NeuroMetrix Inc (NURO) 2014 Q2 法說會逐字稿

Good morning and welcome to the NeuroMetrix second-quarter 2014 conference call. My name is Michelle and I will be your moderator on the call today. (Operator Instructions) As a reminder, this call is being recorded for replay purposes.

NeuroMetrix is a healthcare company that develops wearable medical technology and point-of-care tests to help patients and physicians manage chronic pain, nerve diseases, and sleep disorders. On this call the company may make statements which are not historical facts and are considered forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. Statements that are predictive in nature and depend upon or refer to future events or conditions and 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. Please refer to the risks and uncertainties included in the factors described under the heading risk factors in the Company's 2013 Form 10-K filed with the SEC in February 2014 and available on the Company's Investor Relations website at http://www.NeuroMetrix.com and the SEC's website at http://www.SEC.gov and any updates containing subsequent SEC filings. NeuroMetrix does not intend to or undertakes no duty to update the information disclosed on this conference call.

I'd now like to introduce the NeuroMetrix President and CEO, Dr. Shai Gozani. Please go ahead.

Thank you very much. I am joined today on our call by Tom Higgins, our Chief Financial Officer.

First, we recently celebrated the 10th anniversary of our listing on the NASDAQ. We are proud of our achievements as a public company and pleased with our association with NASDAQ. Over the past 10 years our products have benefited millions of people, and we look forward to continuing to positively impact healthcare in the US and throughout the world, and throughout that success to reward our shareholders.

We appreciate this opportunity to review our business highlights for the second quarter of 2014. Following our prepared remarks we will be pleased to take your questions.

During the second quarter, we built on a strong start that we reported in the first quarter. Key highlights include: another record quarter for SENSUS device sales; we received FDA regulatory clearance for our over-the-counter wearable technology to treat chronic pain; we received DPNCheck regulatory approval in Japan; we reported year-over-year revenue growth of 16%; and we completed an equity offering that raised $8 million to support our continued commercial and R&D initiatives.

I'll get into more detail. SENSUS is our wearable therapeutic device used in the management of chronic pain. Among its many advantages over conventional transcutaneous electrical nerve stimulators is that it is cleared by the FDA for use during sleep, which is critical because poor sleep is a fundamental issue for patients with chronic pain. The device is a powerful and precise electrical stimulator, a high level of proprietary automation. It is lightweight and can be worn easily and operated under clothing either while active in the daytime or at night while sleeping. SENSUS is designed to treat chronic pain, particularly neuropathic pain such as painful diabetic neuropathy which affects about one quarter of people with diabetes.

DJO Global, our largest SENSUS distributor, matched their strong order activity from the first quarter of this year. DJO is a leader in the pain management, rehabilitation, orthopedic devices markets and is promoting SENSUS through the recovery sciences division to their call points, particularly primarily in pain management and podiatry.

Physician and patient feedback about SENSUS continues to be very encouraging. In total, we sold 1707 SENSUS devices in the second quarter in comparison with 208 devices in the second quarter of 2013. The sequential quarter comparison was also favorable with the 1707 second-quarter devices representing an 18% increase from the 1448 devices sold in the first quarter of this year.

In previous earnings calls we discussed the attractive opportunity we saw for a differentiated over-the-counter wearable therapeutic device to treat chronic pain. The product would be sold without a prescription through various retail channels. An independent survey we commissioned last year indicated that an OTC or over-the-counter offering could significantly expand the overall market for our wearable pain therapy technology.

In the second quarter we achieved a significant milestone in this program. The FDA approved our cleared our 510(k) filing for over-the-counter use of this wearable technology, including its use during sleep. This addressed a major hurdle in accessing the retail market and to achieving maximum product exposure. We are now in late stage development of a consumer-oriented wearable device for treating chronic pain and are committing substantial resources to achieving a commercial launch in 2015.

We are planning a preliminary marketing launch at the large consumer electronics show, known as CES, in early January in Las Vegas. We are also pleased to report our progress with DPNCheck in the second quarter in both domestic and OUS, or international markets. DPNCheck is our point of care test for screening, diagnosing, and monitoring peripheral neuropathies such as diabetic peripheral neuropathy. Overall we shipped 24,300 biosensors in the second quarter compared to 8100 in the second quarter of 2013.

Our US business is primarily focused on Medicare Advantage plans where the test plays an important clinical role in patient assessment and an important financial role in the risk adjustment process. In the second quarter, domestic biosensors shipments were 21,600 in comparison with 3900 in the second quarter of 2013. On a sequential quarter basis the 21,600 biosensors in the second quarter represented an increase of about 35% from the 16,100 biosensors in the first quarter of this year.

Overseas our partnership with Omron healthcare saw a high level of activity, significantly DPNCheck received regulatory approval for the Japan market. Omron initiated DPNCheck marketing at the annual meeting of the Japan Diabetes Society, including a prominent booth exhibit, product demonstrations, and a lecture by the internationally recognized thought leader in diabetic neuropathy. The product introduction was well received, and we made our first commercial shipment to Japan in July.

The Japan market is attractive to us for several reasons. The population is generally affluent and aging and health care is a priority. Physicians are reasonably compensated for nerve conduction studies such as those performed using DPNCheck, and there is an improved pharmacological agent for treating diabetic neuropathy. Importantly, we have a strong local partner in Omron which has products complementary to DPNCheck that are being sold by the direct sales organization and third-party distributors.

In the China market we kicked off the regulatory process with a submission of the DPNCheck application in conjunction with Omron. The duration of regulatory review in China is difficult to gauge; however, we believe that approval in the second half of 2015 is possible.

R&D and commercial initiatives around our wearable technology platform and DPNCheck naturally require resources. We were therefore pleased to complete an $8 million equity offering at the end of the quarter to strengthen our balance sheet. I will now turn it over Tom for a discussion of revenue and overall financial results.

Thanks, Shai. Q2 was another solid quarter across our product lines. We reported attractive revenue growth in our new products and continued to manage spending within our plan. We took some necessary steps to improve our cash position and here are some of the highlights. We reported this morning revenue of $1.3 million for the second quarter. This was up 16% from $1.16 million in the second quarter of last year and up slightly on a sequential basis from the first quarter this year.

The strength of Q2 revenue is more apparent if you look at the product details. Our combined new products -- this is SENSUS and DPNCheck -- produced revenue of $616,000 in Q1 versus $160,000 in Q2 of last year and $473,000 in Q1 this year. In other words there was a fourfold increase year on year in revenue from these new products and a 30% increase over the two sequential quarters.

Drilling a little more deeply into revenue, SENSUS revenue was $256,000 compared with $32,000 in the year ago quarter and $195,000 in Q1 of this year. So in SENSUS there was revenue growth of 8X from last year and 31% on a sequential quarter basis. Shai just commented on the increase in devices shipped primarily attributable to DJO Global's efforts and to new distributors. We also interestingly recorded a 64% growth in SENSUS electrode shipments in the second quarter of this year versus the preceding quarter. That was very encouraging. It reflects the expansion of our SENSUS installed base plus electrode reorders by patients using SENSUS. However, we are at an early stage in marketing SENSUS and have a relatively small user community, so it's premature to draw conclusions from this quarter about SENSUS utilization or trends.

DPNCheck revenue in the quarter was $360,000. That compared with $128,000 Q2 of last year and $278,000 in the first quarter this year. So here we saw revenue growth of nearly 3X Q2 last year and 29% on a sequential quarter basis. The bulk of this business in the US is Medicare Advantage. This testing last year was heavily loaded toward the second half of the year. This year we're seeing increasingly more level steady ongoing testing by our larger accounts.

Shai commented on regulatory approval in Japan and marketing the launch in the second quarter. Our commercial activity related to Japan, including revenue recognition, will occur in this third quarter and forward. So there's practically no revenue related to Omron activity in the quarter that we just concluded.

Revenue growth from these new products, SENSUS and DPNCheck, offset the predictable decline we saw in our legacy ADVANCE business. ADVANCE revenue in the quarter was $728,000. That was down about $270,000 from revenue reported in the second quarter of last year and it was down from $858,000 in the first quarter this year. In Q2 of this year, ADVANCE revenue -- and this is mostly from electrode sales -- constituted just over half of our revenue. In the year-ago quarter, the comparable percentage was 86% of revenue.

Moving down the income statement, our gross profit was $655,000 and that's a gross margin rate of 51.2%. That was down from Q2 last year of 56.8%. The margin contraction we're seeing here reflects a shift in mix more heavily weighted now to lower margin SENSUS devices where our pricing strategy is focused on building the installed base. Also, we have increased our manufacturing capability and costs in response to SENSUS and DPNCheck demand. So this involve new headcount, training, and facilities. The costs of these are not fully absorbed in production. Over time we expect margin improvement as we increase throughput and gain additional production experience at the staff level.

Operating expenses in the quarter totaled $3.3 million, an increase of about $500,000 from OpEx of $2.8 million in the second quarter last year. The increase was primarily related to our over-the-counter initiative which Shai just discussed. Within OpEx, R&D spending increased to $1.5 million from about $900,000 in the year ago quarter. About $320,000 of that related to outside engineering support for the OTC initiative and $170,000 was for employee severance accruals. Within sales and marketing, spending dropped to $695,000 in the second quarter and while that was down from $880,000 in the second quarter of last year, it did include about $180,000 for marketing, consulting, and recruiting costs, again related to this OTC initiative.

We recorded an income -- a noncash credit of $475,000. That relates to the revaluation of outstanding common stock warrants which we do at the end of every quarter. We revalue those at market and this is tied to a warrant liability that is on our balance sheet in the amount of $5.37 million at the end of June. So our net loss for the quarter was $2.2 million or $0.85 a share. Our weighted average shares outstanding were about 6 million at June 30, and they were about 2.3 million at June 30 last year.

We significantly strengthened our balance sheet as Shai has reported. The $8 million equity offering was completed with an investor at $2.04 per share, and that's a price that was above market, based on a preceding days NASDAQ closing. Net proceeds from that offering were almost $8 million -- they were $7.95 million. It was a structured transaction and it included common stock, convertible preferred stock, and warrants. And following this raise we ended the quarter with $13.7 million in cash. Our net cash usage during the quarter was slightly below $2 million.

Otherwise in the balance sheet receivables and inventory turnover continue to be satisfactory. Receivables, which amounted to about $533,000, reflected 36 days sales outstanding and inventory of $600,000 reflected a turnover rate of just over 4X per year. So those are lots of numbers. Our 10-Q will be filed later today so you can see them in a little bit more detail. Those are the financial and liquidity highlights. Shai, back to you.

Thank you, Tom. That will conclude our prepared comments, and we will be happy to take your questions at this point.

(Operator Instructions)

Bob Wasserman, Dawson James Securities.

Thanks. Hi, Shai. Hi, Tom. Thanks for taking my call. Just a couple of questions. The data that you said about the biosensor shipments during the quarter, was that for both DPNCheck and SENSUS combined?

We only reported -- no, the data we were talking about was the DPNCheck biosensors.

Okay. I missed that. And can you tell me how many SENSUS you have-- you said how many SENSUS you shipped, can you tell me how many are out in the field right now, what the total number is, roughly?

Yes. I don't have a precise number, Bob, but that the total that we've shipped cumulatively is over 4000, fewer than 5000. So somewhere around 4500 -- and that would be since we launched in the first quarter, a year ago.

Okay. Great. Thanks. And one more question about the OTC product. It looks like you had a lot of costs in ramp-up in the second quarter. With that continue for the second half of the year or will that pare down a little bit? Maybe talk a little bit about the expense line for that product.

A lot of spend -- so I think generally speaking the spend will increase in preparation for the consumer launch. The direction of the spend may change, so right now most of the spend has been on the product development side -- mostly product design work, industrial design, and so forth. That will transition to more of a marketing focus, brand development, and ultimately sales and distribution.

Okay. And will you be signing distributors this year or will you wait until the CES next year to start finalizing those?

I expect that we will not be signing distributors for the consumer products this year. That would probably be something that will occur, as you said, after CES.

Okay. Thanks again for taking the questions.

Thank you, Bob.

[Jennifer Lane, Webster Court Management.]

Thank you, operator. Congratulations. It was a really nice quarter. You made a lot of progress. Now that you have marketing approval in Japan, can you share with us when we should expect to see the first sales? I think you mentioned maybe sometime during the next quarter or so.

Sure. Behind the scenes there's a couple of things that are going on with Omron. To prepare for that first sale in Japan, and this preparation has been going on for a long time but after we got regulatory approval within a couple of weeks we put together our first shipment to them that comprised sufficient devices for them to do a full inspection of the quality of our product and also to supply their salesforce. So that shipment has gone out, and it's being reviewed closely by Omron as we speak. And we expect that that will be fine and that the product will then be distributed to their sales folks within the next several weeks.

Following that in early August we will make another large commercial shipment, which will allow Omron to stock their inventory and deliver on sales that, at that time, hopefully their salesforce making. And so, I would think that by the end of August Omron would be well positioned to fulfill on orders that are coming in and their salesforce will be active in the field. But just a little word of caution, we're learning as we go with Omron -- we're working closely with them -- sometimes timelines are shorter, sometimes longer. But I think we can safely say that during the third quarter we are going to see sales by Omron in Japan and revenue in our accounts for shipments to Omron.

Okay. Thanks. And I have just one more question about the raise. First of all, congratulations. That was really nice to see. Can you talk about the funding implications for the consumer and retail initiative?

Sure. Shai, if you don't mind, let me take that. One reason that we did the raise when we did and one of the important funding implications is that now with regulatory approval we can begin to move beyond the planning phase to actually making some spending commitments. And of course, without sufficient resources we were not able to do that. So we can see forward with a longer time horizon. We can make commitments and we can move ahead more firmly toward that important CES show in early January and eventually to launch.

All right. Thank you very much.

Sir, you have no questions at this time. (Operator Instructions). Thank you. Okay, I would now like to turn the call over to Dr. Shai Gozani for closing remarks.

Thank you very much for joining us on this conference call. We are encouraged by our progress in the second quarter. We are seeing positive momentum across the business, and we look forward to continuing those trends through the balance of the year and we'll look forward to updating you the rest of the year. Thank you very much.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Please enjoy the rest of your day.