NeuroMetrix, Inc.

Good morning, and welcome to the Neurometrics 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 for 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 Neurometrics 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 neurometrics.com, and on the SEC's website at sec.gov. Neurometrics does not intend and undertakes no duty to update the information disclosed on this conference call. I'd now like to introduce the Neurometrics Senior Vice President and Chief Financial Officer, Mr. Thomas Higgins. Mr. Higgins?

Thank you, Shannon. I'm joined on the call by Dr. Shai Ghazani, our President and Chief Executive Officer. Neurometrics develops and commercializes neurostimulation-based medical devices for the diagnosis and treatment of chronic health conditions. Our commercial 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 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 that 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. EPN check orders were strong in the quarter for both devices and biosensors. Demand in the Medicare Advantage sector from new accounts, as well as longstanding customers, led the way. Our Japanese business with Fukuda Denshi also contributed meaningfully to the quarter results. The advanced 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 margins. OPEC spending totaled just under $1.8 million. This level of spending has been consistent over the past two quarters and is about a third 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 DPN check 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. Ghazani, who will now address our overall strategy.

Thank you. As Tom outlined, we are pleased with the company's performance in the third quarter. So I will 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 talents 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 to profitability at this time. The second principle in our strategy is innovation. Our corporate mission is to bring innovative healthcare 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. A 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 DPN check 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 it's novel wearable design that enables use during activity. We have identified three additional indications that we plan to develop, fibromyalgia, chemotherapy-induced peripheral neuropathy, or CIPN, and restless leg syndrome, or RLS. In combination, these conditions represent a market of 10 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, Neurometrics has novel products that are targeting large markets. We are a 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.

Thank you. Ladies and gentlemen, 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. Our first question comes from Jared Cohen with J.M. Cohen & Company. Your line is open.

Yeah, just a quick question. You know, it's been, I guess, what, five years since you launched the quell? And I'm just curious, you know, what your opinion is in terms of why haven't you seen more reoccurring revenue from the gel packs. I think you have, what, a little over 200,000. You've sold a little bit over 200,000 coil devices in the five years since then.

Yeah, that's correct, Jerry. We've shipped around 200,000 devices over about five and a half years now. I think we do have a recurring revenue stream from our 12 customers. 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 potentially don't need it anymore, or they come back and forth, or they go on to alternative therapy. So, you know, it's a fairly dynamic situation. You know, 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. 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, you know, somewhat disappointed. But we do have a consistent revenue stream from those customers and, you know, continue to see that. But we need to improve on it.

Okay. 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.

Yeah, I don't have a good number to give you in that respect. 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 in 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 supports into the app and into our customer service for those applications, I think will strengthen that going forward.

All right. All right. Thank you very much.

Thank you. Once again, Lisa, if you wish to ask a question at this time, please press star then one or your touchtone telephone. Our next question comes from Bill Church with PGRI. Your line is open.

Good morning. How much market share growth is in front of us that we see going forward?

Well, that's a good question. I mean, there is no competition, so we're the only player in that. 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's significant growth opportunities. We're probably at less than, I would say, what, 5% to 10% of even the Medicare Advantage opportunity, which is our core focus in the U.S., and even at lower percentages in international markets, so tremendous growth. Now, you know, 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? 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 being approved for insurance plans and so forth?

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 or 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 like to see because we're dealing with very large organizations and they tend to It tends 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 growing along with the Medicare Advantage business overall. So, you know, 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.

Okay. Thank you.

Thank you. Once again, ladies and gentlemen, if you wish to ask a question at this time, please press star then 1 on your touchtone telephone. And I'm currently showing no further questions at this time. I'll turn the call back over to Dr. Ghazani for closing remarks.

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.