not met our expectations. We're currently restructuring that channel and expect a streamlined, more exciting offering to launch in January 2023. A few days ago, we announced a distribution agreement with Jaren's Healthcare, LLC. that will add more than 12.5 million covered lives within a select managed care health system. The business model with Jerns will be similar to how we work with the VA hospital system. Jerns will handle adjudications, billing, and collections, while ElectraCore will ship directly to patients and provide in-servicing and patient support. Jerns will pay ElectraCore for devices dispensed. The adjourns agreement will take a few months to implement and our field sales team will be responsible for educating clinicians within those managed care systems during that time. We continue to work towards adding covered lives through negotiations with commercial payers and adjourns announcement should support those activities. Net sales from the Department of Veterans Affairs or the VA. and the Department of Defense, or DOD, were $1.1 million, an increase of 21% as compared to $946,000 in the third quarter of 2021. A total of 113 VA and DOD military treatment facilities have purchased Gamma Corps products through September 30, 2022, as compared to 96 through the third quarter of 2021. Note that there are approximately 1,300 VA healthcare hospitals and clinics and over 400 military hospitals and medical clinics. So we believe we still have plenty of potential growth ahead of us. You'll recall that the federal government budget year ends on September 30th. In 2020 and 2021, we saw VA hospital business increase in September, pulling forward revenue from October. In 2022, Exactly the opposite has happened, and we believe the first few weeks of October may bode well for strong performance from our U.S. government channel in the fourth quarter of 2022. Revenue from channels outside the United States increased 9% to $417,000 in the third quarter of 2022, as compared to $383,000 for the third quarter of 2021. And we look forward to steady growth in this channel for the rest of 2022. That said, currency fluctuations continue to be a headwind to our international revenue. For example, our U.K. business increased more than 11% year-on-year measured in local currency, British pounds, but declined almost 5% as reported in U.S. dollars. On April 19, 2022, we announced that GammaCorp Noninvasive Vagus Nerve Stimulation, NVNS, has been selected for additional funding by the Department of Defense Biotech Optimized for Operational Solutions and Tactics, or the BOOST program. The BOOST research program, which will be conducted under the leadership of the 711th Human Performance Optimization Branch of the United States Air Force, seeks to optimize and validate the efficacy of NVNS in accelerated training, sustained attention, reduced fatigue, and improved mood among Air Force personnel. More recently, we've signed an agreement with the prime contractor and received our first purchase commitment under that contract. We are establishing the tax stem brand of NVNS for human performance as an extension of the boost program. And we're exploring ways to make our initial product offerings available to all branches of the active duty military and first responders in the United States and abroad. Now turning to our clinical progress on September 7th, 2022, the company announced the publication of a peer-reviewed manuscript entitled Transcutaneous Cervical Vagus Nerve Stimulation Reduces Behavioral and Physiological Manifestations of Withdrawal in Patients with Opioid Use Disorder in the journal Brain Stimulation, which was conducted with the support of Emory University and Georgia Tech University and sponsored by a grant from the National Institute on Drug Addiction, NIDA. The double-blind randomized sham-controlled study of 21 patients with OUD found that MVNS reduced both the psychological and physiological symptoms of acute opioid withdrawal. Statistically significant reductions in opioid withdrawal symptoms, distress, and pain were observed over the course of a two-hour protocol for the MVNS group in comparison to the sham stimulations. We subsequently participated in a pre-submission meeting jointly with the FDA and NIDA where we discussed the pivotal trial to support a future regulatory submission for an indication to treat the symptoms of withdrawal. NIDA has indicated that they are likely to finance that pivotal trial in its entirety. On October 20th, 2022, We announced data from an oral presentation at Neurocritical Care Society's 20th annual meeting held in San Antonio, Texas, on the possible role of gamma-core NVNS in the acute treatment of traumatic brain injury, TBI. The presentation was given by Dr. Afshin Devani of the University of New Mexico, who is the primary investigator leading the program, and reviewed animal data demonstrating the ability of NVNS to decrease anxiety and improve motor function post-injury. Additional work on the potential benefits of NVNS on traumatic brain injury will be funded by an exploratory development research grant, R21, from the National Institute of Neurological Disorders and Stroke. We'll continue to provide updates about our pipeline and other opportunities. Now, I'll turn the call over to Brian for a review of our financials and other guidance items. Brian? Thank you, Dan.

For the third quarter ended September 30th, 2022, Electric Core reported net sales of almost $2 million as compared to $1.5 million during the same period of 2021. This represents a 33% revenue increase over the same period last year. Gross profit for the third quarter of 2022 was $1.7 million as compared to $1.1 million for the third quarter of 2021. Gross margin was 87% and 76% for the periods ended September 30th, 2022 and 2021, respectively. Our evolving commercial strategy has resulted in the launch of cash payment models under which we license certain starter devices. The cost of the licensed starter device is being recognized as cost of goods sold over the estimated useful life of the starter device. The incremental favorable impact on gross margin associated with licensing a portion of our devices was 9% in the three months ended September 30th, 2022. Moreover, in recent quarters, we have sold an increasing amount of longer duration therapy, resulting in a higher average selling price. These factors And favorable absorption of labor and overhead costs due to an increase in the number of units sold contribute to the increase in gross margin. Total operating expenses in the third quarter of 2022 were approximately $7.3 million, an increase of approximately $2.2 million from $5.1 million in the third quarter of 2021. Research and development expense in the third quarter of 2022 was $1.6 million as compared to $470,000 for the same period in 2021. R&D expense for the quarter included investment for our next generation product currently under development. Selling, general, and administrative expense in the third quarter of 2022 was $5.7 million compared to $4.6 million for the same period in 2021. Total SG&A expenses for the third quarter of 2022 included increased investment in our sales and marketing efforts to support our cash pay initiatives. Gap net loss for the third quarter of 2022 was $5.5 million as compared to a gap net loss of $4 million for the same quarter of 2021. Adjusted EBITDA net loss in the third quarter of 2022 was $4.8 million, as compared to a loss of $3.1 million during the third quarter of 2021. A reconciliation of GAAP net loss to non-GAAP adjusted EBITDA net loss has been provided in the financial statement tables included in today's press release. Net cash used in operating activities during the quarter ended September 30, 2022. was approximately $4.6 million as compared to 3.4 million in the third quarter of 2021. Cash, cash equivalents and restricted cash at September 30th, 2022 totaled approximately $21.9 million as compared to approximately $34.7 million at December 31st, 2021. Looking ahead, For the fourth quarter of 2022, we expect net revenue to be between $2.2 million and $2.3 million, and net cash usage to be between $4 million and $4.5 million. And now I'll turn the call back over to Dan.

Thank you, Brian. I'm pleased with our year-over-year operating results, and I continue to be very enthusiastic about the company's long-term prospects. Continued investment in our cash pay and insurance-covered business models, as well as clinical indications beyond primary headache, could greatly expand the NBNS therapy market. The BOOST project, being financed by the Air Force, could accelerate the adoption of NBNS for human performance among our active duty military. We continue to build our intellectual property portfolio, and we're developing a very exciting next-generation product platform to leverage it. October has been very strong in our VADOD channel, which we believe may bode well for the fourth quarter. Our cash pay commercial initiatives are showing positive results. Our physician dispense programs are growing faster than expected as new prescribers make GammaCore available to patients directly through their practices or directly from ElectraCore. The adjourns announcement we discussed earlier dramatically increases the number of covered lives with access to insurance coverage for NBNS, and could generate material revenue next year. Our UK business has recovered from a slow start in Q1 2022, but currency exchange continues to be a headwind to all of our international efforts. I see many potential growth drivers in the remainder of 2022 and 2023, including continued penetration of the VADOD channel in the United States, continued penetration of the UK market, growth in our US commercial channel, driven by cash-paid business models and direct-to-consumer advertising, while we continue our efforts to gain commercial insurance coverage and expansion of our international business through our distributor network and added traction within the UK e-commerce store. Longer term, we believe there are real opportunities for label extensions into post-traumatic stress disorder or PTSD, opioid use disorder, and mild traumatic brain injury. The Air Force Boost program could lead to incremental product sales to the active duty military as soon as next year. At this time, I'll turn the call over to the operator. Operator, please open the line for questions.

Thank you. At this time, we will be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. To ask questions, ladies and gentlemen, please press star 1. We have a first question from the line of Jeff Coyne with Please go ahead.

Hi, everyone. This is Destiny on for Jeff. Thank you for taking our questions. I think perhaps I'll start with some questions around the cash pay model as well as the e-commerce channel. That's a really incredible growth in prescribers, so congratulations on that. I'm wondering if you can speak to any any drivers of that growth, or is that something that's just coming about based on awareness, or are there any campaigns you're currently doing to really educate these prescribers? Could you just talk a bit about that, and then I'll circle back to my e-commerce question?

Sure, and Destiny, thank you for the question. A variety of things. We do have a small but aggressive field sales presence And then that's our direct employees are augmented, multiplied by a group of what we call 1099 reps, folks who work for straight commission. And we also have an inside sales function and our marketing function has been getting progressively stronger. So a variety of activities as well as we've moved beyond detailing traditional headache specialists in neurology. And roughly a third of the new G-concierge accounts come from functional medicine, integrative medicine, that tend to be cash pay, concierge-style medicine. And we've also opened it up to chiropractors, and especially functional chiropractors, seem to really have prior knowledge and experience working with the vagus nerve and looking for ways to stimulate the vagus nerve mechanically. And so they're early adopters or quick adopters of our technology for stimulating the vagus nerve noninvasively.

Okay, got it. That's very interesting. Thank you. And then quickly circling back to your e-commerce platform, you mentioned that it hasn't necessarily met your expectations. I'm curious what happened there. Is it a function of your marketing messaging or is it just an issue with the funnel? Or if you could just provide a little detail, that would be super helpful.

Yeah, you know, look, we're not proud of it, but the idea was to partner with a telehealth provider to facilitate prescriptions for consumers who would find it more convenient than going to their local doctor. As a practical matter, the requirement for a prescription creates friction in that e-commerce patient journey. And the platform that we chose in partnership with Vital just had some plain old-fashioned bugs, and it was clunky to use. So we're going to take a deep breath and refresh and restart with what I believe is going to be a much more streamlined consumer experience in the near future.

Okay, got it. That's very helpful.

I should emphasize, though, that our awareness campaign, in paid search and, uh, and social media was remarkably successful at, at bringing interested parties, you know, unique visitors, uh, to our platform. It was, it was moving them through the funnel and turning them into transactions where, uh, where the disappointment came from.

I see. Okay. Got it. So that, I guess that would mean that you have several interested individuals, if you will, that might be interested, um, or might be able to convert at a later date, which could potentially help support the pipeline. Am I understanding? Okay. Okay. Yeah. Yeah.

We have a, uh, we will, we will launch an abandoned cart, um, campaign, uh, once we're comfortable with, uh, uh, the new approved, uh, e-commerce platform.

Okay. Got it. And then I'm just going to quickly transition to the, um, VA and DOD channel and then I'll jump back in queue, but I'm wondering, um, Has the strategy there changed at all? You added several additional hospitals this quarter, which is excellent to see. So any change in strategy? Have you added any additional reps to target these clinics or anything that you can point out there?

Yeah, as usual, Destiny, you're right on top of it. The VA hospital system, you know, the good news is that it's a very sticky business, and the challenge is that it's a high-touch business. And so the combination of our field sales personnel and the associated 1099 reps working in concert with our inside sales and our customer experience team, we're getting better and better at that high-touch stay in contact with the supply chain folks at the VA hospital's as well as just our increased ability to open up new hospitals, partly because of the team that we put together, and let's face it, the pandemic is still receding, and so the VA hospital system is slowly but surely adjusting to the new normal and letting us in.

Okay, got it. Thank you for taking my question.

Thank you.

Thank you. Again, to ask a question, ladies and gentlemen, please press star and one on your touchstone telephone now. We have a next question from the line of John Vandermosten with Zax. Please go ahead.

Hello and good evening, Dan, Brian, and Peter. Glad to have you on the call again. Hi, John. How are you doing? Hello. You know, George, that's a great addition to the portfolio of partners. And I wanted to see if there were any characteristics of the JORN's lives that stands out, maybe in terms of geography or anything like that. I noticed that they did have a pretty broad set of their own partnerships on their website and wondered how the ones that you'll be exposed to are made up.

Yes. So, John, thanks for noticing. And the business model, you know, look, this is giving us access – to a managed care provider. And broad strokes, the insurance agreement is going to work very similar to how we work with the VA hospital system. And from a very high level, the VA hospital system is ultimately a managed care organization where the doctors and the clinical staff are all employees of the hospital, right? So, Jerns is going to handle the back office stuff of adjudicating prescriptions, making sure that the individual is on the right benefit plan and looking at the deductible status and co-pay status and managing all of those collections, whether it's a deductible collection or getting reimbursement from the healthcare system. And then just like we do at the VA hospitals, we will be shipping directly to the patients. Our staff will handle patient education and inservicing, and we will get paid by germs as they go through their collections process. So it's a very exciting breakthrough for us. It's a large, primarily West Coast managed care outfit that is under contract. And it's going to take us a while to get the plumbing, to get the back office stuff to be working smoothly. But once we're sure that it's working smoothly, our field sales staff will start a campaign to call on those facilities, much like we call on the VA hospital facilities.

Okay, great. And how full is your pipeline of prospects in the managed care or commercial space? You know, I know we have, maybe you can also tell me how many we have so far. I know Jones is adding to some others that you've closed earlier, but what does the pipeline look like?

You know, the pipeline is very large, but it is moving very, very slowly. We continue to have conversations around getting added to benefit plans from commercial insurers and and then based on that entering into fee schedule conversations. But I can't say that anything is imminent at this time.

Okay. And last one for me is just on the trend throughout the quarter for sales. I had heard from some other companies out there that they saw a week, July and August, that picked up in September. I know you said VA actually didn't follow that pattern, but I was wondering, you know, in the broader sense, maybe in some of the other segments there, Uh, you know what you saw as a trend throughout the quarter, month to month.

Yeah. I, you know, I, I think, I think we saw that same kind of, uh, I'm going to call it a back to normal seasonality where, uh, July and August are slower because people are taking vacations. People on the clinical staff were catching up on vacations. Um, September was, uh, was stronger. and October has been especially strong. We're really very excited about the momentum we have for October and the first couple days of November. One of the seasonality things that we saw in 20 and 21 was in the federal government system pulling forward some orders from October into September, and I think I mentioned it in my remarks, but We saw the opposite in the VA hospital system of we did not get that bump of orders at the end of September, but it looks like we got that bump of orders at the first couple weeks of October. So I have no idea. In coming months, maybe we'll get some color on whether the budget year has something to do with that or not.

Okay. Yeah, yeah, I know that a lot of the government – entities try to spend their budget at the end of the year, right? So they get it reinstated at the same level. And, you know, on October, is there anything in particular that you can point to, why you think the strength is there? I mean, you know, the stock market's been all over the place, right? And not that that's necessarily a barometer that would drive, you know, sales of GammaCorp, but anything you can point to out there that might, you know, explain why, you know, it's a strong October?

Yeah, I think, you know, look, I think we are getting better and better at running our sales and marketing functions. And the VA hospitals are slowly but surely going through a sort of return to normal. And we've got gradually improving access in the VA hospitals. And for our cash pay, you know, commercial activities, You know, success breeds success, right? We have one or two prescribers in a particular city or town that are starting to have success, and then their colleagues and their competitors notice. So right now, it seems to be a very virtuous cycle, and we're enjoying it.

Great.

Thank you, Dan.

Appreciate your time, John.

Thank you. Anyone who wishes to ask a question at this time, press star and 1 on your touch-tone phone now. We have a next question from the line of Anthony Vendetti with Maxim Group. Please go ahead.

Hi, this is Thomas McGovern speaking for Anthony. So I just have a couple questions regarding the Tenjin Limited Licensing Agreement. So I don't know if it's too early for you guys to speak on this, but have there been any developments, and do you have any more insight on when the Ministry of Health is – when you expect the Ministry of Health to give you guys some regulatory approval in Japan?

So we've had – frequent ongoing conversations and data transfers to our colleagues in Japan, but we do not yet have that first determination. So the first step in the process for Japanese Ministry of Health is to determine if the pivotal data that was collected in the US and Europe will be adequate to support a regulatory filing, or, and unfortunately it's more likely that the Japanese Ministry of Health is going to say that they like all of the pivotal data, but they want to see some number of patients trialed in Japan. So that's going to be an important factor in figuring out the timeline, whether we have adequate data or whether a small follow-up pivotal trial has to be executed.

Gotcha. That makes a lot of sense.

So all I got for you is a definite, maybe.

All right. I appreciate it. So, so in your preliminary, and I know it's not a huge chunk, but you said that of your revenue from outside of the U S about 45,000 of that came from that, from licensing fees associated with that agreement. Is that something that we should expect, uh, as a revenue stream quarter over quarter, or is that, you know, And if so, is it going to be kind of staying at that $45,000 level or will it fluctuate quarterly?

So we got an initial payment in March, which is being amortized over four quarters. So you'll see that number for the next two quarters, right, Brian? Yeah, that's correct. That's correct. And then there's an annual license fee increase. to maintain exclusivity that's smaller, but then the license fees start to kick up again based on clinical and regulatory milestones. So we know what the number will be for the next two quarters, and beyond that it's going to fluctuate.

Okay, great. I appreciate that insight. And so this is my last question. It's about your consumer awareness campaigns, and I know you've touched on this a few times throughout the call. But I remember last time on the call, you mentioned that you were kind of being cautious. You were confident in these approaches to gaining additional clients, but you were also kind of cautious and wanted to see the response you were getting from the social media influencer approach as well as the paid search. And it sounds like both of them are going fairly well, as you said earlier. Could you just provide a little bit more insight on that and how we can expect spending in that area to progress throughout the rest of the year and then, you know, as you guys kind of relaunch with your revised platform for payment in the beginning of 2023?

Yeah, so, you know, just elaborating on Destiny's question, we're very pleased with our ability to drive consumers to the top of the funnel. And that's one measure of the success of the paid search and influencers and social media. And we've got pretty good tracings on which channel drove how many unique visitors. We had a full spend in October, but now that we've made the decision to relaunch the platform, We're turning down the spending in November and December. And then assuming things go smoothly with the relaunch, we'll start to ramp up that spending again in the beginning of next year. So a lot depends on how smoothly the relaunch goes and do we solve for some of those friction points, the clunkiness that I mentioned earlier.

Okay, great. Thank you very much. Those are all my questions. Thank you for taking the time to answer them.

Absolutely. Thanks for your time and attention.

Thank you. We have the next question from the line of John Vandermosten with ZACS. Please go ahead.

I thought I'd ask a follow-up on gross margin since it was so impressive. And I guess I'll kind of frame it like this. If the growth areas that you anticipate growing at a greater degree, continue the trajectory. Do you anticipate gross margin staying in that range where it is now? Because as I understand it, the higher margin comes from just a change in the way you're selling the service.

Yeah. Hi, John. It's Brian. Yeah, we've been over 80% for four quarters in a row. part of it's the way we're selling, and part of it is the product mix, and part of it's just greater revenue. So as long as the top line stays strong, we think we should be able to stay over that 80% gross margin, again, as we've done over the past several quarters.

Okay, great. Thank you.

Thank you. Ladies and gentlemen, we have reached the end of the question and answer session, and I'd like to turn the call back over to Dan Goldberger, CEO for Closing Remarks. Over to you, sir.

Thank you, Operator, and thank you all for joining today's call. I want to give a special thanks to all of our employees, to the healthcare professionals and their patients who've been loyally supporting GammaCore therapy, and we look forward to telling you about our December quarter next year. Stay well, everybody.

Thank you. Ladies and gentlemen, this concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.