NeuroMetrix, Inc.
Q1 2015 Earnings Call Transcript

Published: 21 Apr 2015

[Operator:]

Good morning, and welcome to the NeuroMetrix First Quarter 2015 Conference Call. My name is Kate, 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, but 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 the risks and uncertainties, including the factors described under the heading Risk Factors, in the Company’s 2014 Form 10-K filed within the SEC in 2015 February, and available on the Company’s Investor Relations Web site at http

[Dr. Shai Gozani:]

Thank you, and good morning. 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 will be pleased to take your questions. The first quarter of 2015 was a solid quarter for our financial results. Top line revenue was 1.3 million, which was approximately level with the first quarter of 2014. However, within revenue, our new products group, which we refer as our diabetes products, made up of DPNCheck and SENSUS devices showed 44% revenue growth over the first quarter of 2014. DPNCheck was particularly strong with biosensors shipments of about 37,000 tests, more than double the number of biosensors shipped in the first quarter of 2014. This growth was primarily attributable to the U.S Medicare Advantage market. We also continued to make commercial progress in Japan and advanced our regulatory status in China, both in partnership with Omron Healthcare. We are hoping for a commercial launch in China during 2016. We also launched, in Mexico during the quarter and are seeing increasing sales in the Middle East. In both cases, we are working through distributors with effective local operations. Our primary focus in the quarter and most of our efforts are directed towards our newest product Quell, a wearable pain relief device that utilizes proprietary non-invasive neurostimulation technology to provide relief from chronic pain. The device is designed for people with conditions, such as diabetic nerve pain, low back and leg pain, fibromyalgia and pain associated with osteoarthritis. This advanced wearable device is lightweight and can 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 smartphone to automatically track and personalize their pain therapy. We unveiled Quell to January 2015 International Consumer Electronics Show, known as CES, where it was one of fourth finalists for Best of CES in the health & fitness category. It has since gathered significant media attention and interest in people suffering from chronic pain. We plan to initiate commercial shipments for Quell during the second quarter. 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 resell and recommend the product and a direct-to-consumer channel using online marketing and lead generation. We are planning to price Quell at about $250 for the device and $30 per month or about $1 per day for the electrodes, which is a consumable component. During late 2015 and into 2016, we will evaluate additional U.S. retail distribution opportunities. At this time, we are not pursuing international markets. During the first quarter, we continue to refine the Quell device and the associated smartphone app, which has now been submitted to the Apple App store. We will start development of the android version soon. We’re now performing final device testing and are in the process of transitioning to manufacturing. We also completed the build-out of a new manufacturing facility in Woburn, Massachusetts, designed to support Quell and our other products. The facility has been commissioned for production. It has the capacity to produce over 100,000 Quell devices per year. On the commercial front, we have now deployed a small direct sales force to promote Quell to healthcare professionals who will stock the device and electrodes and resell it to the patients. This team has started securing pre-orders. We are building an e-Commerce capability to handle direct online sales and expect to launch that site soon. And we ran a pre-order campaign on Indiegogo to confirm commercial interest in Quell. We are pleased with the results. In comparison with our goal to secure pre-orders of 500 devices, we obtained over 1,900 device pre-orders. There has been meaningful progress across the Company. The Indiegogo campaign provided a tangible evidence of the market opportunity and reinforced our commitment to make Quell available as early as possible. We believe 2015 will be an exciting year for Quell and the Company. I will now turn it over to Tom for a discussion of our overall financial results.

[Tom Higgins:]

Thanks, Shai. Turning to the detail of the release, total revenue for the quarter about 1.3 million, that was similar to Q1 2014. Our new products group of SENSUS and DPNCheck lock Q1 revenue of $680,000. This compares with $473,000 in Q1 of last year, a 44% increase year-on-year. Importantly, these products now represent 53% of total revenue, up from 36% a year ago. This growing revenue stream is steadily surpassing our legacy advanced business. SENSUS revenue totaled a $176,000 from the shipment of about 1,000 devices and 5,500 electrodes. Cumulative device placements crossed 8,000 in the field during the quarter. Q1 revenue and shipments were lower than the Q1 2004 numbers. Q1 a year ago was the inaugural quarter of our U.S. distribution agreement with DJO Global and included initial stocking orders to build DJO supply capability and alter their sales force. DPNCheck revenue was $504,000, up 81% from $278,000 in Q1 of 2014. We saw sales increases, both OUS, reflecting the efforts of Omron Healthcare in the Japan market and in our U.S. Medicare Advantage business. The volume and impact on sales growth was pronounced in this U.S. Medicare Advantage market where biosensor shipments nearly doubled year-on-year reaching a new high of 30,000 biosensors shipped in the quarter. This shipment level confirmed our view that high testing rates in the last quarter, Q4 of last year by healthcare providers, had resulted in inventory draw-downs at these accounts and then this inventory was rebuilt in Q1 of this year. Overall shipments both OUS and U.S., reached nearly 37,000 biosensors in the quarter. Advanced revenue was $603,000 in Q1 versus $858,000 in the prior year and we estimated -- contributed about $300,000 in cash in the quarter. Gross profit was $646,000 and a margin rate of 50.3% versus Q1 2014 margin of 53.8%. The margin contraction is partially due to unabsorbed manufacturing cost during our production shutdown and relocation, which was followed by re-commissioning of our production lines. Operating expenses totaled $3.9 million in Q1, reflecting our commitment through Quell and the launch in Q2. This was a stunning increase of about $1.4 million over Q1 of last year. Within OpEx, R&D spending of $903,000 was essentially flat with $864,000 in the prior year. Engineering resources, both internal and external consulting support, were directed at design refinement, smartphone app development and product testing, prior to the handover to manufacturing. Sales and marketing spending of $1.5 million was up about $1 million from $0.5 million last year. Personnel costs, including travel, comprised about half of the increase or $500,000. And included the cost of the new Quell sales force and also the management and marketing team hired late last year to lead Quell. We invested about $325,000 in Quell marketing activities and $120,000 in tradeshow costs, including the January unveiling of Quell at the Consumer Electronics Show. G&A spending of $1.5 million was up $400,000 from $1.1 million in Q1 of 2014. G&A spending captured the majority of the costs related to our facility’s relocation. In addition to commissioning a new production facility, we also relocated our corporate office and engineering R&D labs to a new facility in Waltham, Massachusetts. Both moves were accomplished during the quarter, and that was a reduction of about 40% in the space we occupy from about 13,000 to 18,000 square-feet, and a similar reduction in ongoing rental costs, which will be in the order of $400,000 per year. G&A spending in Q1 reflected about two months to rent expense overlap as we vacated all facilities and stages and moved to the new premises. That involved the cost of about $150,000. Also we incurred about $200,000 in spending for a temporary support in IT for the relocation of our data center and facilities for accounting staffs to cover turnover and the direct cost of moving people, equipment and records to the new locations. Professional services for legal audit and other outside services increased by about 50,000 in the first quarter and that related to regulatory filings. We recorded, in the income statement, a non-cash credit of $1.17 million for the revaluation of our outstanding common stock warrants at fair value. The warrant liability in the balance sheet was $4.1 million at the end of the quarter. Our net loss for the quarter was $2.1 million or $0.25 per share. Our weighted average shares outstanding totaled $8.3 million. We ended the quarter with $6.4 million in cash. Our net cash usage during the quarter was approximately $2.8 million. The quarter-end balance sheet includes within receivables approximately $320,000 related to the Indiegogo pre-order campaign, which will be collected shortly, now that the campaign is over. Revenue associated with those pre-orders was deferred in the balance sheet and will be recognized in the income statement upon shipment. Also, reflected in the year-end balance sheet in the quarter one balance sheet, were facility related assets totaling approximately $675,000 for build-cost at our production facility and our engineering administrative offices. These facilities having been placed in service during the quarter are now being depreciated. So those were the highlights for the quarter Shai. And back to you.

[Dr. Shai Gozani:]

Thank you very much Tom. That concludes our prepared comments. So, we’d be happy to take any questions at this point.

[Operator:]

(Operator Instruction) And the first quarter comes from the line of Bob Wasserman, Dawson James Security.

[Bob Wasserman:]

Just a couple questions about the new facility, what was the capacity again and is it only point to manufacture Quell devices or is it also going to be used for other devices, and what about the disposables?

[Tom Higgins:]

As you know, we were located in one facility in Waltham until about a month ago. What we decided to do was to bifurcate the activities in that facility, and to move the production that was being done in Waltham to a new purpose built facility in Dover, Massachusetts. It's about 10 miles away from where we are. And that facility, which was commissioned early in March, is going to be used not for Quell but also for assembly of DPNCheck and SENSUS. We will not produce our own electrodes. As you know, those are produced by outside suppliers. But we will continue to stock all of that equipment, both the devices and the electrodes, in the facility in Dover and then fulfill orders out of that facility. So that was half of the move. The other half of the move was to relocate our corporate offices and our engineering R&D labs to a new location in Waltham, couple miles away from where we were. And so, that facility was completed and placed in services in about the middle of March. So both moves are behind us. And we’re safe and securing on our new operations.

[Bob Wasserman:]

And I know Shai you mentioned the capacity. Could you repeat that again?

[Dr. Shai Gozani:]

So on the capacity of the Woburn facility for Quell is 100,000 units, up to 100,000 units a year.

[Bob Wasserman:]

And the first Indiegogo campaign, you mentioned 320,000 has been at least put on the balance sheet for that. Can you -- can I infer the price and for the Indiegogo per device and was there also some disposable -- kind of a disposable pack sent with that as well?

[Dr. Shai Gozani:]

So the 320,000 reflects the Indiegogo campaign through the end of the quarter. It actually continued and at conclusion which was over the weekend hit about $390,000. The price was kind of a mix. Most of them are around $200. And depending on the particular, so called perks, that was other $200 or about $250. And there were some additional options for electrodes. When you get the device, it always comes with one-month supply of electrodes and then there were options of purchase, in some cases up to 12-months supply and various other configurations. One of the things to note is that these pre-orders are purchasing the device several months in advance of receiving the device, so there has to be some incentive. So, we are quite pleased to see that, even though the purchaser is really going to get the device in two to three months from when they bought it, there was -- the $200 was quite compelling.

[Bob Wasserman:]

And will you set-up a registry for these initial, so they can reorder and know where they or where they go through a distributor?

[Dr. Shai Gozani:]

We’ll go direct, it’ll all be direct. So Quellrelease.com will be launching shortly and that has an e-Commerce frontend where you can purchase devices and electrodes and accessories and there will also be an option to subscribe and receive electrodes on a monthly basis.

[Operator:]

Thank you [Operator Instructions]. And your next question comes from Paul Nouri, Noble. Please go ahead.

[Paul Nouri:]

What is the share-count as of the end of the first quarter?

[Tom Higgins:]

At the end of the first quarter, it was about 8.3 million common shares outstanding. On a fully diluted basis, it was nearly 16 million and that include -- that number would have included some convertible preferred stock that had not yet been converted as well as employee options and warrants.

[Paul Nouri:]

And do you expect your operating expenses for the second quarter to be similar than they were this quarter?

[Tom Higgins:]

Well, I think in total they will be similar, possibly a little bit higher. The mix will change somewhat as we get into launching Quell, the component that we spent on promotional activities is going to increase. Obviously, the cost we incurred related to the move will decline. So, I think we’re probably going to be in the similar range or maybe a little bit higher. If you take that through to the bottom-line to cash consumption, I think our net cash consumption in the next quarter or two is going to be in the range of $3 million to $3.5 million, so a little bit higher than we saw in the quarter.

[Paul Nouri:]

And the Quell devices that you sold through the Indiegogo campaign, do you expect to recognize the revenue on all of them in the second quarter?

[Tom Higgins:]

Well, actually that’s a great question, Paul. And the answer is, we don’t know yet. And the reason we don’t know is that we expect that we will be shipping those in the quarter. But the devices that shipped will have a 60-day money-back are guarantee that goes with them. So in the early stages of launching a product, it's difficult to assess what the return rate might be. And until we have history on a return rate, it's difficult to recognize all the revenue associated with the product that you shipped. So, the short answer is, I am not quite sure the extent to which we will see returns and whether we will have enough data by the time we file our second quarter Q to be able to demonstrate that we have a reasonable expectations of what the returns will be. So the short answer is, we’re going to ship the devices, the accounting and our auditors will help us assess the revenue recognition.

[Paul Nouri:]

And when exactly, in the second quarter, are you commercially launching the Quell?

[Dr. Shai Gozani:]

It's in the process of -- we're ramping up to it. So, the simple answer is we're still some steps away we have take we will we're confident we will ship in the quarter in terms of a specific date, we’re not prepared to give that out at this point.

[Paul Nouri:]

And then are there any new opportunities for DPNCheck in the U.S.? I know that the Medicare Advantage has been primary source of revenue in this domestically sell forward.

[Dr. Shai Gozani:]

That’s our focus Paul. It's an excellent market, large customer. So, it's efficient from the sales and marketing perspective. At this point, that is the U.S. market opportunity as we see it. There are more ways to get into that market and more channels than just like direct to Medicare Advantage plans. So, for example, there are testing services that basically such that become effectively distributors for the product in a sense of that they would -- they go out and resell the test to various plans, so that’s a way for us to expand the market and to extend the business. But right now that will be the focus, so that we're not looking at say for example sign it directly to physicians.

[Operator:]

[Operator Instructions]. We have no further questions. I would now like to turn the call over to Dr. Shai Gozani for closing remarks.

[Dr. Shai Gozani:]

Thank you for joining us on this first quarter conference call. We are encouraged by our progress in the first quarter and we look forward to updating you on our progress with Quell as well as DPNCheck and our other businesses during the balance of year. Thank you.

[Operator:]

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