Earnings Call Transcript - NRXS Q2 2024

Operator, Operator

Good day and thank you for standing by. Welcome to NeurAxis Reports Second Quarter 2024 Financial Results. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would like to hand the conference over to your speaker today, Ben Shamsian. You may begin.

Ben Shamsian, Conference Moderator

Good morning, everyone, and thank you for joining us for NeurAxis's second quarter 2024 financial results and corporate update conference call. Joining us on today's call is Brian Carrico, CEO of NeurAxis, and Tim Henrichs, CFO of NeurAxis. At the conclusion of today's prepared remarks, we will open the call to questions. If you are listening through the webcast, you can send in a question through the portal utilizing the Ask a Question box or by simply emailing a question. If you are dialed into the live call and would like to ask a question, you can follow the instructions provided by the operator by pressing star and 11 button. Today's event is being recorded and will be available for replay through the webcast information provided in the press release. Finally, I'd like to call your attention to the customary safe harbor disclosures regarding forward-looking information. The conference call today will contain certain forward-looking statements, including statements regarding the goals, strategies, beliefs, expectations, and future potential operating results of NeurAxis. Although management believes these statements are reasonable based on estimates, assumptions, and projections as of today, these statements are not guarantees of future performance. Time-sensitive information may no longer be accurate at the time of any telephonic or webcast replay. Actual results may differ materially as a result of risks, uncertainties, and other factors, including but not limited to the factors set forth in the company's filings with the SEC. NeurAxis undertakes no obligation to update or revise any of these forward-looking statements. With that said, I would now like to turn the event over to Brian Carrico, Chief Executive Officer of NeurAxis. Brian, please proceed.

Brian Carrico, CEO

Thank you, Ben. Good morning, and thank you for joining our second quarter 2024 earnings call. Today, I will share our recent achievements in commercializing our innovative neuromodulation technology. We will cover our milestones and growth plans for 2024 and into 2025 as we successfully implement our leading PENFS technology. After my remarks, our CFO, Tim Henrichs, will present our financial results for the second quarter of 2024. First, I want to highlight our recent successes and milestones. We are effectively pursuing our growth goals, with the understanding that solid published data will facilitate insurance expansion, resulting in sustainable revenues and margins. We discussed these goals in past calls and are coming off another successful quarter, moving closer to securing blanket insurance coverage to scale our PENFS revenues. Recently, we achieved significant progress, meeting important milestones and charting a clear route to profitability by 2025. In terms of IB-Stim, we are focused on revenue trajectory and observed a notable shift from Q1 to Q2 as new insurance policy coverage has begun to take effect, alleviating some issues from Q1. Based on our strong performance in the first month of Q3, we are optimistic that genuine revenue growth is underway due to the ongoing adoption of the insurance coverage. The scientific community has accepted our flagship technology but has faced challenges related to insurance policy coverage. Major payers have awaited the academic society’s publication of guidelines for functional abdominal pain associated with IVF. The most significant recognition any medical technology can receive is independent guidelines from academic societies, which include a thorough review of literature and an assigned grade that payers typically accept as the standard. We are pleased to announce the systematic review by NASPGHAN, released at a conference in late May, which indicates our technology has the highest grade certainty level and the most substantial magnitude effect. NASPGHAN, as noted in previous calls, is the North American Society for Pediatric Gastroenterology, Hepatology, and Nutrition, which focuses on pediatric gastroenterology where our technology applies. Although this systematic review does not represent published guidelines, we believe this work will contribute to the publication of guidelines in the coming months. This publication is crucial because we have heard from several large payers that it is a prerequisite for policy coverage. Therefore, we eagerly await its release to payers. Continuing with the focus on insurance policy coverage, I want to discuss a critical element of our growth strategy. As we mentioned late last year and early this year, establishing written policy coverage is essential for increasing revenue substantially. We also clarified that once written insurance policy coverage is in place, it typically takes 90 to 120 days for children’s hospitals to adopt the technology, implement their processes, and commence orders. A specific instance involves the Care First Blue Cross Blue Shield policy that became effective in the D.C. and Maryland regions on January 1st of this year. The two leading children's hospitals in that area began placing orders in May, ramping up in June and July. I am happy to report that we have received written confirmation from one of the largest not-for-profit health plans in the country, serving 12.6 million members, that they have approved IB-Stim for all pediatric gastroenterologists nationwide, with an expected effective date around October 1st. We do not have written policy coverage available publicly yet, but technically we will maintain our total lives at $22.5 million compared to $4.5 million at this time last year. Once this policy is publicly available, our total covered lives will officially reach $35.1 million. Additionally, we have about 15 payers currently in the review process. If a few of these payers make favorable decisions this fall, we expect to surpass the projected 50 million covered lives for early 2024. Turning data into policy and revenue is a process that we believe is gaining momentum, and the anticipated academic society guidelines will accelerate this process. Moreover, we have applied for a Category 1 CPT code that will streamline billing and reimbursement. We have also submitted a request to the FDA to expand our IB-Stim label to include a patient population ranging from 8 to 21 years old, effectively doubling the number of children we can treat. We remain cautiously optimistic that the FDA will approve this age expansion later in 2024. With respect to RED, our rectal expulsion device, it identifies patients with pelvic floor dysfunction and provides immediate test results for those with chronic constipation, licensed from the University of Michigan. We filed an FDA 510(k) application in early August and are optimistic about starting commercialization in late 2024. Finally, we have secured necessary financing from reputable healthcare funds, positioning us well for reaching profitability. I will delve deeper into these topics throughout the call today. I want to shift focus to PENFS or IB-Stim. Over the last five years, we have worked diligently to demonstrate the true efficacy of our therapy, resulting in 16 publications across 10 different types of studies. This accomplishment has provided us with the highest level of evidence for addressing functional abdominal pain in children with IBS. We at NeurAxis take pride in this achievement, which affirms our optimism regarding IB-Stim. I’m excited to say that our efforts are yielding positive results. We anticipate that our abstract will not only influence the guidelines but also lead to an expansion in insurance coverage from major payers. We are beginning to see many of our efforts reflected in our performance metrics. Over the past year, we have treated more than 850 additional cases, which represents just over one-tenth of 1% of the 600,000 children in the U.S. suffering from IBS, who are in clear need of IB-Stim. Now, I would like to focus on how all of this translates into revenue growth and why we foresee an acceleration in revenue in the latter half of 2024 and beyond. We are seeing sustained and growing demand for IB-Stim. In the first quarter, we experienced a 20% decline in revenue year-over-year and a 14% drop in units sold. However, in the second quarter, we witnessed a robust recovery, with a year-over-year revenue decline of about 5% and a noteworthy increase in total units sold by 16%. The positive shift has come from insurance reimbursement, which has turned favorably. There remains a significant population of patients in urgent need of IB-Stim whose insurance does not cover the product. Some patients opt to purchase devices through our financial assistance programs. It’s important to emphasize that the revenue losses from 2023 stem from children's hospitals that require written policy coverage from major payers, which has not yet materialized. That we are mitigating these losses, even without the children’s hospitals placing orders, indicates strong growth in both new and existing accounts. Once major payers finalize their policy coverage, the pause in orders from children's hospitals will come to an end, resulting in considerable revenue growth. Typically, selling prices for patients receiving IB-Stim through financial assistance programs are about 60% lower than our list price. This insurance barrier means we are missing out on significant revenue opportunities. In the first half of 2024 alone, we estimate we have left nearly $2 million on the table from just a small number of children’s hospitals, translating not just to revenue loss, but also impacting our margins. As insurance coverage expands across the country, the percentage of sales through purchase orders will also rise. Hence, securing written insurance policy coverage remains our top priority. Our strategy remains clear: strong peer-reviewed publications and key support from organizations like the American Academy of Pediatrics will drive successful coverage from insurance companies, leading to robust revenue growth. We have examples of children’s hospitals with some policy coverage already translating into significant revenue. Two such hospitals are projected to generate over $500,000 each in annual revenue in 2024, with many others on track to do the same. When considering the 260 children's hospitals and pediatricians’ offices, it's clear why we are optimistic about our revenue trajectory as policy coverage and coding formalize, especially with our first indication. We are also exploring various short-term opportunities, including insurance policy coverage, which we are addressing successfully as previously mentioned. We are expanding our internal prior authorization team to lessen the administrative burden on clinic staff, facilitating greater access for pediatric patients, and helping to secure a permanent billing code. Our internal prior authorization program, launched in 2023, has simplified the complex process of acquiring prior authorization to enhance access to care for children. This program is thriving for those children’s hospitals that have transitioned their prior authorizations to us, and we anticipate that, over time, most accounts will shift their prior authorizations to the NeurAxis team. Regarding the billing code, we currently hold a Category 3 CPT technology-specific billing code that serves some areas well but poses challenges for children’s hospitals when billing insurance. This has delayed patient treatment, even after policy coverage is secured. As mentioned, we have applied for a Category 1 CPT permanent billing code. We anticipate that revenue growth will meaningfully accelerate in the latter half of 2024 and into 2025, moving us toward profitability, driven by two catalysts: ongoing coverage gains from insurance companies for IB-Stim, and the rollout of RED. Demand for the product has never been stronger, but expanding insurance coverage is vital for revenue growth. With 22.5 million lives currently under coverage, many have been effective for less than 120 days. It’s essential to acknowledge the lag time between acquiring insurance coverage for PENFS and when hospitals commence purchasing the product, as billing teams require time to implement the necessary processes. We began to see the impacts of coverage from early 2024 in May and June. For Q3, we expect an even stronger performance. Regarding RED for adult patients, we have recently submitted our FDA filing and are hopeful for clearance and the start of commercialization in late Q4. RED, our rectal expulsion device, represents a significant opportunity for NeurAxis. We have officially licensed this product from the University of Michigan, where it was developed, and have recently submitted a 510(k) to the FDA. We are optimistic about RED being available by late Q4. If successful, this product is expected to deliver substantial clinical benefits to patients, and because it already has a Category 1 CPT billing code and strong national reimbursement, we believe providers will be able to integrate this beneficial technology into their practices immediately. RED is a self-employing balloon that serves as an easy-to-use, office-based test for anorectal function, helping identify patients with chronic constipation due to pelvic floor dysfunction who may not improve with laxative use. Currently, treatment involves considerable trial and error by physicians to determine the best course of action, whereas RED will enable physicians to streamline diagnosis and select optimal treatment options right from the first visit, which is a significant advantage for patients. In conclusion, we are pleased with our consistent execution in building a foundation based on robust data and academic support. This has led to early insurance adoption, which we expect to significantly increase revenues in the latter half of 2024, bringing us closer to profitability and laying the groundwork for a successful 2025. I will now hand the call over to CFO Tim Henrichs to discuss our financials.

Tim Henrichs, CFO

Thank you, Brian, and let me add my welcome to everyone joining us on this call. These financial results were included within our press release, which was issued earlier, and were also provided in more detail within our Q2 '24 10-Q. I will add some color on key areas of the financial results, as well as an outlook on certain areas. From a big picture standpoint, we are continuing to execute on our plans, including the commercialization of our PENFS technology. We have been successful in leveraging our 16 completed studies to gain insurance coverage. We expect the number of covered lives to continue to grow through the end of the year. In addition, we are optimistic with regards to the commercialization of RED in late 2024. As such, we expect revenue growth in the back half of 2024 and into 2025. Given our current cost structure, our goal as a company to reach profitability is achievable and a function of our sales volume, given our strong gross margins. Our recent successes in obtaining substantially more insurance coverage since December keep us on that path. Finally, we have strengthened our liquidity position in the second quarter of 2024, as we secured an incremental $3 million in funding in May, in addition to the $6.1 million in financial commitments in the first quarter of 2024 from strong, long-term investors who know the MedTech space well. So far, we have funded $4.9 million, with the remaining $4.2 million coming in monthly installments through 2025. With that, I will go through the financial highlights in detail. 2024 second quarter revenues were $612,000, compared to $646,000 at the same period in 2023. Although revenues in Q2 '24 declined 5% on a year-over-year basis, this is a significant improvement compared to year-over-year declines of 20% and 13% in Q1 '24 and Q4 '24, respectively. But more importantly, we had more accounts ordering and more patients coming to us via our financial assistance program. As Brian mentioned earlier, our unit sales were up 16% in the quarter year-over-year, and that is why we expect revenue growth in the second half of the year as these discounted financial assistance orders turn into full reimbursement dollars with policy coverage. The quarter-over-quarter decrease was primarily due to fewer shipments to certain customers as they managed through the insurance reimbursement process to insurance policy coverage, partly offset by an increase in volume from our financial assistance customers. New customers and total patients coming to NeurAxis have increased, but they have come through our financial assistance programs. Due to a lack of written insurance policy coverage, they are paying a discounted price and lowering our average selling price and revenues. As mentioned before, we are highly focused on expanding our insurance coverage. While we have made great strides in recent months in gaining coverage, note that there is a lag until accounts begin ordering while our customers get their coding and billing processes implemented for our new device. As such, we expect revenue growth late into 2024 and into 2025. Gross profit for the second quarter of 2024 was $538,000 compared to $578,000 in the second quarter of 2023. Although the gross profit declined due to sales volume, we continue to have strong gross margins. Gross margin in the second quarter of 2024 was 88% as compared to 89.5% in the second quarter of 2023. The decline is primarily due to growth in our financial assistance program, which offers discounts to patients without insurance coverage. Our operating loss in the second quarter of 2024 was $2.2 million compared to $1.1 million in the second quarter of 2023. The increase was due to a number of factors. First, our lower sales volume resulted in lower gross profit, but the demand is there to turn that around once our new insurance coverage has become reimbursable for our patients. Second, payroll increased as we continue to build out our market access and sales teams to secure that insurance coverage on behalf of our patients that will benefit from the IB-Stim device. Third, we have incremental public company costs in the second quarter of 2024, such as legal, insurance, investor relations, exchange listing, and board fees that did not exist in the second quarter of 2023. Fourth, our advertising spend increased as we look to expand our market access. Finally, we incurred $435,000 related to non-recurring severance and consulting costs. Our net loss in the second quarter of 2024 was $2.9 million versus a $2.2 million net loss in the second quarter of 2023, primarily due to higher general and administrative costs and the non-cash settlement of certain pre-IPO Series A preferred stock shareholder claims, partly offset by the elimination of debt discount, issuance costs, debt extinguishment, and derivative pair valuation charges. Our liquidity position has substantially improved as we had $1.8 million of cash on hand as of end of June 30, 2024, compared to $51,000 as of June 30, 2023. That increase was primarily due to the funding of $4.9 million in financing during the first six months of the year, partially offset by cash used by operations of $2.9 million in 2024, compared to $1.2 million in 2023. The increased outflow was primarily due to higher general and administrative costs, including market access and sales payroll, as well as continuing to secure insurance coverage, new public company costs, such as legal and investor relations, exchange listing and board fees that were not previously incurred, and higher advertising costs as we looked to expand our market access, as well as payments made to past vendors, which did not occur in the second quarter of 2023. In addition to cash on hand, we have access to $4.2 million of capital as a result of our recent financing transactions with healthcare-focused investors. With that, let me turn the call back over to Brian.

Brian Carrico, CEO

Thank you, Tim. Let me conclude with where I started. I cannot stress enough how the consistent execution continues to lay the foundation and pathway to meet our goals, and we are seeing the results of that via insurance policy coverage to release some of the issues that were present and reflected in Q2, and moreover to start Q3. This is what the milestones we are achieving, and it's setting NeurAxis up to achieve accelerated growth in the second half of 2024 and into 2025. We remain focused on leveraging the strong data from our studies, leading us to insurance acceptance from the lives we have covered today to a significantly higher number by the end of 2024. Furthermore, we remain excited about our opportunity with RED, which we expect to become commercial in late 2024 and has the potential to be our largest revenue driver in the 12 months following. With that, operator, we'd be happy to take any questions.

Operator, Operator

Thank you, everyone. Our first question comes from Mark Foster with Kirr Marbach & Co. Your line is open.

Mark Foster, Analyst

Hey, Brian. Good morning.

Brian Carrico, CEO

Good morning.

Mark Foster, Analyst

A couple of questions for you. If I look year to date, your operating expense is averaging roughly $2.5 million a quarter. So obviously, to get the breakeven, you've got to ramp sales pretty good to cover that. Can you talk a little bit more? I mean, you've given some indications of what's out there and maybe teased us a little bit with July. What kind of visibility do you have into that? Can we still expect breakeven by the fourth quarter of this year?

Brian Carrico, CEO

Good questions. A couple of answers to those questions. I won't speak for Tim and the CFO, but I think a significant number of those expenses in the first half of the year and late last year were non-cash, non-recurring. But I won't get into those numbers. If you have specific questions around the financials, Tim can answer those. Regarding the growth, yes, we've had a very nice start to Q3 because of the policy coverage that took effect early this year. It's starting to take hold in only a couple of accounts. There are three or four large payers that we are told by them are waiting on the guidelines. And 90%, 95% of the children's hospitals nationally are waiting on those large payers. The revenues that we have are from a very small number of children's hospitals. We're not attached to those guidelines. The guidelines are going to be published independently, so we don't know if that will happen next week or if that will happen in October or September. We just don't know when those will be published, and that's why those are so strong is because they come independently from the academic society. Regarding profitability, I think on the last call I said we expect to be profitable within 12 months, which would be Q1 of 2025. I don't see any reason to change that. I'd call that guidance, but I don't have any reason to change that line. So we're more confident today, especially with things starting up for Q3, than we were even six or eight weeks ago. We're very pleased with the insurance policy coverage that's taken effect in those areas and how that's translating to revenues in those few areas, and I'll stress few. We have countless, multiple accounts from revenue we lost in 2023. I don't have the exact number in front of me, but well over a million dollars where accounts were billing, insurance companies receiving no authorization required and then not being paid. So those accounts are all on hold. As I said today, we've brought that revenue back to down 20%, down 5%, and Q3 is looking very nice to date. And I think that everyone's going to be pleased with the direction we're going. I can tell you that we're certainly confident in the position and still have no reason to believe that we aren't trending towards profitability in Q1 of '25.

Tim Henrichs, CFO

Great. Mark, let me address the expense question directly. It's a good one, right? We pay attention to it, of course. You mentioned $2.5 million on average, which obviously is correct through Q1, Q2. Specifically for Q2, our G&A expenses were higher than a year ago by about $1.1 million, but last year we were not a publicly traded company yet, and that has added about $375,000 quarter-over-quarter. Then in the current quarter, we actually did incur about $625,000 of one-time cost of severance and consulting that will not recur next year. So that would put our G&A expenses at about $100,000 higher than last year on a pro forma basis. And looking forward, when you exclude these one-time costs in the second quarter in particular, but it would flow into the first quarter as well, our current quarterly G&A run rate is approximately about $2 million. So just trying to bridge the gap for you between the $2.5 million and the $2 million because of one-time charges in there.

Mark Foster, Analyst

That's helpful. So what's a reasonable cash burn number going forward?

Tim Henrichs, CFO

So our cash burned depending on the month, but it's in between $400,000 and $500,000 a month. And year-to-date, on the cash flow statement that we filed in Q today, it's right around $3 million, and it's rated at that $500,000 mark on average through the first six months of the year. We continue to believe that we'll hold that through the remainder of the year. From an expense standpoint, those numbers that I just gave you, I don't really expect those to change that much in the last six months of the year. It is our ability to continue to get insurance coverage, drive IB-Stim revenue, and then when we get, we believe when we get the approval from the FDA on RED, that top line revenue will drop down at pretty healthy gross margins, which will drop all the way down into operating profit and improve our profitability position.

Mark Foster, Analyst

Right. Okay. So you've got $1.8 million cash on hand. You've got $4.2 million in these monthly installments. So $6 million, if your cash burn is $500, out of that $6 million, you've got a 12-month runway. So if you think you're profitable in the first quarter, you shouldn't need any additional financing given what you have on the table currently. Is that correct?

Tim Henrichs, CFO

We're cautiously optimistic. We would never say never, of course; we can't dictate. We see the abstract that was posted. We're told that that's what the guidelines will be published based on. We can't dictate when those guidelines will be published, and then we can't dictate how many months it takes for payers to actually put policy coverage in place or if there's some additional unexpected unforeseen hurdle, but assuming the guidelines are published this fall and the insurance companies take those guidelines and translate those, the policy coverage as we're told, then we're cautiously optimistic we have the funding we need to get us to profitability based on current knowledge.

Mark Foster, Analyst

It seems like your relationships with Inspire, Flagstaff, those firms have been pretty good. If you needed to do that, I assume those are still viable options?

Tim Henrichs, CFO

I wouldn't commit funding for anyone for them, but I'm confident, it's safe to say we have a strong relationship with these investors, yes.

Mark Foster, Analyst

Okay, great. Thank you very much.

Tim Henrichs, CFO

Sure.

Ben Shamsian, Conference Moderator

Hey, Brian. We have a question that was sent in. Can you talk about any feedback from doctors or patients who've used IB-Stim?

Brian Carrico, CEO

Yes. I mean, at this point, the overwhelming majority of pediatric gastroenterology physicians tell us that there's nothing in this space with as much evidence and nothing that performs nearly as well as IB-Stim, and as soon as the blanket policy coverage is in place, we will see the results of that. Regarding patients, the number of letters and emails we get from families who have had their lives changed for the better continues to grow exponentially. You have to remember that the revenues we are seeing, and this goes back to Mark's questions, are from only a small number of children's hospitals who have some insurance policy coverage, and even those children's hospitals aren't treating most of the children they need to treat. Again, as I mentioned earlier, just in the past 12 months, we've only treated about one-tenth of 1% of the children that are debilitated and in need, so it's safe to say that we have complete academic society buy-in and the technology is here to stay.

Ben Shamsian, Conference Moderator

Okay. We have another question for you. Can you talk about the timeline for the commercialization of RED, and how do you think about the revenues for the product?

Brian Carrico, CEO

Good question. Two things. We know the need is immense, and we also know there's already a CPT-CAT1 billing code and blanket commercial and Medicare insurance policy coverage. Predicting revenues is difficult at this point because we cannot market the product. We, of course, have internal models which we are not ready to share, but as we launch and apply those models to reality, we'll be able to share those and give guidance.

Operator, Operator

And I'm not showing any other questions on the phone lines.

Brian Carrico, CEO

Okay. Well, thank you all very much for being with us today. We look forward to communicating with you again soon. Have a great Friday and a great weekend. Thank you.

Operator, Operator

Thank you, ladies and gentlemen. This concludes today's presentation. You may now disconnect and have a wonderful day.