NeuroMetrix Inc (NURO) 2018 Q2 法說會逐字稿

Good morning, and welcome to the NeuroMetrix's Second Quarter 2018 Earnings Call. My name is Crystal, and I will 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 meanings of the Private Securities Litigation Reformed 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's Senior Vice President and Chief Financial Officer, Mr. Thomas Higgins. Mr. Higgins?

Thank you, Crystal, I'm joined on the call by Dr. Shai Gozani, our President and Chief Executive Officer. NeuroMetrix, as you may know, is a health technology company. We have proprietary in neurostimulation technology that we apply to chronic pain, sleep disorders and diabetes. Our primary commercial products are Quell, an over-the-counter wearable device for managing chronic pain, and DPNCheck, a point-of-care test for diabetic peripheral neuropathy, or DPN.

Our marketing focus is the United States. Outside the U.S., we leverage the capability of global companies, including GlaxoSmithKline, where we have a Quell strategic collaboration for OUS markets, Fakuda Denshi now handling DPNCheck sales in Japan, and Omron Healthcare handling DPNCheck sales in China.

Our business strategy is to maintain disciplined growth on a path to profitability to operate within our present cost structure and to continue delivering product innovation.

The Q2 results are indicative of this strategy and its emphasis on profitability. Several highlights: First, Quell R&D development progress yielded 2 benefits in the quarter. We achieved a GSK milestone and recorded $3.8 million in collaboration income.

Also, we maintained our timetable for next-generation Quell U.S. launch later this year. Number two, we deferred Quell advertising, which, while adversely affecting Q2 revenue, allows us to match ad spending with the launch of our next higher-margin Quell product later this year. Three, Quell distribution has begun to shift toward higher-margin e-commerce sales, early benefits of this change are seen in our Q2 gross margin rates.

And four, we reported positive net income for the second consecutive quarter. Turning to the statement of operations. Total revenue of $3.8 million was down 13%, this is $560,000 lower than $4.3 million in the second quarter of last year. Within total revenue, Quell revenue was $2.1 million, a reduction of 32% from $3 million, a year ago.

Quell provided 55% of our top line. This revenue drop was anticipated and is primarily linked to a 37% or $700,000 planned reduction in advertising spending. We intend to return to a higher level of TV and digital ad promotion later this year in coordination with the next generation Quell launch.

DPNCheck revenue was $1.3 million. This was up 58% from $800,000 year-ago quarter. It contributed 34% of total revenue. DPNCheck is a professional diagnostic technology sold in the U.S. to health care providers mostly within the Medicare Advantage system.

Sales outside of the U.S., by our distribution partners, are to healthcare providers such as hospitals and clinics often with a diabetes focus. Q2 sales growth was realized in both domestic and export business and included sales to Mexico.

Our legacy products contributed the remaining $400,000 or 11% of total revenue.

Our gross profit of $1.8 million was $130,000 higher than $1.7 million, year ago. This was a positive outcome in spite of the drop in total revenue.

The gross margin rate improved to 48% from about 39% in the prior year, a gain of nearly 10 percentage points. Both Quell and DPNCheck contributed to the margin improvement. The Quell margin gain was attributable to the strategic shift in distribution towards the more profitable e-commerce channels.

DPNCheck, a consistently high-margin product line, dominated by aftermarket consumables, factored more significantly in the overall margin rate due its increased weighting within total sales.

OpEx, operating expenditures in the second quarter was $5 million, leveled with the prior quarter.

R&D spending was $700,000 higher with increased personnel cost and engineering support for Quell. The higher spending levels should be short-term and recede later this year following next-gen Quell launch.

Also, GSK will be co-funding Quell development spending starting in 2019 to further reduce future R&D costs.

Lower sales and marketing spending and G&A spending offset the R&D increase. Collaboration income of $3.7 million was earned upon the achievement of the first GSK development milestone. This item will recur in future P&Ls from time to time.

During 2018, we anticipated total of about $12 million in collaboration income, of which $8.5 million has been recorded year-to-date.

The bottom line, our net income was $574,000 in comparison with the loss of $3.2 million, year-ago quarter. This was a positive swing of about $3.8 million. We ended the year with -- ended the quarter with $7.1 million in cash, an increase of a little over $3 million from our balance at the beginning of the year.

Our capital structure was essentially unchanged in the quarter. It remains simple, equity-only and debt-free. Our fully diluted equity is about 14.9 million shares. Dr. Gozani will now address our overall strategy.

Thank you, Tom. My comments today will address 3 topics: first, our overall business strategy; second, an update on the third generation Quell, which, as Tom noted, we plan to launch later this year; and then an update on our GSK collaboration.

Starting with the business strategy. Our primary business objective is to become consistently profitable on an operating basis by the end of 2020. We believe, we could achieve this, while also showing good top line growth and investing in R&D to support long-term growth. Some outcomes of the strategy are as follows: first, our Quell TV advertising strategy will strive for cost-effectiveness. This means that we'll be -- we will time spending to when it most cost-efficient and generates a greatest return. As a consequence, we will experience quarter-to-quarter variability, as we adjust to fluctuations in TV advertising costs. This was evident in our spending in the past quarter. This year, we will channel our spending to the fourth quarter, which is inherently the most efficient and will coincide with the launch of our new Quell product. Second point, we are rationalizing our Quell distribution strategies to the most productive and cost-effective channels.

As a practical matter, this means that we will limit Quell availability to certain retailers as opposed to targeting a specific number of storefronts and in particular, we will focus on the e-commerce channels.

Moving on to products. Both of our core product lines, DPNCheck and Quell, are structured as an initial device sale followed by an aftermarket consumables business.

In the most recent quarter, 61% of our revenue was in consumables. Our DPNCheck business is almost entirely consumables and as a result, it has a 75% or greater gross margin and operating margins over 60%. The Quell business is at its earlier stage, and therefore, is more heavily weighted to the initial device revenue.

Although, we have built a profitable Quell aftermarket consumables business, it is not growing as fast as we expect based on the clinical outcomes that Quell deliverers. We believe that we have identified several key product design features and user engagement steps we need to take to accelerate this part of the business. We are in the process of implementation and hope to see improving performance on this part of the business later this year and in 2019.

And then finally, our expectation is that we will not cut back on R&D or clinical work. We believe that these are essential that we continue and in fact, accelerate innovation to secure a significant competitive advantages in both the DPNCheck and Quell product line to create future revenue opportunities. On the clinical front, we are committed to a strong clinical program that enhances the recognition, understanding and value of our products.

Now moving onto an update on the third generation Quell device. For the past several years, our R&D resources have been focused on development of the third generation Quell device. We are planning to launch this product this year. It is a critical element in our near- and long-term business strategy.

We believe that the third generation device, and its accompanying digital health tools, which include the Quell app and Quell Health Cloud, will improve on their already impressive usability in clinical performance of the current Quell device.

In addition, the third generation Quell device has been designed from the ground up to have lower costs and improved manufacturability. We have accomplished this without sacrificing and in fact, have enhanced the premium features of Quell compared to alternative over-the-counter pain relief devices. We believe that this will drive substantial margin growth for Quell in the entire business into a range exceeding 60% once we have optimized the supply chain.

And then finally, our collaboration with GSK is built around the third generation technology. First, early milestones are related to product development, as we've noted we reach the first milestone. And second, a key part of our collaboration agreement is to co-fund development of the Quell platform with a 50-50 split starting in 2019. And as a result, we expect lower R&D cost next year and beyond.

And my final topic is an update on the GSK collaboration. It is gratified that our collaboration -- it is gratifying that our collaboration with GSK will make Quell technology available to many millions of chronic pain sufferers outside the U.S. The chronic pain epidemic is a worldwide problem affecting 1.5 billion people. We are encouraged that GSK feels our technology is worthy of being commercialized under their highly regarded consumer brand.

From a practical point of view, the GSK collaboration is central to our near- and long-term business strategy. First, it provides us with a reasonably predictable source of income that may offset our operating losses until we achieve profitability.

We do caution that we cannot control the timing of all the milestone, and therefore, while we expect to achieve most or all of milestones within the next several years, there may be a need to bridge short-term funding gaps. Second, GSK is one of the largest consumer health businesses in the world. In pain, they have several of the top international brands, including Voltaren, Panadol and Excedrin. They have deep market knowledge and capabilities. Through this collaboration, we are tapping into some of these resources and feel that doing so will benefit our U.S. business. And third, as I mentioned earlier, we will collaborate on future Quell R&D, which will allow us to shift some of our R&D spending to new products and that could represent additional revenue streams in the future. With that, I'll conclude our prepared comments and we'd be happy to take questions at this point.

(Operator Instructions) And your first question comes from Jarrod Cohen from J.M. Cohen & Company. And it looks like he has placed his line on mute. (Operator Instructions) And our next question comes from John Brown, a private investor.

I was wondering if you could give us a breakdown of the number of units versus the consumables that you sold for this quarter. You have provided that information in the past, I do not see it this time?

Yes. So in the past, we have provided that more regularly. From the beginning of this year, however, we're intending to report that on an annual basis and so at this point, we're not going to be providing that for competitive reasons quarter-to-quarter.

(Operator Instructions) And we do have a question from Jarrod Cohen from J.M. Cohen & Company. And we do have a follow-up from John Brown, a private investor.

Yes, another question. In the last quarterly call, you did say that there are no royalties on the current Quell model with the [yield] that you have developed. Is there any potential for future royalties on any new models?

So let me -- I'll clarify. So the GSK -- I think you're referring to the GSK agreement, just to be clear?

Yes, correct.

Yes. So the GSK agreement is around the third generation Quell product, the one we are launching later this year. And you're correct, there are no royalties built in that. Those are all structured milestones. Future generation products, there could be an opportunity for royalties depending on how those, if GSK or other potential partners are interested in that. But at this point, there are no royalty -- there is no royalty structure.

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

Thank you very much for joining us on this quarter's conference call. We'll look forward to updating you on our Quell results and strategy over the balance of the year. Thank you.

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