NeuroMetrix, Inc.
Q2 2015 Earnings Call Transcript

Published: 22 Jul 2015

[Operator:]

Good morning, and welcome to the NeuroMetrix Second Quarter 2015 Conference Call. My name is Adrian, 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 website at www.neurometrix.com and on the SEC's website at www.sec.gov, and any updates contained in subsequent SEC filings. NeuroMetrix does not intend to, and undertakes no duty to update, the information disclosed on this conference call. I would now like to introduce the NeuroMetrix President and CEO, Dr. Shai Gozani.

[Shai Gozani:]

Thank you very much, 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 are pleased to take your questions. There are important accomplishments during the second quarter that relate to our newest product Quell. Quell is 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, lower back and leg pains, fibromyalgia and pain associated with osteoarthritis. The device is wearable, light weight 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 also have the option of using their smartphone to automatically track and personalize their pain therapy. We launched Quell on schedule during the second quarter. We launched through two distribution channels direct-to-consumer through www.quellrelief.com and through sales to healthcare professionals who stock Quell and dispense to the patients and that was done through our direct sales team. The Quell relief website was operational in May and our direct sales force was hired late in the first quarter and fielded in second quarter. Overtime we expect to expand consumer distribution into [resell], key online price, catalogs and other approaches. Most approaches have long lead times and require extensive planning to anticipate that they will mostly start in 2016. We started commercial activities in June with a strong order backlog, primarily generated during our successful Indiegogo, pre-order campaign which ran from March to the middle of April. By the end of the quarter we had cleared the order backlog and are now shipping out inventory on a daily basis for new orders. Our new product facility in Woburn, Massachusetts was placed in service for Quell during the second quarter ramped up quickly and it was able to demonstrate a runway reflecting production capacity of over 30,000 devices on a single shift basis. In summary and during the second quarter we shipped 2600 Quell devices plus electrode reorders. The total invoice value of these shipments was approximately 600,000. The combination of a strong Quell launch plus the performance history of SENSUS our prescription device for chronic pain helped us reach the milestone of 10,000 cumulative shipment of our wearable technology for chronic pain in the second quarter. With the Quell launch behind us, we [shifted] from building the business with several key areas of activity. We are building brand awareness, expanding the clinical foundation of the product, refining the product and expanding distribution. Over the next several months, there will be expanded promotional activity directed at both the healthcare professional and consumer channels. This will include renewed public relations outreach as well as paid search, paid promotion using social media, banner advertisement and an important [project] at upcoming healthcare trade shows. These efforts are designed to increase Quell awareness leading to consumer enquiry and purchases. We expect the process will be iterative as we evaluate the effectiveness of different approaches on a [test] based on our earnings. We are also building the clinical foundation for Quell. During the second quarter, we initiated our first close market study of Quell used for various forms of chronic pain. We will report the initial results later this quarter. With the transition of Quell from R&D to manufacturing, our engineering efforts have been refocused on innovation to improve the user experience and further build our first (inaudible) competitive advantage. We have an extensive innovation strategy that we’ll progressively share as appropriate. Lastly, we are pleased to complete an equity offering, netting approximately 10.1 million in proceeds and thereby provide timely resources for our near-term Quell marketing efforts. I will now turn it over to Tom for a discussion of financial results.

[Tom Higgins:]

Thanks Shai. Before we are viewing results for the quarter, I’d like to comment on a couple of items. As you mentioned we recently completed an equity offering that was of $14.7 million on total value and we realized net proceeds of 10.1 million after the repurchase of 3.2 million of preferred stock and after underwriting discounts and costs. This raise was important to our support of the Quell launch. Reflecting raised proceeds, we ended the quarter with 12.6 million in cash and our net cash usage during the quarter was approximately 3.9 million. Following the equity offering, our stock has traded below $1 per share. This resulted in a notice from NASDAQ that we were not in compliance with listing requirements and provided us six months to correct the situation. News flow from the Quell should have a positive effect on our stock price. Given the importance of the NASDAQ listing to shareholders and to us, we believe it is prudent to prepare for an appropriate split of our common stock, should that be necessary to maintain the NASDAQ listing. Now back to the Q2 results; this was a good quarter for the company. We reported 1.2 million in revenue plus about $600,000 in deferred revenue primarily related to Quell shipments. Combined the total is 1.8 million in revenue related product shipments for the second quarter. That 1.8 million is an increase of 34% from Q2, 2014, and an increase of 40% from Q1 of this year. Quell posted sales of $597,000 of which 24,000 was booked in Q2 revenue and the balance of 573,000 was deferred in to the third quarter. Quell is considered a new product line in a new market sector, and carries a 60 day customer right of return. Under US GAAP we must develop a reasonable basis to value the products return feature before we can recognize revenue. Until that time, the revenues deferred and recognized when the return period lapses after 60 days. We are starting to accumulate Quell return experience and believe that by Q4 we will have sufficient data for revenue recognition at the point of shipment. We shipped about 2600 Quell devices plus nearly 1000 electrode packages in the second quarter. These shipments satisfied orders from the March-April Indiegogo pre-order campaign, orders from physician resellers who stock Quell, and orders originating via our Quellrelief.com website. DPNCheck revenue was 416,000 in the quarter that was up 16% from 360,000 in Q2 of 2014. Revenue increased both domestically and OUS. Sales growth was pronounced in the US Medicare Advantage market, where 26,000 DPNCheck tests represented a 21% increase year-on-year. OUS, we had limited shipments to Omron Japan, where inventory levels are adequate and where Omron is seeing some pricing resistance. We are working with Omron to address these concerns in the local market. Overall, total shipments were about 28,500 DPNCheck tests in the quarter. On a related topic, we continued to support Omron in addressing questions raised by the Chinese FDA during the review of our DPNCheck regulatory application. This has been a long process which we began about a year ago. Our best current estimate of approval for China is during the second half of this year, however the estimate is based largely on anecdote rather than a clear timeline. By comparison the regulatory process in Japan took about 8 months from initial application to approval. The China market is attractive and we believe it’s worth our persistence through this regulatory process. SENSUS revenue totaled $150,000 with a shipment of about 650 devices and 58,000 electrodes. SENSUS is our prescription wearable technology for chronic pain and it is sold through durable medical equipment or DME channels. In the comparable Q2, 2014, shipments were 1700 devices with 256,000 in revenue. The drop in performance reflects margin pressure in the DME channel largely due to contraction in Medicare and third party insurer reimbursement. This has caused DME suppliers to reduce their sales force and staffing in general as they struggled to cope. ADVANCE revenue was 636,000 in Q2 versus 728,000 in Q2 of the previous year. This legacy product which we managed for its cash flow contributed about 320,000 in cash during the quarter. Our gross profit was $595,000 and represented a gross margin rate of 51.4%. This was almost identical to the Q2 2014 margin of 51.2%. So essentially flat margin year-on-year. Operating expenses totaled $4 million reflecting our commitment to Quell. This was a spending increase of about $660,000 over the previous year. Within OpEx R&D spending of 982,000 was down from about 1.5 million in the prior year. The decrease reflected a restructuring of the engineering department that took place in Q2 last year and caused a high level of severance related cost in that year-ago period. Also spending in outside engineering support was reduced in Q2 this year, as Quell transitioned from R&D to manufacturing. Sales and marketing spending of 1.8 million was up about 1.1 million from about $700,000 in Q2 last year. Personnel cost comprised about half the increase or about $600,000 and included cost of the new Quell sales force and the management marketing team for Quell. Incremental advertising and marketing cost totaled about another $550,000, and were primarily directed at supporting the Quell launch and promoting product awareness. G&A spending of 1.2 million essentially flat with Q2 of last year. We recorded in the income statement a non-cash credit of 2.1 million for revaluing of our outstanding common stock warrants to fair value at the end of the quarter. Our net loss for the quarter was 1.2 million or $0.48 per share, and weighted average shares outstanding totaled 9.2 million. Those are the financial highlights Shai, so back to you.

[Shai Gozani:]

Thank you, Tom. And that concludes our prepared remarks and we’d be happy to take questions at this point.

[Operator:]

[Operator Instructions]. Please standby for your first question and that comes from the line of [Bob Dunaway] of NeuroMetrix. Please go ahead.

[Unidentified Analyst:]

I have a question, is the current demand for the Quell device a robust as it was during the Indiegogo preorder campaign?

[Shai Gozani:]

Well I think we are very pleased with the demand at this point. I think there are different targets, the Indiegogo campaign is a community of early adopters and obviously Quell funding advocates. So I think it’s a unique population and an ideal one to get an initial uptake. So I think it’s hard to directly compared, but I guess the answer I think compared to the more important question is are we pleased with the demand and the performance of the product very importantly in the hands of the people they’ve gone and the answer is yes.

[Unidentified Analyst:]

Okay, and also what is current backlog of Quell?

[Shai Gozani:]

I don’t believe we have, I think we are up to date.

[Unidentified Analyst:]

Pretty much (inaudible).

[Tom Higgins:]

That’s true. We are shipping to demands.

[Shai Gozani:]

So we are shipping to demand. Yeah.

[Tom Higgins:]

Our new facility is able to stock inventory and [ships] as well as commence. So basically we are moving to [divert] shipping.

[Unidentified Analyst:]

Okay. Do you have any plans on introducing the Quell product into the Japanese market or the Chinese market in the future?

[Shai Gozani:]

Yeah, I think that would occur in the future. I mean right now we are entirely focused on the US and Canadian market. So it’s not an immediate opportunity for us, but I think that many of the same reasons that we think DPNCheck has outstanding opportunities in those two markets, flow over to Quell. But just to be clear, we will need to go through the regulatory process in both of those markets as well for Quell. But yes, I think those are outstanding opportunities for Quell.

[Unidentified Analyst:]

Okay, and one more for the last part of my question. Do you have any plans on introducing the product in to the big chain pharmacy such as CVS, Walmart, Rite Aid or any other?

[Shai Gozani:]

Yeah. So, I think retailers absolutely whether that’s naps or drug is absolutely within - is part of the thought process and strategy. We feel like we need to really establish the brand, refine the product performance, the messaging, make sure we have adequate demand and awareness before we go in to those channel. Because it’s obviously one thing to get the product in to the channel, but you really have to have people taking it off the shelves. So the retail channels are definitely a target for us, and we will move in that direction, but we have to do that in a systematic fashion to make sure we are successful when we get there.

[Unidentified Analyst:]

And how about for bringing Quell in to like any of the online venues such as Amazon or eBay or any of them?

[Shai Gozani:]

As I mentioned, right now we are just on our website, but we will be expanding to additional online properties, absolutely.

[Operator:]

[Operator Instructions] You have no more questions at this time. I would now like to turn the call over to Dr. Shai Gozani for closing remarks.

[Shai Gozani:]

Thank you and thank you for joining us on the conference call today. We are pleased to have the Quell launch behind us and are encouraged by the strong early response. We look forward to updating you on the progress with Quell as we move through the balance of the year. Thank you.

[Operator:]

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