electroCore, Inc. (NASDAQ:ECOR) Q2 2022 Earnings Conference Call August 4, 2022 4:30 PM ET
Company Participants
Rich Cockrell – Investor Relations
Dan Goldberger – Chief Executive Officer
Brian Posner – Chief Financial Officer
Conference Call Participants
John Vandermosten – Zacks
Operator
Good afternoon, ladies and gentlemen and thank you for standing by. Welcome to the electroCore Second Quarter 2022 Earnings Call. [Operator Instructions] A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded.
I will now turn the conference over to your host, Rich Cockrell, Investor Relations. Thank you. You may begin.
Rich Cockrell
Thank you all for participating in today’s electroCore earnings call. Joining me today are Dan Goldberger, Chief Executive Officer; Brian Posner, Chief Financial Officer; and Dr. Peter Staats, electroCore’s Chief Medical Officer. Earlier today, electroCore released results for the second quarter ended June 30, 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 this call that include forward-looking statements within 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 facts should be deemed to be forward-looking statements. A forward-looking statement including, without limitation, our limitation of operating trends and our future financial expectations are based upon the company’s current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements. Accordingly, you should not place undue reliance on these statements. For a list of risks and uncertainties associated with the company’s business, please see the company’s filings with the Securities and Exchange Commission. electroCore 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, August 4, 2022.
And with that, I’ll turn the call over to Dan.
Dan Goldberger
Thank you, Rich. Hello, everyone and thank you for joining us on today’s call. Our business performance continued to improve in the second quarter ended June 30, 2022. Revenue for the second quarter of 2022 hit a record $2.2 million, increasing approximately 70% over the second quarter of 2021 and approximately 14% sequentially. Gross margins expanded to 83% and net cash used in operations was about $3.2 million for the quarter ended June 30, 2022.
We continue to invest in the U.S. commercial channels, especially cash pay business models, including physician dispense comprised of gCDirect and gConcierge and direct-to-consumer through our e-commerce platform. Our physician dispense program has grown to about 637 active prescribers across all cash pay programs. We plan to continue investing in our consumer awareness campaigns initially through paid search and social media in an effort to drive headache patients to our various channels in the United States and United Kingdom. We also plan to expand our social media efforts in coming months.
Net revenue from the U.S. commercial headache channel was $501,000 for the quarter ended June 30, 2022, a 382% increase from $104,000 in the second quarter of 2021. Approximately $452,000 of our commercial revenue in the second quarter came from those cash pay programs. Net sales from the Department of Veterans Affairs or the VA and Department of Defense, or DoD, were $1.2 million, an increase of 53% as compared to $779,000 in the second quarter of 2021. A total of 106 VA and DoD military treatment facilities have purchased gammaCore products through June 30, 2022, as compared to 85% through the second quarter of 2021.
Note that there are approximately 1,300 VA health care hospitals and clinics and over 400 military hospitals and medical clinics. So we still have plenty of potential growth ahead of us. Revenues from channels outside the United States and exclusive of the Teijin license fee increased 8% to $419,000 in the second quarter of 2022 as compared to $387,000 for the second quarter of 2021 and we look forward to continuing growth in this channel for the rest of 2022. That said, currency fluctuations continue to be a headwind to our international revenue.
On April 5, 2022, we announced an exclusive license agreement with Teijin Limited for Japan. Teijin is a global conglomerate based in Japan and they will be an outstanding commercialization partner for the long term. This license covers our proprietary noninvasive vagus nerve stimulation technology for headache and includes provisions to expand to additional indications and/or territories in the future. Teijin will be responsible for working through the regulatory process in Japan at Teijin’s expense with support from electroCore and leveraging previously published pivotal data. The initial license fee will be recognized over the next 4 quarters, of which $48,000 was included in the quarter ended June 30, 2022. The agreement provides for additional license payments tied to successful completion of regulatory and commercial milestones in the future. It also requires an annual license fee that will come due every year starting in April 2023. In addition to the cash consideration, this license agreement further validates the long-term commercial opportunities for nVNS therapy around the world.
On April 19, 2022, we announced that gammaCore noninvasive vagus nerve stimulation, or nVNS, has been selected for additional funding by the Department of Defense Biotech Optimized for Operational Solutions and Tactics, the BOOST program. The BOOST Research Program which will be conducted under the leadership of the 711 Human Performance Wing 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. Should the BOOST program confirm previous findings, the project schedule calls for electroCore to supply field-ready devices to the Air Force in the second half of 2023. We are optimistic that the solution we will ultimately provide to the Air Force will also find favor among other branches of the active duty military in the United States and abroad in the future.
Now turning to our clinical progress. We continue to advance nVNS across several trials. We participated in a pre-submission meeting with the FDA on May 2, 2022, where we discuss our plans in posttraumatic stress disorder or PTSD, mild traumatic brain injury or concussion, nVNS as a bridge therapy for inpatient substance abuse programs and acute stroke among other topics. We believe our presentation was well received and we have several follow-up items to pursue. On July 7, 2022, we announced that Mayo Clinic launched an investigator-initiated study to assess the efficacy of gammaCore Sapphire in patients with post-COVID syndrome.
Post-COVID syndrome, also known as Long COVID is a collection of symptoms that persists more than 28 days after the initial onset of symptoms of infection. Symptoms such as headache, brain fog, fatigue and gastric distress can bear a striking resemblance to the central sensitization syndromes, a group that includes fibromyalgia, chronic fatigue syndrome and postural orthostatic tachycardia or POTS. The study entitled outcomes of treatment with noninvasive vagal nerve stimulation in post-COVID syndrome, a pilot study is a randomized, single center controlled trial enrolling up to 20 subjects recruited from the post-COVID Care Clinic at Mayo Clinic in Rochester, Minnesota.
Now, I’d like to turn the call over to Brian for a review of our financials and other guidance items. Brian?
Brian Posner
Thank you, Dan. For the second quarter ended June 30, 2022, electroCore reported net sales of $2.2 million as compared to $1.3 million during the same period of 2021. This represents a 70% revenue increase over the same period last year. Gross profit for the second quarter of 2022 was $1.8 million as compared to $895,000 for the second quarter of 2021. Gross margin was 83% and 71% for the periods ended June 30, 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 versus expensing the cost of goods at the time of sale. Moreover, in recent quarters, we have sold an increasing amount of longer duration therapy, resulting in a higher average selling price. These factors, including Teijin license revenue with no associated cost of goods and favorable absorption of labor and overhead costs due to an increase in the number of units sold contributed to the increase in gross margin.
Total operating expenses in the second quarter of 2022 were approximately $7.6 million, an increase of approximately $1.5 million from $6.1 million in the second quarter of 2021. Research and development expense in the second quarter of 2022 was $1.3 million as compared to $825,000 for the same period in 2021. R&D expense for the quarter include investment for our next-generation product currently under development. Selling, general and administrative expense in the second quarter of 2022 was $6.3 million as compared to $5.3 million for the same period in 2021. Total SG&A expenses for the second quarter of 2022 included increased investment in our sales and marketing efforts to support our cash pay initiatives.
GAAP net loss for the second quarter of 2022 was $5.3 million as compared to a GAAP net loss of $2.9 million for the same quarter of 2021. Adjusted EBITDA net loss in the second quarter of 2022 was $4.9 million as compared to a loss of $4.1 million during the second 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 June 30, 2022, was approximately $3.2 million as compared to $1.7 million in the second quarter of 2021. Cash proceeds from the sale of our New Jersey NOL carryforwards are included in both the second quarter 2022 and 2021 results. Cash, cash equivalents and restricted cash at June 30, 2022, totalled approximately $26.6 million as compared to approximately $34.7 million at December 31, 2021. Looking ahead, for the third quarter of 2022, we expect net revenue to approximate Q2 2022 levels and net cash usage to be between 4.5 and $5 million.
And now, I’ll turn the call back over to Dan.
Dan Goldberger
Thank you, Brian. I’m very excited about our operating results this quarter and we continue to be in a strong financial position. Longer term, clinical indications beyond primary headache supported by the ongoing clinical developments discussed earlier, could greatly expand the nVNS therapy market. Teijin license we announced in April brings in some nondilutive cash and is a huge validation of the commercial appeal of nVNS therapy around the world. The BOOST project being financed by the Air Force could accelerate the adoption of nVNS for a variety of indications 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.
Our VA/DoD channel and our direct-to-consumer initiatives are showing positive results. Our U.K. business has recovered from a slow start but currency exchange continues to be a headwind to all of our international efforts. I see many potential growth drivers through 2022 and 2023, including continued penetration of our VA/DoD channel in the United States, continued penetration of the United Kingdom market, growth in our U.S. commercial channel driven by cash pay business models and direct-to-consumer advertising, while we continue our efforts to gain commercial insurance coverage and finally, expansion of our international business through our distributor network and added traction within the U.K. e-commerce store.
Longer term, we believe there are real opportunities for label extensions into 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. Lastly, we are exploring growth opportunities to enhance and leverage distribution channels through acquisitions. We’re focused on revenue stage targets that might enhance top line growth and offer other synergies.
At this time, I’ll turn the call over to the operator. Operator, please open the line for questions.
Question-and-Answer Session
Operator
[Operator Instructions] Our first question is from Jeffrey Cohen with Ladenburg Thalmann.
Unidentified Analyst
This is Destiny [ph] on for Jeff. Perhaps I’ll just start with kind of a question to your last piece of commentary there. How is the M&A landscaping looking for you now versus maybe at the beginning of the year, not necessarily like what are you looking at? Because I understand it would be something that is synergistic and revenue generating. But more so, what are you seeing as you’re looking at some of these targets, potential targets?
Dan Goldberger
Yes. Destiny, that’s — it’s a very good question but I’m sorry but I’m going to have to beg off because our M&A activities are relatively long term and we really have to maintain confidentiality about the status and cadence of those activities. But there’s nothing imminent if that’s what you’re asking.
Unidentified Analyst
No top secret information. That’s good. Could you discuss how you’re optimizing your strategies and your messaging to ensure you’re targeting the best individuals in terms of your social strategy, specifically as it relates to your paid efforts.
Dan Goldberger
Yes. So we started at the beginning of the year very carefully starting by just purchasing search terms related to migraine and cluster headache, we’ve been dabbling with Facebook and Instagram. We’re looking at expanding into other social media channels. There’s a small group but growing group of influencers in the various social media channels that are starting to talk about gammaCore therapy. But we’re being very careful about that spend as we improve the efficiency of that spend and learn, for example which ads or which posts are resonating more closely with the consumer audience. So it’s a very, very exciting time for us and we’re looking forward to really accelerating growth as we go through the year and really into next year.
Unidentified Analyst
It sounds like you’re being careful about becoming more confident in investing more resources there. So that’s great. I’m just curious –
Dan Goldberger
You said it better than I did.
Unidentified Analyst
You said you were expecting some additional growth drivers. Could you just go into a little more detail there?
Dan Goldberger
Yes. So the vast majority of our international business comes from the United Kingdom, where the National Health Service will pay for gammaCore therapy. The U.K. in the first part of the year was impacted by COVID but even more so just by staffing shortages throughout their health care system. And while that has eased somewhat, there’s a lot of room for improvement as folks use up their vacation time and return to a more normal clinical services cadence. So we’re optimistic that the sheer number of patients is going to increase throughout the year, just being recognizing that the currency exchanges are going against us and there are sort of the mid-teens headwinds to the work that we’re doing in the United Kingdom.
All of that — over time, all of that is going to even out but we expect solid low teens to mid-teens growth in our NHS business, certainly, on a unit volume basis and ultimately, that will translate as currency short — as currency comes back to normal on a dollar value basis as well. Our European distributors, again, are dealing with the disruptions caused by the war, I guess they’re settling into a new normal and our relationship with Teijin has igniting more interest around the Pacific Rim that hopefully, we can make some additional announcements as we get into the back half of the year.
Unidentified Analyst
And maybe just on that same trend with Teijin, I appreciate you giving us an overview and a reminder of the original agreement. I’m curious, do you have any idea of timing? Or are they keeping everything kind of closed?
Dan Goldberger
So it’s early days. They are planning an initial conversation with the Ministry of Health to work out their regulatory approval process. The key decision point is around the pivotal data that has already been collected to support FDA clearances in the United States and the CE mark in Europe, whether that existing data set will be adequate or whether the Ministry of Health is going to require additional data. And so until they have that meeting and digest the response from the Ministry of Health, we’re really not in a position to speculate about timing.
Unidentified Analyst
And then lastly for me, it’s exciting to hear that the Mayo Clinic is starting in their own investigator-initiated trial. I’m curious, is that an indication that you as electroCore would pursue at some point? Or you could rather wait and kind of see the data and then make a decision from there. Is that — I guess, bigger picture, is that even an area you think to pursue?
Dan Goldberger
Well, we already have an emergency use authorization to treat known or suspected COVID-19 patients who are having respiratory trouble. So one way to think about it is that we already have a clearance technically, I should use the word clearance. It’s an emergency use authorization to promote the therapy in COVID-19. So we’ve been relatively unsuccessful in our efforts to commercialize around the COVID-19 therapy and having a very credible institution like Mayo Clinic, recruit patients and ultimately publish a trial, publish a study that could cause us to reevaluate our commercialization efforts for COVID-19.
Operator
Our next question is from John Vandermosten with Zacks.
John Vandermosten
I noticed the pickup in R&D. And obviously, that’s great because you guys have a lot of opportunities out there. And I heard you say Brian, I heard you say that it’s going to be allocated towards your next-gen products. And I was wondering how does that next-gen product differ from what you have now with Sapphire?
Dan Goldberger
Yes. I’ll take that one, John. So we have — we published quite a bit of intellectual property around a noninvasive vagus nerve stimulator that communicates with a mobile device. And so much of today’s consumer electronics is app enabled. So it would be reasonable to connect those dots and say that we’re working on a next-generation platform that will communicate with a smartphone and allow us to leverage all of that digital health capability inherent in a mobile platform.
John Vandermosten
And then continuing on the R&D theme, I remember that PTSD was a priority for you. Should we expect any R&D expenditures for the second half of this year and perhaps into next year being allocated in that direction?
Dan Goldberger
Yes, absolutely. We’re continuing to support all of the clinical work around PTSD around opioid use disorder, Parkinson’s mild traumatic brain injury. All of those clinical activities are proceeding. We’re very, very fortunate in that our out-of-pocket investments in those clinical trials is relatively low. Most of those clinical trials are being supported by government money either in the U.S. or abroad. We had a meeting with the FDA around our technology, our clinical progress in June. We’re going to have a pre-sub meeting around opioid use disorder that’s being cosponsored by NIDA, the National Institute on Drug Abuse, where after we do that. We’re expecting to schedule a similar meeting to talk about the pathway for PTSD. So we should have quite a bit to report in our November call when we talk about our September 30 results.
John Vandermosten
Yes, looking forward to that. And then regarding the National Spine and Pain Centers relationship, are the units – a couple of questions on that. Are the units going to be there on site? And are they going to be prescribed by physicians there. Is that how that’s going to work?
Dan Goldberger
Yes. So that is structured along the lines of our gConcierge program. And so the various clinics, we have sort of a master agreement with National Spine and Health and then each individual clinic will have a certain number of our devices in inventory. They can be demonstrated and prescribed by the health care professionals in that clinic and ultimately dispensed to patients who are customers of that clinic. So it’s a very exciting national account aspects to our gConcierge program.
John Vandermosten
Yes, yes, exactly. I looked at the map and they’re pretty focused, I think, on the East Coast and kind of coming down to Texas. And so yes. Are there any other opportunities in that corporate account type area in the United States?
Dan Goldberger
Absolutely. And it’s — and we look forward to a cadence of reporting more and more of those national accounts kinds of deals.
Operator
Ladies and gentlemen, we have reached the end of the question-and-answer session. Now I would like to turn the call back to Dan Goldberger for closing remarks.
Dan Goldberger
Thank you, operator. And to all of you who participated today, we appreciate you making time to join today’s call. I’d like to give a special thanks to all of our employees who have been working tirelessly to deliver these amazing results, both financially but even more so delivering our therapy to patients. The hard work and commitment in trying times have helped states at the stage for the growth we’ve demonstrated so far during 2022. And of course, we’re looking forward to 2023. I’d also like to thank the health care professionals and their patients for their loyal support of gammaCore therapy. We’ve made so much progress and it couldn’t have been done without your unwavering support. Thanks, everybody.
Operator
This concludes today’s conference. electroCore thanks you for your participation. You may disconnect your lines at this time.
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