NeuroMetrix, Inc.
Q4 2012 Earnings Call Transcript

Published: 19 Feb 2013

[Operator:]

Good morning and welcome to NeuroMetrix’s Q4 2012 Conference Call. My name is Deanna and I’ll be your moderator for the call. NeuroMetrix is a medical device company focused on the neurological complications of diabetes. 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 that include words such as “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” “plan,” or similar expressions 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. The risks and uncertainties include the factors described under the heading “Risk Factors” in the company’s prospectus filed with the SEC on February 8, 2012, and available on the company’s Investor Relations website at http

[Shai Gozani:]

Thank you very much. I’m joined today on our call by Tom Higgins, our Chief Financial Officer. We appreciate the opportunity to review our business highlights for Q4 2012. Following our prepared remarks we will be pleased to take questions. 2012 was a productive year for the company. We made progress and in many cases exceeded the goals that we set for the business a year ago. These goals were designed to build the foundation for our high-growth, profitable diabetes franchise focused on diabetic peripheral neuropathy or DPN. As a reminder, DPN is the most common complication of diabetes effecting over half the people with diabetes. DPN causes significant morbidity including pain, increased risk of falling in the elderly; and is a primary trigger for diabetic foot ulcers which may require lower extremity amputations. The annual cost of diabetic neuropathies has been estimated at $14 billion in the United States alone. The company’s diabetes business has two products – a diagnostic test called NC-stat DPNCheck which was launched in Q4 2011 and the SENSUS pain management system which was launched in January of this year, 2013. NC-stat DPNCheck is a rapid, accurate and quantitative point of care test for diabetic neuropathy or DPN. This product is used to detect diabetic neuropathy at an early stage and to drive treatment. The SENSUS pain management system is a noninvasive nerve stimulator for treating chronic pain. We believe that the product is well suited to managing chronic pain in patients with diabetes such as those due to painful diabetic neuropathy which is a debilitating form of chronic pain that affects 25% of people with diabetes. Here are a few key highlights for 2012 as well as for Q4

[Shai Gozani:]

Thank you very much. We apologize for the technical difficulties. Apparently we lost the connection. So what we need to do because we need to have a clean presentation of the earnings call, we’re going to start at the beginning of my comments not knowing exactly where the call dropped off. So I apologize if we’re repeating content that you’ve heard before. So to begin again, thank you again for joining us today and I apologize for the technical difficulties. On the call I’m joined by Tom Higgins, our Chief Financial Officer. We very much appreciate the opportunity to review our business highlights for Q4 2012 and following our remarks we’ll be happy to take your questions. 2012 was a very productive year for the company. We made progress and in many cases exceeded the goals that we set for the business a year ago. These goals were designed to build the foundation for our high-growth, profitable diabetes franchise focused on diabetic peripheral neuropathy or DPN. As a reminder, DPN is the most common complication of diabetes. It affects over half the people with diabetes and causes significant morbidity which includes pain, increased risk of falling in the elderly; and is the primary trigger for diabetic foot ulcers which may require lower extremity amputations. The annual cost of diabetic neuropathies has been estimated at over $14 billion in the United States alone. The company’s diabetes business has two products – a diagnostic test, NC-stat DPNCheck which was launched in Q4 2011, and the SENSUS pain management system which was launched in January 2013. NC-stat DPNCheck is a rapid, accurate and quantitative point of care test for diabetic neuropathy. This product is used to detect the disease at an early stage and to guide treatment. The SENSUS pain management system is a noninvasive nerve stimulator for treating chronic pain. We believe that the product is very well suited to managing chronic pain in patients with diabetes such as due to painful diabetic neuropathy which is a debilitating form of chronic pain affecting about a quarter of people with diabetes. Some of the key highlights for 2012 and Q4 of last year are as follows

[Tom Higgins:]

Thanks, Shai. I’d like to first expand on your operations comments. The steps we’ve taken to consolidate our operating structure are significant. With a narrow market focus on DPNCheck and SENSUS we’ve put in place an organization capable of supporting revenue growth without proportionate cost increases. We believe it is both flexible and leverage-able. It conserves cash today and lowers our future cash flow breakeven point. Our sales channels are designed for domestic DPNCheck sales to be handled by a small senior level of commercial operations team plus our in-house customer service department. This effort is supplemented by independent distribution outside the US. Domestic sales of SENSUS will rely exclusively on DME suppliers. We’ve redefined the core headcount in our business model to be 30 to 35 employees. We believe this is sufficient to cover our diabetes sales initiatives, the product development pipeline, the legacy ADVANCE business and essential public company administrative support. The near-term implication of this structure is that operating expenses in 2013 are forecasted to drop by $2.5 million from 2012. We forecast cash usage for 2013 in the range of $1.5 million to $2.0 million per quarter based on our 2013 revenue outlook of about $7 million. Quarterly cash usage should decline during the year as SENSUS and DPNCheck revenue grows. Looking forward we project that our cash flow breakeven point has been reset to a revenue level of about $20 million. Our capital structure has also changed. We remain committed to our public company status and NASDAQ listing. In December our shareholders authorized a reverse split of our common stock if it was necessary to maintain that NASDAQ listing and last week we concluded that it was essential. On Friday we executed a 1-for-6 reverse split after the market closed. The measure is intended to increase the trading price of our stock above the $1.00 level required by NASDAQ. The split does not change any individual shareholder’s percentage ownership in the company; it’s just math. It has no effect on the fundamentals of the business. We continue to have a simple capital structure. Post-split our equity accounts consist of 2,141,000 common shares, 782,000 warrants with an average strike price of $7 per share, and 52,000 stock options mostly with exercised prices above $20 per share. We are debt-free. In January, we renewed our credit facility with Comerica Bank in the amount of $2.5 million. This is available for working capital support and other uses should we need it. We maintain an equity registration statement with the SEC; in other words a shelf. Its statutory three-year term is ending and we intend to renew it with the filing of our 10(k) next week. The shelf provides us a degree of flexibility in future equity offerings. Turning to the results we reported this morning, revenue was $1.5 million in Q4 and $7.6 million for the year. Our Q4 gross margin of $847,000 was 56% of revenue, an improvement from 53% gross margins over the full year 2012. DPNCheck diabetes business contributed revenue in Q4 of $352,000. This was 23% of total revenue. For 2012, the first full year of DPNCheck sales, it contributed $1.4 million in revenue or 19% of our total revenue. Quarter-on-quarter revenue from diabetes trended upwards during 2012 with Q2 our highest revenue quarter being above the trend line due to large initial sales from two large customers. Taking a closer look at the $1.4 million diabetes revenue, in the markets of our primary focus we recorded $600,000 in Medicare Advantage sales and $300,000 in international DPNCheck sales. It’s from these initial positions that we expect strong growth in 2013. Diabetes gross margins finished the year strong. For DPNCheck we achieved 69% margins in Q4 and 60% for the full year. Margins were enhanced by the shift in market focus to Medicare Advantage and international, where we achieved higher average sales prices over the course of the year. The Q4 DPNCheck margin of 69% compares favorably with 45% margins we reported in Q1 when sales were directed at endocrinology and podiatry. Q4 particularly benefited from international sales into Europe. The legacy neuro-diagnostic business of ADVANCE devices and consumables continued to make a positive contribution. Q4 neuro-diagnostic revenue was $1.2 million and full year revenue was $6.1 million. Gross margins on this business were stable at about 51% in Q4 and for the full year. Operating expenses were $2.7 million in Q4 and $14.0 million for the full year. Q4 OPEX dropped by $900,000 or 25% from the $3.6 million in Q3. This sequential quarter drop reflects the consolidation of business operations that we’ve discussed as well as a $400,000 benefit from year-end adjustments to our incentive comp plans. Operating expenses in 2013 should be in the range of $2.8 million to $3.0 million per quarter. Our net loss was $1.9 million in Q4 and $10.0 million for the year. After giving effect to the reverse split the net loss was $0.89 per share in Q4 and $5.22 full year. We ended 2012 with $8.7 million in cash and consumed $2.2 million in cash during Q4. The balance sheet accounts that we closely manage, inventory and receivables, remain solid. Year-end receivables of a little under $600,000 reflected 33 days sales outstanding. Year-end inventory of $835,000 reflected a turnover rate of 3.2x per year. That summarizes the financial highlights. Back to you, Shai.

[Shai Gozani:]

Thank you, Tom, and again we apologize for the technical difficulties and appreciate your patience in staying with the call. So with that, those are our prepared comments and we’d be happy to take any questions you might have at this point.

[Operator:]

(Operator instructions.) We have a question from the line of Juan Sanchez at Ladenburg Thalman.

[Juan Sanchez:]

Hi guys, how are you? I think I have a good understanding of the SENSUS and the DPNCheck but should we assume that the ADVANCE legacy business is slowly disappearing or do you see this business will flatten out at some point in the near future?

[Shai Gozani:]

Well, it’s continuing to deteriorate as we have no focus on it. As you know, we just basically ship electrodes to existing customers and are running the business for cash flow. So at this point it continues to deteriorate on a quarter-by-quarter basis and we don’t really have a sense of when or if that would even out at some point or flatten out. So at this point I would view it as continuing deterioration but generating positive cash flow.

[Juan Sanchez:]

Got it. And on the disposables for the SENSUS and the DPNCheck, at which point, at what kind of volumes do you need to have to lower your cost of goods? This is the beginning and the volumes are low so we will have to wait for a while to see some leverage here? Or what’s the situation here?

[Shai Gozani:]

Our gross margins on both electrodes at current volumes are in the 60% plus range for the most part. So there is some potential to increase that into the high-60%’s I think, maybe even low-70%’s. But even where we’re starting today it’s in the low-60%’s and what you have to kind of keep in mind is obviously the overall margins are somewhat weighed down by the cost of the devices themselves which are lower-margin and in some cases are provided at a discount or even no charge in support of an initial order. So the consumables are actually quite attractive from a margin perspective with some potential improvement with volume, but we’re starting out in a pretty good place.

[Juan Sanchez:]

Perfect, thank you Shai.

[Shai Gozani:]

Absolutely.

[Operator:]

(Operator instructions.) There are no more questions at this time. I’d like to turn the call back to the President and CEO, Dr. Shai Gozani for closing remarks.

[Shai Gozani:]

Thank you very much for joining us on the call. Again, I apologize for the technical issues and we look forward to reporting on our progress as we progress through this year. Thank you very much.