NeuroMetrix, Inc. (NASDAQ:NURO) Q3 2020 Results Conference Call October 22, 2020 8:00 AM ET
Thomas Higgins – SVP & CFO
Dr. Shai Gozani – President & CEO
Conference Call Participants
Jarrod Cohen – JM Cohen & Company
Bill Church – TGRA
Good morning, and welcome to the NeuroMetrix Third Quarter 2020 Earnings Call. My name is Shannon, 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 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 companies 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 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. NeuroMetrix develops and commercializes neurostimulation-based medical devices for the diagnosis and treatment of chronic health conditions. Our commercial products are DPNCheck, ADVANCE and Quell.
DPNCheck is a point-of-care test for the detection of peripheral neuropathies. ADVANCE is a point-of-care device that provides neuro conduction studies as way of diagnosing and evaluating patients suspected of having focal or systemic neuropathies. And Quell is a wearable mobile app-enabled neurostimulation device indicated for symptomatic relief and management of chronic pain. It is available over the counter.
Q3 was a good quarter for the Company, particularly considering the larger economic environment and the operating constraints imposed by managing the business with employee safety as the top priority. We experienced a rebound in customer orders from the second quarter of 2020. Production was busy throughout Q3 and facility utilization was necessarily high to address customer needs.
Our operating activities that is R&D, sales and marketing and G&A were all tightly managed. The forward outlook remains unclear. We appreciate the customer demand levels, raw material supply and staffing issues all have a high degree of uncertainty. However, the business performance in Q3 leaves us with a sense of optimism as we enter the last quarter of the year.
Turning to our operating results in Q3, which we reported earlier today. Total revenue was about $2 million. DPNCheck orders were strong in the quarter for both devices and biosensors. Demand in the Medicare Advantage sector from new accounts as well as long-standing customers led the way.
Our Japanese business with Fukuda Denshi also contributed meaningfully to the quarter results. The ADVANCE diagnostic business rebounded from the depressed levels of Q2, and Quell contributed revenue and product line profitability.
Our gross profit on revenue was $1.5 million. This was a gross margin rate of 73.6%. The strong margin level was an encouraging outcome from our efforts at targeting a sustainable margin of 70% plus going forward.
Lower indirect production costs and higher throughput contributed to the margin. OpEx spending totaled just under $1.8 million. This level of spending has been consistent over the past two quarters, and it’s about 1/3 below Q3 of 2019. The current spending level is sustainable going forward.
R&D spending of $652,000 was about flat with the prior quarter and 37% higher than Q3 2019. It reflected R&D activity with a primary focus on the next-generation DPNCheck technology for release next year 2021.
Sales and marketing spending of $340,000 was down 47% from Q3 of last year. And G&A spending of $762,000 was down 48% from Q3 of last year and reflects reduced professional services.
Our net loss for the quarter was $257,000. This was an improvement of $1.1 million or 82% improvement versus Q3 2019 net loss of $1.4 million. On a per share basis, the Q3 2020 loss was $0.07 per share versus a loss of $1.44 per share in Q3 last year.
Cash at the end of Q3 was $4.9 million, an amount sufficient to fund the Company’s operations into and likely through Q4 of 2021. Our capital structure is debt-free. There are about 3.8 million common shares outstanding.
With that, let me turn this over to Dr. Gozani, who will now address our overall strategy.
Dr. Shai Gozani
Thank you. As Tom outlined, we are pleased with the Company’s performance in the third quarter. So I’ll take this opportunity to review our business strategy, which is built around three principles.
The first is that we have prioritized attainment of profitability. This past quarter was encouraging in this respect as we reported an operating loss of about $250,000. We have established an efficient cost structure throughout the business. This covers headcount, manufacturing, marketing and distribution, which has led to lower operating expenses and improving gross margins.
I should point out that our ability to realize these efficiencies is a testament to the commitment and talent of our employees. Because of the overall economic uncertainty and the need to get more experience with our business initiatives, we are not currently positioned to state a specific crossover quarter into profitability at this time.
The second principle in our strategy is innovation. Our corporate mission is to bring innovative health care products to our customers that improve their health and quality of life. Our products are unquestionably the most advanced in their categories, whether that is neuropathy diagnostics or TENS devices.
We have and will continue to maintain our historical focus and investment in R&D. The recent example is our launch of the Quell Watch app, the first Smartwatch app to control a wearable pain relief device. Also, as we have previously announced, we are updating all elements of the DPNCheck system, which includes the device itself, the consumable biosensor and the associated reporting software.
We recently launched the updated biosensor and expect to release the new software, which includes enterprise and data security features that our large Medicare Advantage customers are requesting. We expect to launch that before the end of the year.
And the last principle in our strategy is maintaining a dynamic market strategy. We believe that achieving profitability and leveraging our industry-leading innovation requires a flexible strategy. By that, I mean that we need to be nimble in finding the best opportunities for our products.
This is most clearly manifested in Quell, where we have defined four core clinical indications. The current application for Quell is lower extremity chronic pain, primarily knee pain, which affects up to 25% of adults in the U.S. Quell is particularly well suited to this application, because of its typical placement near the knee and its novel wearable design that enables user activity.
We have identified three additional indications that we plan to develop fibromyalgia, chemotherapy-induced peripheral neuropathy or CIPN and restless syndrome or RLS. In combination, these conditions represent a market of 10 million to 20 million individuals in the U.S.
We have pilot or randomized controlled trial data on all three with our fibromyalgia program the furthest along. We hope to announce program updates in the second half of next year.
In summary, NeuroMetrix has novel products that are targeting large markets. We are committed and operationally efficient organization that is structured to support growth and move towards profitability.
That completes our prepared comments, and we’d be happy to take any questions at this point.
[Operator Instructions] Our first question comes from Jarrod Cohen with JM Cohen & Company.
Yes. Just a quick question. It’s been, I guess, what, five years since you’ve launched the Quell. And I’m just curious what your opinion is in terms of why haven’t you seen more reoccurring revenue from the gel packs, since I think you have, what, a little over 200,000, you sold a little bit over 200,000 Quell devices in the five years since then?
Dr. Shai Gozani
Yes. That’s correct, Jerry. We have — we’ve shipped around 200,000 devices over — it’s about 5.5 years now. Yes, I think there’s — we do have a recurring revenue stream from our Quell customers. And as you might expect in a consumer-oriented product, you are going to have churn and trail off of customers over time. Many customers use our product for a period of time. It helps them. They move — they potentially don’t need it anymore or they come back and forth or they go on to alternative therapy.
So it’s a fairly dynamic situation. I would say, overall, I would agree with you that we’re not — we’re a little bit disappointed overall in the consistency of the recurring revenue stream from the consumables and are — in fact, I think our moving-forward strategy is somewhat reflective of that, where we’re focused on more specific indications that I think we can build better connections to the consumers and better serve their needs to get a stronger recurring revenue and more consistent recurring revenue stream.
But I think, overall, the answer to your question is there are many reasons, some of which are expected and some of which I think were somewhat disappointed. But we do have a consistent revenue stream from those customers and continue to see that, but we need to improve on it.
Okay. Because you don’t give an exact — but do you see from the existing installed base, about 25% of them coming back to you or even less than that? You don’t give an exact number, I know that, but I’m just curious at this point in the life cycle.
Dr. Shai Gozani
Yes. I don’t have a good number to give you in that respect and I think it’s kind of a complicated situation. So I don’t want to quote a number also for competitive reasons. We tend to be fairly subdued on what we describe. But it really depends. I mean, there’s a wide variation among customers. I think it needs to be improved, clearly. And again, by being more focused on specific indications that allow us to build more specific services and support setting to the app and to our customer service for those applications, I think we’ll strengthen that going forward.
[Operator Instructions] Our next question comes from Bill Church with TGRA. Your line is open.
DPNCheck, how much market share growth is in front of us? Do we see going forward?
Dr. Shai Gozani
Well, we have no — so that’s a good question. I mean the — there is no competition. So, we’re the only player in peripheral neuropathy diagnostics at the point of care. So, I think there’s tremendous opportunity in terms of what the overall market. I mean we’re at a fairly early stage, even in terms of our core effort in Medicare Advantage.
So, I would say that there is significant growth opportunities, we’re probably at less than, I would say, what, 5% to 10% of the — even Medicare Advantage opportunity, which is our core focus in the U.S. and even at lower percentages in international markets, so tremendous growth.
Now I want to point out, I mean, this is an emerging concept for many plans and insurers to screen for peripheral neuropathy. So while the opportunity is quite large, there’s a lot of education that has to go along with that, but the opportunity is quite impressive.
So how do we realize that? Or I know you’ve got the new software update coming and that sort of thing. But it’s just getting the word out, I guess, or be improved for insurance plans and so forth?
Dr. Shai Gozani
Well, in the U.S., our core focus is on Medicare Advantage accounts. We are in the two largest Medicare Advantage insurers in the country. So we’ve — over the last four, five years have become sort of standard of care within those insurers. And as they are expanding their footprint, as they are implementing programs, we tend to go along with that. It’s difficult to push the growth at the rate we’d like to see, because we’re dealing with very large organizations, and they tend to develop relatively slowly.
So, it is getting the word out. It’s providing the right kind of software to integrate into their enterprise solutions, and it’s growing along with them and grow along with the Medicare Advantage business overall. So to your point, I mean, yes, we try to get the word out. We try to provide the right support. We’d obviously like to see it grow faster, but there is a pace to it that we have to appreciate.
[Operator Instructions] I’m currently showing no further questions at this time. I’d like to turn the call back over to Dr. Gozani for closing remarks.
A – Dr. Shai Gozani
Thank you and we appreciate you joining us on this call today and look forward to updating you early next year.
Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.