NeuroMetrix, Inc.

Good morning and welcome to the Neural Metrics fourth quarter 2020 earnings call. My name is Anthony 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 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 for Periodic Filings with the SEC available on the Company 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 would now like to introduce Neurometrics Senior Vice President and Chief Financial Officer, Mr. Thomas Higgins. You may now begin.

Thank you, Anthony. I'm joined on the call by Dr. Shah Ghazani, our president and chief executive officer. Neurometrics is focused on the development and global commercialization of noninvasive medical devices for the diagnosis disorders involving the nervous system. The earnings released earlier today conveyed solid financial results for the fourth quarter of 2020 in comparison with the pre-pandemic year-ago quarter. The key financial metrics of revenues, gross profit, net loss, and cash usage all showed improvement over Q4 2019. Q4 revenues were $1.8 million this year. DPN check continued to deliver year-on-year growth. Medicare Advantage was strong and offset weakness in international orders. Advanced electrode sales were about level with the prior quarter and with Q4 2019. And QWEL continued its positive operating contribution with improved efficiency in advertising spending. Gross profit on revenues was 1.3 million. That represented a margin rate of 73.7% versus 62% in Q4 2019, a gain of 11.5 percentage points on the gross margin, or 19% over Q4 2019. Operating expenses total $1.7 million. Spending was down over $1 million, or 39% from Q4 last year. It was roughly in line with spending during the early quarters of 2020. Quarter-on-quarter spending reductions were achieved across the three major OpEx categories of R&D, sales and marketing, and G&A. Reductions in staffing, facilities, and outside services contributed to the lower spending levels. Our loss from operations was $326,000 compared with a loss of nearly $1.7 million in the year-ago quarter. And overall net loss for the quarter was also $326,000. The prior year loss was $1.1 million, and it benefited by $600,000 from the final development milestone under our GSK collaboration. Shifting to the full year results, a few comments. The comparability between 2020 and 2019 is difficult for several reasons. The first obvious one is the COVID-19 effects during 2020, but in addition, operations were restructured in mid-2019. At that time, a P&L charge of 2.6 million was recorded for staff productions, inventory, facilities, and other items. In 2019, the QWEL marketing approach was radically altered. Focus shifted to profit line contribution with lower revenues and away from top line growth. As a result, most retail distribution was curtailed, ad spending was reduced, and redirected from TV to digital advertising. OPEC spending in 2019 from mid-year onward was significantly reduced, including reliance on outside professional services. Also, the QWEL-GSK collaboration in 2019 involved extensive R&D effort to achieve development milestones, and similar activity did not occur in 2020. So with those events in mind, a few brief comments on the 2020 full-year numbers. Revenues were $7.4 million. This was a nearly $2 million drop from $9.3 million last year. It reflected the company's focus on profitability, leading to reduced QWEL revenues, as well as the pandemic effects. 2020 gross profit on revenue was $5.2 million. Margin rate was 71.2% versus 24% in 2019. Excluding the charge to cost of sales for the inventory elements of the 2019 restructuring charge, the 2019 rate was 54%, so still a substantial improvement in gross profit this year versus last year. 2020 operating spending was 7.3 million. OPEX in 2019 was 13.8 million, and included, as I mentioned, greater staffing levels in the first half of the year, staff severance costs, higher R&D spending, and broader QWEL advertising, as well as more extensive professional services. Other income was negligible in 2020. However, during 2019, $7.7 million was earned for achievement of development milestones under the GSK collaboration. And the net loss for 2020 was $2.1 million, and that was an improvement of $1.7 million from the prior year net loss of $3.8 million. Cash at the end of this year was $5.2 million. That's an amount sufficient to fund our operations well into 2022. The company's capital structure remains debt-free, and there are about 3.8 million shares outstanding. And so, in summary, the 2020 financials convey significant improvements to the business. While revenue did contract by 2 million, gross profit, OPEX spending, net loss, cash usage were all superior to the prior year. We exit 2020 with operations that are flexibly structured to accommodate growth and with a balance sheet that has improved over the end of 2019. We believe that 2021, and particularly the second half of 2021, will provide growth opportunities as the pandemic effects begin to recede and our R&D initiatives mature. Dr. Ghazani will now address our overall strategy. Thank you, Tom.

So as Tom outlined, we are pleased with the company's performance in the fourth quarter and are optimistic about our prospects for 2021. I will take this opportunity to review our go-forward business strategy. It is built around two core principles, the first being to attain profitability in the near term, and the second is to continue with industry-leading product innovation to drive our long-term growth. Focusing first on profitability. As we have communicated for the past year and a half, we have prioritized attainment of profitability. To this end, we have established an efficient cost structure throughout the business. Our headcount is 20 full-time employees and several part-time contractors. We have optimized manufacturing, marketing, and distribution, which has led to lower operating expenses and improved gross margins. Our ability to realize these efficiencies reflects the commitment and talent of our employees. The fourth quarter of 2020 provided evidence of our progress on this front, as we reported an operating loss of $326,000, which follows a loss of similar magnitude in the third quarter. A natural question for our shareholders is when we will turn the corner to operating profitability and start to consistently generate cash. We are not in a position to provide specific target quarters for these outcomes at this time due to the continued uncertainty around the impact of COVID-19 on our customers, the need to get more experience with our business initiatives, and because we need to maintain some flexibility to make opportunistic investments and growth. Nevertheless, Our expectation is that we will show year-over-year improvement in net income this year. Moving to innovation and our market expansion initiatives. Our corporate mission is to develop innovative medical devices and bring them to physicians and patients to improve health and quality of life. Our products are unquestionably the most advanced and sophisticated in their categories, whether that is neuropathy diagnostics or non-invasive neurostimulation. We have and will continue to maintain our historical focus and investment in R&D. As we have previously announced, we are updating all elements of the DPN Check neurodiagnostic platform, which includes the device itself, the biosensor, and the associated data management and reporting software. We launched an updated biosensor in the fourth quarter and expect to release the new data management and reporting software this quarter. It includes enterprise and security features requested by Medicare Advantage insurance plans which are our primary customer target in the U.S. Moving to Quell, we believe that there are four leading clinical indications for the Quell wearable pain relief platform. Chronic lower extremity musculoskeletal pain, fibromyalgia, chemotherapy-induced peripheral neuropathy, or CIPN, and restless leg syndrome, or RLS. There are additional uses for Quell, but these are the ones we are specifically targeting. Our current market focus is chronic lower extremity musculoskeletal pain, primarily chronic knee pain, which affects up to 25% of adults in the U.S. QUAL is available over the counter for this clinical application and is particularly well-suited because of its placement near the knee and novel wearable design that enables use during activity. The QUAL Health Cloud now includes data from nearly 100,000 QUAL users with chronic pain, making it one of the largest chronic pain repositories in the world. We are mining this real-world data to improve the product and conduct clinical research. Beyond the QWEL over-the-counter opportunity, which is not profitable for us, we believe that the primary growth engine for the QWEL business will come from its application to specific clinical indications as a prescription medical device. We are working on three areas, as I mentioned before, fibromyalgia, chemotherapy-induced peripheral neuropathy, CIPN, and restless leg syndrome, again, RLS. In combination, these conditions represent a market of up to 20 million individuals in the U.S. alone with significant unmet treatment needs that QWEL is well-suited to address. We have encouraging pilot or randomized control trial data for all three. The next milestone for our prescription QWEL business is the filing of a 510K to treat the symptoms of fibromyalgia. This submission will leverage clinical data obtained in a double-blind randomized sham control trial conducted at Brigham and Women's Hospital in Boston. Our current plan is to file in the third quarter of this year. As this is a novel regulatory claim for transcutaneous electrical nerve stimulation and fibromyalgia is a complex and challenging condition to treat, we cannot handicap the outcome. However, we are optimistic based on the data we intend to present to the FDA. We will communicate our market strategy once we have additional regulatory certainty. We are also closely following an NIH-funded multi-center randomized sham control trial of Quell in chemotherapy-induced peripheral neuropathy that is being run by the University of Rochester School of Medicine. We are currently constructing our CIPN regulatory strategy and planning next steps. We should have updates on this program in the second half of the year. Our RLS program, restless leg syndrome, is not as far along as the other two indications. However, we have a unique and relevant asset in the Quell Health Cloud, which has data from over 10,000 Quell users who report having RLS in addition to chronic pain. We are analyzing this large and growing real-world RLS dataset for valuable clinical and marketing insights. So in summary, Neurometrics has novel products that are targeting large markets with unmet needs. We are a committed and operationally efficient organization that is structured to attain profitability while supporting growth. And that concludes our prepared comments. We'd be happy to take questions at this point.

As a reminder, to ask a question, you will need to press star one on your telephone keypad. And to withdraw your question, press the pound key. Please stand by while we compile the Q&A queue. Again, in order to ask a question, just press star 1 on your telephone keypad. And there are no questions at this time. Turn the call over to Dr. Guzzani.

Thank you, then, for joining us on this conference call, and we look forward to updating you over the balance of the year.

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