Peloton Interactive Q4 2023 Earnings Call Transcript

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February 22, 2024

There are 5 speakers on the call.

Operator

Good morning, and welcome to the NeuroMetrix 4th Quarter 2023 Business and Financial Update. My name is Josh, 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 current views of NeuroMetrix about future results of operations and other forward looking information.

Operator

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 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 atsec.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.

Operator

Mr. Higgins?

Speaker 1

Thank you, Josh, and welcome to our Q4 2023 business update. By way of background, we are a commercial stage medical device company. Our two principal products are first is Quell, a wearable neuromodulation platform addressing chronic pain related to fibromyalgia and with multiple emerging indications including CIPN, long COVID, chronic low back pain, chronic overlapping pain condition and others. And second, DPNCheck, which is a screening technology for peripheral neuropathy, particularly related to diabetes. Our business model is razor razorblade with aftermarket revenue as the primary financial objective.

Speaker 1

At our current operating scale, we are adequately funded with about $18,000,000 in liquid assets. Our cash usage rate averaged about $1,500,000 per quarter during 2023. Our capital structure is simple, it's debt free and common stock based. Earlier today, we reported Q4 2023 revenue of $1,300,000 DPNCheck continues as the largest contributor representing about 80 And as we've discussed in prior quarters, this significant decline was attributable to the Medicare Advantage CMS rule changes in early 2023, which initiated a 2 year timetable to phase out reimbursement for a range of patient screening, including peripheral neuropathy. On a full year basis, this business contracted by 25%.

Speaker 1

The balance of our Q4 revenue reflects offsetting dynamics of Quell Fibromyalgia revenue growth on the upside, nearly doubling from Q3, the sequential quarter. And continuing revenue shrinkage in our legacy products, primarily consisting of electrode sales for nerve conduction testing by long time customers. For the full year 2023, revenue of $5,900,000 was down by 29% from $8,300,000 in 2022, principally due to the Medicare Advantage CMS rule changes. Gross profit in Q4 2020 3 was about $850,000 The gross profit reduction of about $400,000 from $1,200,000 in Q4 of last year correlates with the drop in revenue. Our Q4 gross margin rate was 64.4 percent, a slight contraction from the prior year quarter, reflecting a reduction in the absorption of indirect manufacturing costs, which resulted from lower production problems lower production volumes.

Speaker 1

For the full year 2023, gross profit was $3,900,000 at a margin rate of about 67%, down by $1,800,000 from $5,800,000 in 2022 at a margin rate of just under 70%. Operating expenses in the 4th quarter totaled $2,700,000 The OpEx increase of about $600,000 or 30 percent from the prior year quarter reflects the timing of R and D spending for outside engineering services, plus increased sales and marketing headcount during the year to support the launch of Quell Fibromyalgia. Personnel costs, this would be headcount and compensation, throughout the organization were significantly higher in comparison with the prior year. Full year OpEx of $11,100,000 increased by $600,000 or 5.8 percent from 2022. Net loss in Q4 was $1,600,000 or $1.43 per share.

Speaker 1

The net loss increased by $1,000,000 from a net loss of just under $700,000 or $0.73 a share in Q4 of last year. Operating cash usage in the quarter was about $1,400,000 this year versus $1,500,000 in Q4 of last year. For the full year, our net loss of $6,500,000 or $6.27 per share increased from a loss in 2022 of $4,400,000 or $4.97 per share. We closed the quarter with liquid assets of $18,000,000 as I mentioned previously. During Q4, we executed sales of common stock under our ATM facility of approximately $1,900,000 and of that about $1,600,000 settled during the Q4.

Speaker 1

Common stock outstanding at the end of 2023 totaled approximately 1,500,000 shares. And this is after the November 1, 2023, date in which we implemented a reverse split in the ratio of 1.8% in order to comply with NASDAQ minimum bid requirements. So those are the highlights from the financial report. And now for the comments of Doctor. Shai Ghosani, our Founder and CEO.

Speaker 2

Thank you, Tom. Our growth strategy is built on 3 core efforts. The first is to establish and grow the Quell fibromyalgia indication in the U. S. Market.

Speaker 2

The second is to advance the Quell neurotherapeutics program, which will lead to additional indications in an expanded addressable market. And the third is to revise the DPNCheck business strategy and count for the recent negative changes. Quell is our wearable neuromodulation platform. It is based on our proprietary adaptive transcutaneous electrical nerve stimulation technology and it is the only daily multi hour wearable treatment for chronic pain syndromes. It is FDA cleared for relief of lower extremity chronic pain and has received FDA de novo authorization as the 1st and only neuromodulation device indicated to help reduce the symptoms of fibromyalgia and this latter indication is available by prescription only.

Speaker 2

At this time, our commercialization efforts are exclusively focused on the fibromyalgia indication. Fibromyalgia is a complex chronic pain syndrome that affects up to 15,000,000 people in the U. S. The only FDA approved drugs are pregavalin, cysteine and minasepran, which can have substantial status. Therefore, there's a critical unmet need for additional safe treatments.

Speaker 2

The Q4 of 2023 was the Q4 of the commercial launch of Quell Fibromyalgia. At this time, we are in a deliberate strategic phase that is intended to optimize the effectiveness of our prescription processing solution to refine the clinical and marketing messaging and to identify the most attractive patient cohorts for the solution. Our commercial team consists of a National Director of Sales and 2 regional business managers, which provide us with preliminary coverage in the Florida, Texas and California markets. We have partnered with a national online pharmacy to fulfill both the initial prescriptions and refills. At this time, Quell Fibromyalgia is available on a cash pay basis with the exception of certain VA facilities where it is a covered treatment.

Speaker 2

We've also added a telehealth option that allows patients to receive prescriptions without requiring an in person physician visit. We are pleased with the growth in the Quell Fibromyalgia business in the Q4 of last year. There are 199 unique prescribers during Q4 compared to 125 during Q3. The most common prescribers are rheumatologists, pain medicine specialists and neurologists. The number of Quell Fibromyalgia prescriptions written increased to 5 3 in Q4 from 262 in Q3 with about 60% of prescriptions filled by patients.

Speaker 2

And the number of month refills increased from 3.15 in the Q3 of last year to 5.25 in the 4th quarter. Following the end of the quarter, we increased the refill price by 33%. Overall, we are pleased with the early commercial experience with Quell Fibromyalgia and we hope to see continued progress leading to material revenue this year. Now in terms of the overall Quell neurotherapeutics program, it is the second element of our growth strategy and that is to increase our pipeline beyond the fibromyalgia indication. The program that is furthest along is for treatment of chronic chemotherapy induced peripheral neuropathy or CIPN, which affects as many as 30% of the approximately 1,000,000 people who receive chemotherapy every year.

Speaker 2

It is a chronic and debilitating side effect of cancer treatment. Quell received FDA breakthrough designation for treating moderate to severe CIPN in January of 2022 based on a pilot study conducted at the University of Rochester. A NIH funded multicenter, double blinded, randomized sham controlled trial complete enrollment in the Q3 of 2022. And we recently submitted a pre market notification, our 510 with the FDA for a Quell CIPN indication that was done in December. Depending on the FDA review timeline and the ultimate decision, we could be in a position to initiate commercialization before the end of this year or early next year.

Speaker 2

We also reported positive results from a positive study of Quell in post acute COVID-nineteen syndrome, which is also called long COVID. About 1 third of patients with long COVID have a fibromyalgia like presentation and we are currently evaluating whether this recent clinical data is sufficient to support a 510 submission with qual fibromyalgia as the predicate device. Now moving on to DPNCheck. DPNCheck is our rapid point of care test for peripheral neuropathy such as diabetic peripheral neuropathy or DPN, which is the most common long term complication of diabetes. DPNCheck is the only point of care peripheral neuropathy test based on gold standard nerve conduction study technology.

Speaker 2

Our DPNCheck business has been comprised of B2B sales into the U. S. Medicare Advantage market and international sales in China and Japan through distribution partners. Historically, 80% of our DPNCheck revenue has come from domestic sales. We have a value based commercial care team that has been focused on increasing DPNCheck adoption in the Medicare Advantage market.

Speaker 2

This includes large medical groups, integrated delivery networks, health systems and health assessment companies, where a substantial portion of their patients are covered under Medicare Advantage. The business had been growing for several years. However, substantial uncertainty was injected into the Medicare Advantage sector last year due to policy changes announced by the Centers For Medicare and Medicaid Services or CMS. In April, CMS announced significant changes to the hierarchical condition categories or HCC risk adjustment model for the calendar year 2024. The new model alters the risk adjustment environment and among its many changes essentially eliminates HCC codes for peripheral neuropathy that are detected by DPNCheck screening programs.

Speaker 2

We are evaluating the evolving landscape

Speaker 3

and at this point believe it will be necessary to

Speaker 2

alter our strategy to move away from Medicare value based care. We are currently exploring various alternative alternate markets within value based care and retail healthcare in an attempt to reconstitute a profitable scalable business model. We are not yet in a position to outline a new commercial strategy. As we saw this quarter, the Medicare Advantage changes have caused a material downward pressure on DPNCheck revenues. Implementation of new strategies will take time and therefore we do not see a reversal in revenue this year.

Speaker 2

Nevertheless, we expect the DPNCheck business line will continue to generate positive cash flow by virtue of its attractive operating margins. Now to move on to our recent release on executing a review of strategic options. While the company management and the Board are disappointed by the impact of external forces on DPNCheck, we remain enthusiastic about the potential for our business and in fact also our DPNCheck business. Of course, we are also mindful of the divergence between our stock price and the potential of our product lines and strong balance sheet. A few weeks ago, we announced that we were initiating a process to review strategic options to promote growth of our product lines and to maximize shareholder value.

Speaker 2

We intend to consider various options, including changes in marketing strategies, the acquisition of new assets, potential sale of company assets and merger or other strategic transactions. While we are exploring these options, we do not to make do not expect to make any fundamental changes in the company's commercial operations. We have engaged Ladenburg Thalmann with whom we have a long standing relationship to help us in this process. There can be no assurances that any specific actions will be taken or emerge from this process. And that represents our prepared comments.

Speaker 2

And at this point, we'd be happy to take any questions.

Operator

Thank you. Our first question comes from Gerard Cohen with J. M. Cohen and Company. You may proceed.

Speaker 3

Yes. Just I know you want to is there a broader opportunity for DPM check-in the just I know you don't want to answer it in the broader diabetes market? It just seems odd that it's more for the older population.

Speaker 2

Well, yes, Jared. I mean, that is it is used extensively for diabetic peripheral neuropathy. So yes, the diabetes market. We have been focused on the diabetes market within Medicare Advantage, because of the strong clinical benefits as well as the economic benefits to the medical groups that were using it and many continue to use it. But sort of to your point, expanding our reach outside of Medicare Advantage into other diabetes sectors is part of our strategic consideration.

Speaker 3

Okay. It just hasn't been used so far beyond yes, in the broader okay, all right. And just in doctors, I know because they use codes, but don't they use other beyond codes because I guess I'm trying to get don't they want to use the device or the diagnosis even if we're in a broader scale to help diagnose the patient? What else do they have to do it?

Speaker 2

Well, I think that's a good point. So I think the there is a cost to the device and there's a cost to the consumables. So they do need to be compensated for their time and the materials in some fashion and that was well established in the Medicare Advantage market.

Speaker 3

Right.

Speaker 2

There is in fact a CPT code for our nerve conduction testing technology. The challenge is that most insurers and this includes Medicare as well as commercial insurers, typically do not reimburse for screening testing as opposed to clinical testing. So meaning they just our annual screening is not something that typically is reimbursed for really most diagnostics with some notable exceptions. So, they but the larger it's the largest part of the market is on the screening side. So that was established for Medicare Advantage.

Speaker 2

And then unfortunately, CMS decided to make some broad changes to that, again, not just for peripheral neuropathy, but for many other tests as well. So your point is well taken, but there has to be some sort of economic model that at least covers the cost of the tests for physicians.

Speaker 3

Okay. All right. Thank you. Thank you.

Operator

One moment for questions. Our next question comes from Joshua Horowitz with Palm Global Small Cap Master Fund LP. You may now proceed.

Speaker 4

Good morning. I'd like to know who's advising the company that it's a proper and efficient use of the company's capital and strategy to clandestinely sell stock every quarter under the ATM as opposed to doing a legitimate stock offering with institutional investors?

Speaker 2

Yes. I'll well, I wouldn't describe it as clandestine, but I will let Tom address that question.

Speaker 1

Sure. That's an interesting choice of words that you use since whenever we do use the ATM that's reported every quarter. So perhaps you want to reconsider some of the I'm not going to read, but let me answer We don't find out about it until

Speaker 4

you guys publish, right? So it's sort of clandestine. I'm out there in the market interested in the company buying stock. You guys are sitting there pressing a button and selling it. It's a pretty ridiculous structure and it sort of makes the company uninvestable, don't you agree?

Speaker 1

No, I think you've absolutely got it wrong. If you look at our company, we are a consumer of cash. We're also a company that's looking to grow. And so we do have 2 choices here. We can either do as you recommend, which is to try to put together an offering to the market.

Speaker 1

But you may since you're in this business, you may be aware that the market hasn't been very receptive to pipe deals, particularly for microcap companies over the last couple of years. And so we think that it makes a little bit more sense to sell shares directly to people that are interested in buying on a small basis when the opportunity presents itself. And so if you're asking who gives us this advice, well, it comes from investment bankers that we speak with and it's discussed internally.

Speaker 4

There were $10,000,000,000 of issuances last year. So I don't know what you're talking about, but I would recommend that you cancel the pipe to a legitimate offering, bring in long term value oriented institutional investors that will support the company. Maybe that comes along with some governance changes. And absent that, you should just literally close down, melt the whole thing down and return the cash to the stockholders because the current setup is just a recipe for disaster. You can't point to one legitimate company that's used in ATM.

Speaker 1

Well, thank you very much for your input.

Operator

Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back over to Doctor. Ghazani for any closing remarks.

Speaker 1

Well, thank you for joining us

Speaker 2

on this conference call and we look forward to updating you over the course of this coming year. Thank you for your attention.

Operator

Thank you for your participation. You may now disconnect.

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