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Edited Transcript of NVTR earnings conference call or presentation 31-Jul-19 8:30pm GMT

Q2 2019 Nuvectra Corp Earnings Call

PLANO Aug 22, 2019 (Thomson StreetEvents) -- Edited Transcript of Nuvectra Corp earnings conference call or presentation Wednesday, July 31, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Fred B. Parks

Nuvectra Corporation - Interim President, CEO & Director

* Jennifer J. Kosharek

Nuvectra Corporation - Interim CFO, VP, Controller & Principal Accounting Officer

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Conference Call Participants

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* David Louis Turkaly

JMP Securities LLC, Research Division - MD and Senior Research Analyst

* Matthew Jay Wizman

Raymond James & Associates, Inc., Research Division - Senior Research Associate

* Matthew Oliver O'Brien

Piper Jaffray Companies, Research Division - MD and Senior Research Analyst

* Tram Bui

The Ruth Group, Inc. - SVP

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Q2 2019 Nuvectra Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Ms. Tram Bui from The Ruth Group. You may begin.

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Tram Bui, The Ruth Group, Inc. - SVP [2]

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Thanks, operator, and thanks, everyone, for participating in today's call. Joining me from the company are Fred Parks, Chief Executive Officer; and Jennifer Kosharek, Interim Chief Financial Officer. This call is also being broadcast live over the Internet at nuvectramed.com, and a replay of the call will be available on the company's website for 90 days.

Before we begin, I'd like to caution listeners that comments made by management during this conference call may include forward-looking statements within the meaning of federal securities laws. These forward-looking statements involve material risks and uncertainties. Such forward-looking statements are not guarantees of future performance and actual results and outcomes could differ materially from our current expectations. For a discussion of risk factors, I encourage you to review our 10-K, 10-Q and other reports filed or to be filed with the Securities and Exchange Commission.

Furthermore, the content of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, July 31, 2019. Nuvectra undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this call.

With that said, I'd like to turn the call over to Fred Parks.

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Fred B. Parks, Nuvectra Corporation - Interim President, CEO & Director [3]

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Thanks, Tram. Good afternoon, everyone, and thank you for joining us today for Nuvectra's Second Quarter 2019 Earnings Conference Call.

On today's call, I will, first, provide a commercial update and discuss our strategic initiatives that we believe will accelerate Algovita revenue growth, including optimizing our sales force by rebalancing the composition of the team in addition to enhancing our peripheral device experience for patients. Secondly, I'll provide comments on our full-body MRI conditional submission to the FDA for Algovita that could further expand our market opportunity.

Next, I'll turn to Virtis and provide an update of our plan to complete chemical composition and biocompatibility studies that will support our PMA submission and ultimately expand our technologies into adjacent markets. And then I'll turn over the call to Jennifer, who will review our financial performance for the first -- for the quarter before opening the call to Q&A.

Starting with the commercial update. It's always been Nuvectra's mission to provide physicians with world-class neurostimulation technology that improves the lives of patients suffering from chronic conditions. Algovita represents our current commercial focus that will allow us to achieve that objective.

We believe our IPG core technology and leads offer greater control and precision as compared to other currently marketed products and expect to perpetually improve patient experiences. Further, penetrating the SCS market demands continued ergonomic enhancement of our user interfaces and peripheral devices. Likewise, we continue to advance the platform technology with Virtis for sacral neuromodulation and our development agreement with Aleva for DBS, which is nearing completion.

During the second quarter, Algovita sales grew 7% year-over-year, which we believe will again outpace the overall SCS market while falling short of our internal expectations. Similar to last quarter, our growth was muted by flat rep productivity and lower-than-anticipated sales headcount with successful hiring, offset by unplanned turnover. In part, selling [efforts] have been impeded by some reports of patient frustration with the Algovita charging process.

Our core technology continues to function as designed and labeled -- repeating, our core technology continues to function as designed and labeled, but we believe the ergonomics of the charging process sometimes creates frustration amongst patients. After listening to feedback from physicians, patients and our sales professionals, we believe minor enhancements will improve ease of use and drive rep selling productivity in 2020. We have 80% of our engineering talent devoted to remediating the peripheral concern and have implemented a 4-phase project, of which we have the first phase completed and rolled out to the field and expect to finish the remaining phases by mid-2020.

During this time, we recognize we need to provide additional support for our sales force and remain intent on driving increased levels of productivity. We're continuing to focus our hiring efforts in geographies with large SCS market opportunities, surmountable hospital committee hurdles and established clinical support. However, the fact is that our sales force has been diverted from optimal selling time due to the increased patient interactions. The patients and their experiences always come first.

In the near term, as we look to sustain high-volume accounts and broaden our relationship with physicians and key customers, we will add up to 10 clinical specialists over the next 90 days that should result in improved productivity, starting as early as the fourth quarter of this year. We believe this additional support will concurrently improve retention, not only of territory managers but also of key customers. Meanwhile, our sales reps will continue to sell, and clinical specialists will supplement the management of the charging burden as they have -- many have already been doing.

We also believe full-body MRI-conditional approval for the FDA, which we will discuss in a few minutes, will abate some of the rep turnover. The goals remain to establish a core sales force currently at approximately 60 from which productivity can be consistently improved to drive revenue growth and overall efficiency.

Taking all of this into consideration, we have revised our 2019 Algovita revenue guidance range to $50 million to $55 million. This adjustment is almost totally related to the issue of charging, which will gradually resolve over the next few quarters.

As you can imagine, I am actively devoting much of my time to the revenue issue and assisting our sales professionals during this transition. We remain confident in the Algovita platform technology and in our sales force to reinvigorate the growth through the execution and maturation of the stated initiatives.

Turning now to the Algovita MR-conditional approval cycle. In the second quarter, we completed the regulatory submission with the FDA for full-body MR-conditional approval that will further strengthen Algovita's competitive position. Full-body MR approval in the United States will enable the physicians to treat a larger pool of patients, thus expanding our addressable market and supporting future growth. We anticipate approval around year-end 2019 following the FDA's 180-day review process.

Now to the Algovita chemical -- clinical update. Moreover, we have continued to advance the clinical profile of Algovita during the INS 14th Annual World Conference. We announced preliminary Algovita clinical data for our U.S. and EU multicenter single-arm study, which demonstrated lead fracture and migration rates below that of the industry average. That's good, being below average.

Specifically, incidents of lead migration and lead failures while using Algovita SCS systems were 5% and 0%, respectively, at 1 month. These results are significantly lower than that observed in industry literature of 15.5% and 6.4%, respectively. We believe these results further validate the safety of our Algovita system and demonstrate one of our key differentiating factors.

Now turning to Virtis. On our last call, we reported the FDA had requested additional information. Our intention is to satisfy that latest request with supplementary data on our Virtis leads with chemical composition and biocompatibility studies. We've promptly initiated the studies and they are proceeding as expected, which keeps us on track for the Q4 2019 submission and an expected Virtis approval during the first half of 2020, of course, all subject to the FDA. We look forward to the opportunity to expand into adjacent opportunities with Virtis, which would represent another growth lever for the company in 2020.

With that, I'd like to turn the call over to Jennifer, who will cover our financial performance for the second quarter.

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Jennifer J. Kosharek, Nuvectra Corporation - Interim CFO, VP, Controller & Principal Accounting Officer [4]

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Thanks, Fred, and good afternoon, everyone. In the second quarter, we generated revenues of $12.3 million, representing an increase of 4% from $11.9 million in the second quarter of 2018. Our Algovita revenue in the second quarter was $12.3 million, a 7% increase from $11.5 million in the second quarter of 2018.

Gross profit in the second quarter of 2019 was $6.8 million or 55% gross margin, an increase from $6.1 million or 51% gross margin in the second quarter of 2018. This increase was primarily due to a decrease in inventory-related charges and an increase in the volume of Algovita sales.

Operating expenses in the second quarter of 2019 were $17 million, a 1% decrease from $17.1 million in the second quarter of 2018. Net loss for the second quarter of 2019 was $11.1 million or a loss of $0.62 per share compared with a net loss of $11.8 million or a loss of $0.83 per share for the second quarter of 2018.

Total cash and cash equivalents were $69.8 million as of June 30, 2019. Based on our current plans and expectations, we estimate this cash balance provides us with sufficient funding beyond the next 12 months. However, we recognize the concerns surrounding our liquidity and are currently exploring multiple options to address the issue, including evaluating potential strategic relationships.

Also, earlier this month, we filed a shelf registration statement containing both a base perspective and an at-the-market perspective. These are common equity products that will provide us with maximum flexibility for future capital raises. Additionally, a process to refinance our existing debt facility is underway.

I'd now like to turn the call back over to Fred.

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Fred B. Parks, Nuvectra Corporation - Interim President, CEO & Director [5]

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Thanks, Jennifer. So to conclude, prior to the Q&A, I would like to reiterate that Nuvectra is committed to driving sustained growth and remains confident in our platform technology.

In the near term, we will execute on the following initiatives to be successful: first, to ultimately accelerate the Algovita revenue growth trajectory by selectively growing our sales team, adding clinical specialists and targeting strategic reason -- regions in order to drive sales rep productivity; second, to expand our Algovita label further with a full-body MRI-conditional approval with the FDA; third, to complete and then submit the chemical composition and biocompatibility studies that will support our Virtis PMA submission; and finally, to further improve our financial profile and liquidity while driving responsible growth consistent with fiscal realities to build shareholder value.

Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Matthew O'Brien from Piper Jaffray.

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Matthew Oliver O'Brien, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [2]

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I guess, Fred, for starters, can we just -- can you expand a little bit more on the issue that you saw from the patient perspective as far as recharging goes? Because this is the sentiment from the market for a while, and I'm not sure why this issue is surfacing now. And just the confidence that you have in getting all 4 phases done by the middle of next year and exactly what improvements you're expecting to make to the system in that time frame.

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Fred B. Parks, Nuvectra Corporation - Interim President, CEO & Director [3]

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So I'm going to go backwards. We have designed, and I am very confident that we will execute consistent with the expectation of having this behind us by mid next year. As I've said, we've already implemented one thing, which will add significantly to the intervals between charging requirements, which is a big boost out there for this situation, and we detail the risk. There's no technology issues. I put it in the bucket of we probably put a little more technology in the peripherals than was absolutely required. That's not so uncommon. But we're now trying to simplify that for the users.

As you already know, Matt, the procedures are done. And largely, the continuing maintenance of the patients is moved heavily in our direction through the programming obligation. But I've observed a procedure of recent -- where I can see a little bit of confusion the patients had. Our sales team, to be fair, has said to us this is something we need to look into. But I think it's sort of the water behind the dam. We have been successful. The revenues have been increasing, and so we just put this in a little bit of a lower priority bucket.

And we now see, as the patients require more of the territory manager's time to -- and we -- they get our first priority because they're implanted, it has consumed that selling effort. And in the 2 quarters that I've been here, I now deem that excessive. We, first, have to satisfy the patients, but we need to free up that selling time and that is what we're doing now. We're going to hire some supplementary labor. I'm absolutely confident we'll be able to get the people onboard, and they will be very effective on the front end. I hope I've answered your question.

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Matthew Oliver O'Brien, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [4]

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Okay. Yes, that's really helpful, Fred. Appreciate that. What about the back half ramp in the business? I mean it's still a pretty meaningful step-up for the back half versus the first half to get to the low end of guidance. And so with the sales force that's still going to be spending a lot of time with patients and the clinical specialists likely won't kick in until at least Q4 somewhat, what gives you the confidence in maybe getting to that back, the back end -- or back half number even at the low end of the range?

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Fred B. Parks, Nuvectra Corporation - Interim President, CEO & Director [5]

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Another good question. First of all, we don't expect it in Q3. So it's really a Q4 story. It's always a Q4 story for us but probably a little heavier this year.

How confident am I? I'm pretty confident. I mean we've been carefully -- we vetted this in every direction you can internal to the company, and we are hoping that the MRI approval is going to be in effect to help us in the last month of the year. But I certainly got a surprise in the last 90 days, and that's why we've had to revise our guidance. Never had to do that in this kind of an interval. So we're paying a little extra attention this time around.

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Matthew Oliver O'Brien, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [6]

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Okay. And last question for me, it's for Jennifer. Just the gross margin in the quarter was better than I was modeling, and maybe I wasn't factoring in as much of the scrap that you had last year. But can you talk about the trajectory of that metric as we exit this year?

And then to follow up on that, the SG&A number was a lot lower than I was modeling as well. So where does some of those cost savings come from? Where does that metric or that line item trend over time as you're adding these clinical specialists whereas you're not, I don't think, adding as many sales reps?

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Jennifer J. Kosharek, Nuvectra Corporation - Interim CFO, VP, Controller & Principal Accounting Officer [7]

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Sure. So first, the gross margin. Certainly, we saw Q1 of this year significantly lower than we've seen in the past and do anticipate the remainder of this year to be in the mid-50s, low to mid-50s range, kind of returning to where we had seen it at the end of last year. And of course, that still leaves room for improvement, which we are working on.

Regarding SG&A, of course, as you mentioned, CSs wouldn't add a significant amount of additional costs, especially over the time frame we're going to be adding them into 2019. And as revenues may be worth at the -- I'm not sure the levels you modeled, commissions would've been lower for your sales and marketing. And as a reminder, we had in the G&A some extra costs, as we talked about last quarter, for factories and severance.

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Operator [8]

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Our next question comes from Dave Turkaly from JMP Securities.

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David Louis Turkaly, JMP Securities LLC, Research Division - MD and Senior Research Analyst [9]

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Just to follow up on the charging issue. It was my recollection from trips out there that I thought one of the advantages of Algovita was that the patient controller and the programming was easier than some of the competitors', and I think you mentioned intervals between charging. But are you saying that they have to charge it more frequently? And then you also mentioned patients being confused. So I'm just trying to get at what exactly is the issue because I thought that was one of the benefits that I had heard in the past.

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Fred B. Parks, Nuvectra Corporation - Interim President, CEO & Director [10]

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I can't speak to what you've heard in the past. I can tell you that I've talked to everybody in the circle of the charging. First of all, as I've said, you can still charge. That's not an issue in terms of the compliance with the expectations of the device. But it's -- I won't -- let's see, let's pick the right words here.

The confusion about it, so you have -- the alignment of the charging paddle with the IPG, if you get that alignment and they're communicating, perfect process. What we have learned for some patients is they're not as attentive to the alignment process and not indiligent in compliance with that.

I would say, for our people in the field that provide that education intensity, that's worked well. But it's not a process to be taken lightly at all. And so adding the clinical specialists who do that for a living -- and by the way, we may deploy some of those that are doing other things today into that specialty, we'll lift it.

And I return to the first question that I don't think this issue was going to haunt us very long. Each quarter, it's going to improve and will be a nonissue in fairly short order. But I can't answer your question about the ease with which it was represented to earlier.

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David Louis Turkaly, JMP Securities LLC, Research Division - MD and Senior Research Analyst [11]

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And just to be clear, so the patients are having some sort of -- so you mentioned the time taking the territory guys maybe out of some of their selling opportunities, but it's actually -- some of these patients are having an issue with their charge. So they -- when they're charging, so they're calling the rep and he has to come back and show them how to do it again. Is that sort of what's happening?

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Fred B. Parks, Nuvectra Corporation - Interim President, CEO & Director [12]

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What happens, Dave, is routinely, our people would be -- go back to the implanting office. So they might say, I'll be in your office, I'm making this up, Tuesday morning. And any patients that wanted to be reprogrammed would come in to that period and so it's scheduled. We do not go to homes to do any of the programming.

And what we're seeing is that the patients are requiring more assistance. You're right. And as they do, what would normally be selling time is being diverted into supporting and maintaining those patients. It's in our interest to do that. We want them to have a good outcome. We don't want them reporting any concerns about dissatisfaction of their procedure to the physician.

So we sort of own that and we're making a conscious decision that we're going to devote more energy to make sure that goes well. As the improvements are made on the ease of use side to make them more successful, that time will drift away and that time will once again become selling time.

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David Louis Turkaly, JMP Securities LLC, Research Division - MD and Senior Research Analyst [13]

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Got it. Last one for me, just quickly. The -- you mentioned, I think last quarter, you had 60 reps. I think your goal was to get to 75. You mentioned some attrition. I was wondering if you might be willing to give us where that kind of stands today or where your clinical specialist force stands today.

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Fred B. Parks, Nuvectra Corporation - Interim President, CEO & Director [14]

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I don't know exactly how many clinical specialists we have in the field. We can maybe -- somebody can...

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Jennifer J. Kosharek, Nuvectra Corporation - Interim CFO, VP, Controller & Principal Accounting Officer [15]

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(inaudible) report that, right?

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Fred B. Parks, Nuvectra Corporation - Interim President, CEO & Director [16]

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I don't know that we report that, but it's substantial. I mean if you ask me what I think this is in addition to, I would say it might be a 20% increase, maybe 30% increase from what we have. They're available. The process has already started and some are coming onboard now. And the first part of your question, Dave, I forgot.

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David Louis Turkaly, JMP Securities LLC, Research Division - MD and Senior Research Analyst [17]

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I think you had 60 or something, 60 reps in last quarter and you were going to 75 for the year. I'm wondering if -- is that still the target? Where is it now? Did you have -- are you down from that 60? You mentioned attrition.

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Fred B. Parks, Nuvectra Corporation - Interim President, CEO & Director [18]

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We're about in the same place. And I think it's got a combination of -- we've continued to hire, we've had training classes. We've had attrition on the other side. So it's sort of nets to the same place.

I would say about the 60, and I'm sure you've listened in the prior calls, when I surveyed the sales team and asked them how much of your time are you working below skill level, and what I said is, in some cases, 20%. That's not unusual. But in some cases, we've had reps working at 75% of their time non-selling.

So the point I'm making is with 60 reps selling, supporting their physicians and involved with the original portion of this with patients, we have plenty of capacity to get to $100 million. So it's not so much at this point the number of reps, but how they use their time.

So we will continue to add. I would -- hopefully would add a number between now and the end of the year. But at this stage, to get to our revenue targets, it's more about how they spend their time than their number.

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Operator [19]

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(Operator Instructions) And our next question comes from Matt Wizman from Raymond James.

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Matthew Jay Wizman, Raymond James & Associates, Inc., Research Division - Senior Research Associate [20]

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I'm on for Jayson Bedford. So my first question, I just want to clarify something. For the guidance, is a lift from an expected MRI approval embedded in the guidance? Or would that be upside to guidance right now?

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Fred B. Parks, Nuvectra Corporation - Interim President, CEO & Director [21]

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It's embedded in the guidance.

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Matthew Jay Wizman, Raymond James & Associates, Inc., Research Division - Senior Research Associate [22]

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Okay. Okay. Got it. And then Jennifer had mentioned that one of the things you guys are exploring is strategic relationships. Could you give a little bit more detail on what this would look like and just a bit more detail on that?

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Fred B. Parks, Nuvectra Corporation - Interim President, CEO & Director [23]

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You listened well, and we'll go a little bit into it, but we couldn't go very far. There are companies that would have an interest in us on a partial basis. And to the extent that, that might be part of the liquidity issue as we go forward, we're not relying on that, but we know there is an audience for that discussion. So we are listening more than retrieving at this place.

I'd say our base case is that we would go a conventional route. We don't want you, we don't want physicians, we don't want our team worried about this liquidity issue, and that's why it's a very high priority for us. But there may be an upside, I think, with some kind of a tactical partner in that regard. Probably shouldn't stretch it beyond that point, Matt.

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Matthew Jay Wizman, Raymond James & Associates, Inc., Research Division - Senior Research Associate [24]

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Okay. Got it. I appreciate the color there. And then I have a question on the cash burn. Are you still looking at about $10 million a month, I believe you said before? And then in that sense, are you taking actions to kind of streamline the cost structure, obviously, other than hiring the clinical specialists and things like that?

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Fred B. Parks, Nuvectra Corporation - Interim President, CEO & Director [25]

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So I think the question -- you said $10 million a month. Actually, I think you meant $10 million a quarter. And the answer is we don't expect that burn for the second half of this year. We expect a few million less than that perhaps each quarter in the second part.

And we are looking at other ways to conserve that, depending on what we discover from a liquidity availability, and we are developing plans should that happen. But we think we can solve that with a more conventional route at this stage.

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Matthew Jay Wizman, Raymond James & Associates, Inc., Research Division - Senior Research Associate [26]

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Okay. I actually have one final quick one. So I think last quarter, sales outside the U.S. provided a small amount of upside. I'm curious how trends were outside of the U.S. and if the strategy there has changed or kind of what the strategy is there. And that's it.

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Fred B. Parks, Nuvectra Corporation - Interim President, CEO & Director [27]

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I'm going from memory. You may know what the number is, but I sort of record that there's a $1.2 million to $1.5 million of OUS. It doesn't come in any particular pattern. It comes when it comes.

You're right. We did have an extraordinary period, but I don't think it changes our expectation for the year. We are putting our energy primarily in the U.S. market because we think that's where the greatest opportunity is now. We're grateful for the other relationships, and we expect to sustain them. But that's not where we're putting our energy at the moment.

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Operator [28]

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Thank you. And I am showing no further questions from our phone line, and I'd like to turn the conference back over to Mr. Parks for any closing remarks.

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Fred B. Parks, Nuvectra Corporation - Interim President, CEO & Director [29]

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Thank you, Crystal. Our vision long-term remains focused on a differentiated technology for the neurostim market with expanding indications past SCS and to SNM and beyond. In the near term, we need to improve the charging experience and the funding overhang to be able to achieve that vision.

Although our revised guidance was attributable to the charging issue and its ramifications and revenue is expected to be subdued in Q3 prior to an uptick in Q4, it is notable that Nuvectra has continued to grow with year-over-year comparisons still positive and ahead of most or all competitors. We just expected more of ourselves. We believe that when the charging issue is soon resolved, some of the stalled business can be recouped as the IPG and leads are still seen as advantaged.

In summary, our revenue acceleration relies on the conditional MRI approval in Q4 to expand the addressable market, submission of the data for Virtis in Q4, enhancing the charging experience to preserve our key sales members and reinvigoration of some physicians and some retraining of our team to minimize the charging challenges and finally, hiring up to 10 clinical specialists to support the sales effort.

In order to reestablish our credibility with shareholders, we need to hit these milestones as well as ensure funding is available. Although we're disappointed with the tactical issues on our plate, our strategic vision remains fully alive. Ultimately, the Nuvectra technology should be able to command a double-digit share of this neurostim market and successful entry into the sacral neuro market.

So thank you, everyone, for participating in today's calls and for your interest in Nuvectra. And with that, we close.

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Operator [30]

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Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a wonderful day.