NeuroMetrix, Inc.
Q2 2013 Earnings Call Transcript

Published: 25 Jul 2013

[Operator:]

Good morning and welcome to the NeuroMetrix’s, second quarter 2013 conference call. My name is Sue and I’ll the moderator on your call today. 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 means of the Private Securities Litigation Reform Act of 1995. Statements that are predictive in nature, that depends upon or refer to future events or conditions, that include words such as believe, may, will, estimate, continue, anticipate, intend, expect, plan or other 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. Please refer to the risks and uncertainties in the company’s 2012 Form 10-K filed with the SEC in February 2013 and available on the company’s Investor Relations website at http

[Dr. Shai Gozani:]

Thank you, Sue. I’m joined on the call today by Tom Higgins, our Chief Financial Officer. We appreciate the opportunity to review our business highlights for the second quarter of 2013. Following our prepared remarks, we will be pleased to take questions. Our work in the second quarter and planned activities in the third quarter are foundational. They hold the record at building a broad commercial foundation capable of supporting the future businesses of scale. Broadly, this work addresses markets, products and capital. It’s deliberate and records a combination of forward thinking patience and attention to detail. The results will be realized over time. We made progress in all three areas, which I will address. Our prior business focus and top priority is the SENSUS pain management system, which we launched in January. SENSUS is a unique product addressing a large unmet medical need. The market opportunity is compelling. We estimate the U.S. market alone to be over $300 million annually. SENSUS is a novel transcutaneous electrical nerve stimulator intended for treating chronic pain. It is a convenient and wearable non-invasive device that offers physicians and their patients a non-narcotic pain relief option as a complement to medications. The device is lightweight and can be worn during the day, while remaining active or at night while sleeping. It is the only transcutaneous electrical nerve stimulator designed specifically for people with diabetes that suffer from chronic pain. The most common cause of such pain is painful diabetic neuropathy, which affects up to 5 million people in the U.S. alone. Our strategy for SENSUS has two primary thrusts; the first is to build our distribution channel. We are developing widespread U.S. distribution through multiple sales channels, including durable medical equipment or DME suppliers, mailer suppliers and brix and mortar, as well as online retail outlets. Our second for us is to expand the market. We are developing new applications for SENSUS that address complementary clinical indications, the first of which is sleep. We recognize that channel development takes time, particularly for new products and unfamiliar applications. Our initial challenge was to get into the market quickly, build credibility and use market feedback to refine our approach and market presence is also central for attracting interest from national distributors. We have developed business with about 15 regional durable medical equipment to suppliers who now stock and promote SENSUS. In addition we’ve added an eCommerce presence. Our early market presents has delivered SENSUS placements, provided patient feedback and given us insight in to market economics that we are incorporating into our product planning. During the second quarter we shipped approximately 210 SENSUS devices. Year-to-date we shipped approximate 350 devices. Patient feedback has been encouraging with many patients reporting a substantial decrease in pain and improved sleep. Feedback from durable medical equipment suppliers has also been helpful in optimizing our distribution in pricing strategies. Our efforts to secure national distribution channels are well under way. Discussions are ongoing with several large companies who have attractive national distribution reach. Each has a capability to rapidly expand SENSUS awareness and sales. Their interest level appears solid and we are working with them to develop and launch pilot partnerships. The pilot programs are designed to evaluate market interest and are scheduled for the second half of the year. Progress is encouraging. The program pace is largely set by the distributors priorities. On our side we shifted sales and marketing resources to SENSUS to better insure our support for these distribution efforts. On the product side, we made tangible progress in expanding the SENSUS platform for its complementary clinical indications. In early July SENSUS became the first transcutaneous electrical nerve stimulator to receive 510(k) clearance from the U.S. Food and Drug Administration for use during sleep. This expanded regulatory indication allowing SENSUS to be marketed for overnight use. Further it accelerates our work towards a sleep enabled SENSUS model that will provide hand support for monitoring and managing pain during sleep. This is a major issue for patients with painful diabetic neuropathy and neuropathic pain in general. Our goal is to launch a sleep enabled SENSUS early in 2014. While diabetes and painful diabetic neuropathy is our initial market focus, the core SENSUS technology could migrate to related neurological disorders. Lastly, with regard to capital, we address our near term funding needs for SENSUS commercialization and for general corporate purposes by completing a $5 million equity offering. This offering was priced at market and closed during June. Following the equity offering, we believe our cash resources provide a funding overlay of over 1 year. In summary we are building the foundation for SENSUS and the company. Our market development plans are on track with regional distribution in place and national distribution in process. Product development has been advanced with the SENSUS 510(k) clearance firstly. We successfully raised new capital, which provides the central short-term lead sources for our SENSUS strategy. I will now turn it over to Tom for a discussion of the financials.

[Tom Higgins:]

Thanks Shai. Let me pick up on your last point and review the financial statement impact of the financing we did in the second quarter. The $5 million equity offering was a simple attractive deal in concept, but complex in its legal documentation and accounting. The terms were at market pricing at $2 per share, which was the last closing price before the transaction, plus 100% more in coverage. The warrants are exercisable for cash at $2 per share and they’d have the potential to deliver a second $5 million in equity if exercised. The legal form of the transaction was a combination of convertible preferred stock, common stock and warrants. The use of preferred stock allowed the investor to limit his Neuro common stock ownership to 9.9%, with the additional equity represented by the convertible preferred. The preferred stock is what’s known as plain vanilla and it has no preferences over common stock. The accounting for equity transactions can be complex and so we work closely on this with our auditor PWC. The warrants were recorded as a liability due to a provision that requires us to deliver registered shares when the warrants are presented for stock. If for any reason in the future we were not able to deliver registered shares, we’d be subject to cash penalties. This led to the liability accounting. The warrant liability value was calculated to be $4 million as of the offering date of June 4, using a standard Black-Scholes model. That liability must be revalued or marked-to-market at the end of each reporting period and so at June 30, the end of the period, we revalued the warrants at $2.9 million using the same valuation approach. This amount of $2.9 million was recorded in the balance sheet and we recorded a credit to the statement of operations for $1.1 million, which was the reduction in the warrant liability during that approximately 30-day period. The preferred stock and common stock were classified within stockholders equity. The preferred stock conversion feature required a separate analysis to determine whether it was beneficial to the investor or in the money as of the offering date. Our analysis indicated that in fact it was in the money and that the value of the beneficial conversion feature was $767,000. In accordance with accounting guidance, this amount, $767,000 was included in the EPS calculation and reported in the 10-Q and the notes to the financial statements. So those are the highlights of the offering. Now let me address the statement of operations. We reported revenue of $1.2 million in the quarter. This compares with $1.4 million in the preceding quarter and $2.2 million in the second quarter of last year. We shipped to our distributors approximately 210 SENSUS devices plus electrodes. This was up from 145 units in the first quarter and it includes some devices for use in the market pilot programs that Shai has just described. Shipments generated $32,000 in revenue and as I said, the device shipments increased. NC-stat DPNCheck revenue was $129,000. This amount down from $648,000 in the second quarter of last year, reflect CMS changes to the Medicare advantage premium structure for 2014 for next year. In other words, which narrowed the financial benefits from early diagnosis of DPN. This had the effect of reducing the U.S. market opportunity and delaying its option of DPNCheck. The legacy advance business contributed $1 million in Q2 revenue in comparison with $1.1 million in the preceding quarter and $1.5 million in the second quarter of last year. We expect continued contraction of advance revenue due to the reimbursement environment. Our Q2 gross profit of $659,000 was a rate of 56.8% of sales. This was down 2.5-percentage point from the preceding quarter and it was up by 1.4 percentage points from the second quarter of last year. Our margins are relatively constant in this range of 55% to 60% and should be throughout 2013. Operating expenses totaled $2.8 million in comparison with $3.1 million in the preceding quarter and $4 million in the second quarter of last year. They are offsetting effects in Q2 of this year of increasing employee severance cost and reduced incentive compensation cost. During the remainder of 2013, we expect that OpEx will be reduced into the range of $2.5 million to $2.5 million per quarter. Warrant offering cost of $376,000 was recognized in the second quarter of this year. This represents the portion of the total offering cost, the total cost of the deal of $465,000 that were allocated for the warrants and expensed in accordance with accounting guidance. The balance of $89,000 in offering cost was recorded in the stockholders equity as a reduction in offering proceeds. Change in fair value of the warrants liability of $1,156,000 was also recorded. As I mentioned a minute ago, this credit to income reflects the change in the Black-Scholes valuations of warrants between the offering date of June 4 and the Q2 closing data of June 30. Our net loss was $1.35 million in Q2 versus $2.8 million in the second quarter. On a per share basis the loss of $0.92 was down from $1.32 in the second quarter of last year. The EPS calculation in the second quarter incorporated the charge of $767,000 related to the beneficial conversion feature that I just mentioned, that’s a $0.33 per share effect. The balance sheet accounts that we manage closely, inventory and receivables remain solid, quarter end receivables of $562,000 reflect 42-day sales outstanding, quarter end inventory of $754,000 reflects a turnover rate of about 2.6 times per year. Turning to liquidity. At June 30 we had $9.6 million in cash and we had utilized $1.9 million in cash during the second quarter. These cash resources at the end of June give us a cash runway into the third quarter of next year. Now those are the financial and liquidity highlights. So Shai, back to you.

[Dr. Shai Gozani:]

Thank you Tom. Those are our prepared comments. So we’d be happy to take questions at this point.

[Operator:]

(Operator Instructions). Your first question is from Wayne Gretzky of NeuroMetrix. Please proceed. You’re in the call.

[Unidentified Analyst:]

Hi, no I’m actually not from NeuroMetrix. My question is about the DPNCheck and continuing to push that forward or support it. I think it’s a fantastic product and I’m calling internationally. So I’m immune to the reimbursement model in the U.S. I just wanted to get your thoughts on that.

[Dr. Shai Gozani:]

Yes we of course agree with you on the benefit of the product. We will continue to seek markets for the product and we have distribution in place in various markets and outside the U.S. and our continuing to explore those. But in terms of maximizing our resources, we are focused on SENSUS. But we will continue to support DPNCheck for good opportunities for the product. At least in the near term, primarily OUS.

[Unidentified Analyst:]

Okay. Thank you.

[Operator:]

Thank you for your question. Sir, at this time there are no other questions. (Operator Instructions). The next question comes from the line of Albert Wasserman (ph) of (inaudible). Please proceed.

[Unidentified Analyst:]

Hi Shai, hi Tom. Hey, can you break down revenues by the legacy business and by the two; the SENSUS and the DPN. Is the Q out yet or can you maybe comment a little bit about the different revenue streams going forward.

[Tom Higgins:]

Sure Bob. So the Q hasn’t been filed yet. We intend to file it before the end of the day tomorrow. So you’ll have it by the weekend. So the revenue breakdown was for the SENSUS device. $32,000 was recognized in the quarter or for DPNCheck is was a $129,000; and for the legacy advance business it was about $1 million. So that gives you a total of $1,160,000 in the quarter.

[Unidentified Analyst:]

Okay, and do you…

[Tom Higgins:]

Is that what you are looking for, does that answer your question?

[Unidentified Analyst:]

Yes, a little bit bordering. I know the legacy business, but maybe come out a little bit on where you think DPN and SENSUS are going forward and will DPN continue to grow or will it be SENSUS going forward or where do you guys see yourself a year from now.

[Dr. Shai Gozani:]

Bob, this is Shai. The focus is primarily SENSUS as we talked about. We see that product as having tremendous potential. It has various established reimbursement for the product in the U.S. There is also a pretty attractive retail market for it as well, cash business. So there is really both; both types of business are in play for SENSUS. We definitely expect to see a great deal of the revenue growth coming from SENSUS and are on the cusp of establishing some large distribution partnerships that I think are going to accelerate it, so U.S. focused distribution partnerships. On DPNCheck, it’s a lot more uncertain. I think in the U.S. the Medicare advantage broadly, there was some pretty dramatic changes that were implemented as far as some of their coding and some of that affected us. So that business kind of took a step back. We are reassessing how to approach that business in the U.S., so I don’t see a lot of growth coming from that business in the near-term in the U.S. We do have some good partnerships that we’ve developed OUS. As you know we announced a partnerships with Omron in Japan several months ago and are continuing to pursue the Japanese market in partnership with Omron. So I think we’ve got some good opportunities, but OUS, a lot of it is in the developmental stages as we are going through regulatory, for example in Japan, as well as some other countries. So in the near term we really see revenue, and more broadly we see revenue growth coming from the SENSUS, although we do think there are some – continue to be some good opportunities for DPNCheck.

[Unidentified Analyst:]

Okay, thanks. Thanks guys.

[Operator:]

Thank you for your questions. (Operator Instructions). Thank you. I would now like to turn the call over to Dr. Gozani for closing remarks.

[Dr. Shai Gozani:]

Thank you for joining us on today’s conference call and we look forward to continue to update you on our progress as we progress through the balance of the year.

[Operator:]

Thank you for your participation in today’s conference call. This concludes the presentation. You may now disconnect. Have a very good day.