NeuroMetrix, Inc.
Q3 2019 Earnings Call Transcript

Published: 17 Oct 2019

[Operator:]

Good morning, and welcome to the NeuroMetrix Third Quarter 2019 Earnings Call. My name is Crystal and I'll be your moderator on the call.On this call, the company may make statements which are not historical facts and are considered forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. Statements that are predictive in nature that depend upon or refer to future events or conditions are forward-looking statements.Any forward-looking statements reflect current views of NeuroMetrix about future results of operations and other forward-looking information. You should not rely on forward-looking statements because actual results may differ materially as a result of a number of important factors, including those set forth in the earnings release issued earlier today.Please refer to the risk and uncertainties including the factors described under the heading Risk Factors in the company's periodic filings with the SEC available on the company's Investor Relations website at neurometrix.com and on the SEC's website at sec.gov. NeuroMetrix does not intend and undertakes no duty to update the information disclosed on this conference call.I'd now like to introduce the NeuroMetrix Senior Vice President and Chief Financial Officer, Mr. Thomas Higgins. Mr. Higgins?

[Thomas Higgins:]

Thank you, Crystal. I'm joined on the call by Dr. Shai Gozani, our President and CEO.NeuroMetrix, as many of you know, develops and commercializes products for the chronic pain and diabetes markets utilizing neurostimulation and digital medicine. Our principal commercial products are Quell and over-the-counter wearable neurostimulation stem device for symptomatic relief of chronic pain, and DPNCheck a point-of-care device that provides accurate and cost effective detection of diabetic peripheral neuropathy or DPN.The financial results released earlier this morning for Q3 provides broad evidence of progress in shifting our business towards profitability. We reported revenue of $2.1 million. As expected, these were down from the prior quarter and reflected our emphasis on sales economics, particularly for Quell rather than top-line growth.Gross profit was $1.2 million representing a gross margin rate of 56.2%. This was a gain of 5.9 percentage points from the prior-year quarter.Operating expenses totaled $2.6 million a reduction of $1.9 million or 43% from the $4.5 million in spending in Q3 2018. And loss from operations was $1.4 million an improvement of $1.3 million or 47% from the loss of $2.7 million a year-ago.Regarding our product lines, Quell posted revenue of $800,000 level with the preceding quarter. The Quell gross margin rate was 47.8%. This was up from 40.5% in Q2, and from 47.2% a year-ago. Quell revenue reflected a higher percentage of aftermarket sales particularly on electrodes and in comparable periods. The Quell results were achieved with a reduced staff and controlled efficient ad spending, focused on digital marketing.In absolute terms, working ad spending was about $200,000 in the quarter just ended that was $800,000 lower than a year-ago. Importantly, Quell gross profit in Q3 covered all direct operating costs and made a positive net cash contribution toward company overhead.Having established this profitability baseline the focus now is to steadily increase ad spending and grow revenue without sacrificing customer acquisition efficiency. Dr. Gozani will speak about initiatives in this area following my discussion.DPNCheck had a solid quarter with revenue of $1.0 million, just about a million, slightly below $1.1 million in Q3 last year. Domestic sales primarily Medicare Advantage were up 31% year-on-year and they represent about two-thirds of this business. International sales were down due to truck challenging comps which included $350,000 in Mexico's sales in 2018 Q3 versus none in Q3 this year.Funding challenges in state healthcare systems were a primary factor. Longer-term Mexico is an important market for us. There is a high prevalence for diabetes, and our distributors Handok Pharma has done extensive foundational and clinical work. 2020 should see return of Mexico shipments.The DPNCheck gross margin rate was 78.6% in Q3 that was up from 77.3% in Q3 last year. This business operates with a small staff and very low promotional spending. DPNCheck gross profit covers its direct operating costs and contributes material net cash towards company overhead.Our legacy products primarily the advanced general purpose nerve testing technology contributed $300,000 in revenue in Q3. This was flat with the preceding quarter and the prior year. These products were managed for cash and not actively marketed. They've leveled off at about $300,000 revenue per quarter or about a $1 million plus per year. Sales are mostly aftermarket electrodes with gross margins in the mid-70% range.Q3 operating expenses. The business restructuring that we reported in Q2 was completed during the third quarter. They included staffing reductions and the consolidation of our activities in a single location in Massachusetts. The resulting efficiency contributed to the lower operating expenses of $2.6 million in Q3 versus $4.5 million year-ago quarter.R&D spending of $475,000 was reduced from $1.2 million in the prior year. It included $420,000 from GSK funding of joint Quell projects.Sales and marketing spending of $647,000 reflected the 75% reduction in Quell ad spending that I mentioned a few minutes ago, plus Quell savings in staff and services costs.G&A spending of $1.4 million increased $400,000 year-on-year due to higher professional service costs primarily legal.Our net loss was $1.4 million or $0.14 a share and cash was $3.2 million at quarter-end.Finally, our capital structure remains simple, equity-only, debt free. Common shares outstanding are currently 9.8 million and adjusted for convertible preferred shares. The common share count is 14 million.Given the trading price of our stock, and the delisting risk of non-compliance with NASDAQ rules, we intend to shortly seek shareholder approval for a reverse split, if required to maintain our listing status. The reverse split is a necessary step to maintain liquidity for our shareholders and for potential merger opportunities.Dr. Gozani will now address our overall strategy. Shai?

[Shai Gozani:]

Thank you, Tom.I will cover three topics this morning. First will be the DPNCheck business and the Quell business and then I'll discuss our current strategic option exploration.So starting with the DPNCheck business. As a reminder, DPNCheck is a point-of-care neurophysiological test that is primarily used for screening, detection and staging of diabetic peripheral neuropathy, which is also known as DPN. This product reflects our unique expertise in neuro-diagnostic devices. DPN is the most common long-term complication of diabetes. At an early often asymptomatic stage DPN increases the risk of falls in older diabetics, reduces quality of life, and is linked with neuropathic pain.If undetected and unmanaged, it predisposes to development of diabetic foot ulcers which may require amputation and which are associated with a very high mortality rate. The presence and stage of DPN is also an important indicator of an individual's diabetes severity in this respect complements the HbA1c level.The DPNCheck device measures standard sural nerve conduction which is an accepted biomarker for DPN. DPNCheck has been in commercial use since late 2011 and has no direct competition. It has extensive supportive of clinical data and well established markets in the U.S. Medicare Advantage space, Mexico, and Japan. In addition, China is a relatively new market for us with significant potential.DPNCheck revenue is primarily generated from sales of proprietary DPNCheck disposal biosensors, which have a gross margin exceeding 70% and even better than the U.S. market.We are optimistic about the continued growth of DPNCheck. In support of this opportunity we are developing a second generation DPNCheck system that will launch next year.Our plan is to continue to build the DPNCheck business and we may add sales and marketing resources in support of this effort. At the same time however, we do recognize that as a small company we need to focus, and therefore we are concurrently evaluating the possibility of divesting this business if the right opportunity arises as I will discuss later.Moving on to the Quell business. Our corporate vision is a world where people can live their best life despite chronic pain. To achieve this goal, we believe that everyone living with chronic pain should have the opportunity to experience our Quell wearable pain relief device and determine if it is beneficial to their particular form of chronic pain.Over the past several quarters, we have been re-evaluating our Quell commercial strategy. We came to the conclusion that in order to build Quell to a large, profitable and successful over-the-counter pain relief brand, we need to develop a narrow and highly efficient strategy. This decision was informed by our sales experience over the past four quarters, the result of a comprehensive market research study we commissioned earlier this year and commercial pilots we ran in both second and third quarters of this year. As a result of this work, we announced our new Quell commercial strategy this past Tuesday.We have shifted to an exclusively direct-to-consumer models delivered via the QuellRelief.com website that will allow us to offer the innovative Quell 2.0 system at widely accessible price points. We believe that this streamlined distribution model will allow more people with chronic pain to benefit from Quell. We will also be focusing our recurring electrode sales on our subscription service.Through these changes, we expect to see improved business economics through reduced customer acquisition costs, distribution channel savings, and higher customer retention rates, all of which should result in increased customer life time value.In addition to refinements in the Quell commercial strategy, we continue to invest in R&D and clinical development. We believe that the Quell technology is unmatched within the non-invasive neuromodulation space and we are committed to maintaining and expanding our technological lead. We have a number of innovations that we will launch on the Quell 2.0 platform next year.We also continue to invest in clinical development both generated internally from analyses and peer reviewed publications of data from the Quell Health Cloud and from collaborations with leading pain intense researchers in the U.S. and around the world.As some specific examples, there's currently a randomized, double-blinded, sham controlled study of Quell in subject with chronic pain due to Fibromyalgia underway at Brigham and Women's Hospital in Boston, which is a Harvard Medical School teaching institution. This study is about 75% enrolled and should read out in the first half of next year.Another interesting study is a randomized multicenter, double-blinded sham controlled study of Quell in subjects with CIPN which is Chemotherapy-induced peripheral neuropathy which is a very significant and difficult to treat complication of chemotherapy. This study is expected to launch before the end of the year is being run by the University of Rochester, Rochester and it's funded by the National Cancer Institute.We also currently have two completed studies derived from data in the Quell Health Cloud undergoing peer review and pain medicine journals.Within the Quell business, we also have a very important collaboration with GSK. And that continues to be very strong positive for us. We're working closely with GSK in support of their launch of the Quell technology outside the U.S. We've been impressed by the scale and quality of their pre-launch effort, and are optimistic about the potential for success given their deep expertise in consumer health.We recently joined GSK at EFIC which is the European Pain Federation Meeting where we jointly presented Quell clinical data and have the opportunity to observe a well attended symposium sponsored by GSK on novel applications of TENS, TENS being Transcutaneous Electrical Nerve Stimulation in pain that included a review of Quell clinical data by Christian Lydolph, a prominent German neurologist.It is gratifying to know that the Quell technology may benefit chronic pain sufferers around the world through GSK's efforts. Importantly, there are also 5.1 million in remaining milestones that we are working to attain.Now, finally, with regard to the FTC matter, we have previously disclosed, we are working through this issue. We believe that we've been cooperative with the FTC. We have made an effort to convey our perspective on Quell technology and its role in managing chronic pain to the agency. And we continue to seek resolution of this matter. And if you're looking for further information, I would suggest reviewing our third quarter 10-Q filing for additional details.To wrap up with regard to strategic options, as we have previously stated, we are exploring various strategic options to enhance shareholder value. Our area of focus -- one area of focus is a potential divestiture of the DPNCheck business. This process has been underway since the Spring under the direction of Back Bay Life Sciences Advisors. We have received preliminary indications of interest and are determining if any potential transactions makes sense. We expect to make a decision by the end of the year.We also have retained Ladenburg Thalmann as Financial Advisor to explore various company-wide strategic options. We're exploring all legitimate possibilities, including a merger if it has the potential to create shareholder value. However, we do not expect this process to conclude this year, and know that the process may not yield an outcome.So in summary, we're taking all potential steps to enhance and grow the value of our commercial products and while doing that to manage our operations as cost effectively as possible. We have engaged outside expertise where appropriate, and we look forward to reporting our progress over the balance of the year.That represents our prepared comments. We'd be happy to take questions at this point.

[Operator:]

Thank you. [Operator Instructions].And our first question comes from Jared Cohen from JM Cowen & Company. Your line is open.

[Jared Cohen:]

Yes, hi. I'm just curious as of the end of the quarter, how many active Quell users do you have and out of that user base, how many actually reorder electrodes basically on a quarterly basis?

[Shai Gozani:]

Yes, Jared. We do not report active users for a couple of reasons primarily because it's very difficult to know --

[Jared Cohen:]

I know you don't, I was just trying to get a general sense. I know you don't. But just I know you've given a sense of how many active overall, how many units you sold. So I was just trying to get a rough percentage of out of that?

[Shai Gozani:]

Yes, well, I don't have that. So I apologize, I don't have that a good range to give you right now. I don't want to speak off the top of my head. In terms of electrode reorders, I mean, we generally speaking, it's been pretty consistent as far as going back with the business. What we have seen and do believe is that the reorder rate have improved or with the Quell 2.0 system, which we have a little bit less than the years worth of experience. We've also implemented some stronger customer engagement features in the product primarily through the app, we call that the Therapy Coach. And we're I think we're starting to see benefits of that. So I think we're optimistic about continued improvement in reorder rates from historical levels.And the other piece of this, which I mentioned briefly is that we're -- we've had some success with the subscription service for the electrodes and really be emphasizing that as the primary mechanism for our customers to obtain electrodes.

[Jared Cohen:]

Okay. And with the new orders with Quell or even with the Quell in general, hasn't it always been a product used by people of last resort who have gone through every other alternative views for chronic pain versus something that people who have bought before they tried anything else in terms of surgery or anything else. These are people who had surgery or tried alternative therapies before trying Quell because they've tried everything else.

[Shai Gozani:]

I don't know if I would characterize it as necessarily the tool of last resort. I think in general, when you look at people or thinking about people chronic pain, the average our typical user has had chronic pain for at least four years. So I guess you could imagine over that period of time and many for much longer than that over that period of time, they will have tried many, many different things.So, as a result, it's not unexpected that they've tried multiple different pharmacological therapies and behavioral therapies and maybe surgery and other sorts of intervention. They're not necessarily coming to Quell as the last resort as much as what we try to encourage them is to think of Quell as something potentially in their toolbox with which to treat chronic pain.We don't -- we're not claiming to by any means to be an alternative to drugs or surgery rather intervention for rather and valuable tool for the person with chronic pain to consider using in managing and better managing their condition.

[Jared Cohen:]

I will just be adding to the point where price shouldn’t be that, some people have always considered price been an issue but price shouldn't be that much of an issue since they've tried other treatments that for the most part could be more expensive than what they've tried before in terms of --?

[Shai Gozani:]

Well we've done a lot of market research on price elasticity and price is important. Also many people with chronic pain are disabled, they're not working. They are under financial stress. So as a group, I think they're financially challenged because of their disease.

[Jared Cohen:]

Oh, no, absolutely, yes. But I'm talking about things like even see a surgery which cost up towards of $30,000 something like that or other things.

[Shai Gozani:]

We think that’s for those reasons, we think it makes a lot of sense to have it in the toolbox. Not necessarily as the only option, but as one of the -- one of the -- one of the tools that a personal chronic pain can use potentially every day for the whole day or maybe on an episodic basis as they need it.

[Operator:]

Thank you. [Operator Instructions].And I'm showing no further questions from our phone lines. And I'd like to turn the conference back over to Dr. Gozani for any closing remarks.

[Shai Gozani:]

Well, thank you very much for joining us on conference call this morning. And we look forward to updating you at the year-end. Thank you.

[Operator:]

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