Earnings Call Transcript - NRXS Q4 2024

Operator, Operator

Good day, and thank you for joining us. Welcome to NeurAxis' Fourth Quarter 2024 Financial Results Conference Call. All participants are in listen-only mode at this time. After the presentations, we will have a question-and-answer session. Please note that this conference call is being recorded.

Ben Shamsian, Moderator

Thank you, good morning, everyone, for joining us for NeurAxis' fourth quarter 2024 financial results and corporate update conference call. Joining us today 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 button or simply emailing questions to [email protected]. If you are dialed into the live call, and would like to ask a question, you can follow the instructions provided by the operator. Today's event is being recorded and will be available for replay through the webcast information provided in the press release. Finally, I'd also 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 further 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 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 attending the fourth quarter 2024 earnings call. During today's call, I’ll highlight the continuing accomplishments in our commercialization strategies for IB-Stim, our IBS neuromodulation technology and RED, our product for patients with evacuation disorder. We will recap 2024 and discuss the milestones and growth plans for 2025, as we come off another strong quarter of execution and growth. We continue the commercialization of our market-leading PENFS technology and are closer to the ability to mass scale nationally. Following my remarks, Tim Henrichs, our CFO, will review our financial results for the fourth quarter of 2024. First, I’ll review the recent achievements. As I just mentioned, we are coming off another strong quarter of growth year-over-year, continuing to increase in covered lives and receiving a new FDA indication. This is in addition to the milestones we mentioned on our last call, which were the Category 1 CPT code, which will become effective January 1 of 2026, and the IB-Stim age expansion from 11 years to 18 years of age to 8 years to 21 years of age, nearly doubling our market opportunity. I’ll speak about these announcements in more detail later in the call. We are continuing to execute on our growth objectives, rooted in the foundation that strong published data will drive insurance expansion leading to sustainable revenues and margins. We laid out these objectives in previous calls, and continue to put the final pieces in place to allow blanket insurance coverage and, in turn, the scaling of PENFS revenues. In recent months, we've made significant achievements as we advanced and hit milestones, with the goal of cash flow breakeven and profitability. Regarding IB-Stim, we are primarily focused on revenue trajectory and had significant growth of 40% in Q3 and 43% growth in Q4. We also saw the very beginning of new insurance policy coverage taking effect. As such, I am excited to share with you that the strong momentum of Q3 and Q4 has continued into Q1. I now want to focus on and highlight the catalyst for what we expect to be significant revenue growth in the coming quarters. In the ideal scenario that we have been working toward and are getting very close to, children's hospitals could access blanket insurance policy coverage for their patients and utilize a Category 1 permanent CPT code. For mass scaling and exponential growth, the patient needs to be covered by insurance, and simultaneously, for that ideal scenario, the physician needs to be compensated for their time in the form of RVUs or relative value units, which happens with a Category 1 CPT code. We continue to move closer to this full picture being in place. As mentioned earlier, the Category CPT code has been awarded by the American Medical Association CPT panel and will become effective this coming January 1. Regarding blanket insurance policy coverage, we went from 4 million covered lives on January 1 of last year to approximately 51 million covered lives today. So what does it take to earn the remaining payers? As we've discussed and as we now know, the scientific community and physicians have accepted our flagship technology but have been hindered by a lack of written insurance policy coverage on a national level. The most important recognition any medical technology can receive is independent guidelines by the Academic Society because this is an independent review of the literature and a grade is assigned, which the payers generally accept as the standard. We announced on the Q3 call of 2024 that a systematic review by the Academic Society NASPGHAN, which is the Pediatric Gastroenterology Academic Society, was released at a conference in May 2024, showing the PENFS or IB-Stim technology has the highest grade certainty level and largest magnitude effect. NASPGHAN, as I just mentioned, is the North American Society for Pediatric Gastroenterology, Hepatology and Nutrition and they are the Academic Society for Pediatric Gastroenterology where our technology resides. This systematic review is in abstract form now, but we believe this information is what is being used to publish guidelines any week now. We’re told by the largest payers that this publication is an internal mandate for policy coverage, so we are eagerly waiting for this publication to reach the payers. Sticking with insurance policy coverage, I want to go into detail about the most important aspect of our growth. As we have stated consistently, policy coverage is key to exponential revenue growth. Again, we have had this indication long enough that the Academic Society and the physicians within the society, who treat these patients at the 260 children's hospitals, have been aware and are supportive, but the insurance policy coverage and Category 1 CPT code are imperative for seamless treatment. We also stated that once the insurance policy coverage is written and in place, the children's hospitals that were not already utilizing IB-Stim often take up to 120 days to get the technology loaded, their processes in place, and begin ordering. With all that said, I'm happy to announce we have additional payers as I mentioned earlier, bringing our total covered lives to about 51 million. Additionally and as expected, we have countless payers still in the review process. Regarding the children's hospitals, many have been ordering for years, but for a variety of reasons we have not received insurance policy coverage in those geographic regions. Once insurance policy coverage is written in these areas, the children's hospitals are expected to increase revenue very quickly because the product is already in their system, thus not needing the 120 days to set up. Turning data into insurance policy coverage and then into revenue is a process that we believe is beginning to work well, and the expected Academic Society guidelines will only expedite that process. The second part of the seamless treatment for patients, along with the coverage, is the Category 1 CPT code. On the last call, I mentioned we achieved the company's most important milestone to date in the form of a Category 1 CPT code which will allow for more seamless billing and reimbursement. This is a permanent billing code that will become effective on January 1, 2026. The reason this code is so critical is that it brings a permanent code, making it much easier for revenue cycle teams to bill for the procedure. It will bring a permanent reimbursement amount and it will provide RVUs, which is how most physicians' productivity is measured. One could argue that physicians in the children's hospital are currently treating patients for free because there is no RVU, and this will no longer be the case on January 1. Let us shift to talk about some FDA milestones. Moving to FDA expansions, we have expanded our IB-Stim label to include a patient population beyond the current 11 to 18 years of age to 8 to 21 years of age, as I mentioned earlier, significantly increasing the number of children we can treat. Regarding RED or the rectal expulsion device, our point-of-care device identifies patients with pelvic floor dysfunction and provides immediate actionable test results in patients with chronic constipation. We submitted a 510(k) in early August and we received FDA clearance on that technology on December 6. As we look into 2025, we have submitted to the FDA for an expanded FDA indication for functional dyspepsia in children 8 to 21 years of age. This is critical because it would double our total addressable market, and the synergies within are the same providers treating functional dyspepsia patients. Both IBS and functional dyspepsia fall under the same umbrella of functional abdominal pain disorders, creating synergy for all aspects of our business, including the sales force. Now I'd like to focus on how our efforts translate to revenue growth and why we continue to be bullish on significant revenue growth as we move closer to national insurance coverage and the effective date for the Category 1 CPT code. We are beginning to see many of the achievements reflected in the numbers. The number of treated cases has increased to over 1,000 in the last 12 months, which represents just over 1/10 of 1% of the 600,000 debilitated children in the U.S. who suffer from IBS and are in strong need of IB-Stim. I want to start by highlighting the sustained and increasing demand for IB-Stim. While our revenue growth has accelerated in recent quarters, the facts remain that we are still treating a minuscule portion of the addressable market because of the two factors we have discussed regarding national policy coverage and the CPT code. The positive change we do see here is largely due to accounts becoming more comfortable with billing and coding, physicians seeing the Academic Society guidelines abstract, stating PENFS has the highest grade of evidence and only the very slightest insurance policy coverage taking effect to date. On average, selling prices for patients receiving IB-Stim through financial assistance are roughly 65% below our list price. The insurance barrier is causing us to leave significant dollars on the table, as we have discussed in many calls previously. As insurance coverage continues to increase across the country, the percentage of sales through full purchase orders will also increase. This is why our number one priority with the Category 1 Code imminent continues to be written insurance policy coverage. As we know, the Cat 1 Code becomes effective in roughly nine months from now. Our plan of action is clear. We believe that strong peer-reviewed publications and key society support from the likes of NASPGHAN and the American Academy of Pediatrics result in successful coverage from insurance companies, which leads to strong revenue. Our internal prior authorization team continues to grow and be successful, as it reduces the workload for clinic staff, which allows greater access for pediatric patients and ultimately assists in acquiring a permanent billing code. We believe that in time most accounts nationally will move the prior authorization to the NeurAxis team as we see more and more added each quarter. We expect revenue growth to continue to accelerate meaningfully as we move toward our goal of cash flow breakeven, based on the two catalysts that we discussed today in insurance coverage in the Category 1 CPT code and again the commercialization of RED. Let's talk a little bit more about RED or the rectal expulsion device product, which we believe to be a great opportunity for NeurAxis. We now have FDA clearance, which allows us to soft launch the technology. RED is a self-inflating balloon that is an easy-to-use office-based, point-of-care interrectal function test to identify patients with chronic constipation due to pelvic floor dyssynergia and who are unlikely to improve with increased laxative use. The current treatment involves much trial and error by the physician as to which treatment will work, and RED will allow the physician to streamline the diagnosis and choose the best treatment option after the first visit, which is a real win for the patient. Because the technology already has a Category 1 CPT billing code assigned to the procedure and strong national reimbursement, we believe the providers will be able to bring this clinically beneficial technology to their practice immediately. In summary, we are pleased with the continued and consistent execution of building the foundation of strong data and Academic Society support. Nothing happens as fast as we want, but make no mistake, we are inching very close to the final insurance policy coverage and the effectiveness of the Cat 1 CPT code, which we believe sets the stage for seamless patient treatment and can result in significant growth and profitability. I'll now turn the call over to our CFO, Tim Henrichs, to discuss the financials.

Tim Henrichs, CFO

Thanks, Brian, and let me add my welcome to everyone joining us on the call this morning. These financial results which I'm about to walk through were included within our press release, which was issued earlier and also provided in more detail in our 10-K, which was also released this morning. I will add some color on key areas of the financial results, as well as an outlook on certain areas. The hard work that our team has put in the last few years is beginning to bear fruit. The strong momentum that began in the third quarter last year continued in the fourth quarter, and we are even seeing it into the first quarter as Brian previously mentioned. The good news is that we are only in the early innings of our ramp, as we expect the number of covered lives to continue to grow. In addition, we are optimistic regarding the commercialization of RED. We actually booked our first order in the first quarter of 2025 and expect demand to pick up in the second quarter, through the rest of fiscal year 2025. Given our current cost structure, our goal as a company to reach cash flow breakeven is achievable and is a function of our sales volume, given our strong gross margins. Our recent successes in obtaining substantially more insurance coverage keep us on that path. With that, I'll go through the financial highlights in detail. Revenues in the fourth quarter of 2024 were $761,000, up 43% compared to $531,000 in the fourth quarter of 2023. Unit sales increased approximately 45% due to growth from patients with undiscounted insurance reimbursement and the company's financial assistance program that provides discounts to patients without insurance. The company has made great strides in recent months in gaining insurance coverage, and recent results are indicative of that success. Revenue in fiscal year 2024 was $2.7 million, an increase of 9% compared to $2.5 million in fiscal year 2023. Unit sales increased approximately 19% year-over-year, due to continued growth in patients that are provided discounts through the company's financial assistance program. As Brian mentioned, the strong momentum has continued in the first quarter of 2025, which we expect to be our third consecutive quarter of revenue growth year-over-year. As mentioned before, we remain highly focused on expanding our insurance coverage, despite the inherent lag from insurance coverage device orders, which we have spoken about before. Recent performance indicates strong demand and acceptance on the part of healthcare providers and patients for our product. Gross margin in the fourth quarter of 2024 was 86.4%, the same as the fourth quarter of 2023. Although we saw a significant increase in discounted financial assistance units delivered, outpacing the growth in the higher margin undiscounted full reimbursement program, we had substantial enough growth to maintain a steady gross margin year-over-year in the fourth quarter, and that trend is evidence of our future opportunity. With the Category 1 CPT billing code in place for January 1 of 2026, the devices currently sold at a discount will eventually transition to full reimbursement revenue upon insurance coverage, which will boost our future revenues and gross margin. Gross margin in fiscal year 2024 was 86.5%, compared to 87.7% for the full year 2023. The 120 basis point decline was due to growth in device deliveries from the company's financial assistance programs that are discounted to patients without insurance coverage. Again, as the Category 1 CPT billing code takes hold in 2026 and beyond we expect gross margins to expand. SG&A expenses in the fourth quarter of 2024 were $2.1 million, an increase of 2% compared to the fourth quarter of 2023, which was $2 million. The increase was due to one, the hiring of market access, sales, and finance team members; and two, the introduction of a short-term incentive plan in 2024, mostly offset by cost savings of third-party service spend as the key personnel hires performed the work of previous vendors. SG&A expenses in fiscal year 2024 were $9.5 million, an increase of 7%, compared to $8.8 million in fiscal year 2023. The increase was due to one, incremental headcount to build out the market access sales and finance teams; two, severance charges related to the company's prior Chief Operating Officer; three, one-time advisory costs or the annualization of legal insurance, Investor Relations, Board of Directors, and stock exchange listing costs; four, the introduction of a short-term incentive plan in 2024; and five, higher advertising costs to expand market awareness, partially offset by post-IPO consulting and recruiting fees and IPO bonuses in 2023 that did not recur in 2024. Operating loss in the fourth quarter of 2024 was $1.5 million, an improvement of 10% compared to $1.6 million in the fourth quarter of 2023. That improvement was primarily due to higher sales volumes, partly offset by slightly higher SG&A costs that I previously discussed. The operating loss in the full year 2024 was $7.2 million, an increase of 7% compared to $6.7 million in fiscal year 2023. The increase was due to higher SG&A costs, partly offset by higher sales volume. Net loss for the fourth quarter of 2024 was $1.5 million, a decrease of 73% compared to $5.3 million in the fourth quarter of 2023, primarily due to a lower operating loss and a $3.7 million charge related to the extinguishment of debt upon the company's IPO in 2023. Net loss in fiscal year 2024 was $8.2 million, a decrease of 45% compared to the $14.6 million loss in fiscal year 2023, primarily due to the absence of debt discount, issuance costs, and debt extinguishment charges relating to the company's IPO in 2023, partially offset by a higher operating loss. Our cash on hand as of December 31, '24, was $3.7 million. The company held no long-term debt as of December 31, 2024. However, we did have $154,000 of short-term debt related to the standard financing of our annual business insurance premiums. Cash used in operations in fiscal year 2024 of $6.1 million was $595,000 lower than fiscal year '23 due to more issuance of common stock instead of cash for certain services and lower interest payments from the conversion of debt in the prior year. And with that, let me turn the call back over to Brian.

Brian Carrico, CEO

Thanks, Tim. To sum this up, there are many critical milestones that we have recently seen come to fruition, and we are still at the very early stages of what we see as strong top and bottom-line growth over the next few quarters. The consistent execution of our commercialization strategy is beginning to bear early fruit, as we see from the growth acceleration in the last two quarters. We are also achieving milestones that will enable continued growth, as I spoke about the Category 1 code, increased insurance coverage and the expansion of our 510(k) clearances. Furthermore, we remain excited about our opportunity with RED, which we have just recently soft launched and has the potential to drive significant revenues in the coming quarters. With that, operator, we'd be happy to take any questions.

Operator, Operator

We are beginning to see positive results, particularly with the growth acceleration over the last two quarters. We are reaching key milestones that support ongoing growth, including the Category 1 code, expanded insurance coverage, and more 510(k) clearances. Additionally, we are enthusiastic about our recent soft launch of RED, which could significantly boost our revenues in the upcoming quarters. We are now ready to take any questions.

Ben Shamsian, Analyst

Great. We have some questions that have been sent to us by investors. Brian, can you talk about the significance of receiving the Category 1 code and the 510(k) extensions?

Brian Carrico, CEO

I will address the Category 1 code. We've been working on this for about five to seven years. Obtaining a Category 1 code is very challenging due to the utilization and data requirements, which highlights our achievements in those areas. The importance of the Category 1 code can be difficult to convey, particularly to those unfamiliar with the medical technology field and Relative Value Units (RVUs). However, for those who are acquainted with RVUs, they recognize that most of the physicians we collaborate with—particularly pediatric gastroenterologists affiliated with children's hospitals—base their evaluations on RVUs. Receiving RVUs for a procedure is essentially their form of compensation. If an IB-Stim procedure does not generate RVUs, as I mentioned previously, it means the physicians are effectively volunteering their time. This aspect of the CPT code ensures that physicians receive acknowledgment for their efforts, contributing to their annual targets. Additionally, many Medicaid and commercial insurance providers do not acknowledge the existing Category 3 code, complicating prior authorization processes. The Category 3 code also necessitates that children's hospitals develop a charge bundle, which is quite labor-intensive, contributing to the current revenue situation. The introduction of the Category 1 CPT code will simplify prior authorization processes and ease the workload for revenue officers and billing teams at children's hospitals. Moreover, having a Category 1 CPT code lends significant credibility with payers. As for the 510(k) extension, there are numerous children aged 8 to 21 who are as ill as those aged 11 to 18. We've broadened our target age group from 11 to 18 years to 8 to 21 years, resulting in a roughly 75% to 85% increase in our total addressable market. Since this age expansion, although I'm unsure of the exact percentage of revenue growth, we've received substantial positive feedback from physicians who appreciate this change and are actively utilizing it. We anticipate continued growth in its usage.

Ben Shamsian, Analyst

Okay. We have a question for you, Tim. Can you talk about the variability of the gross margins and how to think about gross margins on a go-forward basis?

Tim Henrichs, CFO

Our reported gross margins are in the mid to high 80s. When we sell an IB-Stim device to a patient with insurance coverage, our gross margins are higher. The gross margins are in the mid to high 80s primarily due to our financial assistance program, which is growing and something we are very excited about. One of our core principles is to ensure that all patients receive treatment, particularly those without insurance or with insufficient coverage. To achieve this, we provide discounts based on patients' income levels. On average, we discount up to 65% off our list price of $1,195 for those in financial assistance. Even with these discounts, our gross margins remain healthy, averaging in the mid to high 80s overall. Looking ahead, particularly when the Cat 1 CPT code is fully established, we anticipate an increase in covered lives and insurance coverage. This will help transition patients from inadequate or no insurance to adequate coverage, allowing us to charge the full reimbursement price. Therefore, we expect that our gross margins will improve as we move into 2026 and beyond, driven by this transition from the CPT Category 1 code.

Ben Shamsian, Analyst

Okay. We have another question sent to us. Brian, what are some of the early learnings from the RED in the commercial mode that you are in now?

Brian Carrico, CEO

Great question. We gathered significant market feedback before deciding to license this technology from the University of Michigan. Key factors for our decision included the presence of a Category 1 CPT code, Medicare reimbursement, and existing coverage by commercial insurance. We recognized there was an unmet need since our soft launch, and the feedback has aligned with our expectations. If we underestimated anything, it would be the size of the practices, which have boards, practice administrators, and CEOs, resulting in a process to navigate. However, positive feedback indicates that the usage expectations from physicians are higher than we anticipated. The physicians are enthusiastic, and our commercial team is very pleased. Conferences are progressing well, and we are optimistic. The second quarter will be crucial in determining our direction for the rest of the year, but we are confident that these developments will lead to meaningful revenue for us.

Ben Shamsian, Analyst

Okay. A question for you, Tim. Given the expected cost structure, what level of revenue do you need to achieve breakeven?

Tim Henrichs, CFO

So at our current run rate, our current cash burn run rate is about $6 million annually. And if you take that and translate it into revenues depending on when we breakeven, in the not-too-distant future, those breakeven revenues will be in that $10 million to $12 million range.

Ben Shamsian, Analyst

Okay. Thank you. A product question, where are your products manufactured and what is your exposure to any potential tariffs?

Brian Carrico, CEO

That is a phone call I have in 30 minutes. But 95% of our technology is sourced and manufactured here in the United States. And I believe the one component we get from overseas is from a country that has no tariffs either way. And I don't believe there is a planned tariff either way. So minimal to none. And again, I have that call in 30 minutes to discuss that. But as of right now, it doesn't appear that we'll be affected.

Ben Shamsian, Analyst

Okay. Thank you. What is the development timeline for a second-generation IB-Stim device and how will that differ from the current version?

Brian Carrico, CEO

We are currently developing Generation 2, which we expect to launch sometime in 2026. This version will have a refreshed, more modern design. While we are still finalizing the details, we've received feedback that patients sometimes don’t feel the device working, which can cause concern. To address this, we're considering adding an infrared light that blinks every 60 seconds to indicate it's operational. Additionally, we are exploring other innovations that aim to improve outcomes in children, with a focus on predicting responses related to heart rate variability and autonomic dysfunction, particularly regarding vagal insufficiency. These concepts are still in the research phase, and while we are making progress on Version 2, the current device remains highly effective with virtually no complaints. I hope this clarifies your question.

Ben Shamsian, Analyst

Okay. We have another question for you, Brian. What is the response after a three-week or four-week course of IB-Stim treatment and what percentage of patients come back for additional treatment courses?

Brian Carrico, CEO

That's a good question. We currently have reliable data from both 6 and 12 months. Last year, we published a study involving seven centers and around 300 patients that showed promising, statistically significant results. Although the physician feedback is primarily anecdotal, about 70% of patients report significant long-term relief. If anyone is interested in a detailed discussion of the data, we can arrange a separate call with Dr. Miranda. It's important to note that while we do have non-responders and some patients who experience partial benefits, the results are not short-lived. Patients do not need to undergo another four-week treatment course shortly after the initial one, as the outcomes are sustainable. We're looking at a total of 16 studies, including two placebo-controlled trials, along with various other study types. This substantial research contributed to strong support from the American Academy of Pediatrics, which submitted the Category 1 CPT code application alongside us. Overall, the data is robust, and the long-term effectiveness of the treatment is both sustainable and statistically significant.

Operator, Operator

This concludes today's Q&A session. I will now turn the call back over for closing remarks. Please proceed.

Brian Carrico, CEO

No, I would just like to say thank you to everyone for joining us today. We appreciate the questions and we look forward to communications with you again very soon via press release. And obviously we'll have quarter one results out in the coming weeks and quarter 1 call in May, and we’ll announce that. So thank you again. Have a great rest of your Thursday.

Operator, Operator

Thank you all for joining today's conference call. You may now disconnect.