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Edited Transcript of NURO earnings conference call or presentation 20-Apr-17 12:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 NeuroMetrix Inc Earnings Call

WALTHAM Apr 21, 2017 (Thomson StreetEvents) -- Edited Transcript of NeuroMetrix Inc earnings conference call or presentation Thursday, April 20, 2017 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 and Secretary

* Thomas T. Higgins

NeuroMetrix, Inc. - CFO, SVP and Treasurer

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Conference Call Participants

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* Yi Chen

H.C. Wainwright & Co, LLC, Research Division - MD in Equity Research and Senior Healthcare Analyst

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Presentation

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Operator [1]

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Good morning, and welcome to the NeuroMetrix First Quarter 2017 Earnings Call. My name is Shannon, and I'll be your moderator on the call. NeuroMetrix is a commercial stage, innovation-driven health care company, combining bioelectrical and digital medicine to address chronic health conditions, including chronic pain, sleep disorders and diabetes. The company is located in Waltham, Massachusetts.

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 the 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 to 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. - CFO, SVP and Treasurer [2]

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Thank you, Shannon. I'm joined on the call by Dr. Shai Gozani, our President and Chief Executive Officer, and we appreciate your participation in this quarterly call. For company background, we operate in 2 markets: wearable therapeutics and point-of-care diagnostics. Our platform technologies in both markets are based on deep expertise in precision nerve stimulation to achieve a therapeutic or a diagnostic result. We're addressing large market opportunities. Our primary product, Quell, is an over-the-counter wearable device for the millions of people suffering from chronic pain. DPNCheck, our test for diabetic nerve disease, addresses a medical condition of about half of all diabetics, representing about 5% of the U.S. population. For Quell, we use 2 primary business metrics to gauge progress: devices placed, which is a proxy for growth in our user base and eventual electrode reorders; and the invoiced value of shipments which is an indicator of overall commercial activity. During the 2 years since Quell launch, we have consistently achieved quarter-over-quarter gains in these metrics. Q1 2017 further extended that upward sloping trend line. Devices placed totaled 18,697, a gain of 31% on the prior quarter, and the invoiced value of shipments totaled $4.1 million, which was a gain of 19% on the prior quarter. Our Q1 GAAP results reflect this business growth. Total revenue was $4.3 million, up 89% from the first quarter of last year. At the product level, Quell GAAP revenue was $3.1 million and contributed 71% of our total revenue. The Quell device shipments that I mentioned were 130% higher than the year-ago quarter. Shipments to retail distributors were particularly strong, including Best Buy, CVS and Bed Bath & Beyond. Also, we had a strong quarter with QVC, following an off-the-year period during the Q4 holidays. Electrode reorders grew to 25,400 electrodes, up 216% from reorder electrodes a year ago. The electrode reorder growth continues to provide evidence on expanding user base. Deferred Quell revenue in the balance sheet, which is anticipated to convert to future revenue upon retail sell-through, was approximately $1.2 million. This was up from approximately $900,000 at the end of last quarter and these amounts are net of estimated returns. Our sales returns are about 25% of shipments and this is in line with our expectations based on the clinical efficacy.

Turning to DPNCheck. It also performed well and contributed revenue of approximately $800,000 or 19% of our total revenue. This new quarterly high reflected strong demand in our U.S. Medicare Advantage accounts. DPNCheck sales were 67% higher than in the year-ago quarter. Our legacy products, primarily ADVANCE diagnostic tests, are managed for cash. These are not actively marketed and they contributed about $400,000 or 10% of total revenue in the quarter. Gross margin was $1.6 million, a rate of about 37.4% of revenue versus $793,000, a rate of 34.8% in the first quarter of last year. In comparison with recent quarters, the gross margin rate reflects 2 primary factors: First, an increased waiting toward Quell due to the accelerating Quell revenue growth rate; and second, within Quell, a shift in sales mix toward retail distribution and QVC. These carry lower average sales prices and lower gross margins. The Quell gross margins are our continuing focus. Our COGS initiatives and operations are focused on labor efficiency and sourcing alternatives to drive cost parts reduction. In engineering, product innovation programs include COGS targets. We believe that there are both near term and longer term opportunities to expand margins.

Total operating expenses was $4.9 million, essentially flat with $5 million in the year-ago quarter. R&D spending of $903,000 increased by $254,000 from year-ago quarter, and this was due to lower outside engineering costs, both hardware and software, following the Quell we released early this year. Sales and marketing spending of $2.6 million increased by 190,000 from Q1 of 2016. This covered the effects of higher TV advertising cost, offset by savings from reduced sales headcount as health care professional efforts are focused on strategic accounts. G&A spending of $1.4 million was flat with $1.4 million in the year-ago quarter. Our net loss declined to $3.2 million versus $4.1 million in Q1 2016. Net loss per share was $0.91, reflecting a weighted average of 8 million shares outstanding. This per share number included a charge of $0.51 for a deemed dividend related to the $7 million equity offering that we completed in the quarter. If you exclude that deemed dividend, loss per share was $0.40 and that compares with a net loss per share of $1 in Q1 2016 on what was then 4.1 million shares outstanding. Our net cash usage was $3.4 million, continuing a downward trend from a peak of $4.2 million in the second quarter of last year, which declined to $3.8 million in the third quarter of last year to $3.6 million in the fourth quarter of last year and then through this quarter's number. We ended the quarter with $6.9 million in cash.

So in summary, the quarterly results showed continued upward trend in Quell key business metrics, top line growth with Quell posting an 89% revenue increase, gross margins of 37% with both short and long-term upside, a reduced loss by $900,000 and a steady downward trend in quarterly cash usage. Those are the financial highlights.

Now Dr. Gozani, for a review of our business and strategy.

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

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Thank you, Tom. I will focus my comments on Quell, which is our primary growth driver. We believe that Quell is well-positioned to address unmet needs in the $20 billion global market for devices and drugs that treat chronic pain. In the U.S. alone, there are 100 million people with chronic pain. I will cover the following aspects of our Quell effort. Our advertising strategy, the development of the Quell retail channel, strategic partnerships, research and development, and then I'll discuss Quell as a digital health solution.

First, the advertising strategy. We are in the early stages of building national awareness of Quell, wearable pain relief technology within the chronic pain community. The current market penetration is only about 0.5% of our estimated attainable market of 20 million U.S. consumers. We hope to reach a tipping point, where wearable marketing within the chronic pain community generates an upward sales inflection. We are starting to see evidence of peer-to-peer marketing. However, at this early stage of commercialization, we still recognize that most sales will be generated by direct advertising. As a result, a substantial portion of our sales and marketing spend is devoted to building awareness in TV and online advertising. We believe that the most effective way to reach our core audience is through TV advertising. Therefore, since the second quarter of 2016, we've been investing in TV promotion, almost common approach is 30 second spots on national cable news channels. However, we're also utilizing other cable channels that match our customer demographics and characteristics. We expect to continue a similar level of TV promotion throughout 2017. In addition to our own TV advertising efforts, we continue to effectively partner with QVC. Their customers are interested in novel health products, and we experienced strong sales on QVC in the first quarter, which is typically a good quarter for health and wellness products. Digital marketing is also an important component of our advertising strategy, representing about 1 quarter of our advertising spend. Our digital marketing strategy consists of paid search, primarily through Google, online advertising including via Facebook and retargeting. In addition to TV and digital marketing, we have recently piloted print and radio advertising to determine if they can provide complementary promotional benefits.

Now discussing the retail channel. We believe that the availability of Quell in top retail outlets is important to the growth of the brand. The association of Quell with premium U.S. retailers enhances its credibility and the convenience of in-store access is important to many of our customers. Therefore, we continue to invest in developing this channel by also recognizing and managing the challenges inherent in retail. These include lower margins and deferred revenue recognition. At the end of 2016, Quell was available in about 1,500 retail stores, approximately evenly distributed among Target, CVS and Walgreens. In the first quarter of this year, we expanded to about 3,000 retail stores. In addition to the aforementioned pharmacies, Quell is now also available at a subset of Best Buy, Bed Bath & Beyond and Sam's Club stores. We are particularly enthusiastic about offering Quell in these retail settings because it demonstrates that the Quell value proposition extends beyond pharmacies into nontraditional consumer health settings. We believe this is consistent with the secular trend towards increased consumer control over health care decision and purchasing. Retailers like Best Buy and Bed Bath & Beyond have recognized this and have decided to increasingly offer their customers novel and effective health and wellness products.

With regard to strategic partnerships. The U.S. Consumer Health market is the largest in the world, and we intend to directly build Quell into a premium high-value consumer brand under NeuroMetrix's ownership. However, we do see opportunities to partner in ways that will accelerate Quell adoption. As one example, Medtronic offers Quell on their diabetes-focused e-Commerce site. We also see opportunities for Quell outside the U.S. There are 1.5 billion people worldwide with chronic pain. We now have regulatory clearance for marketing in Canada, the EU and Australia. And in fact, we're already marketing Quell in Canada. We're most likely going to tap into OUS opportunities through distribution and licensing partnerships, and here our strategy is still evolving. Although, we are engaged in several ongoing discussions, these agreements take time and thus we entered carefully to yield both near and long-term value.

On research and development. A core strength at NeuroMetrix is R&D and our ability to rapidly innovate. I believe we have the most advanced engineering team and technology in the wearable nerve stimulation sector. We typically target major product launches for the Consumer Electronics Show, otherwise known as CES, which occurs in January. In fact, we announced our second-generation Quell device at CES 2017 this past January. This device provides enhanced personalization, automation, battery life and health tracking. And it starts shipping in the middle of the first -- of this past first quarter. We are currently developing a novel third-generation Quell device that we expect to launch in early 2018. We believe this device will accelerate growth and substantially enhance the profitability of the Quell business. We're also committed to conducting clinical studies that build credibility in the Quell technology and enhance our understanding of the mechanism of action and clinical efficacy. We have 4 ongoing clinical studies currently, including in cancer pain and low back pain. We expect to start seeing readouts on these studies in the second half of this year.

Finally moving on to Quell as a digital health solution. We believe that an underappreciated aspect of the Quell's system is that in addition to being a neurotherapeutic, it is also a digital health solution for chronic pain. Chronic pain is a disease onto itself that goes beyond the direct experience of pain, which impacts all aspects of a sufferers' life, including their sleep quality, activity levels and mental health, and thus leads to generally poor overall health. Effectively managing chronic pain requires a broad health and wellness perspective. Quell is uniquely designed to provide this holistic approach to pain management through tracking of objective health metrics such as sleep levels and activity and subjective outcomes such as pain and mood. The data and related health insights are presented to the user via the Quell app and stored and synthesized in the Quell Health Cloud. We already have 23,000 users that have created Quell Health Cloud accounts. We are just starting to tap into the tremendous potential of this rapidly growing database, which may well be the largest chronic pain database in the world. We intend to use sophisticated analytical methods, such as machine learning to better understand each user's pain and health, and thereby offering them personalized insights to optimize their use of Quell and to decrease their pain and its impact on their life. We believe that these types of creative services will create long-term loyal customers that will form the foundation of a growing and profitable consumer health brand. And those are our prepared comments, and we'd be happy at this point to take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Jared Cohen with JM Cohen & Co.

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Unidentified Analyst, [2]

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Just a quick question. Because it seems like one of the keys for your ongoing success will be the reorder rate of electrodes. And just, I know it's been an upward trend over the last 6, 8 quarters, you have given the number of devices out there. And I know the company's objective is, give or take has been depending on usage about for a user to reorder about 1.5 electrodes per give or take a quarter or maybe even more. What does it take for an existing user to want to continue that trend?

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Thomas T. Higgins, NeuroMetrix, Inc. - CFO, SVP and Treasurer [3]

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Yes. So at this point, our models call for a little bit less than 1.5 per quarter, probably closer to about 1.2, 1.25. And we're probably a little bit shy of that at this point, but moving in the right direction. I think one of the things right now is, we design the electrodes to make sure that they provide, in most cases, at least the minimum amount of use, which is we rate as 2 weeks and/or 100 hours of use. As it's common in consumables, most -- many people will stress that out as long as they can possibly go. So there's really isn't -- there isn't a shut-off mechanism right now. So we suspect that users are probably stretching out the consumables until basically the higher joules are falling apart and they can no longer use them. So that's probably contributing to some level of kind of constraining the reorder rate. But I think the most important driver, ultimately, of reorders is that the users are getting pain benefit -- pain relief benefit and are engaged with the product and the overall service. So we're -- we've been pretty much, I would say, primarily focused to date on driving new customers -- bringing on new Quell customers, now that we built up -- we've shipped 80,000 devices over the past 8 quarters. We're starting to shift more and more of our effort towards managing the existing customer base and enhancing that interaction and quality of the survey, so that we do get those reorders.

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Operator [4]

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Our next question comes from Yi Chen with H.C. Wainwright.

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Yi Chen, H.C. Wainwright & Co, LLC, Research Division - MD in Equity Research and Senior Healthcare Analyst [5]

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My first question is, are all the new units shipped -- the Quell units shipped out for now or second-generation units of Quell?

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Shai N. Gozani, NeuroMetrix, Inc. - Founder, Chairman, CEO, President and Secretary [6]

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Yes. Since about middle of the quarter, all the units have been Quell 2s.

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Yi Chen, H.C. Wainwright & Co, LLC, Research Division - MD in Equity Research and Senior Healthcare Analyst [7]

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So based on the consumers' feedback from the second-generation, do they report any -- even more reduction in the amount of, say, oral therapeutics for pain and treatments?

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Shai N. Gozani, NeuroMetrix, Inc. - Founder, Chairman, CEO, President and Secretary [8]

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I think that it's not so much that their -- so the underlying therapeutic methodology and engine, if you will, is the same, Quell 1 and Quell 2. So we do not necessarily expect better clinical efficacy because you're delivering same therapeutic modality. What Quell 2 does is it essentially makes the product easier to use and increases customer engagement. So we would expect to see, for example, potentially fewer -- maybe slight reduction in returns. Because for example, in automated the -- or I should say, we have put the calibration -- initial calibration procedure, which used to be done entirely on the device, you cannot do it via the app, making it easier. So customers are more likely to start correctly. So from that perspective, we expect to get better usage. But from a clinical perspective, we would expect it to be the same.

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Yi Chen, H.C. Wainwright & Co, LLC, Research Division - MD in Equity Research and Senior Healthcare Analyst [9]

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Okay. And what kind of improvements should we expect from the third generation?

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Shai N. Gozani, NeuroMetrix, Inc. - Founder, Chairman, CEO, President and Secretary [10]

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The third generation, well, we're not talking about the specific technological innovations because of competitive reasons. But the -- one of the key things we are talking about and is very important is that we will dramatically improve our gross margins on Quell devices.

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Yi Chen, H.C. Wainwright & Co, LLC, Research Division - MD in Equity Research and Senior Healthcare Analyst [11]

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Will it also potentially -- be able to potentially increase the electrode reorder rates?

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Shai N. Gozani, NeuroMetrix, Inc. - Founder, Chairman, CEO, President and Secretary [12]

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Well, I think anything that -- yes, I believe it could. Anything that enhances the usability and customer engagement, which we do believe the third-generation device will do, should have an impact on electrode repurchasing.

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Yi Chen, H.C. Wainwright & Co, LLC, Research Division - MD in Equity Research and Senior Healthcare Analyst [13]

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Final question. How many shares were outstanding at the end of the first quarter? And how many options and warrants do you currently have?

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Thomas T. Higgins, NeuroMetrix, Inc. - CFO, SVP and Treasurer [14]

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So there were about -- at the end of the first quarter -- so at the end -- the precise number at the end of the first quarter was 8,740,000 shares outstanding. In terms of the shares that -- let me get back to you on the precise number on literature as to it rather than -- I don't have that right in front of me right here.

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Yi Chen, H.C. Wainwright & Co, LLC, Research Division - MD in Equity Research and Senior Healthcare Analyst [15]

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Okay. And that dividend is a noncash expense, right, deemed dividend?

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Thomas T. Higgins, NeuroMetrix, Inc. - CFO, SVP and Treasurer [16]

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Yes, that isn't -- that's just an adjustment to the EPS calculation. It doesn't run through the P&L. It's just an accounting peculiarity.

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Operator [17]

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(Operator Instructions) And I'm showing no further questions at this time. I'd like to turn the call back over to Dr. Shai Gozani for closing remarks.

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Shai N. Gozani, NeuroMetrix, Inc. - Founder, Chairman, CEO, President and Secretary [18]

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We'd like to thank you for joining us on the First Quarter Conference Call. We are encouraged by the continued strong response to Quell and the continued growth of DPNCheck as well. And we look forward to updating you on our progress throughout the balance of the year. Thank you.

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Operator [19]

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Ladies and gentlemen, this concludes today's conference. Thanks for your participation. Have a wonderful day.