NeuroMetrix, Inc.
Q3 2015 Earnings Call Transcript

Published: 22 Oct 2015

[Operator:]

Good morning, and welcome to the NeuroMetrix Third Quarter 2015 Conference Call. My name is Sheela, and I will be your moderator on the call. NeuroMetrix is a healthcare company that develops wearable medical technology and point-of-care diagnostic 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 that 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 February 2015, and available on the company’s Investor Relations website at http

[Shai Gozani:]

Thank you, Sheela. I am joined on the call today by Tom Higgins, our Chief Financial Officer. We appreciate this opportunity to review our third quarter 2015 business highlights. And following our prepared remarks, we would happy to take your questions. We have four commercial products in our metrics. Our wearable therapeutic devices are Quell and SENSUS and our neuro diagnostic offerings including DPNCheck and ADVANCE. I will focus my comments on Quell because it is our latest product and has the strongest potential growth profile. However, first I will make a few remarks about other products. Regarding SENSUS, it continues to generate sales. However, we have downsized our sales and marketing efforts to parallel the overall decline in the DME sector, our durable medical equipment sector, mostly due to the Medicare competitive bidding prices. These changes have created fundamental business challenges for DME distributors that limit their ability and interest in focusing on SENSUS. We had a good quarter for DPNCheck sales as Tom will detail when he speaks. Our Medicare advantage business is generally stable although it is difficult to project sales because of the fluid nature of the Medicare advantage sector in general. We believe that our best prospects for DPNCheck growth are international markets. Omron Healthcare has re-launched DPNCheck in Japan with the revamp business model based on learning from the initial launch. We are optimistic that this revised approach will accelerate sales. We also expect to launch in China and Mexico in 2016 and may see meaningful sales in both markets. Our DPNCheck margins are excellent so this business volume generate cash and help fund our Quell initiatives. Our legacy ADVANCE business continues to manage for cash without any significant operational focus. All right moving now to Quell now. As a reminder, Quell is a wearable nerve stimulation device for treatment of chronic pain that is available over the counter. Quell is operating in the $20 billion chronic pain market. It is unique and offering a non-pharmacological wearable technology option for pain control. The system consists of device, a sports band that holds the device to the user's leg, a two week electrode and a smartphone app. We maintain a minimum advertise price of $249 for the device and $29.95 per electrode package which is of one month supply. We launched Quell in the second quarter of 2015 direct-to-consumer through our website and to healthcare professional through a small dedicate sales force. During that launch quarter we shipped about 2,600 devices and 2,700 electrode packages for invoice value of about $600,000. Sales in that quarter included various pre order activities including our Indiegogo campaign in March and April. In the third quarter of 2015, we expanded our distribution channel to include Amazon and QVC. We shipped about 4,500 Quell devices and 5,500 electrode packages with an invoice value of $985,000. This was a sequential growth in devices up 73% and a two fold increase in electrode packages. The invoice value of shipments increased by about 60%. Some of the key learning in the quarter includes the following. First and foremost the product is working well with many customers reporting substantial pain relief and improvement in the quality of life. A key related metric is that we are currently seeing about 11% returns within a 60 day money back period. Both of these data point are consistent with 80% improvement in chronic pain identified in our recently completed clinical study which is a reminder which presented at the PAINWeek scientific session in early September. Our long-term goal and expectations is about 20% returns which reflect that pain management is complicated with widely varying individual results. We are working on our operational procedures to efficiently handle these expected return rates to eliminate the negative impact on margins. We were encouraged by the substantial increase in electrode reorders, however, it is too early to estimate reorder rates. This is a metric that we hope to accurately quantify and start reporting within the next several quarters. We believe that expansion of our distribution channel to include Amazon and QVC was beneficial and generally additive to our direct-to-consumer efforts via our website. We will continue to monitor optimize and expand distribution in the fourth quarter and beyond. Now with respect to traditional retail distribution, we engaged the retail consulting firm in managed healthcare to provide guidance in penetrating mass merchandiser, chain drug stores and shopping clubs. We believe that retail distribution will eventually represent our single largest distribution channel. For recognize, it will take some time to achieve this goal. We hope to initiative retail distribution in 2016. Therefore, in the near term sales will still be driven primarily by online efforts and through the healthcare professional. On the R&D front, we've been busy. We launched our Quell Health Cloud service which makes a customers' data available on any mobile device. We also launched our first Android app; it has most of the features of the IOS app and will be brought to the same over the next several months. We are working on a major device software upgrade and associate app upgrade that will make the device easier to use, substantially improve battery life and includes novel sleep monitoring technology. It should be quite valuable to our customers because of the tight linkage between chronic pain and poor sleep. We expect to launch these innovations at the consumer electronic show in January of next year. We've also made progress on our restless leg syndrome or RLS program. As a reminder, RLS is one of the most common sleep disorders affecting up to 50% of population. It manifest as a strong urge to move one's legs while when resting usually at night and is also associated with periodic leg movements while at sleep that often lead to poor, fragmented sleep and day time sleepiness. Our plan is to expand the Quell regulatory label to include treatment for RLS. We completed a pilot clinical study and are finalizing the randomized clinical trial that will form the basis of our regulatory filing, as they were planning -- the word the final stages of planning the study they will launching that next year. In summary, we feel that we've accomplished a great deal in the third quarter of 2015 and look forward to continuing to progress during the remainder of the quarter and into next year. And with that I'll turn it over Tom for discussion of the financial results.

[Tom Higgins:]

Thanks, Shai. Q3 was a good quarter. We had successful Quell launch in Q2, followed by meaningful growth in devices and electrodes during Q3. We opened new Quell distribution channels during the quarter which had direct effect on our reported results. Importantly, we are working on longer-term resale initiatives which help position us for future Quell growth. Internally, our new production facility in Woburn, Mass. performed very well and was able to meet increasing Quell demand. This facility provides us the capability to scale up scale down production in response to market conditions. Nameplate capacity is about 100,000 Quell devices per shift per year using multiple shifts and we've tested at annual run rate of about 40,000 devices on a single shift. Turning to results. For Q3, we recorded revenue of $2.1 million; this reflects top line growth of 44% from $1.4 million in the third quarter of last year. On sequential quarter basis, revenue grew by 68%. In addition, we deferred approximately $700,000 in revenue on Quell shipments where customer right of return has not yet lapsed. US GAAP require us revenue deferred under right of return whether it is not sufficient experience to value the expected returns. We believe we will be in a position to recognize Quell revenue upon shipments for most distribution channels by the end of Q4 this year. We anticipate that Quell returns will be approximately 20% over time as Shai has just indicated. These will be accounted for as reductions in revenue. The Quell invoice value of shipment was $985,000 in Q3, we shipped about 4,500 Quell devices plus about 5,500 electrode packages. Cumulative Quell devices sold since our Q2 launch now exceeds 7,000 devices. DPNCheck revenue was $621,000 in the quarter that was up about 2% from Q3 of last year and up about 49% on a sequential quarter basis. Biosensor shipments for DPNCheck reached a three year high of 39,500 Biosensors and international sales primarily to Omron Japan were a high for the year. Shai also mentioned Omron recently re-launched DPNCheck in Japan with new pricing initiatives that are designed to stimulate local demand. Effects of this initiative should be seen starting in the fourth quarter. SENSUS revenue totaled $97,000 in the quarter with the shipment of about 465,000 devices and 3,800 electrodes. SENSUS is our prescription wearable technology for chronic pain and sales reduction from prior quarter reflects the challenging environment for durable medical equipment suppliers in general as well as the Q2 launch of Quell. ADVANCE revenue was $570,000 versus $653,000 in Q3 a year ago. This legacy product which we are really not providing any marketing efforts contribute about $285,000 in cash during the quarter. Our gross profit was $935,000 and represented a margin rate of 45.5% versus a Q3, 2014 margin of 55.2%. The lower margin rate was due to increasing Quell sales which as we build on our install base of Quell users are more heavily weighted to lower margin devices. Operating expenses totaled $4.3 million that reflects our commitment to Quell and was a spending increase of about $1.5 million over Q3 of 2014 with the increase concentrated in sales and marketing efforts. Within OpEx, R&D spending of $941,000 was about level with the prior year. Sales and marketing spending of about $2 million was up about $1.4 million from Q3 of 2014. Personnel cost including travel comprised about 30% of the increase or about $430,000. During the past year we've added retail management and marketing experience to Quell as well as Quell field sales team. Total headcount increased in sale and marketing by about 12 people over the year ago period. Incremental promotional spending marketing cost for Quell totaled about $660,000. G&A spending of $1.4 million was up slightly from $1.3 million in Q3 of last year. We also recorded in the income statement a non-cash credit of $152,000 for revaluation of our existing common stock warrants to fair value. The net loss for the quarter was $3.2 million or $0.26 per share, and our weighted average shares outstanding totaled $12.1 million. We ended Q3 with $9.1 million in cash and cash usage during the quarter was $3.5 million. So those are the financial highlights and Shai back to you.

[Shai Gozani:]

Thank you, Tom. And that completes our prepared comments. And so we'll be happy to take any questions at this point.

[Operator:]

[Operator Instructions] Thank you. And your first question comes from the line of Anthony Vendetti of Maxim Group. Please proceed.

[Anthony Vendetti:]

Okay, good morning, guys. Thanks. How are you? So on Quell, I know you gave the total invoice amount for both the device and the electrode package. I was wondering if you can give us the ASP for the device and then for the package of electrode?

[Tom Higgins:]

Yes, Anthony, so on the -- the ASP numbers are little bit complicated because most of the revenue that's been recognized in the quarter relates to sales of shipments that were made in the second quarter. So as a consequence the ASP of the devices and the electrodes reflect some incentive pricing for Indiegogo that ran in late Q1 early Q2 et cetera. So I think we would rather not get into ASP for either of those because of the lack of link really between sales that were made so far away versus the third quarter that we are reporting on.

[Shai Gozani:]

And another way to just provide little -- so obviously when we sell direct it's at retail which is $249, when we sell to distribution it is going to be -- it could be transfer pricing which is going to be some reduction into that obviously to support the distribution channel.

[Anthony Vendetti:]

Sure, now understand Shai. Can you give just an approximate distribution of how much you sold through the retail channel and how much is sold through the physician channel into --?

[Shai Gozani:]

Roughly speaking I would say it was 50

[Anthony Vendetti:]

Okay, make sense. Can you talk about your expansion because you had a number of new outlets to sell into obviously QVC, you signed up Amazon and then recently Hammacher Schlemmer, so I was just wondering if you could talk about the timing of those agreement approximately which one is so far the one that's producing the most and then sort of your plan rollout as we move through rest of this year and into 2016 and other outlets, retail outlets.

[Shai Gozani:]

Right. So you identified the three major one so kind of working in reverse, Hammacher is primarily will be something that we see through holiday sales. So we provide them with their initial stocking inventory and that will sell through we expect this quarter. Amazon, QVC are little different. And so Amazon we launched in beginning of September, so we had about month of that during the quarter and very encouraged by what we see there. It seems to be largely incremental to what we get through our website directly. Though obviously it is hard to be sure but we definitely saw an immediate step up when we added Amazon and so we are very encouraged what we see there and I think that will be really nice compliment to our direct, our website over this .com. QVC, we had our first airing in beginning of September and we had a second one last -- earlier this week actually. And we don't -- so we will have -- in both of those -- we are pleased with both of those. Obviously, the result end up being highly depended on exactly what time of the day and where they stick you and how much time they give you and what other factors but we are definitely seeing sell-through in QVC and we hope that will get some additional airings this quarter. And if not this quarter then they will pick it up after the holiday season. First additional channels, I don't -- we don't expect anything substantive in the fourth -- new in the fourth quarter. We will just continue to really optimize these existing channels and then as we get into 2016, we are looking to really focusing on expanding into traditional retail channels.

[Anthony Vendetti:]

Okay. So we could -- we should look for some additional maybe big box store kind of channels in 2016?

[Shai Gozani:]

Yes. I mean that's what we are working towards, exactly. We are working towards traditional -- the traditional retail, chain drug, mass merchandisers and club. Now you see if the timeline are long and it is pretty prolonged process and highly involved but yes we are looking towards that, we don't have anything definitive at this point, but are working towards that.

[Anthony Vendetti:]

Sure, now I understood, the big box I know they are very selective and they only do it once or twice a year in terms of adding new SKUs and so forth. Can you just -- last question and I'll hop back in the queue is can you go over your clinical study results for this product?

[Shai Gozani:]

Yes. We did -- there are two things we've done. I assume we are talking about related to chronic pain versus our work in RLS. So on chronic pain we did a post market study, started kind of the late spring and into the summer. And it was really designed to emulate the user experience in the real world so we recruited subjects online, sent them device and then we did a pre use questionnaire and 30-60 day questionnaire. So it really reflected real world uses as opposed to having them go through clinical trial site and so forth where they get a lot of potential. We really want to see if somebody gets this online or through retailers what is their chronic pain experience using the device. We looked at that 30 days and 60 days, we looked at various pain related outcomes. The two -- sort of the primary outcome measure was called PGIC or Patient Global Impression of Change which is the patients are subject overall impression of their improvement or lack of there is in their chronic pain. That was reported on 81% of the subjects, reported improvement in their chronic pain. And then secondary outcome measures were things like pain medication use where we saw 67% report reduced use of pain medication which we thought was really quite profound. We reported those results in abstracts and poster form at the PAINWeek conference and we have many script and preparation for submission.

[Anthony Vendetti:]

Okay. And how many participants totaled?

[Shai Gozani:]

There was about -- the overall -- is 94 now the subject group, they started out there were little bit more, we obviously lost some people along the way to follow up but the final is 94

[Operator:]

Thank you. And your next question comes from the line of Robert Dunaway. Please go ahead.

[Robert Dunaway:]

Hello. Hi, Tom. Hi, Shai. I guess congratulations on a good quarter and now you pretty much implemented everything we talked about in the last conference call. I have a question regarding what plans do you have on marketing the Quell product internationally like in Japan or China or mainland Europe? Any plans there.

[Shai Gozani:]

I think if it is question, we do think that there are tremendous opportunities outside the US that parallel of the US market. At this point, we are really just going to focus on the US market. We are starting to look at -- doing a little bit of market research in Japan for example. We are working towards a CE mark for Europe. So we are starting to put the infrastructure in place and understand the markets better. But in terms of specific initiatives, commercial initiatives, at this point we don't have any. I suspect as we get into 2016 and probably more into back half of 2016 we will start to be more aggressive about that. But at this point we just want to make sure we are focused on the US.

[Robert Dunaway:]

Okay. How about the regulatory approval in China right now? I know you applied for quite a while back and you have any updates on it.

[Shai Gozani:]

So that you are referring to DPNCheck?

[Robert Dunaway:]

DPNCheck

[Shai Gozani:]

Yes, exactly. Tom, do you want to give an update on that?

[Tom Higgins:]

Yes, sure. They are on -- so this is a process that is really not transparent but we filed in China well over a year ago.

[Robert Dunaway:]

Yes, I know quite a while.

[Tom Higgins:]

And so we've -- the direct activity in the field in terms of managing that, our partner Omron Healthcare is handling along with a local consultant. And so we are sort of at the end of the train here, but we have move through several steps in the review process including testing of the product. And now we have two steps remaining. One has to do with a technical review and then which we understand should be relatively short but I can't tell you what relatively short is. And then finally there is an administrative review. So putting all that together there really is no concrete guidance I can tell you other than Omron and we believe that during 2016, hopefully early in 2016 we will be able to get this through the regulatory process. Bottom line is we are making progress, it is slow, and it is not transparent.

[Robert Dunaway:]

Okay. One other question. Have you been approached by any medical device manufacture is about maybe partnering up or helping you promote this item, the Quell, especially the Quell device?

[Shai Gozani:]

We are actively talking with a variety of different companies and consumer healthcare in wearable technology and so forth about ways to partner and see if there are opportunities. So we've -- definitely there is a lot of interest in Quell. So we are always interested in talking and seem to ways to leverage partner. We are really wanted to focus on building the Quell brand. We think that is really will return the most value to the shareholders, to create a very valuable premium wearable technology brand. So we don't want to do anything to partnership that might dilute that. But, yes, we are very actively talking and looking for opportunities to partner in and optimize our efforts.

[Operator:]

And your next question comes from the line of [Technical Difficulty]. Please go ahead.

[Unidentified Analyst:]

Okay. I have a quick question regarding Quell. I understand it takes a long time to be on the store shelf of these major drug chains like Walgreens, CVS, Rite Aid and Wal-Mart. Is it possible to be on their e-commerce site because they do a lot of -- they are starting to do a lot of business there instead of being on the store shelf? That's one question. And the second thing is, is it possible in 2016 if your -- health of your marketing partner to be gradually roll it out to these four store at least in major -- four major metro areas market by market with some kind of Co-op TV advertising.

[Shai Gozani:]

Yes, thanks for your questions. So, yes, it is possible to gain on their website before you get on shelves. And that is something we are looking at. We don’t really see that's going to be dramatically drive sales compared to being on Amazon and on our website. But there is not lot of down side by any mean. So that is something that we have -- had some discussion and that maybe first step, if you will, so I would agree with that. No, but I don't want to imply we have specific plan to be in a specific retailer website but that definitely could happen. As far as getting -- we are working very hard towards being on the shelf in one or more retailers in 2016. As far as rollout, they tend to at least for the product like this they tend to want to roll it out nationally because of the effort is required so rather than rolling out it regionally but we are looking at all possibilities and we are looking at maybe doing smaller -- several launches in specific markets like you outlined but a lot of these retailers once they buy in to the concept, I think a lot of times they really want to go national, so we have to be ready to support it nationally. But those are good questions and we are incorporating that kind of thinking into our discussions and see if there are smaller steps before the national roll outs.

[Operator:]

Thank you. [Operator Instructions] And the next question comes from the line of Bill Kent.

[Bill Kent:]

Thank you. And congratulation gentlemen on the great quarter. In your strategy for mass retail what criteria are mass retailer looking for and how does Quell match up for targets like doing Rite, CBS, Walgreens target et cetera?

[Shai Gozani:]

Well, ultimately they are looking to make money. You are right. They are looking for products that they think will be attractive to their customer base and will have reasonable in store turnover. So given that the category of chronic pain is not surprisingly very attractive one. If you walk into any chain drug store or really any retailer, you are going to -- you can see a lot of products related to pain. One of the interesting data points is that the category of pain relieving devices is the fastest growing in consumer healthcare. So the retailers are very tuned into the concept of non pharmacologic pain relief. Now most of the devices are available, all the devices are available are really for local pain relief, temporary relief of muscle sore and things like that. Whereas we are targeting chronic pains so we are not competitive with those devices by any means but the retailers are clearly identified the segment as something that they are focused on. So we are in the power ally, wearable technology is another area that even the chain drug stores are getting involved with so there is -- I think we meet all the criteria and that the customers are looking for these technologies. We have our unique solution and I think now it is a matter of identifying the best partners and operationalizing that.

[Operator:]

[Operator Instructions] There are no more questions. Now I'd like to turn the floor over to Dr. Shai Gozani for closing remarks.

[Shai Gozani:]

I want to thank you for joining us on our third quarter 2015 conference call. We look forward to updating you next quarter into 2016. Thank you very much.

[Operator:]

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