NeuroMetrix, Inc. (NURO) CEO Shai Gozani on Q2 2019 Results - Earnings Call Transcript

Jul. 18, 2019 10:54 AM ETNeuroMetrix, Inc. (NURO)1 Comment
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NeuroMetrix, Inc. (NASDAQ:NURO) Q2 2019 Results Earnings Conference Call July 18, 2019 8:00 AM ET

Company Participants

Thomas Higgins - SVP, CFO & Treasurer

Shai Gozani - Founder, Chairman, CEO, President & Secretary

Operator

Good morning, and welcome to the NeuroMetrix Second Quarter 2019 Earnings Call. My name is Sonia and I'll 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 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 risk 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 Senior Vice President and Chief Financial Officer, Mr. Thomas Higgins. Mr. Higgins?

Thomas Higgins

Thank you, Sonia. I'm joined on the call by Dr. Shai Gozani, our President and CEO. NeuroMetrix is a health technology company with proprietary neurostim technology applied in 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. There was a high level of activity in the second quarter of 2019.

Revenue trends over the last several quarters continued with Quell revenue in decline and DPNCheck performing well. Development support for the GSK version of the Quell technology was maintained at a high level. We took steps to explore the possibility of monetizing the DPNCheck business, a topic we've mentioned on previous earnings calls. In Q2, we retained an investment banker Back Bay Life Sciences Advisors to organize a formal process of soliciting interest. Our goal is to have a good sense of interest by late in Q3. This product line generated $4.2 million in revenue last year and has been growing nicely, with a rate of growth exceeding 25% in recent years. It generates EBITDA margins in the highest 60% range on a direct cost basis. We see it as an attractive bolt-on opportunity.

We initiated a business restructuring in the second quarter. This should lower operating costs, improve alignment with operating activities, and conserve cash. Three areas were addressed. Headcount was lower through a reduction in force. And this recent step, combined with CapEx earlier in the year, has reduced our workforce by over 50%. Severance costs in Q2 were $225,000.

Facility costs will be lowered with the closing of our corporate office and engineering labs. During Q3 we will relocate these functions into our local manufacturing facility and then offer for sub-let the vacated space. Relocation costs are estimated at $225,000.

We recorded a charge of $1.9 million for excess 2.0 -- Quell 2.0 parts inventory. With supply lines extending beyond a year, which is not a typical in electronics, the reduction in Quell sales volume over recent quarters has left us with excess stock valued above net realizable value. The total business restructuring charge that was booked in the second quarter was $2.3 million.

Also, we met on several occasions with the Federal Trade Commission as we sought to resolve issues that center on Quell advertising.

Turning to the financials that were included in this morning's press release, total revenue of $2.4 million was down $1.4 million, 37% from $3.8 million in Q2 of last year. Quell revenue was $800,000 down $1.3 million from Q2 of last year.

Direct advertising spending on Quell was reduced by over $0.5 million or 65% year-on-year. TV advertising was discontinued in favor of digital promotion. The objective of the change was to improve the profitability of acquiring new customers. Digital promotion did yield improved spending efficiency in Q2 versus the past several quarters, as measured in terms of customer acquisition costs. However, we were unable to meaningfully grow or expand ad spending in the quarter to drive increased volume without sacrificing spending efficiency. We are continuing to refine our digital approach.

DPNCheck revenue of $1.2 million was roughly flat with the prior year. Sales were particularly strong in U.S. Medicare Advantage, up 33% year-on-year. Japan revenue was even with Q2 of last year, while our Mexico business strong in both Q2 and Q3 last year did not make a revenue contribution. Our local distributor in Mexico is dealing with the economic and fiscal disarray in Mexico government sector markets following the change in government last year.

Legacy diagnostic revenue of $300,000 was down from $400,000 in the prior year. These older product lines are managed for cash flow and sales volume of these products is expected to decline over time.

Our gross margin -- gross profit in the quarter was a negative $789,000 as a result of the inventory impairment charge of $1.9 million. Excluding that impairment charge gross profit of $1.1 million represented the margin rate of 47% approximately level with a 48% margin rate in Q2 of last year.

Operating expense spending totaled $4 million in Q2 of 2019, including restructuring charges related to severance and relocation, totaling $450,000.

Excluding these one-time charges, OpEx was $3.5 million versus $5 million last year, a reduction of $1.5 million in spending or 30%. R&D spending within OpEx was $1 million and it benefited from GSK co-funding of Quell joint development projects totaling about $500,000. Gross R&D that is prior to GSK funding effects was down $100,000 from Q2 of last year. Sales and marketing spending of $1.4 million dropped from $2.2 million in the prior year. The largest contributing factor was reduced Quell advertising spending.

And GSK spending -- sorry, G&A spending of $1.6 million versus $1.2 million in the prior year included higher professional services costs, primarily legal. Collaboration income under GSK performance milestones totaled $1.4 million versus $3.7 million year ago quarter, remaining GSK milestones now total $5.1 million.

Our net loss of $3.4 million compares with $600,000 in net income in Q2 2018. Our cash balance at the end of the quarter was $4.96 million. Capital structure remains simple equity-only and debt free. Common shares outstanding are currently 9.8 million. Adjusting that number for all convertible preferred shares on an as converted basis, the common share count would be 14 million.

Dr. Gozani will now address our overall strategy.

Shai Gozani

Thank you, Tom. By way of overview is management’s strong belief that NeuroMetrix has good product lines and technology, and more broadly, the company has real value. We are, however, disappointed, the overall business has not progressed as we had hoped and worked towards, but we remain optimistic. We're working hard to realize this value and have engaged outside expertise to help us in this process.

More specifically, I will cover three topics in my comments. First, the Quell business status. We came to the determination in the second quarter that we simply do not have the resources, scale and brand equity to build Quell as a successful over-the-counter pain relief product in the large and competitive direct to consumer U.S. market. This decision was informed by our commercial experience over the past three quarters, the results of the comprehensive market research study we commissioned earlier this year and our attempts to incorporate several key findings from that research in our marketing and advertising program.

As a result, we are fundamentally reassessing our approach to commercializing the Quell technology. As the assessment -- reassessment continues, we have decided to reduce Quell promotion to a low level of spending and only with cost effective digital marketing. Our customer acquisition costs have dropped, resulting in the Quell business becoming nominally profitable on a direct basis at this much lower level of promotion.

Lower, more efficient promotional spending has also reduced new customer acquisition, shipment volumes and revenues. As a result, it was necessary to right size our operating structure to expected sales. This led to the restructuring and a reduction in force that we announced several weeks ago. We are in the process of evaluating several potential directions for the Quell technology. We continue to believe that the platform has unique market and clinical attributes and is well bedded vetted and refined for use by over 150,000 customers.

Although we are not in a position to share specifics at this time, we believe that we may be successful in the early defined clinical applications of the platform technology, likely with the primary market focus on healthcare providers and third-party reimbursement, rather than entirely direct to consumer.

We currently have several ideas on this front along with two clinical trials that may further inform these decisions. It is a process that will take time and ultimately some financial resources to reset the Quell business model.

Consistent with our commitment to evaluate all options for the business, in parallel, we are exploring options to sell some or all of the Quell business’ intellectual property.

In the meantime, we will continue to support GSK Consumer Health towards their launch of the Quell technology outside the U.S. We have been impressed by the scale and quality of their pre-launch effort and are optimistic about their potential for success given their deep expertise in consumer health. It is gratifying to know that the Quell technology may benefit chronic pain sufferers around the world through GSK's efforts. Importantly, there are also several outstanding milestones in the agreement that we hope to attain.

As we have disclosed since the third quarter of 2017, we're working through an FTC matter related to Quell advertising. We’ve had dialogue with FTC and have been working to negotiate a resolution. We are unable to provide a timeline on potential magnitude of any monetary component. However, our current expectation is that there will be a material monetary element in an eventual resolution. I suggest reviewing our second quarter 10-Q filing for further details.

Moving on to DPNCheck, DPNCheck posted another strong quarter in both revenue and contribution margin. This diagnostic test was commercialized in late 2011 and has no direct competition, has extensive clinical data in well established markets, is growing U.S. Medicare Advantage space, Mexico and Japan. China is a relatively new market for us with significant long-term potential.

We believe that it makes sense to explore monetizing the product line at this time. The processes to evaluate potential divestiture of the DPNCheck business is well underway under the direction of Back Bay Life Sciences Advisors. If we are successful, a potential asset sale could address our near-term cash needs and obviate the need to seek financing in the near-term.

Speaking about strategic options now, as we described in a press release several weeks ago, we have retained Ladenburg Thalmann as financial advisor to explore various strategic options for the company. We're exploring all legitimate possibilities, including a merger if it has a potential to create shareholder value. We're unable to commit to a specific timeline at this time and now that the process may not yield an outcome.

So in summary, we're taking all potential steps to enhance the value of our commercial products and while doing that, to manage our operations as cost effectively as possible. We have engaged outside expertise where necessary and we look forward to reporting on our progress over the balance of the year.

Those were our prepared comments. We’d be happy to take questions now.

Question-and-Answer Session

Operator

Operator

And I'm showing now questions at this time. I would now like to turn the conference back over to Dr. Shai Gozani for any closing remarks.

Shai Gozani

Thank you very much for joining us on this conference call. And we look forward to updating you as we move through the balance of the year.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This conclude today's program. You may all disconnect. Everyone, have a great day.

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