NeuroMetrix, Inc.
Q2 2017 Earnings Call Transcript

Published: 20 Jul 2017

[Operator:]

Good morning and welcome to the NeuroMetrix's Second Quarter 2017 Earnings Call. My name is Nova and I will be your moderator on the call. NeuroMetrix is a commercial stage, innovation driven healthcare company combining neurostimulation and digital medicine to address chronic health conditions including chronic pain, sleep disorders, and diabetes. The company is located in Waltham, Massachusetts. 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 to 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, Nova. I'm joined on the call by Dr. Shai Gozani, our President and Chief Executive Officer and we appreciate your participation in this quarterly review. For those of you who are new, NeuroMetrix operates in two markets, wearable therapeutics and point-of-care diagnostics. Our proprietary platform technologies in both markets are based on expertise accumulated over two decades in precision neurostimulation to achieve a therapeutic or a diagnostic result. Our markets are large. Our primary product Quell, which is an over-the-counter wearable device for the millions of people suffering from chronic pain has an addressable U.S. market of about 20 million by our estimation. OUS would be at least that large. DPNCheck, our test for diabetic nerve disease, addresses a medical condition of about half of diabetics representing about 5% of the U.S. population or about 15 million persons. The financial focus of NeuroMetrix is on topline revenue growth and on cash management as reflected in quarterly net cash usage. Q2 was a good quarter for the company. Topline revenue of $4.3 million was up 63% year-on-year and slightly higher sequentially from Q1. Quarterly net cash usage of $3.3 million was lower by 22% from $4.3 million in Q2 of last year and was also down about 2% or nearly $100,000 sequentially. The revenue increase and reduced cash usage were achieved while maintaining the pace of Quell product development in R&D and while increasing our brand investment in advertising, both of which ultimately strengthened our competitive position and are essential to business capable growth over the long-term. Turning to our principal product lines, we measure Quell progress based on devices placed and invoiced value of shipments. In Q2 devices placed totaled 20,110 and invoiced shipments totaled 4.4 million, both up 8% sequentially from Q1 2017. This marked the eighth consecutive growth quarter for Quell starting with its commercial launch in mid 2015. Quell GAAP revenue was $3 million up 83% from the prior year and essentially flat with Q1 of 2017. It constituted about 70% of total company revenue. Electrode reorders totaled 30.7K sleeves, approximately 3× 10.2K electrode sleeves we shipped in the year ago quarter. The sequential quarter growth rate from Q1 of this year was 21%. Deferred Quell sales which were anticipated to convert to future GAAP revenue were approximately $1.5 million and this was up from $1.2 million at the end of Q1 of this year. These amounts are net of estimated returns. Now, DPNCheck. DPNCheck contributed 814,000 in the quarter. This was up 78% year-on-year and essentially flat with Q1 of this year. The product line constituted 19% of total revenue. In the second quarter we saw continuation of strong Q1 demand in our U.S. Medicare Advantage business. OUS orders were light in the second quarter and these are historically lumpy and primarily from our distributors in Asia and Mexico. We anticipate strengthening OUS in the second half of this year which should compensate for any seasonal effects in Medicare Advantage. Overall DPNCheck is on track for a strong full year growth. Our legacy products, primarily ADVANCE diagnostics tests are managed for cash and are not actively marketed and these contributed the remaining $400,000 of revenue or about 11% of the total. Moving down to our gross margin, it was $1.7 million a rate of just under 39% and this compared with $1.1 million gross margin or a rate of about 41% in Q2 a year ago. We recorded an increased weighting of Quell sales in total revenue and within Quell a shift in mix toward retail distributors and QVC. Retail and QVC sales carry lower average sales price and consequently lower margins. Operating expenses totaled $5 million down 4% from $5.2 million in the year ago quarter. R&D spending of $878,000 decreased by about $250,000, reflecting lower outside engineering costs. Sales and marketing spending of $2.9 million increased by about $90,000 and this encompassed higher TV advertising costs offset by savings from reduced sales headcount. G&A spending of $1.2 million was essentially flat. Our net loss for the quarter declined to $3.2 million versus $4.1 million in Q2 of last year. Our net cash usage of $3.3 million continued the downward trend from a peak of $4.2 million in Q2 of 2016. We ended the quarter with $3.6 million in cash. After quarter end we strengthened our balance sheet by signing a $7 million private placement and funded the first of two $3.5 million tranches. So those are the financial highlights. In summary, strong year-on-year revenue growth in both product lines. Quell continues to maintain the upward trend in it skewed metrics and quarterly cash usage continue to trend down. Now Dr. Gozani will comment on our business and strategy.

[Shai Gozani:]

Thank you, Tom. I will focus my comments on Quell, which is our primary growth driver. We believe that Quell is well-positioned to address unmet needs in the $20 billion global market for devices and drugs to treat chronic pain. In the U.S. alone there are over 100 million people with chronic pain. I'll address the following five aspects of our Quell effort. First will be our advertising strategy, the development of the retail channel, third will be strategic partnerships, fourth R&D and five digital health. First with respect to our advertising strategy. We are still in the early stages of building national awareness for Quell with verbal pain relief technology within the chronic pain community. Our current market penetration is only about 0.5% of estimated attainable market of 20 million U.S. consumers. We are working toward reaching a tipping point where viral marketing within the chronic pain community will generate an upward sales inflection and we are starting to see more and more peer to peer marketing. However at this early stage of commercialization we still recognize that most sales will be generated by direct advertising. As a result, a substantial portion of our sales and marketing spend is devoted to building awareness primarily through TV and online advertising. We continue to believe that the most effective way to reach our core audience is through TV advertising. Therefore, since the second quarter of 2016 we have been investing in TV promotions. Our most common approach is 30-second spots on national cable news channels; however we will also utilize other channels that match our customer demographics and characteristics and we expect to continue a similar level of TV promotion throughout the balance of this year. We also recently developed an impactful new commercial which we will launch in the near term. In addition to our own TV advertising efforts we continue to effectively partner with QVC. Their customers are interested in novel health products and we had strong sales on QVC during the second quarter. Digital marketing is also an important component of our advertising strategy and it represents about quarter of our advertising spend. Our digital marketing strategy consists primarily of paid search through Google and online advertising including social media sites such as Facebook. And then in addition to TV and digital marketing we've also found that radio advertising is cost effective. In building the retail channel we believe that the availability of Quell in top retail outlets is important to the growth of the brand. The association of Quell with premium U.S. retailers enhances its credibility and the convenience of in-store access is important to many of our customers. Therefore, we continue to invest in developing this channel. We're also recognizing and managing the challenges inherent in retail. These include lower margins and deferred revenue recognition. Quell is available in about 2600 retail stores among Target, CVS, Best Buy, Bed Bath & Beyond and several others. The breadth of retail outlets carrying Quell confirms the Quell value proposition extends beyond pharmacies, et cetera, nontraditional consumer health settings. We believe this is consistent with a secular trend towards increased consumer control over healthcare decisions in purchasing. With respect to strategic partnerships, the U.S. consumer health market is the largest in the world we intend to directly build Quell into a premium high value consumer brand under NeuroMetrix's ownership. At the same time we also see opportunities for Quell outside the U.S. There are 1.5 billion people worldwide with chronic pain. We now have regulatory clearance for marketing in Canada, the EU and Australia. We are most likely going to tap into OUS opportunities through distribution and licensing partnerships and our strategy is still evolving here. Although we are engaged in several ongoing discussions, these agreements take time and must be entered into carefully to yield both near term and long term value. On the R&D front, the core strength in NeuroMetrix is research and development and ability to rapidly innovate. I believe we have the most advanced engineering team and technology in the wearable nerve stimulation sector. Our focus is to expand in our existing competitive advantages and establish a foundation for long-term growth. We typically target major product launches for the Consumer Electronics Show known as CES in January. In fact we announced our second-generation Quell device at the CES meeting this past January. This device provides enhanced personalization, automation, battery life, and health tracking. This started shipping in the middle of the first quarter. We are currently developing a novel third generation device that we expect to launch in early 2018. We believe this device will both drive accelerated growth and substantially enhance the profitability of the Quell business. We are committed to conducting clinical studies that build the credibility of the Quell technology and enhance our understanding of the mechanism of action and clinical efficacy. We have two studies that have recently completed and have presented results are in the data analysis phase, and two additional studies are still enrolling subjects. We expect to see additional data readouts in the second half of this year. We are also focused on building our IP position. Two new Quell U.S. utility patents were issues in the second quarter and we have many patent applications at various stages of review both in the U.S. and internationally. Now Quell and digital health. An underappreciated aspect of the Quell system is in addition to being a neurotherapeutic it is also a digital health solution for chronic pain. Chronic pain is a disease onto itself that goes beyond the direct experience of pain to impact all aspects of the sufferers life including their sleep quality, activity levels and mental health and thus leads to poor overall health. Effectively managing chronic pain requires a broad view of the patient's overall health. Quell is uniquely designed to provide this holistic approach to pain management through tracking of objective health metrics such as sleep and activity and subjective outcomes such as pain and mood. The data and related health insights are presented to the user via the Quell App and stored and synthesized in the Quell Health Cloud. We already have over 30,000 users that have created Quell Health Cloud accounts. We are just starting to tap into the tremendous potential of this rapidly growing database which may very well be the largest chronic pain database in the world. We intend to use sophisticated analytical methods to better understand each user's pain and health and thereby offer them personalized insights to optimize their use of Quell and to decrease their pain and its impact on their life. We expect to present new results in these analyses at medical conferences in the third and fourth quarters of this year. We believe that these types of services will create long-term loyal customers that will form the foundation of for long and profitable consumer health brand. And that constitutes our prepared comments. We will be happy to take questions at this point.

[Operator:]

Thank you. [Operator Instructions] And our first question comes from the line of Jared Cohen of Cohen and Company. Jared, your line is open.

[Jared Cohen:]

Oh yean, thank you. Just going to what you said about the different types of users, because the thing I'm most interested in is the reorder rate of electrodes, do you find that it's the people who the most severe people of chronic pain or the ones who reorder the most are for the electrodes? I guess that's my question.

[Shai Gozani:]

Thank you for your question, Jared. We – I don’t have a quantitative answer to give you there. We’ve not done that specific form of analysis yet. That being said, it wouldn’t make sense, but we have not specifically analyzed the Quell Health Cloud from that perspective. One of the reasons for that is we don’t have - we have a lot of information about the individual, their use of the device, but we don’t see electrode reorders through the Quell Health Cloud. And given that most people are now buying it, the electrodes through Amazon or retail or various channels, we don’t necessarily have the ability to track reorders.

[Jared Cohen:]

Okay, because I was just trying to understand or see how you understand or what would stimulate more reorder use, all right.

[Shai Gozani:]

Yes. Well, I think, yeah, I mean we're at, pretty consistently at a little bit under about one per quarter per active user and we want to grow that number somewhat. We believe that one of the most important ways to achieve that is to increase the engagement particularly early with the user. So, we are working primarily on developing various features of the app and communicating via the app particularly on the on boarding experience in the first 30 or 60 days of use to really make sure that new users are effectively utilizing the device and maximizing its potential and then developing early and strong relationship with the customer. So, we have some significant initiatives on that front this quarter and we hope to start seeing some further acceleration in the growth of electrode reorders based on that.

[Jared Cohen:]

Okay. Thank you very much.

[Shai Gozani:]

Thank you.

[Operator:]

Our next question comes from the line of Yi Chen of H.C. Wainwright.

[Yi Chen:]

Hi, thank you for taking my question. Looking at second quarter’s revenue and the sales and marketing expense as compared to your first quarter of this year, the revenue is relatively flat, while the sales and marketing expense is higher than the first quarter. So, is there something we should worry about regarding more dollars need to be spent on sales and marketing to boost the sales of Quell, I mean is the sales trend kind of slowing down?

[Shai Gozani:]

I wouldn’t say that. You know the sales and marketing, I don’t have the exact number in front of me. The numbers are fairly comparable I think. You know the customer acquisition cost can vary a little bit from quarter-to-quarter. We will have PR effects which may lower it in one quarter and that may not kick in another quarter. But we actually as you’ll see, we actually sold, shipped more devices this quarter and considerably more electrodes. So, the invoice value of sales was up 300,000 versus the first quarter, especially from a shipment perspective sales were up. The revenue recognition could be delayed based on the timing of those shipments. So, we actually saw growth in quarter two literally relative to Q1.

[Yi Chen:]

Thank you. Sorry, go ahead.

[Thomas Higgins:]

I was going to say that we did benefit in the first quarter from strong PR, so that was non-paid PR and it was primarily the, I think it was the forward innovation foundation interview, that shined it. So that was the major benefit and it might have helped us lighten up a little bit on our advertising spending, but not very much. I don’t think the numbers were that different between Q1 sales and marketing spending in Q2 but…

[Shai Gozani:]

Well, Yi it's a good question, I guess just to sort of summarize there, we really, because there will be some lumpiness in that in the customer acquisition cost may vary from quarter-to-quarter based on non-PR and other effects, but it was important to look at the number of units and the electrodes and that will ultimately drive the continued GAAP revenue growth.

[Yi Chen:]

Got it. So, for the third and fourth quarter shall we expect the sales and marketing expenses to remain relatively very stable compared to the second quarter?

[Shai Gozani:]

Yes, so I think in the third quarter and the fourth quarter we will see a little bit of growth, not too much in the third quarter, but several hundred thousand dollars worth of growth in Q4. And there what we're looking to is Q4 is a strong, we believe it will be a strong quarter anyway, its holiday, it’s end of year and we want to optimize what we are doing in the fourth quarter. So, I would say a little bit up in the third quarter and then may be up few hundred thousand in the fourth quarter, current plan.

[Yi Chen:]

Thank you.

[Shai Gozani:]

You are welcome.

[Operator:]

[Operator Instructions] And I'm showing no further questions at this time. I would like to turn the call back to Dr. Gozani for closing remarks. One moment sir, we do have another participant in the queue. Our question comes from the line of Alan Singer [ph]. Your line is open.

[Unidentified Analyst:]

Yes, good morning and thank you for this very valuable call. It seems to me like that there are opportunities here to take advantage of the opioid crisis, to offer up a potentially very useful solution, pain free, I mean a drug free solution to a really challenging problem. And there is a second community that I am very interested in hearing about your efforts and that would be the sleep medicine community because I happen to, I have RLS and I would use Quell. I wear it every night and it has been enormously beneficial to me. So, I am just wondering what efforts are being undertaken to reach out to the medical communities and rheumatology and sleep medicine to try to make inroads into those communities for purposes of allowing physicians who treat chronic pain patients and RLS patients a low cost, drug free alternative to the medicines that are proving to be challenging in both areas?

[Shai Gozani:]

Thank you very much for the question and I'm delighted to hear that’s beneficial for your RLS. On the matter of the opioid crisis, we are actively engaged with the pain medicine community and also from a public relations perspective to educate physicians, educate patients, educate government agencies about the opportunity to potentially reduce the dependence on opioids through technology like Quell. We have taken the position, we're not sort of anti or pro-opioids banning, means we are arguing that there is a role for technology in managing chronic pain and potentially that could help reduce the dependence on opioids, so we really view ourselves as advocates of the chronic pain community. And for many of them some level of opioid use is still very, very important, so we're just trying to be part of the solution. Our approach again is primarily by educating pain medicine physicians and by engaging through public relations and we have been pretty successful there. We also have been focused on clinical studies specifically to look at that question. We just - one of the studies that I referenced has finished enrollment and that’s a study at Scripps Translational Science Institute in San Diego which is looking at specifically opioid reduction in cancer pain using Quell, so we'll have some - hopefully some quantitative data to talk about. On the sleep side, very interesting application. We are engaged with the sleep medicine community. We recently were presenting at SLEEP 2017 which is the big annual sleep medicine conference happened to be in Boston. We have done some work specifically on RLS and that’s a feature application for the product and many people with chronic pain actually have RLS, so there is a lot of overlap in any case. So we have been engaging the sleep medicine community primarily through professional health conferences and through publications. And we do see sleep as a - and primarily through RLS and through the impact of chronic pain on sleep as an extension market for us.

[Operator:]

Thank you. And sir, I'm showing no further questions in the queue at this time. I'd now like to turn the call back to Dr. Gozani for closing remarks.

[Shai Gozani:]

Thank you very much for joining us on the second quarter conference call. We continue to be encouraged by the strong response to Quell in the marketplace as well for DPNCheck and we look forward to updating you through the balance of the year.

[Operator:]

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