NeuroMetrix, Inc.
Q4 2014 Earnings Call Transcript

Published: 12 Feb 2015

[Operator:]

Good morning. And welcome to the NeuroMetrix Fourth Quarter 2014 Conference Call. My name is Benny, and I will be your moderator on the call. NeuroMetrix is a healthcare company that develops wearable medical technology and point-of-care tests to help patients and physicians manage chronic pain, nerve diseases and sleep disorders. 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 and 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 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 risks and uncertainties including the factors described under the heading Risk Factors in the company’s 2013 Form 10-K filed with the SEC in February 2014 and available on the company’s Investor Relations website at http

[Dr. Shai Gozani:]

Thank you, Benny. I’m joined on the call today by Tom Higgins, our Chief Financial Officer. We appreciate this opportunity to review our recent business highlights. Following our prepared remarks, we’ll be pleased to take your questions. We had a good fourth quarter of 2014 from both an operating and financial perspective. This capped a year of significant milestones that positions us for a robust 2015. Some key highlights for the quarter include, that we had revenue growth in both the fourth quarter and fully year of 2014. We registered a new high for our diabetes product revenue, which is comprised of our DPNCheck and SENSUS products, that revenues was about $820,000 and we successfully unveiled our new over-the-counter product Quell at the 2015 International Consumer Electronics Show in January. We are particularly pleased to show year-over-year growth. This marks an important milestone in our multiyear transition from our original general purpose nerve testing business that was represented first by our original NC-stat product and more recently by ADVANCE. To becoming a growth-oriented diabetes and pain focused business that includes both rapid diagnostics and therapeutic devices. Our diabetes business consists of our DPNCheck and SENSUS products. DPNCheck has reminds us a rapid point-of-care test for peripheral neuropathies and SENSUS is our prescription wearable pain relief device. Both products have brought clinical indication. They are mostly used in the diagnosis and treatment of diabetic neuropathy which is the most common chronic application of diabetes. As a reminder, Quell which is our upcoming over-the-counter product is a wearable pain relief device that utilizes our proprietary non-invasive neurostimulation technology to provide relief from chronic pain, particularly nerve pain which is due to diabetes and low back problems, but also other forms of pains such as fibromyalgia and osteoarthritis. This advanced wearable device is lightweight. It should be worn during the day while active and at night while sleeping. It has been cleared by the FDA for treatment of chronic pain without a prescription. Users of the device will also have the option of using their smartphones to automatically track and personalize their pain therapy. I encourage you to visit the website www.quellrelief.com for more comprehensive overview of the product. Response to Quell under the Quell unveiling at CES in general was very enthusiastic. In our first appearance at CES, we were one of four finalists for the Best of CES in the health & fitness category. We had 27 original articles published for Quell and there were six video segments produced, including from CNET and AP. It is fair to say that the reception for Quell at CES Med in fact exceeded our expectations. In terms of our go-forward plan, we intend to make Quell commercial available on the U.S. market during the second quarter of 2015. Our commercial launch plan involves two distribution channels, a professional channel using a direct sales force to target podiatrists, pain physicians, primary care physicians and chiropractors who we sell and recommend the product and a direct consumer channel using online marketing and lead generation. Well, it is not entirely finalized, our current expectation is that Quell will be priced at about $250 for the device and $30 a month or about $1 a day for the consumables. During late 2015 and into 2016, we plan to evaluate additional distribution particularly on the retail side. We also believe there are significant opportunities to market growth outside the U.S. However, at this time, we are entirely focused on the U.S. business. Looking forward, our key objectives and milestones for the year 2015 include the following, first to continue and manage our advance business for cash flow. We believe this business will continue to generate positive cash flow for at least two more years. Next is to grow our U.S. DPNCheck business which consist primarily of certain Medicare Advantage plans that perform DPNCheck testing as part of their risk adjustment process. Along the DPNCheck line, we also expect to grow our business in Japan in collaboration with Omron Healthcare. As a reminder, we launched DPNCheck in Japan in about August or September of this year. We are also expecting to launch DPNCheck in China by the year end following regulatory approval. Again this is with Omron as our partner. Just as a reminder, the Chinese diabetes market is expansive with over 100 million people with diabetes. As I mentioned before, we expect to Quell in the second quarter and our objectives for the year are to provide convincing evidence of market adoption in both the professional and direct-to-consumer channel. We also serve a very important R&D initiatives plan for this year for the Quell platform. One of the key ones is development of the customer proprietary microchip that will give our wearable therapeutic devices of which Quell is the key device, unmatched performance in even small form factor and at substantially lower cost. Finally, we also expect to complete our first study of the use of our wearable pain relief technology in restless leg syndrome which will provide us with expanded indications for the technology. And we hope to make an indication whether to move forward with this application in the second half of the year. As background, RLS or restless leg syndrome is a common feet disorder that affects 5% to 15% of the U.S. population. It is currently managed pharmacologically and it represents a $600 million in growing market, $600 million annual market that is growing and is highly underserved. So 2014 was a busy year marked by meaningful progress that position us for the future. 2015, as I have just outlined, we have some excellent objectives and are looking forward to a very successful year. I’ll now turn over to Tom for discussions of financial results.

[Tom Higgins:]

Thanks, Shai. This was a solid quarter financially and a good wrap to the fiscal year. For the full year 2014, we reported revenue of $5.5 million. This was up about 4.5% from $5.3 million in 2013. The more interesting revenue story is in product mix, however. SENSUS and DPNCheck, our diabetes products delivered 2014 revenue of approximately $2.7 million, in comparison with $1.5 million in 2013 for a growth rate of about 83% year-on-year. Consequently, our diabetes products more than offset the ongoing decline in the ADVANCE business, which dropped by about a $1 million to $2.8 million revenue in 2014. Revenue from our diabetes products overcame the advanced decline and also provided enough for overall revenue growth. We expect this trend will continue in the future. The diabetes products accounted for just under half of 2014 total revenue. In the second half of the year, they were in fact the majority of our revenue. Now, focusing on the fourth quarter, we reported revenues this morning of approximately $1.4 million, up slightly from Q4 of last year. Diabetes products consisted of $820,000 revenue and this compares with $565,000 diabetes product revenue in Q4 of last year, that’s a 45% increase year-on-year. The SENSUS product rebounded nicely from the slow summer months of the third quarter. Revenue in Q4 was $262,000 for SENSUS. That was four times 4x of the $67,000 we reported a year ago. It was also up 60% from the third quarter. This year-on-year increase was largely attributable to our agreement with DJO Global, which provide national distribution starting in Q1 of last year. They were 1,655 devices shipped in Q4, bringing total devices shipped in 2014 to 5,800 and total cumulative devices shipped since we launched in Q1 of 2013 to over 7,000 devices. SENSUS electric shipments jumped by 33% in sequential quarters to 6,243 electrodes in Q4. This was continuing the positive trend we've seen in the past few quarters really since the beginning of the year. It's also a key indication of therapeutic benefit from SENSUS, which is resulting in continuing usage of the devices replaced in the market. DPNCheck revenue in the quarter was $556,000, compared with $498,000 in Q4 of last year, that’s an increase of 12%. Within those numbers, sales outside the U.S. were up sharply. In fact, international sales were five times the prior year quarter. That’s primarily on device in biosensors shipments into the Japan market. This offset year end softness, Q4 softness in test sales to a larger U.S. Medicare Advantage accounts. You may recall these accounts had heavy purchases in the third quarter of 2014 and then we saw this drop in the fourth quarter. Since the first of the year, we’ve seen a rebound in the Medicare Advantage business. We believe that this new business that we are seeing confirms the testing was in fact solid during the fourth quarter and that Medicare Advantage testing in the fourth quarter has reduced customer inventory levels leading to the stock replenishment activity we are currently seeing. Back to Japan, our partner Omron Healthcare has reported a positive view on the pace of DPNCheck sales since the Q3 launch and it’s optimistic on 2015 prospects. We believe that this market has the potential for rapid growth. ADVANCE revenue was $592,000 in the fourth quarter. We estimate that it contributed about $300,000 in cash. Our gross profit in the fourth quarter was $750,000, that’s a margin rate of 53.2% versus a Q4 2013 margin of 61%. The margin contraction reflects the product mix more heavily weighted to SENSUS in Q4 this year than in last year. Our operating expenses totaled $3.2 million. This reflects our commitment to Quell. It was a spending increase of about a $1 million over the fourth quarter of 2013. Looking a little more deeply within OpEx, R&D spending was up about $100,000 to $802,000 in the quarter. Approximately $140,000 of that spending was for outside support of Quell design engineering, including the smartphone application. Sales and marketing spending of $1.2 million was up about $600,000 from Q4 of last year. Personnel costs comprised about $250,000 of the increase, as we hire management and marketing team to lead Quell. We also invested about $350,000 in Quell marketing activities, covering branding, website developing, PR video development and other activities in preparation for the unveiling of CES and for the launch in 2015. G&A spending of $1.1 million was up about $135,000 on last year. Personnel costs and temporary staffing contributed to the increase. In the income statement, we recorded a non-cash credit of $504,000 for revaluing our common stock warrants to fair value. At the end of the year the warrant liability on the balance sheet was $5.3 million. Our net loss for the quarter was $2.9 million, or $0.06 a share and our weighted average shares outstanding totaled about $8.2 million. We ended the quarter with $9.2 million in cash. Our net cash usage during the quarter was approximately $2 5 million. Receivables aging and inventory turnover continued to be under satisfactory control. Our quarter end receivables of $580,000 reflected 38 days sales outstanding and inventory of $680,000 reflected a turnover rate of four times per year. Also reflected in the year end balance sheet where assets totaling about $350,000 from early spending to relocate our business within Massachusetts. We’re in the process of segregating our activities into a corporate engineering function, which will move to a nearby office parking Waltham, and manufacturing, which will relocate to a close by town of Woburn. The new manufacturing facilities customized to our needs and provide the capability to support Quell to early commercialization. On a combined basis, these two new facilities will occupy about 40% of our present footprint and about 40% of today’s costs. The moves are planed to be completed during the first quarter of 2015. Those were 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 any questions at this point.

[Operator:]

[Operator Instructions] Okay, we have a question and it comes from Bob Wasserman. Please go ahead.

[Bob Wasserman:]

Hi Tom, hi Shai. Congratulations on the good quarter in the busy winter, it sounds like -- just a question on Quell and Tom you had a lot of comments on this. It sounds like in the fourth quarter you had quite a bit of cost in pre-launch expenses. Will that continue in the first quarter? And how much -- will that continue in the year or did you mention a little bit about inventory cost? And the other question on Quell is at what point will you evaluate whether to go at more typical kind of a large distributor in McKessons, the HBOs of the world, Thermo into the drug store change?

[Tom Higgins:]

Okay. Thanks Bob. So let me tackle the first of your questions regarding spending levels, which were $3.2 million in the quarter and cash consumption, which was about $2.5 million. So I -- we expect to see spending levels in that range or a little bit higher as we get into the launch. The spending is coming in two areas primarily, one is in research and development, where we have some pretty exciting programs that Shai has mentioned in his comments to improve the initial Quell design and particularly the form factor of the device that involves a customized chips. So that and other initiatives related to Quell will keep in R&D spending in the range of probably $1 million maybe a little higher. Sales and marketing spending will also be higher from two perspectives. One is that we are in the process of staffing up a small direct field sales force to make professionals -- to make sales into the professional market, in other words to podiatrist, chiropractors et cetera. And so those costs will be coming in starting toward the end of the first quarter.

[Bob Wasserman:]

Okay.

[Tom Higgins:]

In addition to that, we expect that there will be promotional spending to build awareness for Quell that we expect to be productive in terms of our direct sales. So you put those together and total operating expenses will be in this range of $3 million or higher. And we expect that our cash consumption per quarter will be in the range of about $2.5 million to $3 million per quarter. Is that helpful, Bob?

[Bob Wasserman:]

Yeah. And that includes inventory as well?

[Tom Higgins:]

Well no. So -- so inventory we try to keep pretty tight reps on inventory. We do expect some increase in working capital not only in inventory to support Quell, but also in receivables. So in the cash consumption number that I indicated that $2.5 million to $3 million per quarter that includes our best estimates today of the combined effect of working capital OpEx spending and in fact revenue from Quell sales.

[Bob Wasserman:]

Okay.

[Tom Higgins:]

And Bob, to take on the second part of your question. So the -- as I mentioned in my statements earlier, the plan is to approach the market now and we control fashion through a professional channel using the small sales force that Tom mentioned as well as direct-to-consumer. And those sales will come to our website QuellRelief.com and would be driven by marketing awareness campaign. We already started and towards in later part of this year and in early part of next year, we will look at expanding into additional reach-out channels. And that could include everything from chain drug stores to big box retailers to other online approaches. So, we will be evaluating all of those, after we have launched and have some sense of the market and have begun to establish the brand.

[Bob Wasserman:]

Okay. And I know you mentioned this, but what percentage of your sales was international last year and is it strictly Japan at this point?

[Dr. Shai Gozani:]

Bob, I haven’t got that percentage right in front of me, but I believe it is in the 15% to 20% range but really need to get back to you on that.

[Bob Wasserman:]

Okay. Great. Thanks again.

[Dr. Shai Gozani:]

Thank you.

[Operator:]

Thanks for the questions. [Operator Instructions] Okay. We have no further questions. So, I would now like to hand the call back to Dr. Shai Gozani. Please go ahead.

[Dr. Shai Gozani:]

Thank you for joining us on the conference call today. We are encouraged by our progress in the fourth quarter of 2014. We are seeing great deal of positive momentum across the business. And we look forward to continuing these trends and results in 2015 and updating you as we progress through the balance of the year. Thank you very much.

[Operator:]

Thank you. Ladies and gentleman that concludes the call for today. You may now disconnect.