NeuroMetrix Inc (NURO) 2015 Q2 法說會逐字稿

Good morning and welcome to the NeuroMetrix second-quarter 2015 conference call. My name is Adrian and I will be your moderator on the call. 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 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 that depend upon or refer to future events or conditions that include words such as believe, may, well, 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, including the factors described under the heading Risk Factors in the Company's 2014 Form 10-K filed with the SEC in February 2015 and available on the Company Investor Relations website at www.NeuroMetrix.com, and on the SEC's website at www.SEC.gov and any -- in the updates contained in subsequent SEC filings.

NeuroMetrix does not intend to and undertakes no duty to update information disclosed on this conference call.

I would now like to introduce the NeuroMetrix President and CEO, Dr. Shai Gozani.

Thank you very much and good morning. I am joined on the call today by Tom Higgins, our Chief Financial Officer. We appreciate this opportunity to review our recent business highlights. Following our prepared remarks, we are pleased to take your questions.

There are important accomplishments during the second quarter that relate to our newest product, Quell. Quell is a wearable pain relief device that utilizes proprietary noninvasive neural stimulation technology to provide relief from chronic pain. The device is designed for people with conditions such as diabetic nerve pain, low back and leg pain, fibromyalgia, and pain associated with osteoarthritis. The device is wearable, lightweight, and can be worn during the day while active and at night while sleeping. It has been cleared by the FDA for treatment of chronic pain without a prescription.

Users of the device also have the option of using their smart phone to automatically track and personalize their pain therapy. We launched Quell on schedule during the second quarter. We launched through two distribution channels; direct to consumer through www.QuellRelief.com and through sales to healthcare professionals who stock Quell and dispense it to patients and that was done through our direct sales team.

The QuellRelease.com website was operational in May and our direct sales force with hired late in the first quarter and fielded in the second quarter. Over time, we expect to expand consumer distribution into retail, key online sites, catalogs and other approaches. Most of these opportunities have long lead times and require extensive planning, so we anticipate that they will mostly start in 2016.

We started commercial activity in June with a strong order backlog, primarily generated during our successful Indiegogo preorder campaign which ran from March to the middle of April. By the end of the quarter, we had cleared the order backlog and announced shipping out inventory on a daily basis for new orders. Our new production facility in Woburn, Massachusetts was placed in service for Quell during the second quarter, ramped up quickly and was able to demonstrate a run rate reflecting annual production capacity of over 30,000 devices on a single ship basis.

In summary, and during the second quarter, we shipped 2,600 Quell devices plus elective reorders. The total invoice value of these shipments was approximately $600,000.

The combination of the strong Quell launch plus the performance history of SENSUS, our prescription device for chronic pain, helped us reach the milestone of 10,000 cumulative shipments of our wearable technology for chronic pain in the second quarter. With the Quell launch behind us, we have shifted from -- to building the business with several key areas of activity.

We are building brand awareness, expanding the clinical foundation of the product, refining the product and expand distribution. Over the next several months, there will be expanded promotional activities directed at both the healthcare professional and consumer channels. This will include renewed public relations outreach as well as paid search, paid promotion using social media, banner advertisements and an important presence at upcoming healthcare trade shows.

These efforts are designed to increase Quell awareness, leading to consumer inquiry and purchases. We expect the process will be iterative as we evaluate the effectiveness of different approaches and adjust, based on our learnings.

We are also building the clinical foundation for Quell. During the second quarter we initiated our first post-market study of Quell used for various forms of chronic pain. We will report initial results later this quarter.

With the transition of Quell from R&D to manufacturing, our engineering efforts have been refocused on innovation to improve the user experience and further build our first mover competitive advantage. We have an extensive innovation strategy that we will progressively share as appropriate.

Lastly, we are pleased to complete an equity offering, netting approximately $10.1 million in proceeds and thereby providing timely resources for our near-term Quell marketing efforts.

I will now turn it over to Tom for a discussion on the financial results.

Thanks, Shai. Before reviewing results for the quarter, I would like to comment on a couple of items.

As you mentioned, we recently completed an equity offering. That was a $14.7 million total value and we realized net proceeds of $10.1 million after the repurchase of $3.2 million of preferred stock and after underwriting discounts and costs. This raise was important to our support of the Quell launch. Reflecting raised proceeds, we ended the quarter with $12.6 million in cash and our net cash usage during the quarter was approximately $3.9 million.

Following the equity offering, our stock has traded below $1 per share. This resulted in a notice from NASDAQ that we were not in compliance with listing requirements and provided us six months to correct the situation. News flow from Quell should have a positive effect on our stock price.

Given the importance of the NASDAQ listing to shareholders and to us, we believe it is prudent to prepare for an appropriate split or our common current stock, should that be necessary to maintain the NASDAQ listing.

Now back to the Q2 results. This was a good quarter for the Company. We reported $1.2 million in revenue plus about $600,000 in deferred revenue, primarily related to Quell shipments. Combined, the total is $1.8 million in revenue related product shipments for the second quarter. That $1.8 million is an increase of 34% from Q2 2014 and an increase of 40% from Q1 of this year.

Quell posted sales of $597,000, of which $24,000 was booked in Q2 revenue and the balance of $573,000 was deferred into the third quarter. Quell is considered a new pipeline in a new market sector, and carries a 60-day customer right of return. Under US GAAP, we must develop a reasonable basis to value the products return feature before we can recognize revenue.

Until that time the revenue is deferred and recognized when the return period lapses after 60 days. We are starting to accumulate Quell return experience and believe that by Q4, we will have sufficient data from revenue recognition at the point of shipment.

We shipped about 2,600 Quell devices plus nearly 1,000 electrode packages in the second quarter. These shipments satisfy orders from the March/April Indiegogo preorder campaign, orders from position resellers who stock Quell, and orders originating via our QuellRelief.com website.

DPNCheck revenue was $416,000 in the quarter. That was up 16% from $360,000 in Q2 of 2014. Revenue increased both domestically and O-US. Sales growth was pronounced in the US Medicare Advantage market where 26,000 DPNCheck tests represented a 21% increase year on year. O-US we had limited shipments to Omron Japan, where inventory levels are adequate and where Omron is seeing some pricing resistance. We are working with Omron to address these concerns in the local market. Overall, shipments were about 28,500 DPNCheck tests in the quarter.

On a related topic, we continued to support Omron in addressing questions raised by the Chinese FDA during the review of our DPNCheck regulatory application. This has been a long process we began about a year ago.

Our best current estimate of approval for China is during the second half of this year. However, the estimate is based largely on anecdote rather than a clear timeline. By comparison, the regulatory process in Japan took about eight months from initial application to approval. The China market is attractive and we believe it is worth our persistence through this regulatory process.

SENSUS revenue totaled $150,000 with the shipment of about 650 devices and 50,000 electrodes. DPNCheck is our prescription wearable technology for chronic pain and it is sold through durable medical equipment or DME channels. In the comparable Q2 2014, shipments were 1,700 devices with $256,000 of revenue. The drop in performance reflects margin pressure in the DME channel, largely due to contraction in Medicare and third-party insurer reimbursement. This has caused DME suppliers to reduce their sales force and staffing in general as they struggle to cope.

Advanced revenue was $636,000 in Q2 versus $728,000 in Q2 of the previous year. This legacy product which we manage for its cash flow contributed about $320,000 in cash during the quarter.

Our gross profit was $595,000 and represented a gross margin rate of 51.4%. This was almost identical to the Q2 2014 margin of 51.2%. So, essentially flat margin year on year.

Operating expenses totaled $4 million, reflecting our commitment to Quell. This was a spending increase of about $660,000 over the previous year. Within OpEx, R&D spending up $982,000 was down from about $1.5 million in the prior year. The decrease reflected a restructuring of the engineering department that took place in Q2 last year and cause a high level of severance-related costs in that year ago period. Also spending in outside engineering support was reduced in Q2 this year, as Quell transitioned from R&D to manufacturing.

Sales and marketing spend of $1.8 million was up about $1.1 million from about $700,000 in Q2 last year. Personnel costs comprised about half the increase, or about $600,000, and included costs of the new Quell sales force and the management marketing team for Quell. Incremental advertising and marketing costs totaled about another $550,000 and were primarily directed at supporting the Quell launch and promoting product awareness.

G&A spending of $1.2 million was essentially flat with Q2 of last year. We recorded in the income statement a non-cash credit of $2.1 million for the revaluing of our outstanding common stock warrants to fair value at the end of the quarter. Our net loss for the quarter was $1.2 million or $0.48 per share and our weighted average shares outstanding totaled 9.2 million.

Those are the financial highlights, Shai, so back to you.

Thank you, Tom. That concludes our prepared remarks, so we would be happy to take questions at this point.

(Operator Instructions) [Bob Dunaway], NeuroMetrix.

I have a question. Is the current demand for the Quell device as robust as it was during the Indiegogo preorder campaign?

Well, I think that the -- we are very pleased with the demand at this point. I think they are different targets. The Indiegogo campaign is a community of early adopters and obviously crowdfunding advocates. So I think -- it's a unique population and an ideal one to get an initial uptake. I think it's hard to directly compare, but I guess the answer -- I think probably the more important question is, are we pleased with the demand and the performance of the product, very importantly, in the hands of people who have gotten it. And the answer is yes.

Okay. And also, what is the current backlog of Quell?

I don't believe we have -- I think we are up-to-date (multiple speakers)

Pretty much caught up?

That's true. We are shipping to demand, so (multiple speakers) our new facility is able to stock inventory and ship as those orders come in. So basically we are in within a day we are shipping.

Okay. Do you have any plans on introducing the Quell product into the Japanese market or the Chinese market initially?

Yes. I think that would occur in the future. Right now, we are entirely focused on US and Canadian market. So it's not an immediate opportunity for us, but I think that many of the same reasons that we think DPNCheck has outstanding opportunities in those two markets flow over to Quell.

But, to be clear, we will need to go through the regulatory process in both of those markets as well for Quell. But, yes, I think those are outstanding opportunities for Quell.

Okay, and one last part of my question, do you have any plans on introducing the product into the big chain pharmacies such as CVS, Walmart, Rite-Aid or any of them?

Yes, so, I think retail is absolutely -- whether that is mass or drug is absolutely within -- is part of the thought process and strategy. We feel like we need to really establish the brand, refine the product performance, the messaging, make sure we have adequate demand and awareness before we go into those channels, because it's obviously one think of the product into the channel. But you really have to have people taking it off the shelves.

So, the retail channels are definitely a target for us and we will move in that direction. But we have to do that in a systematic fashion to make sure we are successful when we get there.

And how about bringing Quell into any of the online venues, such as Amazon or eBay or any of them?

Yes, as I mentioned, right now we are just on our website, but we will be expanding into additional online properties, absolutely.

Okay, thank you very much. I appreciate that.

Absolutely.

(Operator Instructions) You have no more questions at this time. I would now like to turn the call over to Dr. Shai Gozani for closing remarks.

Thank you, and thank you for joining us on a conference call today. We are pleased to have the Quell launch behind us and are encouraged by the strong early response. We look forward to updating you on our progress with Quell as we move through the balance of the year. Thank you.

Thank you for your participation in today's conference. That concludes the presentation. You may now disconnect. Good day.