Q1 2020 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the first quarter 2020 financial and operating results.
This conference call at this time, all participants are they listen only mode.
After the speakers presentation, there will be a question and answer session. Please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today Mr. Mark Klausner. Thank you and please go ahead Sir.
Thank you operator, a good morning, and thank you for joining us for neural networks first quarter 2020 conference call.
A replay of this call will be available on our website for 30 days.
Joining me on today's call, our neuro kinetics, Chief Financial Officer, Steve for a long and Andy Mccann Senior Vice President and General Counsel.
Even Andy are also members of the company's office with the President.
Before we begin I would like to caution listeners that certain information discussed by management. During this conference call will include forward looking statements covered under the Safe Harbor provisions of the private Securities Litigation Reform Act of 1995, including statements related to our business strategy financial and revenue guidance the impact of Cobot 19.
And other operational issues in metrics actual results could differ materially from those stated or implied by these forward looking statements due to risks and uncertainties associated with the company's business.
For a discussion of risks and uncertainties associated with Normedix business I encourage you to review the company's filings with the Securities and Exchange Commission, including the Companys Annual report on form 10-K filed on March Threerd 2020, and quarterly report on form 10-Q, which will be filed later today the company.
Disclaims any obligation to update any forward looking statements made during the course of this call except as required by law.
During the call, we'll also discuss certain information on a non-GAAP basis, including EBITDA.
Management believes that non-GAAP financial information taken in conjunction with US GAAP financial measures provides useful information for both management and investors by excluding certain noncash and other expenses that are not indicative of trends in our operating results.
Management uses non-GAAP financial measures to compare our performance relative to forecast and strategic plans the benchmark our performance externally against competitors and for certain compensation decisions reconciliations between us GAAP and non-GAAP results are presented in tables accompanying our press results press release, which can be viewed on our website.
That it's my pleasure to turn the call over to narrow networks, Chief Financial Officer, Steve for long.
Good morning, everyone and thank you for joining us on today's call I'll provide an update on recent events that have occurred within the company along with an overview of how the co bid 19, pandemic and resulting economic turmoil are impacting our business.
Ill, then provide an overview of our first quarter financial results.
Provide our thoughts on the remainder of the year and then open the call up for your questions.
Beginning with the management transition in early March the company announced the transition and senior management.
The board of directors establish an interim office of the President made up of myself and Andy Mccann Senior Vice President and General counsel to lead the business, while the company recruits and new CEO.
Additionally, Brian Farley.
The company's chairman of the board was appointed as the Board's liaison to the office of the President.
The board of directors has the power.
Pointed and executive search committee and has engaged to recruiting firm who is performing a formal search for a permanent CEO.
In the meantime, we continue to drive the Companys tactical and strategic initiatives with the goal of maintaining and expanding our market leading position.
Shifting gears.
We'd like to provide an update on our response to the impact of cobot 19, as well as an update on our business more generally.
As previously announced we have experienced a material impact on our business from Covidien 19, as a result, we have taken numerous proactive steps aim that.
Upping, our employees and customers save.
Continuing to support our customers and their patients during the crisis and managing our capital resources with a view towards both near and long term business continuity.
Depression is a debilitating condition that millions of patients suffer from worldwide and for those undergoing or in need of Tms treatment for depression, we believe that Tms treatment is the medical necessity.
The company is not aware of any co bid that 18 related government order that prohibits the initiation or continuation of Tms therapy for the treatment of depression.
We estimate today that approximately one third of our customers have temporarily suspended treating patients while many others have heavily curtailed tms patient treatments.
We believe adoption of state and appropriate pandemic operating procedures by our customers is possible in many customers have already established these operating protocols.
Militate, they ongoing use of the company's products. The company has provide customers with clear sanitizing and disinfecting procedures for the Northstar Tms therapy system.
Clinical association such as the close as the clinical Tms Society are definitely providing guidance to practitioners deliverable delivery of this important therapy in a manner that as protective of both patients and practitioners.
At this time does not clear when practices that have suspended our curtailed in person patient treatments will begin to restart patient treatments utilizing the pandemic Tms and patient treatment protocols.
In the short term, we expected our capital equipment sales and treatment session revenues will be materially impacted by this pandemic.
Customers are deferring capital purchase decisions and new patient treatments starts and system utilization have declined compared to our pre covance 19 projections.
In the first quarter total revenue was $11.5 million.
Down 10% versus the prior year quarter. During the first two months of the year. We were on track to hit our previously issued revenue guidance for the quarter.
Beginning in mid March as the spread of co bit 19 and related stay at home orders accelerated in the us.
We started to see a significant decline in both new system sales and treatment session volumes.
Despite our belief that Tms treatment is a medical necessity for the treatment of depression.
System sales slowed and various levels of shelter in place initiative deterred patients from seeking treatment and cause some customers to temporarily reduced or ceased providing tms therapy.
As a result of both the recent management transition and the anticipated impact of Cobot 19, the company implemented a number of steps to adjust the size of the business, where they focused on both near and long term business continuity.
Even before cobot 19, we were evaluating the company's commercial model would be goal of Rightsizing our organization.
Prior to the restructuring implemented on April eight.
The company had 213 employees, including 152, and the sales and marketing organization.
After the restructuring, which involve layoffs or lows and spending decreases.
The company has 117 employees of which 74 or in the sales and marketing organization.
It was a difficult decision to reduce staffing.
But in doing so we believe the company is then a far better position, so whether a prolonged impact of the pandemic on our business and come out successfully.
We also reduced our marketing spend and delayed certain project.
Reduced expenses and conserve cash.
The full financial effect of these changes will emerge in the third quarter of 2020.
We now project operating expenses in the second half of 2020 to range from $25 million to $27 million.
This represents a projected reduction of our operating expenses in the second half of 2020.
Of approximately one third compared to the first half of the year.
It is our belief that the company can maintain industry, leading customer service with fewer people and more efficient processes.
Given the restructuring and the ongoing economic disruptions caused by the co bid 19 pandemic our priorities have shifted accordingly.
We had previously cat calibrated our commercial organization using a traditional sales representative productivity model, where the majority of the growth in the business was driven primarily by adding BTM to drive system placements, and adding and Pcs NCTC to improve system utilization.
Jason.
With the current revenue pressures along with a shift in our customer base to a higher mix of Pms only providers.
Who have unique buying preferences and system utilization we.
Now believe that we can support the future growth of the business with this realign commercial organization.
As it relates to our geographic expansion efforts. We have previously indicated that we will continue to focus exclusively on the opportunity that exists in Japan.
That strategy remains unchanged as we still view, Japan as a medium term growth driver for the business.
While our expectations for the revenue contribution from Japan for this year. We're not initially significant we have started to see a negative impact from Covidien 19.
Similar to what we are experiencing in the U.S.
We will continue to monitor the situation alongside our distribution partner Tagine.
With.
Our goal of anticipating an appropriate appropriately reacting to changing conditions in Japan.
Lastly, as to our indication expansion efforts.
We are continuing dialogue with the FDA regarding appropriate study designs for demonstrating efficacy and treating bipolar disorder and potentially other indications.
Before shifting to a financial review I'd like to briefly comment on the limited duration stockholder rights plan that we recently announced.
The board believes that the Companys current trading level does not reflect neural networks inherent value or the potential of our products and strategy execution.
Given the share price dislocation created by an extremely turbulent market. The board of directors adopted the rights plan to protect all shareholders' best interest.
The rights plan is designed to guard against opportunistic tactics to exert control over the company during the period of economic uncertainty and market volatility.
Protect long term shareholder value and ensure that all of our shareholders received fair equal treatment in the event of any proposed takeover of the company.
For further details regarding the rights plan. Please review the current report on form 8-K filed on April 820 20.
Now shifting gears to a financial review.
Total revenue for the first quarter of 2020 was $11.5 million.
A 10% decrease compared to first quarter 2019 revenue of $12.7 million.
Cross our business.
Our system sales were heavily impacted and late March as many customers differed or delayed purchasing decisions due to the impact of covert 19.
Nevertheless, our sales team was able to successfully self 38, and aerostar systems and Q1 2020.
Pair to 43 systems and Q1 2019.
Similarly treatment session volumes, both from ongoing treatment and new patients starts declined substantially beginning in mid March as sheltering place orders and other similar restrictions or putting in place throughout the United States.
To provide some contacts on the magnitude of the decline we are going to share some operating metrics that we typically do not disclosed and do not anticipate providing on an ongoing basis.
In March Wesat, 21% year over year decline and per click treatment session volume.
Even though the covert 19 disruption did not substantially impact our business until the second half of March.
New patients starts across all of our customers fell by an average of over 55%. During the final two weeks of March as compared to the average weekly Runrate during January and February.
The trends we experienced in late March continued into April.
Total revenue for the month was down approximately 45% first April of last year.
Totally U.S. capital revenue was most significantly impacted from a year over year perspective down approximately 80 per cent as customers continue to differ or delay purchasing decisions.
Within the treatment session portion of the business, we side continued year over year slow down and April with total treatments session revenue down approximately 33%.
Decline was primarily driven by significant decrease in per click treatments session volumes.
U.S. Neurostar advanced therapy system revenue for the first quarter of 2020 was $2.6 million a decrease of 23% versus first quarter 2019 revenue of $3.3 million.
The decrease was primarily driven by fewer neurostar system sales as well as lower other revenue related to H.P. coil revenue and the first quarter of 2020.
We expect that average selling prices will fluctuate based on the mix of capital sales and sales type.
Leases as well as underlying pricing trends.
And the first quarter Neurostar capital revenue was $2.4 million.
Decrease of 18% compared to first quarter 2019 revenue of $2.9 million.
During the quarter, we saw our active installed base increase by 20% to 1119 unit.
A net increase of 188 units from the first quarter of 2019, and they net increase of 34 units sequentially.
As a reminder, the active install base includes capital units sold sales type leases and operating leash unit.
In the first quarter U.S. operating leaves revenue was $155000 a decrease the 15% compared to the prior year quarter.
To the accounting change that went into effect in 2019, we don't currently expect to install any new systems under operating lease agreements.
This revenue number will eventually go to zero as the terms of these operating leases expire.
In the first quarter of 2020, other U.S. Neurostar advanced therapy system revenue was $29000.
Decrease of approximately 80 per cent over the prior year quarter.
As we saw a significant decline and the number of treatment coil upgrades purchase during the quarter.
Turning T.U.S. treatments session revenue.
<unk> treatment session revenue was $8.2 million for the first quarter of 2020, a decrease the 7% over the prior year quarter.
The decrease in treatment session revenue was driven by decline an average revenue per active system largely caused by a material reduction in per click treatment session volume during March caused by Cobin 19.
During the quarter average revenue per active system was approximately $7600.
Decrease of 22% from the prior year quarter.
Primarily driven by a 16% year over year decrease in U.S. treatment session revenues during march being spread over much.
Fred over a much larger active install base during the first quarter of 2020.
Gross margin for the first quarter of 2020 was 75.5%.
The first quarter 2019 gross margin of 77.9%.
The decrease was the result of lower blended Neurostar capital system, A.S.P.'s as well as lower per click treatment session volumes during the quarter.
Operating expenses during the first quarter of 2024 $19.1 million and increase of $2.1 million compared to $17 million in the first quarter of 2019.
The increase was primarily driven by sales force I or product in clinical development expensive as well as management transition costs.
Net loss no the quarter for the first quarter of 2020 with $12.6 million or negative 68 cents per share as compared to first quarter 2019 law.
Of $7.5 million or four or negative 42 cents per share.
Even for the first quarter of 2020 was negative $10.5 million as compared to the first quarter of 2000, 1980, but of negative $6.4 million.
Moving to the balance sheet as noted earlier, we have put in a significant amount of effort aimed at ensuring that we have adequate capital resources and liquidity to support the business over both the near and longtime.
<unk>.
The March 31st cash in cash equivalents, where $63.6 million.
On April 27, we disclose that we had applied for and receive a 6.4 million dollar loan from the Paycheck protection program.
The intent of the P.P.P. is to help small businesses <unk> in their employees, whether the kobe's 19 pandemic.
And the business closure mandate and acted through the U.S.
<unk> intended to use the P.P.T. loan proceeds for exactly these purposes.
Do do questions concerning eligibility of public companies.
Situated to the company the company will read pay it.
P P.P. loan on it before May 720 20.
Frankly, it's a shame the P.P.P. could've provided an important bridge the companies like ours that had been severely impact by <unk> 19, and lack access to other forms of liquidity. The P.P.P. loan would have benefited our employees and partially mitigated the significant disruption that code.
19 has had on our business.
Beyond conserving cash we are significantly reducing operating expenses. The company now estimates operating expenses for the full year 2020 to be in the range of $58 million to $60 million.
Parents are the previously issued guidance of 70 $678 million.
Based on the restructuring of the business and the realignment of our strategy, we expect operating expenses to be in the range of $12 million to $14 million per quarter.
These levels I mean, I believe that we are likely to achieve operating income break even at revenue of $18 million to $20 million per quarter.
Looking into the balance of 2020.
Given the ongoing disruption caused by covert 19, we withdrew our full year 2020 revenue guidance in early April.
Was substantially all of our revenues generated in the U.S. a revenue performance during the remainder of the year will be driven in large part by the cadence a reduction and eventual elimination of Kobe 19 related staying home orders and social distancing restrictions throughout the country.
Due to capital equipment placements will be highly correlated with new and existing customers willingness to expand their T.M.S. service capabilities. During the Kobe 19, pandemic and their ability to secure financing through third party lenders.
We will continue to drive revenue from treatment sessions, where practices are actively treating patients, but we acknowledge that the volume of treatment sessions being purchased his materially lower than we would typically see.
Based on these expectations and our April results, we expect our second quarter revenue to be down materially both sequentially and year over year.
Once restrictions have beneath we believe there is the potential for returning demand for Neurostar advanced therapy in the back half of the or they will not only be a backlog of patients who have not been able to it access treatment during the quarantine who will seek yet.
But we believe it is entirely possible to see a spike in new patients starts in response to the intense drink put upon many Americans during this period.
Any such increased demand for mental health services should help to keep psychiatric practices and providers in good economic health.
Like these customers we are in a good position to help me potentially growing number of M.D.D. patients as they become suitable for T.M.S.
I think our therapy is more important than ever.
Was that I would like to open up the line for question.
Ladies and gentlemen, if you would like to ask a question. Please press star than the number one on your television key pads again to ask a question. Please press start one on your telephone keypad for possible just a moment to compiled a key Wednesday roster.
Your first question comes from the line of Margaret Khazar from William Blair.
Hey, good morning, guys things for taking the question.
And the morning it first.
Started out we can dive into the sales and marketing span in the changes you guys are making their so first can you give us details in terms of how many P.D.M. do you have with that as well as N.P.C.C.P.C.'s and whether you're keeping that structure now.
We are maintaining that structure I would say the most significant change we made to the sales organization was integrating those three functions vertically.
You know prior to early March we had a different management structure now we feel going more vertical with C.D.M.S.N.P.C.'s N.C.P.C.'s under the same manager was a more efficient approach an extremely timely given the environment, we're operating and.
Yeah, the specific numbers I I don't think of that relevant at this point, but we do.
We will be <unk>, maintaining that same type of structure in the port to our customers.
Okay.
So.
<unk> the impact the what that means for kind of two types of account. So you guys have so he reference focusing primarily on those T.M.S. only account.
But on the same token yeah, we've seen a little bit of pressure on the legacy account for the last two quarters.
You can give us a sense of how your strategically changing the focus on on that as well as a percentage of sales that those account could represent will be represents.
Sure Yeah in in 2019, we did see a significant shift in sales to the T.M.S. only service partners and we are forecasting that to continue into 2020 and 2021, you know these entities, a very self sufficient and don't need the less.
<unk> support that Standalone practices are psychiatrists require so we we are able to you know redirect some of our B.D.N. time to our traditional customer base.
I'm, an M.P.C. and C.T.T.C.P.C. perspective, it's pretty much the same type of model again those service providers.
Or again self sufficient and have a great business models and are able to conduct their business without.
A lot of our support.
Obviously, we do offer training and other types of support to those partners, but they are less reliant on the neural networks offerings.
Okay and I think the the question for me is more focus on the legacy account so.
This would be that counts I assume maybe were closed a little bit more or maybe you saw you know maybe aren't getting as much T.M.S. treatment. During this environment. So between that and maybe yeah less support potentially coming to then does that mean that that segment can grow or is it gonna decline per bit while you guys refocus back on the T.N.I. funny.
Yeah during our last conference call Margaret We we did indicate that we had a program in place to address those legacy accounts you know we highlighted the top 150, and our N.P.C.'s have been working with each of those legacy account.
Again, a lot of the the operational issues that led to some of those volume declines were I I would say easily addressed by R.N.P.C. team and hopefully they can get those legacy accounts back to the volume's, where they were prior to that drop off that we saw in between two three and Q. for 19.
Okay.
<unk>.
You're welcome.
Your next question comes from the line of Marie doubled from B.T.I.G.
<unk> Hi, I'm just to follow up on Margaret's question I'm curious what you saw in the first two months the quarter when things are a little that normal in terms of the success of efforts increase utilization legacy accounts any craziness.
Not specifically, but you know again as as we communicated on the call.
The expectations you know as late as March 13th where we were going to achieve the the guidance that we had.
Yeah.
[laughter].
[laughter].