NeuroMetrix, Inc.
Q3 2018 Earnings Call Transcript

Published: 17 Oct 2018

[Operator:]

Good morning and welcome to the NeuroMetrix Third quarter 2018 Earnings Call. My name is Amanda 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 meanings 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" and the company's periodic filings with the SEC available on the company's Investor Relations Web site at neurometrix.com or on the SEC's web site at sec.gov. NeuroMetrix does not intend and it takes no duty to update the information disclosed on the 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, Amanda. I'm joined on the call by Dr. Shai Gozani, our President and CEO. NeuroMetrix as you know is a health technology company. We have proprietary neurostimulation technology that we apply to chronic pain, sleep disorders and diabetes. Our principal 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. We also supply aftermarket products for our advanced general purpose neuro testing system and for Sensus our older prescription wearable for chronic pain. Our business objectives are profitable growth while delivering meaningful innovation and while operating within our existing cost structure. The financial results for Q3 showed evidence of progress. There were several key highlights. Top-line growth, gross margin expansion reduced OpEx spending and a positive bottom-line. Most importantly we launched Quell 2.0 during the quarter. This next generation Quell positions us for future revenue growth and margin improvement. Turning to the Q3 financial highlights. Total revenue was $3.7 million up from $3.5 million in the year ago quarter. Within total revenue, Quell revenue was $2.2 million and contribute 60% of the total. In contrast, Quell revenue in the third quarter last year was $2.6 million. Quell revenue in Q3 and year-to-date reflects lower ad spending in anticipation of our new product launch. DPNCheck revenue was $1.1 million a gain of 76% from $600,000 reported in Q3 2017. It contributed 31% of the total. International sales were particularly strong offsetting a modest decline in our U.S. Medicare Advantage business. O-U.S. strength was seen primarily in Mexico and in Japan. Our legacy products Advance and Sensus contributed about $300,000 in revenue and comprised the remaining 9% of the total. Gross profit was $1.8 million up $300,000 or 23% from $1.5 million in Q3 of 2017. Viewed in terms of gross margin rate, the Q3 2018 gross margin was 50.3% versus 42.5% year ago. This was a quarter-on-quarter gain of 7.8 percentage points or 18%. Both of our lead products contributed. Viewed individually, the high margin DPNCheck business weighed heavily in Q3 '18 revenue and had a positive margin effect of 8.8 percentage points. Quell margins improved with distribution efficiency contributing 3.8 percentage points. Our legacy products and miscellaneous cost of goods were the balance of the margin rate change. The margin rate reflects continuous improvement over the past two years. Year-to-date our 2018 margins were 45.6% and this is in contrast with 39.3% year-to-date margins in the first nine months of last year. Our OpEx spending totaled $4.5 million a reduction of about $0.5 million quarter-on-quarter. R&D spending increased $300,000 with higher personnel costs and consulting engineering services in connection with the Quell 2.0 product and to support our GSK collaboration. Sales and marketing was lower by $600,000 almost exclusively due to scale back advertising promotion. And G&A expense was reduced by $200,000 in the quarter reflecting lower spending on professional services. Within other income, collaboration income was $3.75 million. This was earned upon achievement of the second GSK development milestone. The payment raised 2018 collaboration to a total of $12.3 million. In terms of cash, we ended the quarter with $7.5 million cash on hand. Our capital structure was unchanged in the quarter. It remained simple, equity only and debt free. Our fully diluted share count is 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, I'll provide an update on the launch of Quell 2.0 which is our next generation Quell product; and then review of our GSK collaboration. First from the business strategy. As we have noted over the past year, our primary business objective is to become consistently profitable on an operating basis in 2020. We believe we can achieve this while showing good top-line growth and investing in R&D. Some outcomes of this strategy include that our Quell TV advertising will strive for cost effectiveness. This means that we will time our spending when it's most efficient and generates the greatest return. Consequently, we will experience quarter-to-quarter advertising and it result sales variability as we adjust to fluctuations in TV advertising costs. This was evident in our reduced spending in the second and third quarters of this year. This year, we are channeling our spending into the fourth quarter which is our most efficient period and also coincides with the launch of Quell 2.0. We are also rationalizing our Quell distribution strategy to the most productive and cost effective channels. As a practical matter, this means that we will limit Quell 2.0, the new product to e-commerce will continuing to offer the original Quell at retail. Both of our core product lines, DPNCheck and Quell are structured as an initial device sell followed by an aftermarket consumables business and the most recent quarter of 54% of our revenue was in consumables. Our DPNCheck business is almost entirely consumables and as a result it has a 75% gross margin and operating margins over 60%. The Quell business is at an earlier stage and therefore is more weighted to initial device revenue. Although we have built a profitable Quell aftermarket business, it is not growing as fast as we expect based on the clinical outcomes Quell delivers. We believe that we have identified several key user engagement steps that we need to take to accelerate this part of the business and are in the process of implementation and hope to see improved performance in 2019. We expect to maintain our current level of investment in R&D and clinical. We believe it is essential that we continue to innovate to secure our significant competitive advantage in both the DPNCheck and Quell product lines and to create future revenue opportunities. On the clinical front, we are committed to a strong clinical program that enhances the recognition of our standing and value of our products. Two clinical studies were recently published in peer reviewed journals as evidence of that strategy. Now moving on to Quell 2.0. For the past several years, our R&D resources have been focused on development of a third generation Quell device which we launched in September as Quell 2.0. This product is a critical element in our near and long-term business strategy. We believe that Quell 2.0 is accompanying digital health tools which include the Quell app and Quell health cloud will improve on their already impressive usability and clinical performance of the original Quell device. Quell 2.0 is 50% smaller than the original Quell device has increased stimulation power and incorporates new automation technology that enhances usability. Moreover we have planned a rich set of additional innovations that we will deliver to existing and new Quell 2.0 users over the next couple of years. Quell 2.0 has been designed from the [ground up tabular caused] [ph] an improved manufacturability. We will accomplish this without sacrificing and in fact enhance 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 have optimized the supply chain. Our collaboration with GSK is built around the Quell 2.0 technology. First early milestones are related to product development. Second a key part of our collaboration agreement is to cope on further development of this Quell platform with a 50

[Operator:]

Thank you. [Operator Instructions] The first question comes from the line of [indiscernible]. Your line is open.

[Unidentified Analyst:]

Good morning and congratulations on the launch of the third generation Quell.

[Shai Gozani:]

Thank you.

[Thomas Higgins:]

Thank you.

[Unidentified Analyst:]

I just had a few questions, you can cut me off if I go past my allotted privileges here. But the first one was regarding the second generation, are you guys still manufacturing and marketing that now?

[Shai Gozani:]

We are at a decreasing level and eventually will complete transition to the third generation product. But there will be a transitionary period.

[Unidentified Analyst:]

Okay. And how many quarters do you expect that transitionary period to be?

[Shai Gozani:]

We would definitely complete the transition by the end of next year. It depends on demand and how that the channel structure evolves. But by the end of next year it should be complete, if not earlier.

[Unidentified Analyst:]

Okay. I haven't used either of the products fortunately I don't have a need for either one. But looking at them and the clear advantages of the Quell 2 over Quell, I can't imagine why anyone would buy the second generation. Can you speak to that at all?

[Shai Gozani:]

Generally we would agree with you. There is a few aspects of the second generation product that are attractive to some customers. So first of all, it does not require a mobile app or a smartphone to use. For those individuals that don't have or don't want to use a smartphone, it offers an option. It's also a bigger device with a bigger battery so for the small number of people that need or want a very, very long battery life, so I'm talking here somewhere between one and two weeks between charging. It offers that as an option. So it's -- you're correct in your assessment, but there are a small number of customers I still think benefit from it. And as I mentioned, we were really limiting Quell 2.0 to the most profitable channels for us which are e-commerce, which is primarily our Web site and Amazon and continuing to offer the older products through the retail channels. So that also offers us a little bit of an expanded distribution option.

[Unidentified Analyst:]

Okay. As far as the electrodes are concerned, it looks like they both use the same electrode, are you guys planning any upgrades to those in the foreseeable future or not necessarily?

[Shai Gozani:]

You're correct. They do both use the same electrodes. We were always looking at developing new electrodes that have various -- the benefits to our customers but there are no specific announced plans this time.

[Unidentified Analyst:]

Okay. And then, you had mentioned in the prepared remarks that you look forward to tapping into resources from a marketing standpoint, I guess with GSK. Can you talk about what that might look like at all?

[Shai Gozani:]

I apologize. Hi, Robert. You broke up. I didn't exactly hear the question.

[Unidentified Analyst:]

Okay. I'll repeat it. I saw that you mentioned during your prepared remarks that you were looking forward to tapping into marketing resources in relation to the GSK collaboration and I'm wondering if you could talk a little bit about what that might look like?

[Shai Gozani:]

Yes. So to be clear, there's really more tapping to their expertise, so that we have exclusive ownership of the U.S. market and GlaxoSmithKline has exclusive ownership of the outside the U.S. market. So there's no marketing overlap in terms of distribution or commercialization. But through the interactions with their various commercialization teams, clinical teams, quality teams and others, we're tapping into a very deep well of expertise that I think improves and educates us on various aspects of large scale commercialization that are beneficial.

[Unidentified Analyst:]

Okay. And can you comment at all as to whether GSK has begun actual sales and marketing of any Quell related products outside the U.S.?

[Shai Gozani:]

I can't comment on GSK commercialization that would be confidential information.

[Unidentified Analyst:]

Sure. Okay. Well, that's all the questions I had. But thanks for entertaining me.

[Shai Gozani:]

Thanks for the questions.

[Operator:]

Thank you. [Operator Instructions] And at this time, I'm showing no further questions. I'd like to turn the conference back over to Dr. Gozani for any closing remarks.

[Shai Gozani:]

Thank you very much for joining us on our conference call this year. And we look forward to updating you early in 2019. Thank you.

[Operator:]

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