NeuroMetrix, Inc. (NASDAQ:NURO) Q1 2017 Earnings Conference Call April 20, 2017 8:00 AM ET
Thomas Higgins - SVP & CFO
Shai Gozani - President & CEO
Jared Cohen - JM Cowen & Company
Yi Chen - H.C. Wainwright
Good morning and welcome to the NeuroMetrix's First Quarter 2017 Earnings Call. My name is Shannon and I will be your moderator on the call. NeuroMetrix is a commercial stage, innovation driven healthcare company combining bioelectrical and digital medicine to address chronic health conditions including chronic pain, sleep disorders, and diabetes. The company is located in Waltham, Massachusetts.
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 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 to and undertakes no duty to update the information disclosed on this conference call.
I would now like to introduce the NeuroMetrix Senior Vice President and Chief Financial Officer, Mr. Thomas Higgins. Mr. Higgins?
Thank you, Shannon. I'm joined on the call by Dr. Shai Gozani, our President and Chief Executive Officer and we appreciate your participation in this quarterly call. For company background, we operate in two markets wearable therapeutics and point-of-care diagnostics. Our platform technologies in both markets are based on deep expertise in precision neurostimulation to achieve a therapeutic or a diagnostic result.
We are addressing large market opportunities. Our primary product Quell is an over-the-counter wearable device for the millions of people suffering from chronic pain. DPNCheck, our test for diabetic nerve disease addresses a medical condition of about half of all diabetics, representing about 5% of the U.S. population.
For Quell, we use two primary business metrics to gauge progress, device is placed which is a proxy for growth in our user base and eventual electrodes reorders and the invoice value of shipments, which is an indicator of overall commercial activity. During the two years since Quell launched we have consistently achieved quarter-over-quarter gains in these metrics.
Q1 2017 further extended that upward sloping trend line. Device is placed to total 18,697 a gain of 31% on the prior quarter and the invoice value of shipments totaled $4.1 million which was a gain of 19% on the prior quarter.
Our Q1 GAAP results reflect this business growth. Total revenue was $4.3 million, up 89% from the first quarter of last year. At the product level Quell GAAP revenue was $3.1 million and contributed 71% of our total revenue. Quell device shipments that I mentioned were 130% higher than the year ago quarter. Shipments to retail distributors were particularly strong including Best Buy, CBS and Bed Bath & Beyond. Also we had a strong quarter with QVC following an off the year period during the Q4 holidays.
Electrode reorders grew to 25.4000 electrodes, up 216% from reorder electrodes a year ago. The electrode reorder growth continues to provide evidence on expanding user base. Deferred Quell revenue in the balance sheet which is anticipated to convert through future revenue upon retail sell-through was approximately $1.2 million. This was up from approximately $900,000 at the end of last quarter and these amounts are net of estimated returns.
Our sales returns are about 25% of shipments and this is in line with our expectations based on clinical efficacy.
Turning to DPNCheck, it also performed well and contributed revenue of approximately $800,000 or 19% of our total revenue. This new quarterly high reflected strong demand in our U.S. Medicare advantage accounts. DPNCheck sales were 67% higher than in the year ago quarter. Our legacy products primarily ADVANCE diagnostics tests are managed for cash, these are not actively marketed and they contributed about $400,000 or 10% of total revenue in the quarter.
Gross margin was $1.6 million a rate of about 37.4% of revenue versus $793,000 a rate of 34.8% in the first quarter of last year. In comparison with recent quarters, the gross margin rate reflects two primary factors: first, an increased weighting toward Quell due to the accelerating Quell revenue growth rate; and second, within Quell, a shift in sales mix for retail distribution and QV sale. These carry lower average sales prices and lower gross margins. The Quell gross margins are continuing focus, our COGS initiatives and operations are focused on labor efficiency and sourcing alternatives to drive cost parts reduction.
In engineering, product innovation programs include COGS targets. We believe that there are both near-term and longer-term opportunities to expand margins.
Total operating expenses was $4.9 million essentially flat with $5 million in the year ago quarter. R&D spending of $903,000 increased by $254,000 from the year ago quarter and this was due to lower outside engineering cost both hardware and software following the Quell 2 release early this year.
Sales and marketing spending of $2.6 million increased by $190,000 from Q1 of 2016, this covered the effects of higher TV advertising cost offset by savings from reduced sales headcount as healthcare professional efforts are focused on strategic accounts.
G&A spending of $1.4 million was flat with $1.4 million in the year ago quarter.
Our net loss declined to $3.2 million versus $4.1 million in Q1 2016. Net loss per share was $0.91 reflecting a weighted average of 8 million shares outstanding. This per share number included a charge of $0.51 for deemed dividend related to the $7 million equity offering that we completed in the quarter. If you exclude that deemed dividend loss per share was $0.40 and that compares with a net loss per share of $1 in Q1 2016 on what was then 4.1 million shares outstanding.
Our net cash usage was $3.4 million continuing a downward trend from a peak of $4.2 million in the second quarter of last year which declined to $3.8 million in the third quarter of last year to $3.6 million in the fourth quarter of last year and then through this quarters number. We ended the quarter with $6.9 million in cash.
So in summary the quarterly results show continued upward trend in Quell key business metrics, top-line growth with Quell posting 89% revenue increase, gross margins of 37% with both short and long-term upside, our reduced loss by $900,000 and a steady downward trend in quarterly cash usage.
Those are the financial highlights. Now Dr. Gozani for a review of our business and strategy.
Thank you, Tom. I will focus my comments on Quell which is the primary growth driver. We believe that Quell is well positioned to address unmet needs in the $20 billion global market for devices and drugs that treat chronic pain. In the U.S. alone there are 100 million people with chronic pain. I will cover the following aspects of our Quell effort. Our advertising strategy, the development of the Quell retail channel, strategic partnerships, research and development, and then I'll discuss Quell's digital health solution.
First advertising strategy. We're in the early stages of building national awareness of Quell verbal pain relief technology within the chronic pain community. The current market penetration is only about 0.5% of our estimated attainable market of 20 million U.S. consumers.
We hope to reach a tipping point where viral marketing within the chronic pain community generates an upward sales inflection. We are starting to see evidence of peer to peer marketing. However at this early stage of commercialization we still recognize that most sales will be generated by direct advertising. As a result, a substantial portion of our sales and marketing spend is devoted to building awareness in TV and online advertising.
We believe that the most effective way to reach our core audience is through TV advertising. Therefore since the second quarter of 2016 we have been investing in TV promotion almost common approach is 30 seconds spots on national cable news channels although we're also utilizing other cable channels and match our customer demographics and characteristics. We expect to continue a similar level of TV promotion throughout 2017.
In addition to our own TV advertising efforts, we continue to affectively partner with QVC. Their customers are interested in novel health products and we experience strong sales in QVC in the first quarter which is typically a good quarter for health and wellness products.
Digital Marketing is also an important component of our advertising strategy representing about one quarter of our advertising expense. Our digital marketing strategy consists of paid search primarily through Google, online advertising including via Facebook and retargeting. In addition to TV and digital marketing, we have recently piloted print and radio advertising to determine if they can provide complimentary promotional benefits.
Now discussing the retail channel. We believe that the availability of Quell in top retail outlets is important to the growth of the brand, the association of Quell with premium U.S. retailers enhances its credibility and a convenience of in-store access is important to many of our customers. Therefore we continue to invest in developing this channel by also recognizing and managing the challenges inherently in retail. These include lower margins and deferred revenue recognition.
At the end of 2016, Quell was available in about 1,500 retail stores approximately evenly distributed among Target, CBS, and Walgreens.
In the first quarter of this year, we expanded to about 3,000 retail stores. In addition to the aforementioned pharmacies, Quell is now also available at a subset of Best Buy, Bed Bath & Beyond and Sam's Club Stores.
We are particularly enthusiastic about offering Quell in these retail settings because it demonstrates that the Quell value proposition extends beyond pharmacies, into non-traditional consumer health settings. We believe this is consistent with a secular trend towards increased consumer control over healthcare decisions and purchasing. Retailers like Best Buy and Bed Bath & Beyond have recognized this and have decided to increasingly offer their customers novel and effective health and wellness products.
With regard to strategic partnerships, the U.S. Consumer health market is the largest in the world and we intend to directly build Quell into a premium high value consumer brand under NeuroMetrix's ownership. However we do see opportunities to partner in ways that will accelerate Quell adoption. As one example, Medtronic offers Quell on the diabetes focus e-commerce site. We also see opportunities for Quell outside the U.S. there are 1.5 billion people worldwide with chronic pain. We now have regulatory clearance for marketing in Canada, the E.U. and Australia and in fact we're already marketing Quell in Canada. We are most likely going to tap into OUS opportunities through distribution and licensing partnerships and here our strategy is still evolving.
Although we are engaged in several ongoing discussions these agreements take time and must be entered carefully to yield both near and long-term value.
On research and development, a core strength in NeuroMetrix is R&D and our ability to rapidly innovate; I believe we have the most advanced engineering team and technology in the wearable nerve stimulation sector. We typically target major product launches for the Consumer Electronics Show otherwise known as CES which occurs in January.
In fact, we announced our second generation Quell device at CES 2017 this past January. This device provides enhanced personalization, automation, battery life, and health tracking and to start shipping the middle of the first -- of this past first quarter. We are currently developing a novel third generation Quell device so we expect to launch in early 2018. We believe this device will accelerate growth and substantially enhance the profitability of the Quell business.
We are also committed to conducting clinical studies that build credibility in the Quell technology and enhance our understanding of the mechanism of action and clinical efficacy. We have four ongoing clinical studies currently including in cancer pain and low back pain. We expect to start seeing readouts on these studies in the second half of this year.
Finally moving on to Quell's digital health solutions. We believe that an underappreciated aspect of the Quell system is in addition to being a neurotherapeutic is also a digital health solution for chronic pain. Chronic pain is a disease onto itself that goes beyond the direct experience of pain to attack all aspects of the sufferers life including the sleep quality, activity levels, and mental health and thus leads to generally poor overall health. Effectively managing chronic pain requires a broad health and wellness perspective. Quell is uniquely designed provides a holistic approach to pain management through tracking of objective health metrics such as sleep levels and activity and subjective outcomes such as pain and mood.
The data and related health insights are presented to the user via the Quell Apps and store and synthesized in the Quell Health Cloud. We already have 23,000 users that have created Health Cloud -- that have created Quell Health Cloud accounts. We are just starting to tap into the tremendous potential of this rapidly growing database which may well be the largest chronic pain database in the world. We intend to use sophisticated analytical methods such as machine learning to better understand each user's pain and health and thereby offer them personalized insights to optimize their use of Quell and to decrease their pain and its impact on their life. We believe that these types of creative services will create long-term loyal customers though from the foundation of a growing and profitable consumer health brand.
And those are our prepared comments and we'd be happy at this point to take questions.
Thank you. [Operator Instructions].
Our first question comes from Jared Cohen with JM Cowen & Company. You may begin. Mr. Cohen your line is open.
Yes. Just a quick question because it seems like one of the keys for your ongoing success will be the reorder rate of electrodes and just I know it's been an upward trend for the last six, eight quarters. You have given the number of devices out there and I know the company's objective is give or take it's been depending on usage about for a user to reorder about 1.5 electrodes per give or take a quarter or may be even more, what does it take for a existed user to want to continue that trend?
Yes, thank you for the question Jared. So at this point our models call for a little bit less than 1.5 per quarter probably closer to about 1.2, 1.25, and we're probably a little bit shy of that at this point but moving in a right direction. I think one of the things right now is we designed the electrodes to make sure that they provide in most cases at least a minimum amount of use which is we rate as two weeks and/or 100 hours of use.
As is common in consumables most, many people will stress that out as long as it can possibly go. So there really isn't a -- there isn't a set-off mechanism right now. So we suspect that users are probably stretching out the consumables until basically these hydrogels are falling apart and can no longer use them. So that's probably contributing to some level of kind of constraining the reorder rate. But I think the most important driver ultimately of reorders is that the users are getting pain relief benefits and are engaged with the product in the overall service.
So we're not -- we've been pretty much I would say primarily focused to-date on driving new customers, bringing on new Quell costumers. Now that we've built up we've shipped 80,000 devices over the past eight quarters. We're starting to ship more and more of our effort towards managing the existing customer base and enhancing that interaction and quality of the services that we do get those reorders.
Thank you. Our next question comes from Yi Chen with H.C. Wainwright. You may begin.
Hi, thank you for taking my questions. My first question is, are units shipped at, the Quell units shipped out from now or second generation units of Quell?
Yes, since about middle of the quarter all the units have been Quell 2.
Okay. So based on the consumer's feedback from the second generation did they report any -- even more reduction in the amount of say RO therapeutics for pain and treatment?
I think that it's not so much that there, so the underlying therapeutic methodology and engine if you will is the same Quell one and Quell two. So we do not necessarily expect better clinical efficacy because you're sort of delivering the same therapeutic modality. Like what Quell two does is essentially make the product easier to use and increases customer engagement. So we would expect to see for example potentially fewer let may be slight reduction in returns because for example we in automated or I should say we put the calibration, initial calibration procedure which is used to be done entirely on the device, you cannot do app making it easier. So customers are more likely to start correctly. So from that perspective we expect to get better, better usage but from a clinical perspective we would expect it to be the same.
Okay. And what kind of improvements should we expect from the third generation?
The third generation well we're not talking about the specific technological innovations because of competitive reasons. But one of the key things we are talking about is very important is that it will dramatically improve our gross margins on Quell devices.
Will it also potentially be able to potentially increase the eletro reorder rates?
Well, I think anything that yes I believe it could, anything that enhances the usability and customer engagement which we do believe the third generation device will do, should have an impact on electrode repurchasing.
Okay, thank you. Final question what, how many shares were outstanding at the end of the first quarter and how many auctions and warrants do you currently have?
So there were about at the end of the first quarter give me just a second here. As of the end of the -- the precise number at the end of the first quarter was 8,740,000 shares outstanding. In terms of the shares got, let me get back to you on the precise number of diluted shares rather than I don't have that right in front of me right here.
Okay. And that none -- that dividends is non-cash expense right, deemed dividends?
Yes that isn't, that is just an adjustment to the EPS calculation that doesn’t run through the P&L, it's just an accounting peculiarity.
Okay, got it.
And I'm showing no further questions at this time. I will turn the call back over to Dr. Shai Gozani for closing remarks.
We would like to thank you for joining us on the first quarter conference call. We are encouraged by the continued strong response to Quell and the continued growth of DPNCheck as well and we look forward to updating you on our progress throughout the balance of the year. Thank you.
Ladies and gentlemen, this concludes today's conference. Thanks for your participation. Have a wonderful day.
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