NeuroMetrix Inc (NURO) 2010 Q3 法說會逐字稿

Good morning and welcome to the NeuroMetrix third-quarter 2010 conference call. My name is Stephanie and I will be your moderator on the call.

NeuroMetrix is a science-based healthcare company that is transforming patient care through neurotechnology. The Company's mission is to provide innovative products for the preservation of nerve function.

On this call the Company may make statements which are not historical fact 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 that include the 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 , our Form 10-Q for the period ending September 30, 2010, which was filed today with the SEC, the Company's annual report on Form 10-K for the fiscal year ended December 31, 2009, 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. Dr. Gozani, you may

Thank you, Stephanie. I am joined on the call today by Tom Higgins, our Chief Financial Officer, and Walter Christensen, our Senior Vice President of Sales.

In this conference call we will discuss financial highlights for the third quarter and recent business developments. Following our prepared remarks, we will be pleased to respond to your questions. Tom, please take them through the financial highlights.

Thanks, Shai. Let me start with a few highlights in the quarter.

On our last earnings call we outlined steps we were taking to reduce our cash consumption. These consisted of a reduction in force of 25% of our employee headcount, tighter working capital management including a reduction in electrode inventory purchases, and termination of a sales program for new customers that involved extended payment terms.

These steps, as well as others taken before and during the third quarter, contributed to a significant improvement in our cash consumption rate from $4.2 million in the second quarter to $2.7 million in the third quarter. That is a reduction in the burn rate of $1.5 million or 37%. Going forward we expect that quarterly cash consumption will be below $3 million and will trend downward in 2011.

Among the other structural changes we have made during the third quarter was to focus our sales efforts and supporting R&D on a single technology platform, the advance ADVANCE NCS/EMG system. This product was launched into the physician office market in October 2010 and sales of NC-stat were discontinued.

As a result of that decision, which will reduce product and support costs over time, we wrote off the remaining NC-stat inventory in the amount of $187,000. This had the effect of reducing our gross margin for Q3 by 550 basis points from 66%, which it would have been without the charge, to 60.5% which we reported. We believe that our margins in the fourth quarter should be in the low to mid 60% range before declining in the first half of 2011 as higher cost electrodes move through cost of goods.

With our launch of ADVANCE into the physician office market we are offering a promotional program under which a new customer who purchases a quantity of electrodes at a premium above list price will receive the right to use an ADVANCED device for a year. This type of equipment rental program tied to consumables purchased is common in the life sciences tools industry.

GAAP requires that multiple element arrangements such as this be disaggregated into their components and each treated separately for revenue recognition purposes. For us, the consequences of this program is that we will recognize approximately 80% of new customer revenue upon shipment of the ADVANCE system and consumables. The remaining 20% will be deferred and recognized in revenue over the following 12 months.

We anticipate that most, if not all, of our new US customer revenue starting in Q4 will receive this accounting treatment. In other words, 80% revenue recognition at the point of shipment. We expect this will reduce revenue; we recognize that new accounts in Q4 by about $100,000.

Our Q3 key business metrics were mixed. Our active accounts, which we measure on a 12-month look-back basis, were 4,044. This was down 3% from Q2, which in turn was down 3.3% from Q1. So there has been some progress on this metric.

Patient studies were 32,064, down 7.4% from 34,638 in the second quarter. We believe the primary factor influencing the testing rate was a decline in patient visits as reported throughout our physician office and orthopedics installed base. Patient studies per active account were down 4.6% to slightly below 8 studies per account in the quarter.

We continue to track performance of new customer accounts that we have brought on since the first of the year and also our international accounts. There is encouraging news on both these fronts.

International patient studies crossed the 1,000 mark in Q3, up 18% on Q2, and have been growing quarterly in the mid-teens over the past year. Our international accounts, concentrated in the UK and the Netherlands, are testing at about three times the rate of our domestic installed base.

New domestic accounts brought on after the Medicare code 95905 became effective on January 1 of this year are also testing at a higher rate than our installed base and averaged 17 patient studies in Q3. And that is more than two times the overall average. These new domestic accounts, plus international accounts, now comprise 7.3% of Q3 active accounts and that is up from 4.5% in the second quarter.

Turning to our financial results, I would like to focus on the Q3 versus Q2 sequential quarter comparisons. Total revenue was $3.4 million versus $3.9 million in the second quarter and $6.3 million in the third quarter of 2009. Revenue was down 11% on a sequential quarter basis. The revenue split was 15% device, 85% consumables.

Device sales were $500,000, same as $500,000 in the second quarter and $700,000 in Q3 2009. So essentially flat across all periods. We shpped 85 devices net in the quarter. This was up from 77 net devices in the second quarter. Over the past two years we have consistently shipped about 75 devices per quarter and we are pleased to step up that shipment rate in the third quarter, particularly while we were undergoing the restructuring of our sales channel.

NC-stat average selling price was about $600 in Q3 and reflected a large number of low-cost refurbished devices. ADVANCE ASP was about $6,000 in the quarter.

Consumables revenue was $2.9 million versus $3.3 million in Q2 and $5.6 million in the prior year. Consumables are primarily preconfigured electrodes used for nerve conduction studies. Electrode ASP was $27.26 and we have consistently been in the range of $27 to $27.50 during 2010. Electrodes sold of 120,000 were down 14% from the second quarter.

Our gross margin was $2.1 million versus $2.4 million in Q2 2010 and $4.5 million in Q3 of last year. The gross margin rate was 60.5% versus 63.5% in Q2 and 71.1% in Q3 2009. As I mentioned, the margin in Q3 was adversely affected by $187,000 write-off of NC-stat inventory and excluding this event, Q3 margin improved to 66% from 63.5% in Q2.

Our total OpEx spending was $5.6 million, dramatically reduced from a run rate of about $7 million over the past two quarters and from $6.4 million in Q3 2009. A recent headcount reduction and other cost containment initiatives over the past two quarters caused the reduction. Going forward, OpEx should be in the quarterly range of $5.8 million to $6.2 million.

We recorded a federal income tax benefit of $120,000 related to the application of NOLs back to 2006 under a recent tax code amendment related to alternative minimum tax. Our net loss was $3.4 million in Q3, $0.15 a share; that reflects 23 million weighted average shares outstanding. This is down from a loss of $4.5 million in the second quarter and a loss of $9.3 million in the third quarter of 2009. The 2009 quarter included a charge of $7.4 million that was related to mark-to-market accounting on certain outstanding warrants which we have since amended.

Turning quickly to the balance sheet, we ended Q3 with $19 million in cash. Our cash consumption in the quarter was $2.7 million and that was an improvement from $4.2 million in the second quarter of 2010.

Accounts receivable was reduced to $2.3 million from $2.8 million at the end of the second quarter. The balance includes -- the balance of $2.3 million includes about $1 million related to the 12-month financed accounts. Inventories were down to $4.5 million from $4.9 million at the end of the second quarter. As I mentioned, we have taken steps to lower incoming electrode purchases to bring this asset in better line with operations.

At lower purchase rates our per-unit vendor cost is 20% higher than current prices and this will continue until we resume higher purchase volumes. Higher electrode purchase costs are forecasted to begin impacting COGS in the first quarter of 2011.

So those are the financial highlights; back to you, Shai, for a broader look at the business.

Thanks, Tom. Q3 was mixed in terms of the financial results, however, I feel we have made meaningful progress in several strategic areas.

The restructuring of our sales channel is under way. [Broader] product exposure, including more feet on the street, is essential to accelerating new account acquisition and to returning our installed base to growth.

By adding independent distributors to our core of direct sales representatives we now have about 60 sales representatives carrying our products. This represents about 70% coverage in the physician office market and 50% coverage in our specialty market. We hope to push those numbers up by the end of the year to eventually have about 100 distributors or direct sales reps on the street. This hybrid direct distribution model allows us to increase product exposure while shifting towards a more variable cost structure.

We met our goal of launching the ADVANCE NCS/EMG system into the physician office market on October 1 of this year. This was after a national sales meeting, new product training, and production of marketing collateral. We have an attractive product offering with new ADVANCE customization features plus an equipment rental program that Tom talked you through designed to lower financial barriers to adoption.

Additionally, our field clinical educators and our customer service sales representatives are offering transition incentives to encourage our installed base of NC-stat accounts to migrate to ADVANCE.

We continue to work with reimbursement experts to expand the number of commercial insurance companies providing reimbursement to physicians for nerve conduction testing with our preconfigured electrode technology. This has been an uphill battle and our progress this year has been slow. It is our sense that commercial insurers are at present reluctant to add coverage for diagnostic testing, particularly by primary care physicians, in virtually every medical clinical arena.

While we continue these efforts the near-term prospects of a major breakthrough are not favorable, therefore, we are encouraging physicians to implement advanced beneficiary notices, or ABNs, where they believe the nerve conduction testing may not be covered by commercial carriers. In many cases the cost to patients under an ABN of a nerve conduction study using our preconfigured electrode technology is less than referral for a study due to co-pays and other incurred costs.

We see a significant opportunity to expand utilization for our nerve testing technology in individuals with diabetes. Currently about 25% of the tests performed with our NC-stat and ADVANCE devices are targeted at diagnosis of large fiber diabetic peripheral neuropathy or DPN in patients exhibiting clinical symptoms of that condition.

Nerve conduction studies are the gold standard for the diagnosis of DPN. However, cost and limited access have prevented utilization of NCS for widespread screening which is essential for the early detection of DPN and prevention of its complications such as foot ulcers. We believe that a rapid, low-cost, point-of-care test for DPN represents an attractive US and international market opportunity. We have made development of a low-cost version of NC-stat and a low-cost disposable electrode for this application an R&D priority.

Reaction to the product by thought leaders in diabetes, several of which were authors of the American Diabetes Association neuropathy guidelines, have been very encouraging. We are currently working to expand our management team with specific diabetes market expertise including direct-to-consumer marketing. We are pleased with our progress and believe that we have the capability of launching this product in the US in the second half of 2011.

Those are our prepared comments. We will take questions now.

(Operator Instructions) Bill Plovanic, Canaccord.

Great, thank you. Good morning. Just a question, as I look at the number of tests performed and accounts and what have you, typically Q3 is a seasonally slow quarter, down a bit, and we have heard that office visits are down in general.

I was just kind of wondering if you could give us some flavor for what is going on as we move into October and early November, if you have seen a bounce back or maybe an uptick in that. Any color on trend lines would be very helpful, thanks.

You are right, summertime generally is a -- there is seasonality in patient visits, particularly in the orthopaedic part of our business. We have had reports, widespread reports throughout the summer and that has really continued well into this quarter of overall physicians seeing far fewer patients than they had in the past. So that part of the downturn we still see evident in this quarter.

Okay. And then relative to the burn, I think you burned about $2.5 million in the quarter and that is down, which is good. I was curious if -- as we move into Q4 if revenues stay flat or improve does the burn remain constant or does it decrease as revenues should they move up again.

It should be relatively constant with what we did in the third quarter. There is a little bit of heavier G&A spending that typically hits companies in the fourth quarter, but I would think we would be below $3 million. Probably not as low as $2.5 million but somewhere in the middle of that range.

Okay. And then just lastly on the new product flow. We talked about I think historically a combination of some electrodes, combining two tests into one to kind of work better with the updated coding and I was just wondering if you could give us a progress update on that. That is all I had, thanks.

Sure, Bill. We are planning to launch the combined electrode for two most -- combined electrode that incorporates the two most commonly tested nerves early in 2011. So to answer your question, yes, that will be launched early next year.

Great, thanks.

[Thomas Wahlstrom].

Good morning, Shai. I see some positives in your quarterly report this quarter. I had a couple of questions. One of them had to do with the hiring of [Bala] in April. Do you foresee opening of international markets in other countries through his efforts?

Yes, so in fact Bala is not with us today because he is in Europe right now doing exactly that. So we have to date focused mostly on the United Kingdom as well as Netherlands and a few other countries in Western Europe, but we are also -- Bala has been spending a lot of time in the Far East looking at some of those markets, such as India and so forth.

So we are looking for distribution, understanding the markets, and are working intensely to open up these various international markets keeping in mind that each market, each country has its own characteristics in terms of how medicine is practiced, reimbursement, and so forth. But we are encouraged by the opportunities and have been encouraged by what we have seen thus far in the United Kingdom.

Thank you on that one. Also you have received a notice of delisting from NASDAQ and I was wondering how that is going to play out. If you feel in guidance that you should be able to correct that situation?

Sure. So that notice had to do with our stock price dropping below $1 for a certain number of days and as a result of the notice we have a 180-day period or six months to correct that. We also have the opportunity to change our classification in NASDAQ, which really has no effect on trading, which would give us another 180 days. So there is a year we have to work with.

And a year is a pretty long time in this business. So as we look at some of the exciting products we have in our pipeline, particularly the new initiative in the diabetes area, and as we look at what could be the benefits of our increasing move toward a distribution system, a hybrid model of direct and independent distributors, we think there is enough there that we can work with that should be helpful to the stock price over time.

Sounds good if that works out for you folks. And then a last question, has to do with the layoffs. You had a layoff the last quarter, something like 25% or 25 employees. Do you foresee any further layoffs in the next couple of quarters?

Well, we are always looking at how our cost structure is aligned to the Company's needs but I wouldn't want to comment specifically on any plans. But we are always looking at how the operating expenses, the cost structure, and the needs of the Company align to the headcount so that is something that we do on a regular basis.

Okay, that is all the questions I have. Thanks a lot.

(inaudible), NeuroMetrix.

It's the wrong company; I am from the University of California Berkeley. But my question I guess was asked and answered, so the only thing I have left is the comment you made regarding the NASDAQ delisting is something that concerns me and a year being a long time. Could you possibly flesh that out a little more because the stock price we are really talking about is at double the current level within a year?

Sure. I am not sure exactly what we can say on this. The issue is getting the stock price above $1 and there is a couple of techniques that you can use to do this. One is -- and the most important one and the only one that will work over time is to improve performance and attract investors and increase trading volume so that is what we are working on.

Some other companies have used a technique such as a reverse split. Sometimes temporarily that can help get a stock, leverage a stock price above $1. That is not something that we are looking at right now. Our focus really is on operations and that is where the answer has to come.

All right, thank you.

Do we have any more investors in the queue?

Hello?

Kevin, is that you?

Yes, it's Kevin. Hi.

I am sorry; we didn't hear you announced.

Yes, I wasn't -- I didn't hear myself announced but I took a wild guess. Shai, you mentioned the fact that you would go after direct-to-consumer marketing for the diabetes test. Is that correct?

To build the -- so the test would be performed by physicians and other clinicians, but it's the type of test that it's very important to have patient awareness so that patients are asking for the test in addition to physicians being educated about the test. So that is what we were referring to there.

Right, but I am just saying as far as building patient awareness what -- direct-to-consumer is typically done when you have high installed bases and they are very expensive programs. Just doesn't seem like direct to -- I mean what kind of media, I guess, would you consider doing direct-to-consumer?

In the diabetes -- yes, when people hear those words they may think TV advertising and glossy magazine articles but -- or advertisements. In the diabetes community there are very effective ways to communicate with people with diabetes via the Web. There are many educational websites that many people with diabetes, particularly those that are more focused on their health, often frequent and those are cost effective ways to educate those patients.

It also includes in-office tools such as posters and brochures and those sorts of techniques. So it's a broad, not necessarily overly expensive; it's more the point that there needs to be a focus and a product of this type on building awareness within the patient community as well as within the physician community.

Got you. Shai, I haven't listened to the conference calls for a while. What happened to the whole needle-guided technology that you were working on for nerve finding and drug delivery?

We talked about that at the last meeting. As part of our reduction in force and cost containment efforts we put those developmental programs -- and that program actually we have FDA clearance for and the product is actually at a fairly late stage, but we decided to suspend the program, at least for the time being, so we could focus our efforts, our resources, and preserve capital as we were trying to get the nerve testing business fixed. So we put that on the shelf temporarily at least.

Next year we will look at what we can do with that technology and that may include a partnering opportunity, potentially outright sale of that technology, and so forth. But for the time being it has been suspended.

Got you. And what are you saying -- I missed on the call because I was going from the webcast to the phone. What were you saying that actually the burn rate went down by a little? What is the expectations for it to be in the fourth quarter?

Comparable.

Okay. And so for 2011 is there a chance that this gets to break even or that is not in the cards?

Well, I think we feel that we can continue to bring burn down but I don't think we would be particularly optimistic about being cash flow positive in 2011 given the initiatives we have. But we are always focused on the cash consumption side. We have stated that we have cash through the end of next year and into 2012.

Got you. Okay, thank you.

At this time we have no further questions in queue. I would now like to turn the call over to the management for any closing remarks. Please proceed.

Thank you for joining us on this conference call. We look forward to reporting on our progress as we finish this year and move into next year. Thank you.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect and have a great day.