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NeuroMetrix, Inc. (NASDAQ:NURO)

Q2 2014 Earnings Conference Call

July 24, 2014, 8:00 AM ET

Executives

Shai Gozani - President & CEO

Tom Higgins - CFO

Analysts

Bob Wasserman - Dawson J Securities

Jennifer Lane - Webster Court Management

Operator

Good morning, and welcome to the NeuroMetrix Second Quarter 2014 Conference Call. My name is Lisha, 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 test 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 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.

Please refer to risks and uncertainties including 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 contained in 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.

Shai Gozani

Thank you very much. I’m joined today on our call by Tom Higgins, our Chief Financial Officer. First, we recently celebrated the 10th anniversary of our listing on 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 U.S. and throughout the world, and through 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’ve built on the 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.

Now, again for some 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 it is cleared by the FDA for use during sleep, which is a critical because poor sleep is a fundamental issue for patients with chronic pain.

The device is a powerful and precise electrical stimulator at high level of proprietary automation. It is lightweight and can be worn easily and operate 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 our strong order activity from the first quarter of this year.

DJO is a leader in the pain management, rehabilitation, and orthopedic devices markets and is promoting SENSUS through the Recovery Sciences Division to their call points, primarily in pain management and podiatry.

Physician and patient feedback about SENSUS continues to be very encouraging. In total, we sold 1,707 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 1,707 second quarter devices representing an 18% increase from the 1,448 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 will 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 wearable pain therapy technology. In the second quarter, we achieved a significant milestone in this program. The FDA 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’re also pleased to report our progress with DPNCheck in the second quarter in both domestic and O-U.S. or international markets. DPNCheck is our point-of-care test for screening, diagnosing and monitoring peripheral neuropathy such as diabetic peripheral neuropathy. Overall, we shipped 24,300 biosensors in the second quarter, compared to 8,100 in the second quarter of 2013.

Our U.S. 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 biosensor shipments were 21,600 in comparison with 3,900 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 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 in ageing and healthcare 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 their direct sales organization and third-party distributors.

In the China market, we kicked off the regulatory process with the 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 to Tom for a discussion of revenue and overall financial results.

Tom Higgins

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 (sic) [Q2] versus $160,000 in Q2 of last year and $473,000 in Q1 of this year, in other words there was a four-fold 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 this year versus the preceding quarter. That was very encouraging.

It reflects the expansion of our SENSUS installed base, plus electrode re-orders 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 last year and $278,000 in the first quarter of this year. So here we saw revenue growth of nearly 3x Q2 last year and 29% on a sequential-quarter basis. Bulk of this business in the U.S. 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 launch in the second quarter. Our commercial activity related to Japan, including revenue recognition, will occur in this third quarter and forward, so there is 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 that we saw in our legacy Advanced business. Advanced 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 of this year.

In Q2 of this year, Advanced 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 does involve new headcount, training, and facilities. The costs of these are not fully absorbed in production. Overtime, 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 reported an income, a non-cash 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 there 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 the 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 more detail. Those are the financial and liquidity highlights, Shai back to you.

Shai Gozani

Thank you, Tom. Those conclude our prepared comments, so we’d be happy to take your questions at this point.

Question-and-Answer Session

Operator

(Operator Instructions) First question we have comes from the line of Bob Wasserman from Dawson J Securities. Please go ahead.

Bob Wasserman - Dawson J Securities

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?

Shai Gozani

No. The data we were talking about was the DPNCheck biosensors.

Bob Wasserman - Dawson J Securities

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?

Tom Higgins

I don’t have a precise number Bob, but the total that we’ve shipped cumulatively is over 4,000, fewer than 5,000, so somewhere around 4,500 and that would be since we launched in the first quarter a year ago.

Bob Wasserman - Dawson J Securities

Just one more question about the OTC product, it looks like you had a lot of cost in ramp up in the second quarter, will that continue for the second half of the year or will pare down a little bit? Maybe talk a little bit about the expense line for that product.

Shai Gozani

A lot of the spend – 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 then ultimately sales and distribution.

Bob Wasserman - Dawson J Securities

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

Shai Gozani

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

Operator

Thank you. The next question we have comes from the line of Jennifer Lane from Webster Court Management. Please go ahead.

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?

Tom Higgins - CFO

Sure. Behind the scenes is 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’ve 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 sales force. So that shipment is going out and it’s being reviewed closely by Omron as we speak. And we expect that that will be fine and 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 at that time hopefully their sales force are making, and so I would think that by the end of August Omron would be well be positioned to fulfill orders that are coming in and their sales force will be active in the field.

But just a little word of caution, we are 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’re going to see sales by Omron in Japan and revenue in our accounts for shipments to Omron.

Jennifer Lane - Webster Court Management

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?

Tom Higgins

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’re not able to do that.

So we can see forward to 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.

Operator

You have no further 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.

Shai Gozani

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.

Operator

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

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