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Nuvectra Corporation  (NASDAQ:NVTR)
Q4 2018 Earnings Conference Call
Feb. 28, 2019, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Q4 and Full Year 2018 Nuvectra Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) And as a reminder, today's conference call is being recorded.

I'd now like to turn the conference over to Tram Bui, with The Ruth Group. Please go ahead.

Tram Bui -- Investor Relations

Thanks, operator, and thanks, everyone, for participating in today's call. Joining me from the company are Fred Parks, Chief Executive Officer; and Walter Berger, Chief Operating Officer and Chief Financial Officer. This call is also being broadcast live over the internet at www.nuvectramed.com, and a replay of the call will also 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-Q, 10-K 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, February 28th, 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.

Fred Parks -- Chief Executive Officer

Thanks, Tram. Good afternoon everyone and thank you for joining us today for Nuvectra's fourth quarter and full year 2018 earnings conference call. On today's call, I will provide my initial perspectives on our business. Walter will then highlight the company's key achievements through the fourth quarter and full year 2018, before covering our financial performance. I will then conclude with our 2019 initiatives and key areas of focus. Before we open up the call for questions.

First, I'd like to highlight the Company's early success and gaining traction in the spinal cord stimulation market in a few short years, as reflected in our ability to deliver 84% growth in Algovita sales in full year 2018, compared to 2017. Our early growth has been and will be driven by our experienced sales team and their ability to leverage our competitive feature set, which includes a robust IPG and differentiated lead technology to provide physicians with versatility and clinical results.

In addition to our ability to gain share, we have continued to benefit from consistent SCS market growth fueled by positive patient outcomes, increased awareness of SCS and a new buy physicians to advance SCS within the treatment continuum of a non-opioid alternative. In addition, hiring incremental sales professionals through 2019 will further expand our market access. We will also continue to invest in our current sales team in terms of on-the-job training.

And most importantly, we are collecting ideas from the sales team on changes that would make them more efficient, we are listening. I look forward to leveraging our experience to an adolescent and organizations, the size of Nuvectra, as it enters the next growth phase. Second upon FDA approval, we will introduce Virtis for SNM to leverage our platform technology. Employing lessons learned with SCS to diversify our product offering and further build shareholder value. We continue to work with the FDA as they review our PMA submission following their extension of the 180-day review process in late January, which to clarify, did not initiate an additional 488 review period. We will provide an update on our submission as appropriate.

The company has been responsibly deploying resources, as we balance driving commercial momentum with fiscal prudence. As Walter will further describe, we have worked diligently to drive revenue while expanding our margins. As we continue to grow, we will remain dedicated to further improving our financial cost structure, driving responsible growth consistent with fiscal realities.

With that, I'd now like to turn the call over to Walter, who will highlight key achievements through 2018 in subsequent calls, Walter, and I will share the achievement discussion. Walter?

Walter Berger -- Chief Operating Officer and Chief Financial Officer

Thanks, Fred, and good afternoon, everyone. As Fred mentioned, before I cover our financial performance. I'd like to highlight our progress over the past year. Specifically, our continued US commercial success of Algovita were 3,000 US implants, completed as of December. Second our FDA Head-Only and CE Mark, Full-Body MR-Conditional approvals for Algovita in December 2018. Third the advancement of our Algovita post market clinical studies. And finally, our success in improving gross margins this year, while reducing our cash used from operating activities, and enhancing our balance sheet.

With respect to our commercial update through 2018, our growth continue to accelerate as we expanded our salesforce, while building a larger market share position. Notably, we delivered record revenues from continuing operations of $14.5 million in the fourth quarter, representing a 36% year-over-year growth. Following record quarters in both the second and third quarter of 2018.

Total Algovita revenue was $14.1 million in the fourth quarter in 2018, which represents a 36% growth year-over-year, and a 13% growth sequentially. As we benefited from Q4 seasonal tailwinds that are typical, as patients reach their year-end deductibles. We continue to generate year-over-year growth in US for Algovita by growing the number of case ready and revenue-generating accounts with the more tendered salesforce.

In 2018, we also continued to penetrate hospital systems in a competitive market. These factors contributed to our ability to deliver $47.1 million and Algovita revenue for the full year of 2018, representing 84% growth year-over-year.

Furthermore, we remain committed to expanding our Algovita commercial team in 2019. We currently have approximately 60 active territories, as of February 28th, which although slightly lower than our prior earnings call is in line with our expectations of our stated goal of carrying 60 reps by year-end. We expect to have approximately 75 to 80 territories by the year-end of 2019.

In terms of our Algovita regulatory update, as we look ahead, we expect US Algovita sales to further benefit from the recent FDA Head-Only MR-Conditional approval. This approval further validates the safety of our Algovita system, while growing the number of patients eligible for implantation of our system. We continue to look forward to the further advancement of the system with submission for Full-Body MR-Conditional approval to the FDA in the coming months.

Now, turning to our clinical update with respect to Algovita. As previously stated, the initial arm of our forearm multi-center prospective randomized post market clinical study is focusing specifically on comparing Algovita's high fidelity tonic stimulation versus ultra-high pulse width stimulation in 90 patients at 12 to 14 sites. We have initiated the first phase with seven sites activated today with patients currently being actively rolled, as we look ahead, we expect to add additional study arms designed to highlight the efficacy profiles of the different stimulation modes that Algovita delivers, which include high fidelity tonic, burst, ultra-high pulse width high frequency and paresthesia.

Now with that, I'd like to turn to and provide an overview of our fourth quarter and full year 2018 results. In the fourth quarter, we generated revenues from continuing operations of $14.5 million, which excludes NeuroNexus discontinued operations revenue of $1.2 million, representing an increase of 36% from $10.7 million from continuing operations in the fourth quarter of 2017.

Total revenue from continuing operations for the full year of 2018 was $48.8 million, which excludes NeuroNexus discontinued operations revenue of $4.9 million, representing an increase of 80% from $27.1 million from continuing operations for the full year of 2017.

Our Algovita revenue in the fourth quarter was $14.1 million, a 36% increase from $10.4 million in the fourth quarter of 2017. Total Algovita revenue for the full year 2018 was $47.1 million, an 84% increase for $25.6 million for the full year of 2017.

Our deep brain stimulation system development agreement with Aleva generated $429,000 of revenue in the fourth quarter of 2018 and $1.7 million for the full year of 2018, up from $317,000 for the fourth quarter of 2017 and, up $1.5 million for the full year of 2017. As we previously stated, we expect to be winding down our existing development agreement with Aleva in the coming quarters.

Upon completion of a DBS system for Aleva and it's receipt of regulatory approval, we expect Aleva will commercialize the DBS system in certain European markets initially and later possibly in the United States. If it does so and is successful, we will receive royalties on the sale of these DBS systems and components.

Gross profit from continuing operations in the fourth quarter of 2018 was $8 million or 55% gross margin, an increase from $5.4 million for a 50% gross margin from continuing operations in the fourth quarter of 2017. Gross profit from continuing operations for the full year 2018 was $25.8 million or 53% gross margin, and increase from $12.7 million, or a 47% gross margin, from continuing operations for the full year 2017.

Although operating expenses from continuing operations were $18.3 million in the fourth quarter of 2018, and $69 million for the full year 2018, a 40% and 26% increase year-over-year respectively, improved our operating leverage for the full year. The increase for both periods primarily reflects an increase in personnel-related expenses.

Net loss for the fourth quarter of 2018 was $12.9 million or $0.73 per share loss, including a loss of $1.3 million or $0.08 per share NeuroNexus discontinued operations, compared with a net loss $8.6 million for $0.80 per share, for the fourth quarter of 2017. Net loss for the full year 2018 was $48.1 million or a loss of $3.25 per share, including a loss of $1 million or $0.06 per share from NeuroNexus discontinued operations, compared to $44.6 million for a $4.22 loss per share for the full year of 2017.

Lastly, turning to cash and cash-equivalents. There were $99.2 million as of December 31st, 2018, compared to $101.9 million at the end of September. This figure includes net proceeds received from our strategic divestiture of NeuroNexus. And as a reminder, we also raised gross proceeds of approximately $69 million from a follow-on offering September, and gross proceeds of approximately $26 million from the following offer in February 2018. Notably, net cash used in operating activities decreased from $38.7 million in the full year of 2018, from $48.2 million in the full year of 2017.

With that, I'd now like to turn it back to Fred for closing comments. Thank you.

Fred Parks -- Chief Executive Officer

Thanks, Walter. I'd also like to take a moment to welcome, Chris Chavez to our Board of Directors. Chris is extensive industry experience makes him a great addition, and I believe his insights will steer the Board and Company in directions rewarding for our shareholders.

Let me now conclude by outlining the Company's key initiatives for the year. First, to continue our revenue growth trajectory with Algovita by growing our sales team and driving sales rep productivity to further expand our SCS market share. Second, to expand our Algovita label even further by advancing toward Full-Body MR-Conditional approval with the FDA. Third, to design and execute post-market studies focused on the clinical effectiveness of the four stimulation waveforms of which our Algovita system is capable. Fourth, to cooperate with the FDA as they review our PMA submission for Virtis. And lastly, to further improve our financial profile, while driving responsible growth consistent with fiscal realities to build shareholder value.

Before turning the call over for Q&A, I'd also like to thank our employees for their hard work and dedication, which is powered Nuvectra's growth today. It has been a privilege to join Nuvectra team and I feel they're welcome. I look forward to working closely with our entire team including our Board of Directors to refine a comprehensive business strategy over the coming months, and we'll provide more insights on our future quarterly calls.

With that, I now turn the call back to the operator and open the Q&A session.

Questions and Answers:

Operator

Thank you. (Operator Instructions) And our first question comes from Matthew O'Brien of Piper Jaffray. Your line is now open.

Matthew O'Brien -- Piper Jaffray -- Analyst

Good Afternoon. Thanks so much for taking the questions. Fred or Walter, can we just start with the salesforce, a little bit of churn here in Q4. It's not like the end the world, but, you know, you've got a management change as well. And so I would love to hear about the stability of the salesforce, early days here and then what you're anticipating, because it sounds like, Fred, you're trying to balance top line growth with pushing on the profitability side, what kind of productivity improvements we should expect this year?

Fred Parks -- Chief Executive Officer

Matt, thanks for your question. First of all, we had a highly successful National Sales Meeting recently here in Dallas. There was a ton of energy in that room. So I'm very optimistic about our future. Regarding the sales team after the sales meeting I started calling a sample of that sales team, and ask them how we could help? What else we can do? How we could organize to make them more effective? And I got a ton of good ideas for competitive reasons, I'm not inclined to share those, but I think the message is the improvements don't start from here, they start from the people that have to create that productivity, and I'm encouraged and I think we will find that productivity. The numbers we cited take us roughly from low of around 60, we expect to add another 15 or 20 during the year, and I think that will be sufficient to meet our expectations. Thanks for your question.

Walter Berger -- Chief Operating Officer and Chief Financial Officer

Yeah, I think, Matt, what I would also add is at the end of the day, our goal for last year was to be at around 60. As you know any salesforce is going to be sooner in terms of headcount. I think what's most important is what we delivered financially with that salesforce that we have and the one that we're very proud of.

Matthew O'Brien -- Piper Jaffray -- Analyst

Very helpful, so talking about the Head-Only and Full-Body approval over in Europe. Can you talk a little bit about how those two indications should influence the business this year?

Walter Berger -- Chief Operating Officer and Chief Financial Officer

Well, I think when you look at the one with respect to our international business. Well, I think it's helpful your international business has been relatively small, because of the success we've enjoyed in the United States of the accelerated growth over the last several years, and as we've commented on a host of the prior calls that has to one extent or another, if you will, been a modern inhibitor to us in penetrating some accounts. So we're excited about the prospect that has in front of us for our sales organization, it will be favorable.

Matthew O'Brien -- Piper Jaffray -- Analyst

Okay. Just two more for me, one of your competitors has talked about moving into multi-modality, kind of validating, what you've been saying for a while here, and I think something that investors are afraid of is their ability to catch up that what you're doing and then all of a sudden, there's really no differentiation for Nuvectra and Algovita. So can you just share a little bit in terms of the challenges that you're facing that to be super specific getting to multi-modality. And then maybe the time frame that, that it's taking to get here, and then how do you compete an environment with more and more competitors having multi-modality?

Fred Parks -- Chief Executive Officer

Well, I think the first responses were flattered that there is a follow the leader attitude out here and sort of endorses the strategy that we've had for a while, you ask us how long it's taking to get here, it has taken since inception of the company to make this offering. And my third comment is in direct conversations with position, it's a huge asset as this procedure matures and gets better every year. There is still a little bit of trial here on the front end, and so I've heard personally from some of the user set, the value of having options should the first waveform not be exactly to their liking. So I think the net of all this is flattered by the complement of a competitor.

Matthew O'Brien -- Piper Jaffray -- Analyst

Okay and last one for me, just to try to push a little bit on Virtis, I'm sure you're limited and what you can say, but obviously a lot of investors are waiting for an update there. Just to be clear, they haven't come back ask for more data. Would you characterize the discussions as real-time that's something that you're doing on a daily basis or multiple times a day, and you think there could be a conclusion within the next few weeks or just any kind of qualitative commentary there would be helpful?

Fred Parks -- Chief Executive Officer

So I think it's safe to say Fred again, they're not waiting on us from any additional information to make a determination that could change at any time we know, but you're right beyond that, I think the last date we made remains valid until we get the next phone call.

Walter Berger -- Chief Operating Officer and Chief Financial Officer

Or email.

Fred Parks -- Chief Executive Officer

Or email any response we'd enjoy having, but they're not waiting on us.

Matthew O'Brien -- Piper Jaffray -- Analyst

Fair enough. Thank you.

Fred Parks -- Chief Executive Officer

Thank you, Matt.

Operator

Thank you. And our next question comes from Dave Turkaly of JMP Securities. Your line is now open.

Dave Turkaly -- JMP Securities -- Analyst

Thanks and congrats Dr. Parks, excuse me, I was sad to see Scott leave being afore and SOM (ph), but happy to see -- very happy to see Chris Chavez get name to the Board. And just to be clear, I wanted to just confirm the sales rep, the five or so fewer that you have, you don't think that had anything to do with Scott's departure, just want to make sure that you don't think any disruption would go on, whether it'd be in operations or in sales. Given that departure, I guess what I'd say is, from a positive standpoint to have one hand SOM, you know, the part for the former CEO, who I covered for years. Seems like a positive decision, but just thoughts on that any potential disruption?

Walter Berger -- Chief Operating Officer and Chief Financial Officer

So I think Scott's been gone for a matter of a couple weeks and I believe these people's are part of the long before Scott did so the math wouldn't actually turns away. As you know, having filed the stories as long as -- as well as you have Dave, we are responsible in terms of how we evaluate the salesforce, we've got a strong salesforce leadership that evaluates sort of talent. And again, I think you're trying to or potentially trying to connect two dots that frankly don't exist.

Fred Parks -- Chief Executive Officer

Yeah, Dave, Fred, by the way I go by Fred, you don't need the formality, but thank you for that. I think we all wish, Scott well, we're here today because he and many other people brought us to this stage, but the circumstances under which he left the company would not allow him to do any recruiting of these people, so unrelated events.

Dave Turkaly -- JMP Securities -- Analyst

No, and that's great to hear. I wasn't making the assumption, I just wanted to clarify that, that was the case. And then I guess as a follow-up, you talked about the HiFi study and some of the other modalities, you're going to test it, is it your intend to run you to them separately until completion or is there a chance that you kind of start to ramp up some of the others, while that main one is enrolling?

Walter Berger -- Chief Operating Officer and Chief Financial Officer

So here's a little bit of an answer, I mean, I'm going to Fred a little bit of time to get his feet really planted, we've been working on these, as you know, Dave, because you've had some helpful insights, as we've discussed these. The team is moving on the -- we have such a firm belief in the sort of the relevance of the waveforms that come out of the IPG and we just need to sort of validate it, and we knew to move probably a little bit more concisely and faster on this, and I think Fred is going to bring some insight and some background to help facilitate that process.

Fred Parks -- Chief Executive Officer

I got in my hand. The document, talks about four or five studies. Good question, I think we'll probably go late into Q4 2019, which is a primary endpoint for a couple of studies. So then we'll have outcomes, it won't be speculating. And I think I can give you a better quality answer there, as far as the Full-Body MRI kinds of studies, I think we'll have those design probably maybe in four months from now. So we may not catch a full detail on the next quarterly telecom, but certainly before the second one, we'd be able to give you a quality answer.

Dave Turkaly -- JMP Securities -- Analyst

Thanks so much.

Fred Parks -- Chief Executive Officer

Thank you.

Operator

Thank you. And our next question comes from Bruce Nudell of SunTrust. Your line is now open.

Bruce Nudell -- SunTrust -- Analyst

Good afternoon, thanks for taking the question and welcome Fred.

Fred Parks -- Chief Executive Officer

Thank you.

Bruce Nudell -- SunTrust -- Analyst

Sure. And just looking at just prognosticate into 2019. Leaving 2017 you guys, I think had about 2% share, exiting 2018, you had about 2.5 points. The market in the US grew about 17% over the year, but looks like it slowed in the fourth quarter quite dramatically. Not sure if that is real or not in terms of just as durability. But looking forward to 2019 should we be assuming about the same amount of share gain. And could you just hazard or guess of what you guys are thinking internally regarding the pace of US market growth?

Fred Parks -- Chief Executive Officer

I'm going to start from the position and after three weeks I shouldn't be guiding you and my colleagues (inaudible) say we don't guide in general, so I don't have an answer for you, Bruce. Can you help him, Walter.

Walter Berger -- Chief Operating Officer and Chief Financial Officer

So, Bruce, I think it's a great question and I think it's one that a lot of people kind of trying to reconcile, because they're getting different data points on where the market is heading. Our view is and I think frankly you and I have dialogued about this, that how the markets evolving, is a little bit at this point still little bit independent of how we performed, because of our size relative to our competitors. And so most of ours is going to be a share shift, then obviously is going to be benefited by a stronger market. So we can't really because I think it's sort of boards on guidance to say, whether we replicate the share type that we've enjoyed in 2017 or 2018. But I think when we've commented on the fact that our expectation is to continue to grow and invest into our Algovita sales team, independent of what we do on the Virtis that the intent is going to be -- to continue to take share.

Bruce Nudell -- SunTrust -- Analyst

Fair enough.

Walter Berger -- Chief Operating Officer and Chief Financial Officer

So we are focused on doing that.

Bruce Nudell -- SunTrust -- Analyst

Sure and then just, you know, just looking, stepping back and looking at Virtis you're sort of in between where Medtronic is right now, and where Axonics is in terms of size, longevity, Full-Body MRI probably for Axonics, as well as clinical data. So, what level of confidence you have regarding the relative competitiveness our Virtis relative to those two other offerings?

Fred Parks -- Chief Executive Officer

Fred, speaking here. I remain quite confident about this, I mean, offering a new product, I'm ready to get it to market, as soon as we have approval, our launch will be somewhat different than spinal cord, I think (inaudible) we'll do a round of patients, a few dozen perhaps. And as long as that goes well, then I think we'll hit the gas pedal. But I think until we've done the first round of patients, we probably can help you into a specific number. Walter?

Walter Berger -- Chief Operating Officer and Chief Financial Officer

Yes, I think the interesting thing is that when you look at how we have performed in Algovita as the fifth entrant with a very compelling product. We still had to compete. And as you said, we've been successful in taking market share out of the market. When you look at the landscape that you just described, with respect to Virtis. I think we should be at least as positioned as well to be able to take share out of that market. The dynamics are very different. You have as you described one company that is the legacy company and you have another one that is sort of calibrating at the same pace we are to sort of get through regulatory approval. One, as I said is the legacy product; the other one is yet to commercialize, we've had success commercializing in a very tough environment. I think, we'll be able to leverage that, as we look to go into market on Virtis.

Bruce Nudell -- SunTrust -- Analyst

Thanks so much.

Operator

Thank you. And our next question comes from Jayson Bedford of Raymond James. Your line is now open.

Matt Vismin -- Raymond James -- Analyst

Hi, this is Matt Vismin (ph) on for Jason Bedford, thanks for taking the questions. So my question is on Algovita growth? So, are you seeing growth mainly from opening new accounts? Or are you seeing success further penetrating the same accounts sale with same-store growth. So, can you speak to that a bit? And then I have one follow-up. Thanks.

Walter Berger -- Chief Operating Officer and Chief Financial Officer

It's both. And we've talked about that on the host of our prior calls, our sales team does a very good job of penetrating into an account and then driving share into that account. There are also charge with new accounts integration as well. So, we're agnostic in terms of our orientation, other than to say, we're going to push for new accounts and for deeper penetration. No, different than any of our competitors candidly.

Matt Vismin -- Raymond James -- Analyst

Okay, got it. And then my question is on gross margin, so when Virtis launches, can we expect, what impact can you expect on gross margins, will economics be similar, is that something you can speak to yet? Or how should we think about that modeling wise? Thanks.

Walter Berger -- Chief Operating Officer and Chief Financial Officer

So as we have said on prior occasions, the ASP for Virtis is going to be 20-ish to maybe 25% lower than the ASPs, we've enjoyed on Algovita. We are having gone through the entire cost structure on Virtis, but I'd probably going to believe that the margins will not be as strong as they are on Algovita. But also remember that for others that have a desire to get into the second indication a great deal of that capital or the R&D investment has already been baked into the existing IPG, obviously will need to continue further, but it's not like starting greenfield from the beginning. So as you think about this is a multi-indication of a company, you can see the leveraging benefits of that.

Matt Vismin -- Raymond James -- Analyst

Thank you.

Operator

Thank you. And that concludes our question-and-answer session for today. I would like to turn the conference back over to Fred Parks for closing remarks.

Fred Parks -- Chief Executive Officer

Thank you, Candice. Again, I'd like to thank everyone for participating today and for your support and interest in Nuvectra. I like forward to meeting many of you personally at some of the upcoming investor conferences, and have a great evening.

Operator

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

Duration: 34 minutes

Call participants:

Tram Bui -- Investor Relations

Fred Parks -- Chief Executive Officer

Walter Berger -- Chief Operating Officer and Chief Financial Officer

Matthew O'Brien -- Piper Jaffray -- Analyst

Dave Turkaly -- JMP Securities -- Analyst

Bruce Nudell -- SunTrust -- Analyst

Matt Vismin -- Raymond James -- Analyst

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