NeuroMetrix, Inc.
Q4 2019 Earnings Call Transcript

Published: 27 Jan 2020

[Operator:]

Good morning and welcome to the NeuroMetrix Fourth Quarter and Full Year 2019 Earnings Call. My name is Shannon 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 or 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, Shannon. I'm joined on the call by Dr. Shai Gozani, our President and Chief Executive Officer, and we apologize for any inconvenience due to the delay in this call. Unanticipated personal travel caused the scheduling adjustments, so we hope that didn't cause any problems.NeuroMetrix develops and commercializes both diagnostic and therapeutic medical devices utilizing neurostimulation and digital medicine. Our three main products are DPNCheck, ADVANCE and Quell.DPNCheck is a point-of-care test for the detection of diabetic peripheral neuropathy or DPN, and we market this principally in the U.S., Japan, China and Mexico. ADVANCE is a point-of-care and nerve conduction technology that evaluates multiple nerves including the median nerve, which is affected in carpal tunnel syndrome.ADVANCE electrodes are sold to an installed base in the U.S. and Europe. And Quell is a wearable neurostim technology for symptomatic relief of chronic pain. It is marketed over-the-counter within the United States.Our key highlights in the quarter. Q4 revenues were $1.7 million, as expected these were down from the prior year quarter and reflected our emphasis on gross margins and product line profitability rather than top-line growth. Gross profit was $1.1 million with a gross margin rate of 62.2%. Margin rate on product sales improved 15 percentage points over the prior year quarter.Operating expenses totaled $2.7 million, reflecting a reduction of $1.8 million or 40% from the prior year quarter. And our net loss was $1.1 million down by $1.7 million or 62% from a loss of $2.8 million in the prior year quarter. Perhaps the most important takeaway is that the structural changes we implemented in Q2 have significantly reduced operating costs, improved the bottom line and positioned us for profitable growth in future quarters.Regarding our product lines, DPNCheck had a solid performance. Q4 revenue of $900,000 was up 51% year-on-year. Growth came from U.S. Medicare Advantage, which grew 78% in the fourth quarter. The U.S. market is roughly two-thirds of the business and new customer accounts contributed to that growth.DPNCheck on a full-year basis, revenue was $4.2 million. It was up a couple of percent. They were offsetting market dynamics in DPNCheck. The U.S. market was up 25% in the year and international was down 44% with the international drop entirely attributable to Mexico, which we previously discussed. Asian markets were flat between the years.The geographic mix shift benefited DPNCheck gross margin dollars which full year were 17% higher than 2018. This was attributable to the higher margins U.S. sales. Overall, gross margin rates were about 80%. So in summary, DPNCheck's strong Q4 was a nice wrap up to a growth year with the U.S. business being the main contributor.ADVANCE revenue was $280,000 in the quarter and $1.2 million for the full year, compared with $300,000, Q4 2018, and $1.4 million full year 2018. This legacy product is not actively marketed and primarily consists of consumable electrodes sales, gross margin rates are about 70% and the business is managed for cash.Quell posted revenue of $500,000 down from $2.8 million in the prior year quarter and in line with our expectations. Ad spending was lower by $1.5 million nearly 86% from Q4 last year. Direct staffing was maintained at minimal levels; however, the gross margin rate for Quell improved to 59% from 49% a year ago quarter.Moving down to operating expenses, total operating expenses were $2.7 million down from $4.6 million in Q4 of last year. R&D spending of $737,000 is net of about $250,000 in GSK funding of joint Quell development projects. Sales and marketing spending of $700,000 reflected the 86% reduction in Quell ads spend that I just mentioned, plus Quell savings and staff and service costs.G&A spending of $1.3 million increased $400,000 year-on-year due to higher professional service costs, primarily legal. We booked collaboration revenue of $600,000 with the achievement of certain development milestones under the GSK collaboration. Our net loss for the year was $1.1 million or $3.90 per share. We ended the year with $3.1 million in cash that was approximately level with cash at the end of Q3.Our capital structure remains simple, common stock only and debt free. All previously outstanding convertible preferred shares were converted to common during the quarter. So, our capital structure now consists only of common stock and that common stock count at the end of the year was approximately 1.4 million shares. This is after the reverse split that we executed in November of 2019. Dr. Gozani will now address our overall strategy.

[Dr. Shai Gozani:]

Thank you, Tom. I'll provide updates on our DPNCheck and Quell businesses. First, on DNPCheck. As a reminder, DPNCheck is our proprietary point-of-care neurophysiological test that's primarily used for screening, detection and staging of diabetic peripheral neuropathy or DPN, which is the most common long-term complication of diabetes. This product reflects our unique expertise in neuro-diagnostic devices.DPNCheck has excellent operating characteristics with a gross margin over 75% and operating margins greater than 60%. In 2019, the DPNCheck business experienced good growth in our domestic Medicare Advantage market that offset a quiet year in our Mexico business, as Tom alluded. In this year 2020, we expect continued growth in Medicare Advantage, increased sales in Asia and are optimistic that Mexico will resume sales.Overall, we believe that DPNCheck will exhibit strong growth this year. And in support of the long-term DPNCheck opportunity, we have been undertaking a major upgrade of the DPNCheck device that we expect to launch in the fourth quarter of this year, which we believe will help fuel future growth.With respect to the Quell business, we continue to believe that Quell technology is unmatched within the non-invasive neuro-modulation spaces. At the same time, we are intent on building this business in a profitable fashion. Therefore, we are now operating the Quell business at a reduced promotional spending level, which are naturally led to substantially lower sales but has moved the business towards profitability. This restructuring gives us time to evaluate our go-forward strategy for the technology platform.As we evaluate our direction for Quell, we continue to invest in high-value R&D activities and clinical studies. We're also working closely with GSK in support of their watch of the Quell technology outside the U.S.And finally, as we disclosed since the third quarter of 2017, we are working through a Federal Trade Commission or FTC matter related to earlier Quell advertising. We're actively engaged with the FTC at final resolution.So in summary, we believe that NeuroMetrix has excellent products that are targeting large markets. We have an operationally efficient organization that is structured to support growth and move towards profitability. The DPNCheck business is well positioned for strong growth for the foreseeable future.We do have work to do on Quell in particular to identify the commercial strategies and clinical applications that deliver consistently profitable Quell. The executive team is committed and optimistic, as indicated by our recent proactive decision to forego some or all of our compensation in favor of stock options.And that concludes our prepared comments. We'll be happy to take questions at this point.

[Operator:]

[Operator Instructions] Our first question comes from Jared Cohen with Cowen and Company. Your line is open.

[Jared Cohen:]

Just a quick question. In your Quell revenue, how much was more reoccurring revenue in terms of reorders of electrodes versus people buying new Quell systems?

[Dr. Shai Gozani:]

Jared, I actually don't have that number right in front of me, but let me check just a minute.

[Jared Cohen:]

Okay. Thank you.

[Dr. Shai Gozani:]

Jared, I just looked it up. It was about 50/50.

[Jared Cohen:]

Okay, all right. Thank you very much.

[Operator:]

[Operator Instructions] And I'm currently showing no further question at this time. I'd like to turn the call back over to Dr. Shai Gozani for closing remarks.

[Dr. Shai Gozani:]

Thank you very much for joining us on this conference call and we look forward to updating you over the balance of the year.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.