NeuroMetrix, Inc.

Good morning and welcome to the Neurometrics first quarter 2020 earnings call. My name is Justin 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 statements 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 or forward-looking statements Any forward-looking statements reflect current views of the neural metric 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 the neurometric.com and on the SEC's website at sec.gov. Neurometric does not intend and undertakes no duty to update the information disclosed on this conference call. I'd now like to introduce the neurometric senior vice president and chief financial officer, Mr. Thomas Higgins. Mr. Higgins, please go ahead, sir.

Thank you, Justin. I'm joined on the call today by Dr. Shai Gozani, our President and Chief Executive Officer. Neurometrics develops and commercializes neurostimulation-based medical devices that are used to diagnose and treat chronic health conditions. Our three main products are DPN Check, Advance, and Quell. DPN Check is a point-of-care test for the detection of peripheral neuropathies. Advance is a point-of-care device that provides nerve conduction studies as an aid in diagnosing and evaluating patients suspected of having focal or systemic neuropathies. And Quell is a wearable mobile app enabled neuro stimulation device indicated for symptomatic relief and management of chronic pain. It is available over the counter. The COVID-19 environment presented a challenge during the first quarter. We responded by modifying our operating structure to maintain customer support and to advance our R&D programs all while supporting employee safety. These will continue to be our priorities until circumstances improve. For the first quarter of 2020, we reported total revenue of $2.2 million. Revenue was adversely impacted by a drop in March orders. Gross profit on Q1 revenue was nearly $1.6 million, representing a margin rate of 71.4 percent. By comparison, in the year earlier quarter, revenue of $3.1 million earned a gross profit of $800,000 at a gross margin rate of 25.6 percent. Adjusted, that margin rate was 48 percent, excluding inventory write-offs in that period. So, the year-on-year improvement in adjusted margin was 23 percentage points. DPN check revenue of $1.34 million in the quarter was up 17% from $1.12 million in the first quarter of 2019. This was a record quarter for DPN check. Growth was seen in Medicare Advantage as well as distributor orders for our Asia markets. DPN check gross margins were above 80% in the quarter. Advanced revenue was $260,000 in Q1 compared with $330,000 in the prior year quarter. Margins were slightly under 70%. And QWEL revenue was $570,000 versus $1.6 million in Q1 2019. The QWEL gross margin rate was over 70% versus about 40% a year ago. Importantly, QWEL made a positive operating contribution. Q1 operating expenses were about $2.2 million. These were down over 50% from $4.5 million in the prior year. R&D spending of $534,000 was down $321,000, or 37% year-on-year. It includes the benefit of $115,000 in GSK funding of joint QWEL projects. Sales and marketing costs of $424,000 were down 1.6 million, nearly 80% from Q1 2019. QWEL staffing, consulting, and advertising reductions were the significant contributors to the reduction in spending. G&A's spending of 1.25 million was down 368,000, or about 23% year on year. This reflected lower staffing and professional services, primarily legal. There was no collaboration income in the current year quarter and $5.7 million in the year-ago quarter. The GSK collaboration development milestones were fully earned by the end of last year, 2019, in the cumulative total of $20.6 million. Consequently, we expect no future GSK collaboration income. As mentioned previously, GSK contributions to funding of our joint QWEL development projects will continue to be recorded as a credit in R&D expense as required under US GAAP. Our net loss was $657,000, or 45 cents a share, and we ended the quarter with cash of $2.8 million. This reflected offsetting effects of operating cash consumption of $800,000 and an equity raise of $450,000 through the sale of about 250,000 shares under our ATM program. Subsequent to quarter end in April, we raised an additional $1.7 million on the sale of about a million shares in the ATM. Our capital structure today remains simple. It is common stock only, and it is debt-free. We have approximately 2.7 million common shares outstanding currently. Dr. Ghazani will now address our overall strategy.

Thank you, Tom. First, I will cover the impact of COVID-19 on our company. As Tom mentioned, March sales were adversely impacted by the pandemic, particularly DPN check in advance, which are clinic-based diagnostic procedures. Most healthcare clinics have stopped elective procedures and routine healthcare. Quell has also been affected as consumers' financial situation has deteriorated due to the poor overall economy. We expect the sales downturn to persist through Q2 and hope to see a partial return in Q3 and relatively normal sales in Q4. However, there's a high degree of uncertainty at this time as the pandemic progresses and direction from the state and federal government and public health agencies evolves. As a supplier of medical devices, we are an essential business and have continued to operate. We successfully transitioned our business operations in early March to provide for employee safety while continuing to support our customers, particularly those using QWEL for pain management. Functions that can be performed remotely, such as R&D, finance, and customer service, are operating from the home, while manufacturing and fulfillment functions continue at our Woburn, Massachusetts facility with appropriate precautions. We are not implementing layoffs or furloughs. To assist in managing through this period, we have submitted a payroll protection plan loan application, which we hope will be funded in the program extension currently under consideration by Congress. We will maintain this operational mode pending public health direction from Governor Baker of Massachusetts. We do not expect any substantial changes until June. Now moving to our Q1 2020 results. We are pleased with the company's performance despite the slowdown in March due to the COVID-19 pandemic. We delivered good financial results on the top and bottom line. On the top line, DPN check revenue was a record of $1.34 million. Overall company gross margin was over 70% for the first time in 10 years, and operational expenses decreased by over 50% from the year-ago quarter. This resulted in a net loss of $657,000. In aggregate, these results indicate that we are well on our way towards achieving operating profitability. However, there is work to be done. We are not yet profitable, and our challenge is also to grow the top line. We believe that we are taking the right steps to achieve these goals in the near term. Along these lines, we have some highlights. We have made good progress in updating our DPN check technology. This includes the second-generation device, improved reporting and data management software, and new technology in the disposable biosensor. All these elements will be commercially launched this year or by early 2021. We believe that these product improvements will position the DPN CHECK business to go faster through better pricing, enhanced utilization by existing customers, and new market opportunities. We've also formally launched development of a new prescription product called Quell Flex for treating fibromyalgia pain. This new product is based on our core Quell technology, and the preliminary version will be used in a large NIH-funded study run by the University of Iowa and Vanderbilt University to examine treatment of fibromyalgia in physical therapy clinics. This was recently announced. We believe that the pharma biology market is ideal as it is large and has substantial unmet needs, and there has been little innovation, particularly on the device side. We are currently anticipating a regulatory filing in the second half of the year, and pending 510 clearance will look to launch in the second half of 2021. I will note that there is a lot of work to be done and some timing uncertainty that we hope to decrease over the coming several quarters. In summary, Neurometrics has excellent products that are targeting large markets. We are a committed and operationally efficient organization that is structured to support growth and move towards profitability. And that concludes our prepared comments. We'd be happy to take questions at this point.

Thank you. As a reminder to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. And once again, that is star 1 if you would like to ask a question. Again, ladies and gentlemen, if you'd like to ask a question, that is star one. Again, that is star one if you'd like to ask a question. And we have a question from Bill Church from TGRA. Your line is now open.

Yes, thank you for taking the question. Could you go into a little more detail with the test with the Iowa and Vanderbilt and what are we trying to get to or show or prove that we don't know yet?

Yeah, so this is a study that is being run, as you noted, by the University of Iowa in Vanderbilt. It's a large study looking at what's called a pragmatic study. So it's looking at how this device improves the care of patients with fibromyalgia in physical therapy clinics. So it's The prior studies have already demonstrated that this particular approach is clinically efficacious, so in a randomized controlled trial. So this is looking at the practical benefits in practice as opposed to in the clinical trial setting. So this will give a lot of insight into how to actually deploy a device like this into the fibromyalgia community and market.

Okay, okay. Would this help us get approval for Medicare reimbursement?

So these kinds of, you know, what we call pragmatic or real-world studies are very beneficial in getting reimbursement approval. That's correct. Because they demonstrate the practical benefits of technology as opposed to just the benefits in controlled trials.

Okay. And if all goes well, which got to a rough start with COVID-19. But what did you say the timing is again?

This study is slated to begin in the fall. Everything is being ramped up at this point. Okay.

Okay.

Thank you very much. Thank you for asking the question.

Thank you. And I am showing no further questions. I would now like to turn the call back to Dr. Ghazani for further remarks.

Thank you very much for joining us during today's conference call. We look forward to updating you and balance of the year, and I hope everybody remains healthy as well with their families. Thank you.

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.