NeuroMetrix, Inc.
Q3 2013 Earnings Call Transcript

Published: 23 Oct 2013

[Operator:]

Good morning and welcome to the NeuroMetrix's third quarter 2013 conference call. My name is Jen and I will be your moderator on 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 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 other similar expressions are forward-looking statements. Any forward-looking statements reflect current views on 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 risks and uncertainties included in the factors described under the heading Risk Factors 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

[Shai Gozani:]

Thank you very much. I am joined on the call today by Tom Higgins, our Chief Financial Officer. We appreciate the opportunity to review our business highlights for the third quarter of 2013. Following our prepared remarks, we will be pleased to take questions. NeuroMetrix is a medical device company that develops and markets home use and point-of-care devices for the treatment and management of chronic pain, peripheral neuropathies and associated neurological disorders. The company is presently focused on diabetic neuropathies, which affect over 50% of people with diabetes. If left untreated, diabetic neuropathies trigger foot ulcers and may require amputation and cause disabling chronic pain. Within the past two years we have launched two significant new products into this arena. DPNCheck is a rapid, accurate and quantitative point-of-care diagnostic test for diabetic peripheral neuropathy, which goes by the acronym DPN. Our second product SENSUS is a therapeutic device, which addresses pain associated with diabetic neuropathy. Both products are performing at a high level from a technology and clinical perspective. SENSUS is a more compelling near-term market opportunity and it commands a majority of our resources. In more detail, SENSUS is novel transcutaneous electrical nerve stimulator intended for treating chronic pain. It is a convenient and wearable non-invasive device that offers a non-narcotic, non-addictive pain relief option as a complement to pain medications. The device is lightweight and it 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 goes by the acronym PDN, which affects up to 5 million people in the U.S. alone. The market opportunity is large. The U.S. market alone is over $300 million annually. Our efforts today are directed at building a broad national distribution system for SENSUS that is based on independent durable medical equipment or DME suppliers. Ideally, the DME suppliers have interest to us who have a field sales force that calls on healthcare professionals or we'll be in direct contact with diabetic patients and therefore capable of building SENSUS awareness and fulfilling demand. We have made good progress in these efforts. In the third quarter, we shipped 557 SENSUS devices, a significant increase from 210 devices in the second quarter and 145 devices in the first quarter, which is our large quarter. Recently cumulative shipments have passed the level of 1,000 SENSUS devices. Rehabilitation Management Group through its subsidiary, OsteoArthritis Centers of America will incorporate SENSUS into its chronic pain program, thereby making it available to over 100 affiliated clinics. The Neuropathy Medical Care Program is a national opportunity to introduce SENSUS to patients experiencing neuropathy and associated pain. We are also in the process of discussing or implementing partnerships with a number of large DME mail order organizations, including those who have traditionally provided diabetic testing supplies, most specifically Simplex Healthcare through their Diabetes Care Club subsidiary. And others who are focused on therapeutic products, such as therapeutic footwear, pain management products and rehabilitation products. Important pilot programs are underway with several national distribution companies who see the clinical and market potential for SENSUS. These programs began during Q3 and are expected to conclude around the end of the year. Pilot success could lead to SENSUS distribution decisions later this year or early next. Progress during the third quarter was encouraging. It takes time however to build affective national distribution, which is essential to the commercial success of SENSUS. We recently expanded the commercialization assets available to the company. David Van Avermaete, former U.S. President of Johnson & Johnson's LifeScan division and a seasoned executive in the medical device and diabetes field has joined our Board of Directors. David was with LifeScan during its 10 year evolution in the glucose monitoring business to a solid position with over $1 billion in annual revenue. He brings a wealth of strategic and tactical experience at a crucial time for us. We are pleased to have him on the board and look forward to his contributions. Finally for the third quarter, we reported revenue of $1.3 million, which mark sequential quarterly growth from the $1.2 million reported for the second quarter of 2013. I will now turn to Tom for a discussion of revenue and the overall financial results.

[Thomas Higgins:]

Thanks, Shai. Q3 was a positive quarter from a financial as well as an operational perspective. We should progress in revenue, in spending and in cash management. Here are few of the highlights. First, I'll address the statement of operations. We reported revenue this morning of $1.3 million in the quarter. This compares favorably with $1.2 million in the preceding second quarter of this year. We were down from the prior year third quarter revenue of $1.8 million. Our revenue performance was solid across all three of our product lines. For SENSUS, we shipped 557 SENSUS devices plus consumable electrodes. This was up over 2.5x to the second quarter, when we shipped 210 devices. Cumulatively, we were at 910 SENSUS devices at the end of the quarter, and to date we are well over a 1,000 devices. SENSUS revenue in Q3 totaled $73,000. This primarily represents device sales, as we build the customer installed base in advance of the recurring revenue from electrode sales. DPNCheck revenue in the quarter was $317,000. This was also up over 2.5x the second quarter revenue, which is $129,000. The increase was attributable to increased testing and consumables purchases in our Medicare advantage accounts and to a lesser degree new account acquisition. Testing in biosensor order should remain solid through the fourth quarter, as providers focus on documenting the health status of the patient population prior to yearend, in anticipation of reporting their patients SENSUS data in 2014. The legacy ADVANCE business contributed $925,000 in Q3 revenue, only slightly below to $1 million in the preceding quarter. We expect continued contraction of the ADVANCE business, which is managed for cash flow. Our Q3 gross profit was $736,000. That was a 56% margin on sales. Our margins have been consistent during 2013 in the range of 55% to 60% of revenue. Our margin of 56% in the third quarter was up about a full percentage point from the third quarter margin of last year. Our operating expenses totaled $2.3 million in the quarter. This was lower by about $450,000 from second quarter spending, which we reported at $2.8 million and it was about $1.2 million lower than the spending of $3.6 million in the third quarter of last year. Most of the OpEx reduction was in the sales and marketing expense. In the third quarter of 2012, we maintained a DPNCheck field sales force and field clinical educators. Those field resources were curtailed during the fourth quarter of last year, and this reduction in headcount caused the greatest part of the cost reduction. We reported a change in the fair value of our warrant liability of about $882,000. This credit to income relates to warrants issued in a recent equity financing, which by the terms of the warrants require that they be re-measured at the end of each reporting period. The Black-Scholes method yielded a warrant liability of about $2 million at September 30, 2013, versus about $2.9 million at the end of the second quarter. So the balance sheet was adjusted to the new warrant fair value and this change in the balance sheet accounts was credited to the income statement. Our net loss for the quarter was reduced to $716,000, in comparison with a loss of $2.6 million in the third quarter of last year. On a per share basis, the loss was $0.26 in the quarter just ended, down from $1.24 in the year ago quarter. As I mentioned, re-measuring our warrant liability at the end of the quarter created a non-cash credit of $882,000 or about $0.33 a share. If you take that benefit item out of our results for the quarter, our Q3 net loss would have been $1.6 million and this adjusted amount was still an improvement of about $1 million from the prior year. Turning to the balance sheet highlights. The balance sheet remains solid. We closely manage our working capital accounts, particularly inventory and receivables, both of which improved during the quarter. Receivables of $619,000 reflected 40 days sales outstanding at the end of the quarter, and that was a 2 day pickup from the second quarter. Our quarter end inventory of $554,000 reflected a turnover rate of 3.6x per year and that was an improvement of one full annual inventory turn over the $2.6 million turnover rate in the second quarter of this year. Turning to liquidity. We ended the quarter with $7.8 million in cash. Our net cash consumption during Q3 was $1.75 million. Conservatively, this cash position gives us a cash runway at about a year into Q3, 2014. So Shai, those are the financial and liquidity highlights, back to you.

[Shai Gozani:]

Thank you, Tom. Those represent our prepared comments. We would be happy to take any questions at this point.

[Operator:]

(Operator Instructions) First question comes from Bob Wasserman from Dawson James Securities.

[Bob Wasserman:]

So question on utilization. Can you maybe comment a little bit on the SENSUS devices that have been out of the whole year here and whether you're seeing some reorders and initial shipments? And whether you can comment a little bit on what type of placements are giving the highest utilization?

[Shai Gozani:]

So I guess, I can answer in a few ways. We have definitely seen patients who came on early in the year when we first launched the product and they remain on therapy, now six-to-nine months later. So that's very encouraging, again, very good results. The bulk of the orders obviously have come in the last quarter. So we don't have a lot of data yet in terms of reorders and long-term utilization. But I would say the general trends are quite positive based on our anecdotal feedback that once patients get on therapy and particularly if they get past a couple of months of use and decide to continue using it, then they're going to be on it for quite a long period of time. But it is very early, so it's hard to draw some more substantive conclusions at this time. But we are very encouraged with what we're seeing.

[Bob Wasserman:]

And the large number of shipments on the third quarter, were they to a particular part of the country or to a particular distributor, are they pretty wide ranging?

[Shai Gozani:]

There's still a number of large distributors that we're working with, some of which are essentially piloting distribution with a small number of their smaller substance of their sales representatives. So if those pilots go successfully, we would expect to see acceleration in early 2014.

[Thomas Higgins:]

It's around the country. There's no particular geographic focus.

[Bob Wasserman:]

I know you've given this in the past, maybe related to DPNCheck, but do you have a target on a number of sites for this year or next year or will that be something you might get later?

[Shai Gozani:]

Well, we were looking to do between 1,000 and 2,000 devices in 2013, kind of as last year obviously not knowing a lot about the market when we started. So we obviously were into that range. So we're quite please of where we stand and we're looking forward to having a good fourth quarter to build towards the high-end of that range.

[Operator:]

Thank you. I would now like to turn the call over to Dr. Shai Gozani for closing remarks.

[Shai Gozani:]

Well, thank you very much for joining us on this conference call. And we look forward to reporting on our progress as we move to the balance of the year. So thank you very much.

[Operator:]

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.