NeuroMetrix, Inc.
Q2 2018 Earnings Call Transcript

Published: 19 Jul 2018

[Operator:]

Good morning and welcome to the NeuroMetrix's Second Quarter 2018 Earnings Call. My name is Crystal and I will 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 risks 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's 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 Chief Executive Officer. NeuroMetrix as you may know is a health technology company. We have proprietary neurostimulation technology that we apply to chronic pain, sleep disorders, and diabetes. Our primary commercial products are Quell, an over-the-counter wearable device for managing chronic pain; and DPNCheck, a point-of-care test for diabetic peripheral neuropathy or DPN. Our marketing focus is the United States. Outside the U.S. we leverage the capability of global companies including Glaxosmithkline where we have a Quell strategic collaboration for OUS markets, Fukuda Denshi now handling DPNCheck sales in Japan, and Omron Healthcare handling DPNCheck sales in China. Our business strategy is to maintain disciplined growth on a path to profitability, to operate within our present cost structure, and to continue delivering product innovation. The Q2 results are indicative of this strategy and its emphasis on profitability. Several highlights, first Quell R&D development progress yielded two benefits in the quarter. We achieved a GSK milestone and recorded $3.8 million in collaboration income. Also we maintained our timetable for next-generation Quell U.S. launch later this year. Number two, we deferred Quell advertising which while adversely affecting Q2 revenue allows us to match ad spending with the launch with the launch of our next higher margin Quell product later this year. Three, Quell distribution has begun to shift toward higher margin e-commerce sales, early benefits of this change are seen in our Q2 gross margin rates. And four, we reported positive net income for the second consecutive quarter. Turning to the statement of operations, total revenue of $3.8 million was down 13%. This was $560,000 lower than $4.3 million in the second quarter of last year. Within total revenue Quell revenue was $2.1 million a reduction of 32% from $3 million a year ago. Quell provided 55% of our top line. This revenue drop was anticipated and is primarily linked to a 37% or $700,000 planned reduction in advertising spending. We intend to return to a higher level of TV and digital ad promotion later this year in coordination with the next generation Quell launch. DPNCheck revenue was $1.3 million. This was up 58% from $800,000 year ago quarter. It contributed 34% of total revenue. DPNCheck is a professional diagnostic technology sold in the U.S. to healthcare providers mostly within the Medicare Advantage system. Sales outside of the U.S. by our distribution partners are to healthcare providers such as hospitals and clinics often with a diabetes focus. Q2 sales growth was realized in both domestic and export business and included sales to Mexico. Our legacy products contributed the remaining $400,000 or 11% of total revenue. Our gross profit of $1.8 million was $130,000 higher than $1.7 million a year ago. This was a positive outcome in spite of the drop in total revenue. The gross margin rate improved to 48% from about 39% in the prior year a gain of nearly 10 percentage points. Both Quell and DPNCheck contributed to the margin improvement. The Quell margin gain was attributable to the strategic shift in distribution towards the more profitable e-commerce channels. DPNCheck, a consistently high margin product line dominated by aftermarket consumables factored more significantly in the overall margin rate due to its increased weighting within total sales. OpEx, operating expenditures in the second quarter was $5 million level with the prior quarter, R&D spending was $700,000 higher with increased personnel costs and engineering support for Quell. The higher spending levels should be short-term and recede later this year following next gen Quell launch. Also GSK will be cofounding Quell development spending starting in 2019 to further reduce future R&D costs. Lower sales and marketing spending and G&A spending offset the R&D increase. Collaboration income of $3.7 million was earned upon the achievement of the first GSK development milestone. This item will recur in future P&Ls from time to time. During 2018 we anticipate a total of about $12 million in collaboration income of which $8.5 million has been recorded year-to-date. The bottom line, our net income was $574,000 in comparison with the loss of $3.2 million year ago quarter. This was a positive swing of about $3.8 million. We ended the quarter with $7.1 million in cash an increase of a little over $3 million from our balance at the beginning of the year. Our capital structure was essentially unchanged in the quarter. It remained simple, equity only and debt free. Our fully diluted equity is about 14.9 million shares. Dr. Gozani will now address our overall strategy.

[Shai Gozani:]

Thank you, Tom. My comments today will address three topics; first our overall business strategy; second, an update on the third generation of Quell which as Tom noted we plan to launch later this year; and then an update on our GSK collaboration. Starting with the business strategy, our primary business objectives have become consistently profitable on an operating basis by the end of 2020. We believe we can achieve this while also showing good topline growth and investing in R&D to support long-term growth. Some outcomes of the strategy are as follows; first our Quell TV advertising strategy will strive for cost effectiveness. This means that we will time spending to when it is most cost-efficient and generates the greatest return. As a consequence, we will experience quarter to quarter variability as we adjust to fluctuations in TV advising costs. This was evident in our spending in the past quarter. This year we will channel our spending to the first quarter which is inherently the most efficient and will coincide with the launch of our new Quell product. Second point, we are rationalizing our Quell distribution strategies in most productive and cost effective channels. As a practical matter, this means that we will limit Quell availability to certain retailers who are supposed targeting a specific number of storefronts and in particular we will focus on e-commerce channels. Moving on to products, both of our core product lines, DPNCheck and Quell are structured as an initial device sale followed by an aftermarket consumables business. In the most recent quarter, 61% of our revenue was in consumables. Our DPNCheck business is almost entirely consumables and as a result it has a 75% or greater gross margin and operating margins over 60%. The Quell business is at an earlier stage and therefore it is more heavily weighted to the initial device revenue. Although we have built a profitable Quell aftermarket consumables business, it is not growing as fast as we expect based on the clinical outcomes that Quell delivers. We believe that we have identified several key product design features and user engagement steps we need to take to accelerate this part of the business. We are in the process of implementation and hope to see improving performance on this part of the business later this year and in 2019. And finally, our expectation is that we will not cut back on R&D or clinical work. We believe that these are essential that we continue and in fact accelerate innovation to secure significant competitive advantages in both the DPNCheck and Quell product lines to create future revenue opportunities. On the clinical front we are committed to a strong clinical program that enhances recognition, understanding and value of our products. Now moving on to an update on the third generation Quell device. For the past several years our R&D resources have been focused on the development of the third generation Quell device. We are planning to launch this product this year. It is a critical element in our near and long-term business strategy. We believe that the third generation device is accompanying digital health tools which include the Quell app and Quell Health Cloud and will improve on the already impressive usability and clinical performance of the current Quell device. In addition, the third generation Quell device has been designed from the ground up to have lower cost and improved manufacturability. We have accomplished this without sacrificing and in fact have enhanced the premium features of Quell compared to alternative over-the-counter pain relief devices. We believe that this will drive substantial margin growth for Quell and the entire business into a range exceeding 60% once we've optimized the supply chain. And then finally, our collaboration with GSK is built around the third generation technology. First, early milestones are related to product development. As we have noted, we reached the first milestone and second a key part of our collaboration agreement is to cofund development of the Quell platform with a 50-50 split starting in 2019. And as a result we expect lower R&D cost next year and beyond. And my final topic is an update on the GSK collaboration. It is gratifying that our collaboration with GSK will make Quell technology available to the many millions of chronic pain sufferers outside the U.S. The chronic pain epidemic is a worldwide problem affecting 1.5 billion people. We are encouraged that GSK feels that our technology is worthy of being commercialized under a highly regarded consumer brand. From a practical point of view, the GSK collaboration is central to our near and long-term business strategy. First, it provides us with a reasonably predictable source of income that may offset our operating losses until we achieve profitability. We do caution that we cannot control the timing of all the milestones and therefore while we expect to achieve most or all of the milestones within the next several years there may be a need to bridge short-term funding gaps. Second, GSK is one of the largest consumer health businesses in the world. In pain, they have several of the top international brands including Voltaren, Panadol and Excedrin. They have deep market knowledge and capabilities. Through this collaboration we are tapping into some of these resources and feel that doing so will benefit our U.S. business. And third, as I mentioned earlier, we will collaborate on future Quell R&D which allows to shift some of our R&D spending to new products and that could represent additional revenue streams in the future. And with that, I'll conclude our prepared comments and 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. And it looks like he has placed his line on mute. [Operator Instructions] And our next question comes from John Brown [ph] a private investor. Your line is open.

[Unidentified Analyst:]

Yes good morning.

[Shai Gozani:]

Good morning.

[Unidentified Analyst:]

I was wondering if you could give us a breakdown of the number of units versus the consumables that you sold for this quarter. You have provided that information in the past I did not see it this time?

[Shai Gozani:]

Yes, so in the past we have provided that more regularly. From the beginning of this year however, we’re intending to report that on an annual basis and so at this point we’re not going to be providing that for competitive reasons quarter-to-quarter.

[Unidentified Analyst:]

Okay thank you.

[Operator:]

Thank you. [Operator Instructions] And we do have a question from Jared Cohen from JM Cowen & Company. Your line is open. And we do have a follow-up from John Brown [ph] a private investor. Your line is open.

[Unidentified Analyst:]

Yes, another question, in the last quarterly call you did say that there are no royalties on the current Quell model with the year-over-year developed. Is there any potential for future royalties on any new models?

[Shai Gozani:]

So let me - I’ll clarify, so the - I think you’re referring to the GSK agreement just to be clear.

[Unidentified Analyst:]

Yes correct.

[Shai Gozani:]

Yes, so the GSK agreement is around the third generation Quell product, the one we’re launching later this year. And you’re correct, there are no royalties built in that. Those are all structured milestones. Future generation products yes, there could be an opportunity for royalties depending on how those - if GSK or other potential partners are interested in that, but at this point there is no royalty structure.

[Unidentified Analyst:]

Okay thank you.

[Operator:]

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

[Shai Gozani:]

Thank you very much for joining us on this quarter’s conference call. We look forward to updating you on our Quell results and strategy over the balance of the year. Thank you.

[Operator:]

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