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Edited Transcript of NURO earnings conference call or presentation 17-Oct-19 12:00pm GMT

Q3 2019 NeuroMetrix Inc Earnings Call

WALTHAM Oct 25, 2019 (Thomson StreetEvents) -- Edited Transcript of NeuroMetrix Inc earnings conference call or presentation Thursday, October 17, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Shai N. Gozani

NeuroMetrix, Inc. - Founder, Chairman, CEO, President & Secretary

* Thomas T. Higgins

NeuroMetrix, Inc. - Senior VP, CFO & Treasurer

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Conference Call Participants

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* Jarrod M. Cohen

JM Cohen & Company - MD

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Presentation

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Operator [1]

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Good morning, and welcome to the NeuroMetrix Third Quarter 2019 Earnings Call. My name is Crystal, and I'll be your moderator on the call.

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 that depend upon or refer to future events or conditions 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 periodic filings with the SEC available on the company's Investor Relations website at neurometrix.com and on the SEC's website at sec.gov. NeuroMetrix does not intend and undertakes no duty to update the information disclosed on this conference call.

I'd now like to introduce the NeuroMetrix' Senior Vice President and Chief Financial Officer, Mr. Thomas Higgins. Mr. Higgins?

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Thomas T. Higgins, NeuroMetrix, Inc. - Senior VP, CFO & Treasurer [2]

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Thank you, Crystal. I'm joined on the call by Dr. Shai Gozani, our President and CEO. NeuroMetrix, as many of you know, develops and commercializes products for the chronic pain and diabetes markets utilizing neurostimulation and digital medicine. Our principal commercial products are Quell, an over-the-counter wearable neurostim device for symptomatic relief of chronic pain; and DPNCheck, a point-of-care device that provides accurate and cost-effective detection of diabetic peripheral neuropathy or DPN.

The financial results released earlier this morning for Q3 provide broad evidence of progress in shifting our business toward profitability. We reported revenue of 2.2 -- $2.1 million. As expected, these were down from the prior quarter and reflected our emphasis on sales economics particularly for Quell rather than top line growth. Gross profit was $1.2 million, representing a gross margin rate of 56.2%. This was a gain of 5.9 percentage points from the prior year quarter.

Operating expenses totaled $2.6 million, a reduction of $1.9 million or 43% from the $4.5 million in spending in Q3 2018. And loss from operations was $1.4 million, an improvement of $1.3 million or 47% from the loss of $2.7 million a year ago.

Regarding our product lines, Quell posted revenue of $800,000, level with the preceding quarter. The Quell gross margin rate was 47.8%. This was up from 40.5% in Q2 and from 47.2% a year ago. Quell revenue reflected a higher percentage of aftermarket sales, particularly electrodes, than in the comparable periods. The Quell results were achieved with reduced staff and controlled efficient ad spending focused on digital marketing.

In absolute terms, working ad spending was about $200,000 in the quarter just ended, that was $800,000 lower than a year ago. Importantly, Quell gross profit in Q3 covered all direct operating costs and made a positive net cash contribution toward company overhead. Having established this profitability baseline, the focus now is to steadily increase ad spending and grow revenue without sacrificing customer acquisition efficiency. Dr. Gozani will speak about initiatives in this area following my discussion.

DPNCheck had a solid quarter with revenue of $1.0 million, just about $1 million, slightly below $1.1 million in Q3 last year. Domestic sales, primarily Medicare Advantage, were up 31% year-on-year, and they represent about 2/3 of this business. International sales were down due to challenging comps, which included $350,000 in Mexico sales in 2018 Q3 versus none in Q3 this year. Funding challenges in state health care systems were a primary factor.

Longer term, Mexico is an important market for us. There is a high prevalence of diabetes, and our distributor, Scienta Farma, has done extensive foundational and clinical work. 2020 should see a return of Mexico shipments.

The DPNCheck gross margin rate was 78.6% in Q3, that was up from 77.3% in Q3 last year. This business operates with a small staff and very low promotional spending. DPNCheck gross profit covers its direct operating costs and contributes a material net cash toward company overhead.

Our legacy products, primarily the advanced general purpose nerve testing technology, contributed $300,000 in revenue in Q3. This was flat with the preceding quarter and the prior year. These products are managed for cash and not actively marketed. They've leveled off at about $300,000 revenue per quarter or about $1 million-plus per year. Sales are mostly aftermarket electrodes with gross margins in the mid-70% range.

Q3 operating expenses. The business restructuring that we reported in Q2 was completed during the third quarter. It included staffing reductions and the consolidation of our activities in a single location in Massachusetts. The resulting efficiency contributed to the lower operating expenses of $2.6 million in Q3 versus $4.5 million year-ago quarter.

R&D spending of $475,000 was reduced from $1.2 million in the prior year. It included $420,000 from GSK funding of joint Quell projects. Sales and marketing spending of $647,000 reflected the 75% reduction in Quell ad spending that I mentioned a few minutes ago, plus Quell's savings in staff and services costs. G&A spending of $1.4 million increased $400,000 year-on-year due to higher professional service costs, primarily legal.

Our net loss was $1.4 million or $0.14 a share, and cash was $3.2 million at quarter end. Finally, our capital structure remains simple, equity-only, debt-free. Common shares outstanding are currently 9.8 million, and adjusted for convertible preferred shares, the common share count is 14 million.

Given the trading price of our stock and the delisting risk of noncompliance with NASDAQ rules, we intend to shortly seek shareholder approval for a reverse split, if required to maintain our listing status. The reverse split is a necessary step to maintain liquidity for our shareholders and for potential merger opportunities.

Dr. Gozani will now address our overall strategy. Shai?

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Shai N. Gozani, NeuroMetrix, Inc. - Founder, Chairman, CEO, President & Secretary [3]

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Thank you, Tom. I will cover 3 topics this morning. First will be the DPNCheck business, then the Quell business, and then I'll discuss our current strategic option exploration.

So starting with the DPNCheck business. As a reminder, DPNCheck is a point-of-care neurophysiological test that's primarily used for screening, detection and staging of diabetic peripheral neuropathy, which is also known as DPN. This product reflects our unique expertise in neurodiagnostic devices. DPN is the most common long-term complication of diabetes. At an early, often asymptomatic stage, DPN increases the risk of falls in older diabetics, reduces quality of life and is linked with neuropathic pain. If undetected and unmanaged, it predisposes to development of diabetic foot ulcers, which may require amputation, and which are associated with a very high mortality rate.

The presence and stage of DPN is also an important indicator of an individual's diabetes severity, in this respect complements the HbA1c level. The DPNCheck device measures standard sural nerve conduction, which is an accepted biomarker for DPN. DPNCheck has been in commercial use since late 2011. It has no direct competition. It has extensive support of clinical data and well-established markets in the U.S. Medicare Advantage space, Mexico and Japan. In addition, China is a relatively new market for us with significant potential.

DPNCheck revenue is primarily generated from sales of proprietary DPNCheck disposable biosensors, which have a gross margin exceeding 70% and even better in the U.S. market. We are optimistic about the continued growth of DPNCheck. In support of this opportunity, we are developing a second-generation DPNCheck system that will launch next year.

Our plan is to continue to build the DPNCheck business, and we may add sales and marketing resources in support of this effort. At the same time, however, we do recognize as a small company, we need to focus. And therefore, we are concurrently evaluating the possibility of divesting this business if the right opportunity arises, as I will discuss later.

Moving on to the Quell business. Our corporate vision is a world where people can live their best life despite chronic pain. To achieve this goal, we believe that everyone living with chronic pain should have the opportunity to experience our Quell wearable pain relief device and determine if it is beneficial to their particular form of chronic pain.

Over the past several quarters, we have been reevaluating our Quell commercial strategy. We came to the conclusion that in order to build Quell into a large, profitable and successful over-the-counter pain relief brand, we need to develop a narrow and a highly efficient strategy. This decision was informed by our sales experience over the past 4 quarters, the results of a comprehensive market research study we commissioned earlier this year and commercial pilots we ran in both the second and third quarters of this year. As a result of this work, we announced our new Quell commercial strategy this past Tuesday.

We have shifted to an exclusively direct-to-consumer model delivered via the QuellRelief.com website that will allow us to offer the innovative Quell 2.0 system at widely accessible price points. We believe that this streamlined distribution model will allow more people with chronic pain to benefit from Quell. We'll also be focusing our recurring electrode sales on our subscription service. Through these changes, we expect to see improved business economics through reduced customer acquisition cost, distribution channel savings and higher customer retention rates, all of which should result in increased customer lifetime value.

In addition to refinements in the Quell commercial strategy, we continue to invest in R&D and clinical development. We believe that the Quell technology is unmatched within noninvasive -- within the noninvasive neuromodulation space and we are committed to maintaining and expanding our technological lead. We have a number of innovations that we will launch on the Quell 2.0 platform next year.

We also continue to invest in clinical development, both generated internally from analyses and peer-reviewed publications of data from the Quell Health Cloud and from collaborations with leading pain and TENS researchers in the U.S. and around the world. Some specific examples. There is currently a randomized double-blinded sham-controlled study of Quell in subjects with chronic pain due to fibromyalgia underway at Brigham and Women's Hospital in Boston, which is a Harvard Medical School teaching institution. This study is about 75% enrolled and should read out in the first half of next year.

Another interesting study is a randomized multicenter double-blinded sham-controlled study of Quell in subjects who have CIPN, which is chemotherapy-induced peripheral neuropathy, which is a very significant and difficult-to-treat complication of chemotherapy. This study is expected to launch before the end of the year. It is being run by the University of Rochester and is funded by the National Cancer Institute. We also currently have 2 completed studies derived from data in the Quell Health Cloud undergoing peer review in pain medicine journals.

Within the Quell business, we also have a very important collaboration with GSK and that continues to be a very strong positive for us. We're working closely with GSK in support of their launch of the Quell technology outside the U.S. We have been impressed by the scale and quality of their prelaunch effort and are optimistic about the potential for success given their deep expertise in consumer health.

We recently joined GSK at EFIC, which is the European Pain Federation meeting where we jointly presented Quell clinical data and had the opportunity to observe a well-attended symposium, sponsored by GSK, on novel applications of TENS, TENS being transcutaneous electrical nerve stimulation, in pain that included a review of Quell clinical data by Christian Maihöfner, a prominent German neurologist. It is gratifying to know that the Quell technology may benefit chronic pain sufferers around the world through GSK's efforts. Importantly, there are also $5.1 million in remaining milestones that we are working to attain.

Finally, with regard to the FTC matter that we have previously disclosed, we are working through this issue. We believe that we've been cooperative with the FTC. We have made an effort to convey our perspective on Quell technology and its role in managing chronic pain to the agency and we continue to seek resolution of this matter. And if you're looking for further information, I would suggest reviewing our third quarter 10-Q filing for additional details.

To wrap up with regard to strategic options, as we have previously stated, we're exploring various strategic options to enhance shareholder value. Our area of focus -- one area of focus is the potential divestiture of the DPNCheck business. This process has been underway since the spring under the direction of Back Bay Life Science Advisors. We have received preliminary indications of interest and are determining if any potential transactions make sense. We expect to make a decision by the end of the year.

We also have retained Ladenburg Thalmann as financial adviser to explore various company-wide strategic options. We're exploring all legitimate possibilities, including a merger, if it has the potential to create shareholder value. However, we do not expect this process to conclude this year and note that the process may not yield an outcome.

So in summary, we're taking all potential steps to enhance and grow the value of our commercial products and while doing that to manage our operations as cost-effectively as possible. We have engaged outside expertise where appropriate and we look forward to reporting our progress over the balance of the year.

That represents our prepared comments and we'd be happy to take questions at this point.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Jarrod Owen from JM Owen and Company (sic) [Jarrod Cohen from JM Cohen & Company].

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Jarrod M. Cohen, JM Cohen & Company - MD [2]

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I'm just curious, as of the end of the quarter, how many active Quell users do you have? And out of that user base, how many actually reorder electrodes basically on a quarterly basis?

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Shai N. Gozani, NeuroMetrix, Inc. - Founder, Chairman, CEO, President & Secretary [3]

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Yes, Jarrod, we do not report active users for a couple of reasons, primarily because it's very difficult to know...

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Jarrod M. Cohen, JM Cohen & Company - MD [4]

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Oh, I know you don't. I'm just trying to get a general sense. I know you don't, but just -- I know you've given a sense of how many active -- overall how many units you've sold, so I was just trying to get a rough percentage of -- out of that.

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Shai N. Gozani, NeuroMetrix, Inc. - Founder, Chairman, CEO, President & Secretary [5]

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Yes. Well, I don't have that, so I apologize. I don't have that -- a good range to give you right now. I don't want to speak off the top of my head. In terms of electrode reorders, I mean, we're -- generally speaking, it's been pretty consistent as far as going back with the business. What we have seen and do believe is that the reorder rates have improved with the Quell 2.0 system, which we have a little bit less than a year's of -- a year's worth of experience.

We've also implemented some stronger customer engagement features in the product, primarily through the app, we call that the Therapy Coach, and we're -- I think we're starting to see benefits of that. So I think we're optimistic about continued improvement in reorder rates from historical levels. And the other piece of this which I mentioned briefly is that we're -- we've had some success with the subscription service for the electrodes and will really be emphasizing that as the primary mechanism for our customers to obtain electrodes.

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Jarrod M. Cohen, JM Cohen & Company - MD [6]

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Okay. And with the new orders with Quell or even with Quell in general, hasn't it always been a product used by people of last resort who've gone through every other alternative use for chronic pain versus something that people have bought before they've tried anything else in terms of surgery or anything else? These are people that have had surgery or tried alternative therapies before trying Quell because they've tried everything else.

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Shai N. Gozani, NeuroMetrix, Inc. - Founder, Chairman, CEO, President & Secretary [7]

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I don't know if I would characterize it as necessarily the tool of last resort. I think in general, when you look at people with -- or think about people with chronic pain, the average -- our typical user has had chronic pain for at least 4 years. So as you can imagine over that period of time -- and many for much longer than that, over that period of time, they will have tried many, many different things. So as a result, it's not unexpected that they've tried multiple different pharmacological therapies and behavioral therapies or maybe surgery and other sorts of interventions, they're not necessarily coming to Quell as the last resort as much as what we try to encourage them is to think of Quell as something potentially in their toolbox with which to treat chronic pain. We don't -- we're not claiming to by any means to be an alternative to drugs or to surgery or other interventions, but rather a valuable tool for the person with chronic pain to consider using in managing -- in better managing their condition.

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Jarrod M. Cohen, JM Cohen & Company - MD [8]

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Oh, I was just getting to the point where price shouldn't be that -- some people have always considered price being an issue, but price shouldn't be that much of an issue since they've tried other treatments that for the most part could be more expensive than what they've tried before in terms of...

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Shai N. Gozani, NeuroMetrix, Inc. - Founder, Chairman, CEO, President & Secretary [9]

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Right. Well, we've done a lot of market research on price elasticity. Price is important. And also many people with chronic pain are disabled, they're not working, they're under financial stress. So as a group, I think they're financially challenged because of their disease.

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Jarrod M. Cohen, JM Cohen & Company - MD [10]

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Oh, no. Absolutely, yes. But I am talking about things like even surgery which cost up towards of $30,000, something like that, or other things.

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Shai N. Gozani, NeuroMetrix, Inc. - Founder, Chairman, CEO, President & Secretary [11]

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Yes. No, I mean, we think it's -- for those reasons we think it makes a lot of sense to have it in the toolbox, not necessarily as the only option but as one of the tools that a person with chronic pain can use potentially every day for the whole day or maybe on an episodic basis as they need it.

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Operator [12]

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(Operator Instructions) And I'm showing no further questions from our phone lines. And I'd like to turn the conference back over to Dr. Gozani for any closing remarks.

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Shai N. Gozani, NeuroMetrix, Inc. - Founder, Chairman, CEO, President & Secretary [13]

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Well, thank you very much for joining us on the conference call this morning, and we look forward to updating you at the year-end. Thank you.

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Operator [14]

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Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone, have a wonderful day.