NeuroMetrix, Inc.
Q2 2016 Earnings Call Transcript

Published: 21 Jul 2016

[Operator:]

Good morning and welcome to the NeuroMetrix Second Quarter 2016 Earnings Call. My name is Abigail and I will be your moderator on the call. NeuroMetrix is an innovative healthcare company that develops wearable medical technology and point-of-care tests that help patients and physicians better manage chronic pain, nerve diseases and sleep disorders. The company is located in Waltham, Massachusetts. On this call, the Company may make statements which are not historical facts, and 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 today's -- I am sorry, 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 -- I am sorry, 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, please go ahead.

[Thomas Higgins:]

Thank you, thanks Abigail. I'm joined on the call today by Dr. Shai Gozani, our President and Chief Executive Officer, and we appreciate this opportunity to review our Q2 financial highlights. In our two markets; Wearable Therapeutic Technology and Point-of-Care Diagnostic Tests, our primary products are Quell and DPNCheck. Quell is an over-the-counter wearable neurostimulation device for treating chronic pain, and DPNCheck is a point-of-care diagnostic, primarily used in screening for diabetic peripheral neuropathy, or DPN. Earlier this morning we reported our Q2 results, so the revenue was $2.6 million, over 2x the year ago quarter. Quell shipments totaled 11,201 devices, and 9,676 electrodes reorder packages with a total invoiced value of $2.53 million. This was a sequential quarter increase of 38% in volume, and 48% in invoiced value. We consider these matrix of device placements and total invoiced value as important leading indicators of the health of the business. Invoiced value shipments will often precede GAAP revenue for two reasons; the first is our sales into distributions where the retail has contractual rights of return for unsold product resulting in deferred revenue recognition until that product is sold through to the ultimate customer. Product returns right such as these are common feature of retail contracts. And second where our Quell sales included 60 day of risk-free right-of-return [ph], revenue recognition is deferred until the return period has lapsed or there is a sufficient channel experience to estimate returns. As a consequence application of GAAP can delay revenue recognition and cause a build-up of deferred revenue in a growing business, and we experienced this with Quell. Turning to the GAAP financial results that we reported this morning, total revenue of $2.6 million was an increase of 116% year-on-year and 16% sequentially. Quell was a growth driver contributing $1.6 million in revenue, up 35% sequentially, it contributed 62% of our total revenue. Deferred revenue recorded in the balance sheet that we anticipate, will be recognized in future quarters with $734,000, up from $410,000 at the end of the first quarter this year. The growth in deferred revenue was influenced by shipments to new retailers carrying Quell and building the product pipeline. The majority of these shipments have not yet sold through to the ultimate costumers. DPNCheck contribute $0.5 million or 17% of total revenue, this was a growth rate of 9% year-on-year and decline of 6% sequential quarters. Almost all DPNCheck revenue came from the domestic Medicare advantage business which continues to show attractive growth. OUS DPNCheck revenue drivers drive primarily from a distribution partnership we have with Omron Healthcare. Omron is selling down an overstocked inventory position in Japan resulting in few quarters -- few orders for us this year. Further, Omron announced in June, the sale of its Omron colon [ph] subsidiary which handles our product. This will likely have an unfavorable destabilizing effect at least in the short-term. In China, DPNCheck has achieved product regulatory clearance and is in the final stages of approval of our manufacturing site. We are working with Omron China on a marketing plan which contemplates launch of DPNCheck in China in the fourth quarter this year or early next year. In Mexico, our expanded presence in the important governmental healthcare sector grew with Q2 order from second of six major governmental departments. The order shipped after the end of the quarter in first quarter -- in the third quarter this year. Our legacy products SENSUS and ADVANCE which we manage for cash flow and not growth contributed revenue of $60 million -- $600,000 or 21% of the total. Gross margin was $1.1 million or 40.6% of revenue. This was a reduction from the Q2 2015 margin rate of 51% and reflects the shift in product mix the lower margin Quell devices as we build our installed user base. We anticipate margin improvement overtime with growing electrodes sales and positive effects of volume on both manufacturing utilization, and on component costs. Total OpEx spending was $5.3 million increased from $4.0 million in the second quarter of last year. R&D spending of $1.1 million was up slightly with efforts directed towards the next generation of Quell. Sales and marketing spending of $2.8 million increased from $1.8 million in the second quarter of last year. Broader TV promotion is now supporting our retail expansion and contributed to this growth. G&A spending of $1.3 million was flat with the sequential quarter -- with the prior year quarter. Our warrant valuation adjustment was a $77,000 non-cash credit in the second quarter. And this is simply a revaluation of liability classified warrants at market value. In the comparable period of 2015, there was a larger $2.1 million credit; these have no effect on operations. Our net loss for the quarter was $4.1 million compared with $1.2 million in the second quarter 2015. On an apples-to-apples basis and excluding these warrant revaluation effects from both periods, the current quarter net loss was about $800,000 higher than the second quarter of 2015. Our net loss per common share was $5.37, and this included a deemed dividend charge from an equity offering that we completed during the quarter. Excluding the offering effect net loss per common share was $0.92. Our cash usage in quarter was $4.2 million and we ended the quarter with $11.3 million in cash. In the fourth quarter since Quell launched in the second quarter of last year, our total revenue has averaged 83% year-on-year growth. This growth trend and the start we've made with Quell causes us to believe that we are on a path to profitability. Our modeling indicates that in the annual revenue range of $45 million to $50 million, we may cross over to profitability. This could occur in the next several years. Modeling also indicates that our capital needs to reach crossover maybe in the range of $20 million to $25 million depending on many variables and assumptions. Of course there are risks associated with this outlook and it is highly uncertain. To address our capital needs we foresee several potential sources; there will likely be an equity component which would include a new offering for cash exercise of outstanding warrants or both. Also there may be an opportunity to monetize non-strategic assets, including our DPNCheck business and/or our legacy products. These generated a combined $1 million in high margin revenue in the second quarter. In the case of DPNCheck there are meaningful growth opportunities, both domestically and outside the U.S. and the business is separable from our operations. Those are the financial highlights for the quarter, and now Dr. Gozani will review of our business and strategy.

[Shai Gozani:]

Thank you, Tom. I will be focusing 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 markets for devices and drugs that treat chronic pain. In the U.S. alone there are over 100 million people with chronic pain of which our market research indicates about one-fifth or 20 million people are good [ph] to Quell. I will address the following aspects of our Quell efforts. First, TV promotion; second, development of our retail channel; third, international expansion and -- actually I will address four areas and the fourth is our innovation in clinical program. First, with respect to TV promotion we believe the most effective way to reach our core audience to both drive near-term sales and build long-term brand awareness is through TV advertising. Therefore, starting the most recently completed quarter we have been investing heavily in TV promotion. We are constantly optimizing our approach in terms of specific channels, commercial spotlight in time of day and other factors. For the most part we have focused on short response on national cable news channels including CNN, Fox News and CNBC. We expect to continue a similar level of TV promotion through the balance of the year. With respect to our retail channel, we believe the availability of Quell in top retail outlets is essential to continued growth and expansion of the brand. Our market research indicates that many consumers with chronic pain are most comfortable learning about and purchasing chronic pain treatments in and around the pharmacy where they are obtaining the prescription medication and other over the counter healthcare products. Therefore, our goal for 2016 has been to make substantial progress towards widespread availability of Quell at pharmacy affiliate retail settings. Quell is now available on 1,500 retail stores, approximately evenly distributed among Target, CVS and Walgreens. A primary objective of this initial roll out is to understand how to most effectively position the market call for success in the over the counter section of these leading retailers. We are generally pleased with our initial retail results though it is very early in the process. Ultimately, we are looking to position Quell for the next phase of retail expansion which we believe will take place in 2017. In addition to pharmacy centric retailers we also believe there are attractive opportunities for Quell with specialty and chronic retailers. We're currently working on several of such opportunities and maybe positioned to announce one or more such pilots later this year. On the topic of international expansion, our commercial focus has been and will continue to be the North America market. In particularly, the U.S. consumer healthcare mark is the largest in the world and we intend to directly build Quell into a premium, high value consumer brand under NeuroMetrix ownership. At the same time we see large opportunities for Quell outside of the U.S. We are starting to put the pieces in place to tap into these opportunities. Our initial effort is directed at the EU market or we recently announced that we filed an application for Quell CE mark. While we cannot be certain about the timing, we believe that we could receive a CE mark in the fourth quarter of this year. In connection with that event, we are starting to put our EU launch plan together. It is our expectation that our efforts in Europe will be some combination of direct-to-consumer sales, such as via Amazon and partnerships with one or more consumer healthcare focused companies. We will provide more details as we approach the Europe launch, where we hope to see self-starting in the first half of 2017. Regarding our innovation in clinical program, one of the core strength in NeuroMetrix is our RD sophisticate and ability to rapidly innovate. I believe that we have the most advanced engineering team in capabilities in the wearable nerve stimulation sector. Over half of our technical team holds PhDs, MDs or Master's Degrees. Our Quell product roadmap is exciting with important product enhancements and launches planned for the next several years. As a general matter, we will not be -- will not preannounce details in the upcoming products. However, as a guideline we typically target major product launches for the consumer electronics show in January, and other major consumer health and/or wearable technology events. We are also wrapping up our clinical program. We announced last quarter that we are sponsoring the study of Quell for chronic cancer pain and at The Scripps Translational Science Institute. In this randomized double-blinded controlled studies Scripps investigators will be evaluating the ability of Quell to reduce prescription opioid use and provide pain relief in patients with cancer pain. This form of chronic pain is among the most challenging of all types of chronic pain. The study is now underway with initial subjects enrolled. This study is a partnership with one of the leading scientific and clinical institutions in the country expectations with Quell clinical program. We hope to launch several additional studies in the second half of this year. 2016 is an important exciting year for Quell under our metrics. We will keep you informed as we proceed to the balance of the year. And with that, that is our prepared remarks. We'll now be happy to take questions.

[Operator:]

[Operator Instructions] And our first question comes from Yi Chen with Rodman and Renshaw. Your line is open.

[Yi Chen:]

Hi, thank you for taking my questions. My first question is can you talk about the potential commercial expansion -- retail expansion in 2017 in terms of scale as -- do you plan to cover expenditure in more stores or do you expand -- plan to have collaboration with more brand name or same-stores?

[Shai Gozani:]

Yes, thank you for the question. So the general thinking right now is that we are in -- we have the initial pilots, if you will, in three of the major retailers

[Yi Chen:]

Okay, got it. Second question

[Thomas Higgins:]

Yes, I would expect that to be -- initial results probably in the form of submitted abstracts would be probably potentially as early as late this year or early 2017. It's a…each subject is tracked for approximately 10 to 12 weeks and enrollment is going pretty well, so we probably will be fully enrolled fairly quickly and would hope to see results, again, late this year and, if not, then the first quarter of next year, at least in the abstracts -- submission of abstracts.

[Yi Chen:]

Okay, thank you. My third question is on the financial side. So can we expect those Sales & Marketing expenses and the G&A expenses to remain relatively stable for the rest of the year? And also how many shares of common stock were outstanding at the end of the second quarter?

[Shai Gozani:]

With regard to your first question, Sales & Marketing spending, which was about $2.8 million in the second quarter, our expectation is that it will remain relatively stable in the third and the fourth quarter. So through the end of the year with the mix shifting a little bit more towards television and away from some other more structural spending programs, the same with G&A. G&A should be pretty constant in that range of $1.2 million to $1.4 million. It was $1.3 million in the second quarter. And R&D should be pretty stable. In terms of the share count at the end of the year, it was about -- sorry, at the end of the quarter, it was just about 5.1 million common shares outstanding.

[Yi Chen:]

Okay, got it.

[Thomas Higgins:]

We'll be -- our intention is to file our 10-Q later today. And so you can get the precise count and the breakdown when that's filed.

[Yi Chen:]

Okay, got it. Just to follow up, do you plan to provide, in future quarters, do you plan to provide a guidance [ph]?

[Thomas Higgins:]

So at the moment, the answer to that question is no, we don't, in the short term. We're still gaining experience with Quell and what is particularly challenging in looking forward with Quell is GAAP revenue as opposed to shipments and the invoice value of shipments. So I think we need a little bit more experience before we can, with some confidence, provide meaningful guidance.

[Yi Chen:]

Okay, got it. Thank you very much.

[Operator:]

Thank you. Our next question comes from Jared Cohen with JM Cohen & Company. Your line is open.

[Jared Cohen:]

Yes, just a few questions. One, I was wondering about what is in the -- it's early on yet, but your reorder rate with maybe people who have had the Quell for a quarter or two?

[Shai Gozani:]

Yes, we're seeing, on an average basis, across all customers going back, we're seeing about one per quarter and we'd like that to be higher. What we don't have a good sense is the distribution of different types of usage. So for example, there are people who are using it episodically. One example would be low back pain. You typically will have that for three to four months. It might get better; you might put the device on the shelf and then pick it up again three or four months later when you have an aggravation. So averaged out across the entire customer base, it's about one per quarter. We would like to see that go up to the vicinity of one and a half per quarter. And I think we've got programs in place to push in that direction.

[Jared Cohen:]

Okay. And same thing with your return rate, I know you have it averaging around 20%. Are you still seeing that, give or take?

[Shai Gozani:]

Yes, that's been very, very consistent in the vicinity of 20% to 25%. It varies by channel, as you might expect. For example, in online channel -- online purchases, where the consumer can do some research and really make sure it makes sense for them, we have lower returns. If it's a direct response TV where they're making more snap decisions, it tends to be a higher rate of return because the reason for purchase may not be well aligned to the benefits of Quell. But overall, we're in that -- very consistent in that 20% to 25% range.

[Jared Cohen:]

Okay, and in terms of marketing and consumer awareness, do you think it -- what gets the consumer, talking of people with chronic pain, does it come from TV, seeing it on TV, or does it come from a physician recommendation? Because, is this a, Quell, you think a last resort thing from people who've been taking pills and or gotten steroid shots or anything, and they're just looking for something that's a last resort because they've tried everything else, or…what's your feedback from, so far, from people?

[Thomas Higgins:]

Well, we do have some strong efforts to educate healthcare professionals and, as I think you know, we actually sell through healthcare professionals and actually had a good quarter with respect to that. But that's still a relatively small driver of sales, though we'd like to make that a larger component. I think early on it was more desperate -- early on in the launch of Quell before TV, it was people who were out of options as you described, looking on the web really in a desperate attempt for sort of a last-ditch effort to control their pain. I think with TV, we're getting the people earlier, and I think it's a good thing. So I think we're probably seeing a transition away towards more -- maybe less severe, more common forms of pain with TV promotion. But I think it's a mix. I mean, we're getting people who are searching online, we're getting people through TV, we're getting people though healthcare professionals and, increasingly, we're getting people through word of mouth. So it's really all of them together. But I do think, on the whole, we're seeing -- we're catching people earlier in the process with less desperation and that's primarily driven by TV.

[Jared Cohen:]

Okay. I guess the last question -- I know that paper is very good you put out. But since you're in Target and CVS and so forth, how do you think you differentiate your device from some of the other devices people see in those stores?

[Thomas Higgins:]

Well, there is really little difficulty doing that. We're the only wearable therapeutic device that you can use for chronic pain. Most of these devices, and they're really -- they're good for what they do, which is provide short pain relief on a localized basis, so a very simple way to think about it is those devices are good if you have -- if your shoulder hurts or you just have a little bit of back pain or your knee hurts and you put the device on those -- on those locations for a short period of time and get some pain relief hopefully. If you have chronic pain, and particularly most people with chronic pain have multisite pain, meaning multiple parts of the body, they need a device that's going to provide widespread pain relief or systemic pain relief and they need it for many, many hours a day. Our average user has the device on for eight to ten hours a day. So we're much more along the lines of comparing ourselves to internal analgesics, pills, which provide you with prolonged and consistent pain relief. Another differentiator is we're the only device cleared by the FDA for use overnight. So really on -- and then finally, of course, we're the app-enhanced, digital health-enhanced device. So really, we've had very little difficulty differentiating ourselves, either on the retail shelf or generally in the marketplace. I think we're really targeting different parts of the market than some of the lower cost temp devices.

[Jared Cohen:]

Okay. You think that the people in the stores understand that in terms of showing that, explaining that to the customers or potential customers?

[Shai Gozani:]

Yes, I mean there is always a potential for some confusion but yes through the retail packaging and through some of the retail promotion efforts and of course, the TV promotion and you know, broadly our individual content we have online, I think we are doing that. The individuals have a pretty good sense of what they need and I think they, we have a team that has a particularly big challenge. I think in general, the growth and focus on non-pharmacologic approach as the pain therapy is evidence why we have expansion of these very expensive devices at retail is a good one. It is driven by large consumer healthcare companies like Sanofi and Bayer. I think that brings a lot of attention to the space. On the whole I think it's positive and I think there is enough pain to go around for everybody to help patients and do well financially.

[Jared Cohen:]

Okay. Thank you very much.

[Shai Gozani:]

Sure thing.

[Operator:]

Thank you, ladies and gentleman. [Operator Instructions] Our next question comes from the line of Sherry Grisewood from Dawson James Securities. Your line is open.

[Sherry Grisewood:]

Hi, good morning guys. Great results. Just wanted to follow-up on your comments concerning DPN in China and are you planning to do a launch in China with the product and if so what's your strategy and pricing now?

[Shai Gozani:]

Yes, so it's a little bit early to talk about the strategy directly but we have an agreement with Omron in China where they will act as our distributor and Omron has a pretty healthy presence in China to begin with. We have been working with them through the product regulatory process and now the plant qualification process and so we are in the process now of working with Omron on that Launchpad. Most likely it will be a regionally, a regional plan rather than a broad country wide plan primarily because of the payment structure that exists where the structure is more favorable to the diagnostic tests like this in the principal cities of course Shanghai and Beijing are top of the list. So broadly speaking, we would be starting this with Omron and it would be in those cities and we would see how it goes and expand it from them. Issues such as pricing are yet to be determined and again we are working on those Sherry.

[Thomas Higgins:]

Sorry, let me just add one thing. We have noticed that the sale of Omron is focused exclusively on Japan. And Omron healthcare as a corporate entity continues to man and that's how our relationship is with Omron Healthcare. Broadly, they continue to manage the China business as well as other national markets.

[Sherry Grisewood:]

Okay. With regards to the manufacturing, when you go through the regulatory process in China the next step is that manufacturing license, that typically used to give you a five year exclusivity in their terms, so when you receive the manufacturing license will you also get back time marketing exclusivity for this particular product?

[Shai Gozani:]

Well, just to be clear the regulatory process typically, in my understanding, doesn't involve a second staff to approve the plant where the product will be produced. In our case where this has spanned several years and we moved our production within Massachusetts from one side to another, that necessitated us going back notifying the regulators and then going through a re-review if you will. But I am not familiar with that granting us license of exclusivity.

[Sherry Grisewood:]

I think you answered my question. I thought you were talking about manufacturing in China so, you are going to be manufacturing in Massachusetts and exporting to China?

[Shai Gozani:]

That's correct, yes.

[Sherry Grisewood:]

Okay, got it. That's a little different, thank you.

[Operator:]

Thank you. I am showing no further questions at this time. I would like to return the call back to Shai Gozani for closing remarks.

[Shai Gozani:]

Well, thank you very much for joining us on today's conference call. We are very encouraged by the continued strong response for Quell and early results from our retail efforts and we look forward to updating you on the progress of Quell and other business activities during the balance of the year. Thank you

[Operator:]

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