NeuroMetrix, Inc.
Q3 2017 Earnings Call Transcript

Published: 19 Oct 2017

[Operator:]

Good morning and welcome to the NeuroMetrix's Third Quarter 2017 Earnings Call. My name is Candice 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, Candice. I'm joined on the call by Dr. Shai Gozani, our President and CEO and we both appreciate your participation in this quarterly review. NeuroMetrix operates in two markets wearable therapeutics and point-of-care diagnostics. Our proprietary platform technologies in both markets are based on our in-house expertise in precision neurostimulation to achieve therapeutic or diagnostic results. We are addressing large markets. Quell, our over-the-counter wearable device for people suffering from chronic pain addresses the U.S. market that we estimated about 20 million persons. Outside the US, we believe that the aggregate market opportunity could be equally large. DPNCheck, our test for diabetic nerve disease, addresses a medical condition affecting about half of people with diabetics. This represents about 5% of the U.S. population or about 15 million people. DPNCheck in available in Japan, recently in China, and in Mexico all markets whether as an acknowledged diabetics epidemic. We reported our Q3 financial highlights this morning and plan to file our 10-Q tomorrow. In Q3, we achieved top line revenue growth coupled with a reduction in cash usage from operations. This was during a period of summer seasonality, as well as a first weather and other conditions in key markets. We also funded the first tranche of an equity offering designed to supplement our cash position, while simplifying our capital structure. Turning to the quarter results, total revenues were $3.5 million, up 5% from $3.4 million in Q3 2016. Quell was the largest contributor with $2.6 million GAAP revenue, up 21% from $2.1 million in Q3 2016, and down 16% sequentially from the second quarter of this year. Quell constituted 72% of total company revenue. The invoiced value of Quell’s shipments was $3.6 million, up 25% year-on-year. Quell GAAP revenues booked under the sell-through accounting method for most sales to retail distributors. In Q3, we shipped 15.6K devices that was up 29% year-on-year, and we shipped 28.7K electrode reorder packages up nearly double the year ago quarter. In comparison with the prior quarter, devices were down 22% and electrodes were down 7%. Contributing factors in this sequential quarter decline during the summer months were shipments to QVC, which were down by about half, and shipments to retail distributors, which were down about 26%. Our e-commerce shipments were about flat. Orders now in hand indicate that we should see a recovery in QVC in the fourth quarter and we expect that holiday sales will have a positive effect on fourth quarter retail distribution sales. Quell sales that were deferred in the balance sheet under the sell-through method and which should convert to future GAAP revenue were 1.7 million as of September 30 and this increased from 1.5 million at the end of the second quarter of this year. Both amounts are net of approximately 25% estimated returns under our 60 day return policy. We intend to implement the new accounting pronouncement for revenue recognition ASU 2014-9 in the first quarter of next year. We will be required to discontinue sell-through accounting for retail sales, but in its place to report a provision for future returns of retailer held inventory. This will likely accelerate revenue recognition on future Quell shipments. We were in the early stages of developing our approach to the new standard and gauging its impact on revenue recognition. DPNCheck contributed $648,000 in the third quarter down 18% year-on-year. This product line constituted 18% of the total revenue. Our US Medicare Advantage business in Q3 was roughly flat both year-on-year and in comparison with the second quarter. However, OUS where we expected growth was down 80% year-on-year. In Q3 of last year, we recorded a several hundred thousand dollar order from our Mexico distributor and we’re positioned to do the same this year thereby keeping us on a strong growth track for DPNCheck for the full year of 2017. The Mexico earthquakes of late September intervened and the shipment was delayed. We are in close contact with our local distributor in Mexico City. We understand that while recovery efforts are underway this has been particularly disrupted to local health clinic activity where DPNCheck is deployed. It is not clear when a higher degree of normalcy will return in Mexico leading to the shipment of our DPNCheck diagnostic test. Our legacy advanced diagnostic test contributed to the remaining revenue of about $300,000 or 9% of the total, advances managed for cash and not actively marketed. At the gross margin line, our gross margin was 1.5 million, a rate of 42.5% of revenue. This compared with 1.4 million in gross margin or a rate of 40.1% in Q3 of last year. The margin improvement of 240 basis points reflected its shift in Quell mix toward higher margin e-commerce sales and away from QVC and retail, as well as increased electrode shipments. DPNCheck also recorded an unplanned beneficial mix shift towards higher margin US sales that resulted from the Mexico sales deferral. Our operating expenses were $5 million down 6% from $5.3 million in the year ago quarter. There were no unusual items. R&D spending of 841,000 reflected a $362,000 decrease in comparison with Q3 of last year and that was due to lower outside engineering costs. Sales and marketing spending of 2.9 million was essentially flat with the prior year. The G&A spending of $1.3 million increased by about $100,000 from Q3 of last year reflecting higher professional service cost. Our net loss declined $3.5 million versus $3.9 million a year ago. Net cash usage was $2.9 million continuing a downward trend from our peak in cash usage of $4.2 million in the second quarter of 2016. We ended the quarter with about $4 million in cash. Regarding our capital structure, we executed a $7 million pipe offering in the third quarter, the first 3.5 million tranche of which was funded in July and the second tranche is scheduled for late October. In addition to raising new money at market pricing, the offering included the repurchase of 4.2 million warrants that were outstanding or 86% of the total warrants outstanding. This leaves a small number of 660,000 warrants with a weighted average duration of less than three years and an exercise price of $32. The warrant repurchase simplifies a capital structure and eliminates a distraction. We currently have 2.3 million common shares outstanding and 12.3 million shares outstanding, including preferred shares on an as converted basis. After the second tranche of the July pipe is closed, our total common plus preferred as converted share count will be 13.7 million. Now Dr. Gozani will comment on our business and strategy.

[Shai Gozani:]

Thank you, Tom. My comments today will address an important evolution in our strategy. Since launching Quell about two years ago our focus has been on rapidly building and validating consumer interest, while concurrently advancing the technology through our R&D efforts. We believe that we have made substantial progress on both fronts. This past quarter we shipped our 100,000th device, at the same time our R&D program has progressed such that we are positioned to launch a novel third generation Quell product in 2018. We now have two solid commercial product platforms Quell and DPNCheck. As we look forward, we believe the optimal course of action for the company and our shareholders is to place our primary focus now on profitability, while continuing consistent top line growth. We are in the initial stages of implementing the strategy. As Quell is our primary growth product I’ll focus my remaining comments on how this evolving strategy will impact our Quell program. In particular, I will address our advertising strategy, retail channel strategy, strategic partnerships, and R&D. First, with regard to advertising. Quell market penetration sits a little bit less than 1% of the estimated attainable market of 20 million US consumers. As we expand our user base over time, we expect to reach a tipping point where viral marketing within the chronic pain community generates an upward sales inflection and in fact we are starting to see some evidence of this effect. However at this stage of commercialization, we recognize that most sales will still be generated by direct advertising. As a result a substantial portion of our sales and marketing spend has been devoted to building awareness through TV and online advertising. We continue to believe that TV advertising is important. However, we are aligning TV spending to a more sustainable level that is consistent with our profitability focus. We will supplement our TV efforts with cost effective media such as TV shopping and digital marketing. With regards to the retail channel, we continue to believe that the availability of Quell in top retail outlets is important to growth of the brand. Based on our learning over the last two years we are focusing our channel strategy on outlets that provide the opportunity to deliver margin, drive profitable growth, educate consumers, and build the Quell brand. While we expect Quell to remain available at retail we will be focused on strategic. With regard to strategic partnerships, strategic partnerships have a potential to bring in non-dilutive financing and offset certain ongoing cost such as R&D. Therefore they are essential to our effort to move the company to profitability, while limiting dilution. There are opportunities for Quell outside the US with our 1.5 billion people worldwide with chronic pain and in fact we currently have regulatory clearance for marketing Quell in Canada, the EU, and Australia. We expect to tap into these OUS opportunities through strategic partnerships and are engaged in discussions at the current time that may come to fruition over the next several quarters. Research and development, a core strength in NeuroMetrix is R&D, and the ability to rapidly innovate. I believe that we have the most sophisticated capabilities and technology in the wearable neurostimulation sector. Our focus is to enhance our competitive advantages and establish a foundation for long-term growth of Quell technology, including through additional clinical indications. We are currently developing a novel third generation Quell device that we expect to launch in 2018. We will enhance the user experience and substantially improve profitability of the Quell business. We anticipate Quell margins over 60% once the supply chain for the third generation device is optimized. As such, it is essential that we continue to invest in Quell innovation and therefore our plan is to maintain our current level of R&D spend. In summary, we are invigorated by the opportunity to evolve our business strategy with a long-term view towards profitability and sustained growth leveraged on the Quell and DPNCheck product lines, and enhanced by our strong commercial and R&D capabilities. That concludes our prepared comments. We will be happy to take questions at this point.

[Operator:]

[Operator Instructions] And our first question comes from Yi Chen of H.C. Wainwright. Your line is now open.

[Yi Chen:]

Hi, thank you for taking my question. My first question is, is the impact - the impact in Texas and Mexico are already over?

[Thomas Higgins:]

So the impact in Mexico is not already over according to everything we hear from our distributor in Mexico. As I mentioned on the call, we had a very large shipment to Mexico that was scheduled to go in September and has been postponed due to the impact of the earthquake and just that this doesn't add to top of the priority list in the Ministries in Mexico that we’re selling this to. And so it is difficult for us to know when this shipment will be cleared and when we will be able to make it. So, I would say, with regard to Mexico it’s not over. With regard to the Medicare advantage business for DPNCheck that’s a little bit more difficult to pin down. We believe that a lot of the test that we ship are destined for use in the Southeast and the Southwest, both of which were impacted by storms in the last quarter. From what we can gather recovery method, recovery is well underway and so probably by mid-to-late Q4 that should be under pretty good control. I would remind you however though that our US Medicare advantage business is seasonal with a strong testing and shipments being in the early part of the year. So, in Q1 Q2 and to a lesser degree in Q3. So, Q4 is typically slow for US Medicare advantage.

[Yi Chen:]

Okay. Just to follow-up, is the revenue generated from Mexico mostly related to Quell or DPNCheck or both?

[Thomas Higgins:]

No that this exclusively DPNCheck.

[Yi Chen:]

Okay. Got it. And second question regarding the third generation Quell in 2018, will it be likely priced at a higher price than the current generation?

[Shai Gozani:]

Our current thinking is that it will be priced at the same point, the same price point.

[Yi Chen:]

But with an improvement in gross margin?

[Shai Gozani:]

That is correct.

[Yi Chen:]

Okay got it. Thank you.

[Operator:]

Thank you. [Operator Instructions] And our next question comes from Jared Cohen of JM Cowen. Your line is now open.

[Jared Cohen:]

Yes, just a quick question on just electrode re-usage, it seems like at this time you should be getting a little bit more reorders then you seem to be getting, and you seem to get positive feedbacks from users I guess if you could talk about that a little bit more.

[Thomas Higgins:]

I think a couple of points. One, we did see strong year-over-year growth. However, I would agree with you that we do expect to see higher reorder rates. We’re currently about approaching one electrode reorder, one package per quarter proactive device. We do expect seasonality. People are going to generally use the product less in the summer for a variety of reasons and in fact we did see some recovery stronger reorders in the September month as opposed to the July and August month. So I think that kind of supported, but it is an area of focus. We need to dig in further and understand better the reorder process and facilitate it and do a better job, I think ageing our existing customers to maximize every order rate, so it is a definite focus for the company.

[Jared Cohen:]

Okay. Does your applications in terms of with the points help you see how people are using the devices to get an idea in terms of the daily usage, so that you know when they are using them and to get an idea of when they will need to be reordering electrodes or not?

[Thomas Higgins:]

It is a sort of a tiered system, so many - not all users use the app and not all app users have accounts in the Cloud that allows - we need a Cloud account to see what they are doing. So probably somewhere between 25% to 40% or so of our customers we have some level of visibility, so we do have some visibility, but not on everybody. So we have information about usage on some users and are learning a great deal about that and how to best optimize that. We don't have - the electrodes are not digitally - there is no digital signature on them, so we can't really tell when somebody has used - is using electrode for any particular time period of time. So we can't specifically inform them it is time to change the electrode. We have that technology, we call that digital electrode technology, we have not implemented that yet, but currently we will not have any way to know somebody had used it for a week or a month or two months. We are seeing some evidence based on social media and in other places that users are using the electrodes for longer than the two week period that we anticipated or designed it for, it is pretty robust so many people can use it if they take care of it for much longer. So that’s something we need to look into.

[Jared Cohen:]

Okay, thank you very much.

[Operator:]

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

[Shai Gozani:]

Thank you for joining us on this conference call. We look forward to updating you as we close out 2017.

[Operator:]

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