Q1 2020 Earnings Call
[music].
Ladies and gentlemen, thank you for standing by and welcome to the first quarter 2020 financial and operating results conference call. At this time, all participants Arnie listen up.
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 the hand, the conference over to your speaker today Mr. Mark Klausner. Thank you and please go ahead.
It's 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 todays call, our neuro genetics, Chief Financial Officer, Steve for a long and Andy Mccann Senior Vice President and General Counsel Steven Andy are also members of the company's office with the precedent.
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.
The impact.
Active.
We'll issue and metrics.
Actual.
So.
Associated with the company's business.
For discussion of risks and uncertainties associated with Normedix business I encourage you to review the company is filings with the Securities and Exchange Commission, including the Companys Annual report on form 10-K filed on March Threerd 2020.
Quarterly report on form 10-Q, which will be.
We 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 payables or Cup.
Putting our press results press release, which can be viewed on our website with that it's my pleasure 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 Covidien 18, pandemic and resulting economic turmoil are impacting our business.
I'll 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 believed the business, while the company recruit a 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 appointed an executive search committee and has engaged in recruiting crop.
Who is performing a formal search for a permanent CEO.
In the meantime, we continue to drive the company's tactical and strategic initiatives with the goal of maintaining and expanding our market leading position.
Shifting gears.
I would 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.
Ripping up.
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 for Anita CMS treatment for depression, we believe that Tms treatment is.
Medical necessity. The company is not aware of any Kobe teen related government order that prohibits the.
Initiation for 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 pms patient treatments.
We believe adoption of state and appropriate pandemic operating procedures by our customers is possible.
And many customers have already established the operating protocols.
To facilitate say 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 similarly, providing guidance to practitioners undeliverable delivery of this important therapy in a manner that is protective of both patients and practitioners.
At this time does not clear when practices that have suspended our curtailed in person patient treatment.
We'll begin to restart patient treatments utilizing the pandemic Tms inpatient treatment protocols.
In the short term, we expect that our capital equipment sales and treatment session revenues will be materially impacted by.
At this pandemic.
As customers are deferring capital purchase decisions and new patient treatments starts and system utilization have declined compared to our pre covance 19 projections.
And.
First quarter total revenue was 11.
Tms treatment is a medical necessity for the treatment of depression system sales slowed and various levels of shelter in place initiatives deterred patients from seeking treatment and cause some customers to temporarily reduce foresees, 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 with a focus 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 layoff furloughs and spending decreases.
The company has 117 employees of which 74 are 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.
Fan and delayed certain project.
Reduce expenses and conserve cash.
The full financial effective 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 shift.
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.
For 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 re.
The line commercial organization.
As it relates to our geographic expansion efforts, we have previously index.
Cadence 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.
Can we have started to see a negative impact from Covidien 19, similar to what we are experiencing in the U.S. we.
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 does that.
James for demonstrating efficacy and trading bipolar disorder and potentially other indications.
Before shifting to a financial review I would like to briefly comment on the line.
Okay.
Switching to stick tactics to exert control over the company. During this 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.
2019 revenue of $12.7 million.
<unk>.
From the beginning of the year until mid March we we're on track to meet our previously announced guidance of 13 point.
$5 million to $14 million.
Starting in mid March the Cobin 19 pandemic government.
Mandated social distance thing and the resulting economic turmoil cause they significant drop off in performance across 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 sell 38, and Aerostar systems, and Q1 2020 compared to 43 systems and Q1 2019.
Similarly treatment session volumes, both from ongoing treatment and new patients starts declined substantially beginning in mid March a shelter in place orders and other.
Similar restrictions were put 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 we cite 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 and 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 slowdown in April with total treatments session revenue down approximately 33%.
Decline was primarily driven by significant decreased and per click treatments session volumes.
<unk>.
Are advanced therapy system revenue for the first quarter of 2020 with $2.6 million, a decrease of 23% versus first quarter 2019 revenue up $3.3 million.
Decrease was primarily driven by fewer neurostar system sales.
As well as lower other revenue related to H.P. coil revenue and the first <unk>.
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 the 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.
Increase of 188 units from the first quarter of 2019, and they net increased a 34 units sequentially.
As a reminder, the active install base includes capital units sold sales type leases and operating lease unit.
Yeah.
In the first quarter U.S. operating leaves revenue was $155000.
Decrease the 15% compared to the prior year quarter.
Due to the accounting change that went into effect in 2019, we don't currently expect to install any new system under operating lease agreements and that this revenue number will eventually go to zero.
But as the terms of these operating leases expire.
In the first quarter of 2020, other U.S. Neurostar advanced therapy system revenue was $29000.
They decrease of approximately 80 per cent over the prior year quarter.
As we saw a significant decline and the number of treatment.
Coil.
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 the 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% compared to first quarter 2019 gross margin of 77.9%.
The decrease was the result of lower blended neuro stuff.
Dark capital system, A.S.P.'s as well as lower per click treatments session volumes during the corner.
Operating expense.
Senses 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 for negative 68 cents per share as compared to first quarter 2019 loss.
Of $7.5 million or four or negative 42 cents per share.
Even after 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 or.
<unk>, 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.
As of 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.
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.
Narrow phonetics intended to use the P.P.P. loan proceeds for exactly these purposes.
Do two questions concerning eligibility a public companies. Similarly, situated to the company the company will repay it's P.P.P. loan on it before may 7th 2020.
Frankly, it's a shame the P.P.P. could've provided an important bridge the companies like ours has it been severely impact by <unk> 19, and lack access other forms of liquidity. The P.P.P. learned 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 compared to 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. We now 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.
It's an early April.
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 stay at 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 purchase is materially lower.
That we would typically see based on these expectations and our April results, we expect our second quarter <unk>.
I have a new to be down materially both sequentially and year over year.
Once restrictions have beneath we believe there is the potential for return and demand for Neurostar advanced therapy, and the back half of the air.
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 biking, new patients starts in response to the intense drain put upon many American 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.
And for question.
Ladies and gentlemen, if you would like to ask a question. Please press Star then the number one on your telephone keypad again to ask a question. Please press star one on your television keypads full pots with just a moment you compiled the key Wednesday roster.
Your first question comes from the line of Margaret cause R. from William Blair.
Hey, good morning, guys things, you're taking a question and the morning. It first.
Started out and we can't.
And dive into the sales and marketing spending the changes he hasn't making there <unk>. So first can you give us details in terms of how many PDMC has 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 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 managed.
Okay, Yeah. So.
<unk> the impact the what that means for kind of two types of account. So you guys have so he reference focusing primarily leno's 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.
Maybe 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 accounts could represent will be represents.
Sure Yeah in in 2009 team, 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 <unk>.
<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 from an M.P.C. and C.T.T.C.T.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 northern attics offerings.
Okay and I think the the question for me is more focus on the legacy account so.
This would be that counts, but I assume maybe were closed a little bit more or maybe it's you know maybe aren't getting as much cannot treatment. During this environment. So between that and maybe yeah <unk> potentially coming to then does that mean that that segment can grow or is it going into klein per bit while you guys refocus back on those 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 these 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 Q3 in 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.
The quarter when things.
Oh that normal in terms of the.
<unk>.
<unk>.
I see accounts any crazy.
Ugly, but you know again as as we communicated on the call.
The the expectations you know as late as.
March 13th where we were going to achieve the the guys that we had previously offered at 13.5.
Colors.
A lot of the inputs from the field, both from B.D.M.D.N.M.P.C.'s, where that at least until that point the the impact on from Cobot 19.
Sure.
And then all of this that that last two and a half weeks of March volume declines were were extremely material. Yeah, I I will say that the program that we put in place was still relatively early in Q1, so it would be difficult to forecast those <unk>.
Nope.
But but we did have yeah, oh, well formalized program to again get those volumes back to where we saw them in the early part of 2019.
Okay sure and then with a castle states or some states opening last week are you seeing any customers in those geography sound I guess any early career you can tell us about finishing opening or treatment session volumes and interested like.
The idea of an up checking more patients coming out of this quarantine meeting the mental health health.
Are you.
Listening for any new marketing efforts around that with your customers anything you can tell us about that would be helpful.
[laughter] so.
Regarding the states that they're starting to ease the restrictions.
Yes, our customers that are seeing those ease things are starting to restart the <unk>.
No.
You know speaking with our T.M.S. only providers, they really haven't skipped a beat they've really been pushing you know to maintain their treatment session volumes.
I think the one area being hardest hit still is the Chicago.
The end of April.
That would indicate to us that you know, it's not 100% correlated but it is correlated to the new patients starts which you would think would lead to you know a bit of a recovery as we headed to maintain Jim I'm. So we are seeing some signs that we are gradually starting that.
Yeah.
And then regarding marketing for notations.
Yeah. So we we have started I would.
Say more strategic focus marketing efforts again, we don't want to get too far ahead of ourselves.
But again trying to preserve cash and being on shore of the the land and the magnitude of covert 19.
But we did see in April the.
The incidence of depression scripts spiked up significantly and 75% of those scripts were for new patients.
So following the the treatment protocol of you know T.M.S.C. indicated for one failed drugs. It's.
You can't envision a a potential increase M.P.M.S. treatments towards the latter half of 2020.
Thank you.
You're welcome.
Your next question comes from Matthew Oh, Brian from Piper.
Or.
I'm more than thanks for taking good morning, Thanks for taking the question.
<unk> I guess just to start with you know with your your various customers out there you've got the T.M.S. only providers to change you got the independence.
Provider.
Because as well can you just talk about their ability to ramp back up from from a capital perspective to get back going I know in the past you've had some or one of your 20 or chain providers actually give you systems back is that potential head when we could see if some people decide that they just can't make it go over it.
Environment.
That we could see over the next several corridor. So just how does things thought out here from a a patient treatment perspective as rates are cute three and then capital perspective is it more you're expecting very little capital sales Q2 to three maybe a little bit more cue for just that the general you know ecosystem, how do we think about things for.
Grossing there.
Yeah, I I think our existing customers will be in the best position to restart since they already have the capital in place.
Again, depending upon the duration of some of the social distancing and stay at home orders some of the lower volume customers could be impacted.
More than than others.
Yeah, I I think one of the the fall out of this pandemic could be some consolidation.
Depending upon the customers both economic and just overall willingness to continue with P.M.S. I I just think it's too early to tell.
You know, we do have a a number of of third party financing financing partners that are still willing to lend to our customers and so at least from that finance in perspective that hasn't dried up at this point and and I know, our our sale seem to fill out there no pushing for it.
Factions and selling as many nurse stars as they can so.
I I do think the the environment.
Will likely change.
Again, it really depends on how long this last and what the economic impact leads to our customers.
But I woke up.
Sorry.
I was going to say that the T.M.S. only partners you know they probably are in the larger the larger facilities are and the best shape to come out of this.
Even stronger.
Okay. So you know I know you're in cash preservation mode, but you're much better capitalised than many of your other competitors in the space. So I'm curious you've got flexible financing plans available for for customers. So is there an opportunity with some maybe wounded.
Competitors to get some of that share away from them in this environment, maybe near term and maybe that being a little bit of a backstop first system placements go.
I I mean that possibility exists.
<unk> and some that you know, making these difficult decisions in reducing our work horse it certainly wasn't easy, but <unk> Andean I as soon as we saw somebody indicators in mid March really starts to decline.
You know knowing that two of our more valuable assets were commercial team and our strong balance sheet. We really wanted to make sure that we were in a great position to come out of this whenever the end of the pandemic coms.
And so yeah part of that strategy could be yeah, maybe being a a bit more aggressive and the sale side using that strong balance sheet to our advantage when it comes to sail and understanding that you know customers are making their purchasing decisions.
Not only on our best in class technology, but also you know the the longevity of the company and you know who is likely to survive and thrive. Once this is all behind us. So so yeah that is certainly a possibility.
Okay, and then just one more for me if you don't mind, just the reductions a a cross organization were a little bit steeper than I was expecting I I got I know you guys are trying to preserve cash the smart move, but again little steeper than I expected. So.
You know as we come out of this what kind of what kind of grower is neuro Nite X., what you know and and how do you support your customers because a big big part of the story really is your customer support than that everything else like that so so what what happens to the organization from here and what kind of grow or do you look like.
You know I I really think part of that will be dictated by the level of economic recovery, but you know similar to a lot of industries and it's just a lot of unknown as to what the fallout will be but the one thing. We did do was can ensure our financial ability to weather the storm.
And I agree we we were I would say extremely aggressive with what we did and late March in early April and it really was to preserve the company you know I.
Assuming things got back to normal or close to what normal was pretty cobin.
Yeah, I I think the company.
You know again with would be growing along the lines of what we previously communicating and again with the increase in depression prescriptions during March and April.
It is reasonable to think that some of that increase we'll eventually head towards T.M.S. therapy.
Thank you.
<unk>.
Your next question comes from so Celia for long from Cannacord Genuity.
Hi.
Q parents, taking our questions I just wanted to ask and again just about your sales force specifically from that Terry.
Respecting some that'd be an perspective kind of what you're seeing now and after the reductions, but then marceau longer term when p. is kind of that coverage it scale level, especially given you're in new kind of focus within just H.T.T.
So the the territory realignment is still working process at this point.
You know we still view.
The territory alignment based on.
Opportunities density you know the amount of of coverage of the B.D.M. can appropriately cover as well as you know I've been a productivity in the back of our mind.
You know, we we do think that once those guitars are fully aligned that the DDMS, we'll have the opportunity to both make money and also service the accounts that they're assign.
So at this time.
Again with the with the increase in T.M.S. only providers some of that opportunity within those territories really is deflected to those partners and so again, we think would the the vertical management integration and that support structure.
Are being again, so we'll be able to be more more efficient and also more productive.
<unk> and we do reserve the the right or ability to add back resources, you know as the economic environment unfolds.
Yeah. This this really was I would say a a very aggressive action to secure a balance sheet, but we will not jeopardize the service offerings that we have in place for our customers.
So if we see strains are pressure is within the commercial organizations, we do reserve the right to to add those resources to assist our customers.
Great. Thank you and I think it also I, just where things are reduced spending this year, just how you're thinking about <unk> specifically the next <unk> in New York pipeline initiative initiatives bipolar being the time anyone but it just how kind of these reduction.
They play out on timeline to not perspective.
Yeah from an R. and D. perspective.
The projects that we had in place at the beginning of the air are are still in place I will say, we we did slow some understanding and r. and D. I again and late March and April <unk>, it's the duration and the severity of cope with that we we didn't fully understand.
So we didn't think it was primitive than to go out.
And kinda execute on original plan that was in place well, we had our original 2020 plan in place.
But that that's still exists and is an ongoing project.
Regarding the other indications again, we've we've communicated <unk> in the past and we continue with discussions with the F.D.A. Obviously, the pandemic has redirected some of the F.D.A. resources honestly they have a lot more on their plate with.
19 than than worrying about you know, how we're gonna structure, our clinical trial with with bipolar, but those discussions do continue and we are hopeful and optimistic that you know we can come up with a collaborative red resolution.
<unk> and see where that heads in the future.
Great. Thank you.
You're welcome.
Thank you. This consist today's question and answer session I, we're now trying to call back to Mr. For a long for any closing remarks.
Thank you all for joining the call today, we look forward to updating you on our progress on our next quarterly earnings call.
Please stay healthy and have a great day. Thank you.
Ladies and gentlemen business conclude today's conference. Thank you for your participation you may know disconnect speakers. Please hold.
[laughter].
[music].
Oh.
[music].
[music].
[music].
Ladies and gentlemen, thank you for standing by and welcome to the first quarter 2020 financial and operating results conference call. At this time, all participants are they listen only mode.
After the speakers presentation, there won't be a question and answer session. Please be advised that today's conference is being recorded I.
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.
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 todays call, our Neurogenetic, Chief Financial Officer, Steve for a long, adding Mccann senior Vice President and General Counsel.
Stephen had the are also members of the company's office with a precedent.
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.
Looking 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 Exchange Commission, including the Companys Annual report on form 10-K filed on March 3rd 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 U.S. GAAP financial measures provides useful information for both management and investors by excluding certain non cash 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 U.S. 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 turn the call over dinner kinetics, Chief Financial Officer steeper along.
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.
Divide 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 in 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 believed 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 GAAP at some of the president.
The board of Directors has appointed an executive search committee and has engaged in recruiting firm who is performing a formal search for a permanent CEO.
In the meantime, we continue to drive the company's tactical and strategic initiatives with the goal of maintaining and expanding our market leading position.
Shifting gears.
I would like to provide an update on our response to the impact of Kobin 19, as well as an update on our business more generally.
As previously announced we have experienced a material impact on our business from co bit 19, as a result, we have taken numerous practice that aim that.
Upping, our employees and customers save.
10 doing 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 isn't debilitating condition that millions of patients suffer from worldwide.
For those undergoing or a neither CMS treatment print depression, we believe that Tms treatment is the medical necessity. The company is not aware of any Kobe died teen related government order that prohibits the initiation or continuation of T. M. S therapy for the treatment of depression.
We estimate today that approximately one third of our customers have temporarily suspended treating patients while many others that have really curtailed tms patient treatments.
We believe adoption of state inappropriate pandemic operating procedures by our customers if possible and many customers have already established the operating protocols.
So, let's say they ongoing use of the company's products.
But he has provide customers with clear sanitizing and disinfecting procedures, but the Northstar Tms therapy system.
Clinical association such as the cliffs has the clinical Tms society are definitely providing guidance to practitioners and the liberal delivery of this important therapy in a manner that its protective about patient and practitioners.
At this time, there's not clear when practices that have suspended our curtailed in person patient treatments well begin to restart patient treatments utilizing the pandemic amat inpatient treatment protocols.
In the short term, we expect that our capital equipment sales and treatment that shouldn't revenues will be materially impacted by this pandemic.
Its customers are deferring capital purchase decisions and new patient treatments starts and system utilization have declined compared to our pre covance 19 projection.
And the first quarter total revenue was $11.5 million.
Down 10% versus the prior year quarter. During the first two months of the out we were on track to hit our previously issued revenue guidance for the quarter <unk>.
Beginning in mid March as the spread of co bit 19 and related staying at home orders accelerated in the U.S.
We started to see 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.
Themselves load and various levels of shelter in place initiative, the turret patients from seeking treatment and caused some customers to temporarily reduce for ceased providing tms therapy.
As a result of both the recent management transition and the anticipated impact of co bit 19, the company implemented a number of steps to adjust the size of the business.
They focus on both near and long term business continuity.
Even before cobot 19, we were evaluating the company's commercial model with the 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 the impact of the pandemic on our business and come out successfully.
We also reduced our marketing spend and delayed certain project.
Reduce expenses and conserve cash.
The full financial effect of these changes will emerge in the third quarter of 2020.
We now project operating expenses and 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.
And it's 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 bit 19 pandemic, our priorities have shifted accordingly.
We had previously cat calibrated our commercial organization using a traditional sales represented the productivity model with the majority of the growth in the business was driven primarily by adding BD and to drive system placements, and adding and Pcs NCTC to improve system utilization.
Jason.
The current revenue pressures along with a shift in our customer base to a higher mix of CMS only providers.
Who have unique buying preferences and system utilization, we now believe that we can support the future growth of the business would 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 do your Japan as the 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.
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 trading 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 narrow networks inherent value or the potential of our products and strategy execution.
Even 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 that 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.
Take over 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.
From the beginning of the year until mid March we were on track to meet our previously announced guidance of 13.5, the $14 million.
Starting in mid March the Cobot, 19, pandemic government mandated social death, and thing and the resulting economic turmoil caused a significant drop off in performance across our business.
Our system sales were heavily impacted in late March as many customers deferred or delayed purchasing decision due to the impact of cobot 19.
Nevertheless, our sales team was able to successfully sell 38 Ameristar system and Q1 2020 compared to 43 system in Q1 2019.
Similarly treatment session volumes, both from ongoing treatment and new patient starts declined substantially beginning in mid March as shelter in place orders and other similar restrictions were put in place throughout the United States.
To provide some context on the magnitude of the decline we are going to share some operating metrics that we typically do not disclose and do not anticipate providing on an ongoing basis.
In March we cite 21% year over year decline and per click treatment session volume.
Even though the cobot 19 disruption did not substantially impact our business until the second half of March.
New patient 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 run rate during January and February.
The trends we experienced in late March continued into April.
Total revenue for the month was down approximately 45% burst April of last year.
Total U.S. capital revenue was most significantly impacted from a year over year perspective down approximately 80% as customers continue to defer or delayed purchasing decisions.
Within the treatment session portion of the business. We saw continued year over year slowdown in April with total treatment session revenue down approximately 33%.
The decline was primarily driven by significant decrease and per click treatment session volumes.
You asked in Aerostar advanced therapy system revenue for the first quarter of 2020 with $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 sale as well as lower other revenue related to HP 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.
In the first quarter Neurostar capital revenue was $2.4 million.
The decrease of 18% compared to first quarter 2019 revenue of $2.9 million.
During the quarter, we saw our active installed base increased by 20% to 1119 units a.
A net increase of 188 units from the first quarter of 2019, and a net increase of 34 units sequentially.
As a reminder, the active installed base include capital units sold sales type leases and operating lease unit.
In the first quarter U.S. operating lease revenue was $155000.
The decrease a 15% compared to the prior year quarter.
Due to the accounting change that went into effect in 2019, we don't currently expect to install any new systems under operating lease agreements and that 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 advance therapy system revenue was $29000.
The decrease of approximately 80% over the prior year quarter.
As we saw a significant decline and the number of treatment coil upgrades purchase during the quarter.
Turning to U.S. treatment session revenue.
Wes treatment session revenue was $8.2 million for the first quarter of 2020, a decrease of 7% over the prior year quarter.
The decrease in treatment session revenue was driven by a decline in average revenue per active system largely caused by a material reduction and per click treatments session volume during March caused by cobot 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 and U.S. treatment session revenues during march being spread over a much.
Spread over a much larger active installed base during the first quarter of 2020.
Gross margin for the first quarter of 2020 was 75.5%.
Impact your first quarter 2019 gross margin of 77.9%.
The decrease was the result of lower blended Neurostar capital system, a fees as well as lower per click treatment session volumes during the quarter.
Operating expenses during the first quarter of 2020 were $19.1 million, an increase of $2.1 million compared to $17 million in the first quarter of 2019.
The increase was primarily driven by Salesforce higher product in clinical development expenses as well as management transition costs.
Net loss for the quarter for the first quarter of 2020 was $12.6 million or negative 68 cents per share as compared to first quarter 2019 law.
Of $7.5 million or <unk> or negative 42 cents per share.
EBITDA for the first quarter of 2020 was negative $10.5 million as compared to the first quarter of 2019 EBITDA of negative $6.4 million.
Moving to the balance sheet as noted earlier, we have put in a significant amount of efforts aimed at ensuring that we have adequate capital resources and liquidity to support the business over both the near and long term.
As of March 31st cash and cash equivalents were $63.6 million.
On April 27, we disclose that we had applied for and received a 6.4 million dollar loan from the Paycheck protection program.
The content of the P.P.P. it to help small businesses like narrowing that and their employees, whether the kobe's 19 pandemic and the business closed a mandate and acted through the U.S.
Narrow networks intended to use the PPP loan proceeds for exactly these purposes.
Due to questions concerning eligibility of public companies. Similarly, situated to the company. The company will repay PPP loan honored before May 720 20.
Frankly, it's a shame the PPP could have provided an important bridge the companies like ours that have been severely impact by Covance 19, and lack access to other forms of liquidity. The P.P.P. learned would have benefited our employees and partially mitigated the significant disruption that.
Hope at 19 has had on our business.
Beyond conserving cash we are significantly reducing operating expenses. The company now estimate operating expenses for the full year 2020 to be in the range of $58 million to $60 million compared to 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. We now believe that we are likely to achieve operating income breakeven at revenue of $18 million to $20 million per quarter.
Looking into the balance of 2020.
Given the ongoing disruption caused by Cobot 19, we withdrew our full year 2020 revenue guidance and early April.
With substantially all of our revenues generated in the U.S. our revenue performance during the remainder of the year will be driven in large part by the cadence a reduction and eventual elimination of co bit 19 related stay at home orders and social distancing restrictions throughout the country.
Q2 capital equipment placements will be highly correlated with new and existing customers willingness to expand their Tms 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 session, where practices are actively treating patients, but we acknowledge that the volume of treatment sessions being purchased is materially lower than we would typically see.
Based on these expectation and our April results, we expect our second quarter revenue to be down materially both sequentially and year over year.
Once the restrictions have been needs. We believe there is substantial for a return and demand for aerostar advanced therapy in the back half of the year. They will not only be a backlog of pace into have not been able to it access treatment during the quarantine who will see get.
But we believe it is entirely possible to see a spike in new patient starts and respond to the intense drain 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.
These customers we are in a good position to help me potentially growing number of MDD patients as they become suitable for Tms.
Making our therapy is more important than ever.
With that I would like to open up the line for questions.
Ladies and gentlemen, if you like to ask a question. Please press Star then the number one on your telephone keypad again to ask a question. Please press star one on your telephone keypad, we'll pause for just a moment to compile the Q1 day roster.
Your first question comes from the line of Margaret because our from William Blair.
Hey, good morning, guys. Thanks for taking the question Ed Good morning first.
Start out we can dive into the sales and marketing spend in the changes he hasn't making there that so first can you give us details in terms of comedy Pdm didn't have as well as NPC, ctcs and whether you're keeping that structure.
We are maintaining that structure I would say the most significant change we made to the sales organization was integrating those to be functions vertically.
You know prior to early March we had a different management structure.
Now, we feel going more vertical with BT, EM and Pcs NCTC under the same manager.
What's the more efficient approach and extremely timely given the environment, we're operating and yeah. The specific numbers I don't think of that relevant at this point, but we do we will be met maintaining that same type of structure and support to our customers.
Okay, Yeah. So.
Yes part of it is the impact the what that means for kind of two types of account. So you guys have so he referenced focusing primarily on or Tim It's only account.
But on the same token yeah, we've seen a little bit of pressure on the legacy accounts over the last few quarters. So maybe you can give us a sense of how you're not strategically changing that focus on that as well as the percentage of sales at those accounts could wrap because that will get represent.
Sure Yeah in 2019, we did see a significant shift in sales to the Tms 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 lever.
All of support that Standalone practices are psychiatrists require so we are able to redirect some of our BD and time to our traditional customer base from an MPC and CTP C.T.C. perspective, it's pretty much the same type of model.
Again those service providers.
Our again self sufficient and have great business models and are able to conduct their business without.
A lot of our support obviously, we do offer training and other types the support to those partners, but they are less reliant on the northern addicts offerings.
Okay and I think the question for me is more focused on the legacy account. So those would be that counts I assume maybe were closed a little bit more or maybe you saw a you know maybe aren't giving as much Tms treatment. During this environment now so between that and maybe that left support potentially coming to them or does that mean.
That segment can grow or is it going to decline per bit while you guys refocused back on the telephone.
Yeah during our last conference call market, we did indicate that we had a program in place to.
Address those legacy accounts, you know, we highlighted the top 150, and our and Pcs have been working with each of those legacy account.
Again, a lot of the operational issues that led to some of those volume declines where I would say easily addressed by our NPC team and hopefully they can get those legacy accounts back to the volumes, where they were prior to that drop off that we saw in Q3 in Q4 of 19.
[music].
Okay got it thanks.
You're welcome.
Your next question comes from the line of Marine doubled from B T I G.
Typically Mary Shan, Hi, I'm, just a follow up on Margaret's question I'm curious what you saw in the first two months the quarter when things were a little bit normal in terms of the success of bomb efforts to increase utilization legacy accounts any color you can give us there.
I'm not specifically, but you know again as as we communicated on the call.
The expectations you know as late as much 13, where we were going to achieve the the guidance that we had previously offered at $13.5 million to $14 million a lot of the inputs from the field both from BT M., Dan Mpcs, where that at least until that point is the impact.
From Cobot 19.
Wasn't really material and then all of the sudden that that last two and a half weeks of March volume declines were.
Extremely material.
Yeah, I will say that the program that we put in place was still relatively early in Q1, so it would be difficult to forecast those results.
But but we did have a.
Well formalized program to again.
Get those volumes back to where we saw them in the early part of 29 team.
Okay sure and then with a couple states or some states opening last week are you seeing any customers in those geography, I guess any early color you can tell us about centers pre opening or treatment crushing volumes and interest is I'd be idea.
Up tick in more patients coming out of this quarantine meeting the mental health help are you positioning for any new marketing effort there around that with your customers anything you can tell us about that.
[noise] up so.
Regarding the states that they're starting to eat the restriction yeah.
Our customers that are seeing those easing are starting to restart the business.
You know speaking with our Tms only providers.
They really haven't skipped a beat they've really been pushing you know to maintain their treatment session volumes.
I think the one area being hardest hit the is the Chicago area, that's that's slowing a little bit of progress there.
But all in all I think you're seeing a general low reopening of those centers the 33% that had ceased treatment.
One of the key indicators that we look at so we track sales utilization, but also the M.T.R. moda threshold starts.
And we D., we did see a nice uptick towards the end of April.
That would indicate to us that you know, it's not 100% correlated but it is correlated to the new patient starts.
Which you would think would lead to you know a bit of a recovery as we head into May and June I'm. So we are seeing some signs that we are gradually starting that uptick.
And now regarding marketing for new stations.
Yes. So we have started I would say more strategic focus marketing efforts.
Again, we don't want to get too far ahead of ourselves.
Again trying to preserve cash and being unsure of the the land and the magnitude of cobot 19.
But we did see in April the.
The incidence of depression scripts spiked up significantly and 75% of those scripts were for new patients.
So following the the treatment protocol of you know Tms <unk> indicated for one failed drug.
It.
You can't envision a potential increase in P.M.S. treatments towards the latter half of 2020.
Thank you.
You're welcome.
Your next question comes from Matthew O'brien from Piper.
Handler.
Hi, good morning, Thanks for taking my good morning, Thanks for taking the questions.
I guess just to start with you know with your various customers out there you've got that CMS only providers to change you've got the independents independent providers as well can you just talking about their ability to ramp backup permit from it.
Cap.
<unk>.