NeuroMetrix, Inc.

Good morning, and welcome to the Neurometric Second Quarter 2021 Earnings Call. My name is Michelle, 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. Many 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 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 neurometrics.com and on the SEC's website at sec.gov. Neurometrics does not attend and undertakes no duty to update the information to close 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, Michelle, and those of you attending today's call. Dr. Shai Ghazani, our President and CEO, is also participating in this Q2 review. Neurometrics is a leader in proprietary non-invasive medical devices for the diagnosis and treatment of pain and neurological disorders. We design and deploy a recurring revenue business model in all of our products. These commercial products include the neuro-diagnostic technologies of DPN check in advance, plus our chronic pain treatment technology, Quell. Our results for the second quarter of 2021 were just released. Overall financial performance was in line with our expectations. We continue to make progress in positioning our commercial products for future growth while supporting the ongoing research and development programs, which I will address shortly. Turning to the highlights of the Q2 earnings report, Q2 revenue was about $2.2 million, an improvement of 63% from $1.4 million in Q2 of last year. Last year, results, however, were depressed by the pandemic-related decline in customer orders that we saw across the industry. Within total revenue, DPN check was the largest component, and within DPN check, our domestic Medicare Advantage business was the largest contributor. International DPN check sales, which are primarily in Japan and China, improved from Q1 of this year but continued to lag last year, We believe this reflects conditions on the ground in those two countries. Advanced electrode sales delivered another strong quarter. This was both year-on-year as well as on a sequential quarter basis. Electrode unit volumes and pricing were both higher. Advance is primarily used to evaluate carpal tunnel syndrome by hand surgeons and by occupational health physicians in industrial settings. Quell continued to deliver positive operating margins. Our gross profit on revenue for the quarter was about $1.7 million. That represents a margin rate of 74.8% versus 63.6% in the prior year quarter. This improvement of 11.2 percentage points is primarily due to increased cost absorption due to the higher production rates currently due to this year versus the low production volumes of last year. Operating expenses totaled $2.2 million. R&D spending of about $600,000 was relatively constant year on year. Sales and marketing spending of $300,000 was lower than last year due to reduced QWEL advertising spending. And G&A spending of $1.3 million was up about $600,000 from 2020. This primarily reflects the timing of equity awards incentive comp accruals, professional services, and state sales tax obligations. Our net loss for the quarter was $532,000, which compares favorably with a net loss of $852,000 in the prior year quarter. And on a per share basis, our net loss was $0.13 versus $0.28 loss per share in Q2 of last year. Regarding the balance sheet, We ended the quarter with cash of 8.4 million. Our cash balance was subsequently increased to over 10 million following ATM equity sales of 2.3 million, which we made over the last three weeks or the first three weeks in Q3. We believe that our cash on hand provides the company with sufficient resources for the foreseeable future. Operating cash usage was $567,000 during the quarter, and that included a $350,000 payment to settle a retailer closeout for Quell. Excluding this one-time payment, our net operating cash consumption was $217,000 in the second quarter of this year. Stockholders' equity at the end of the quarter was $8.8 million, or $1.75 per share. And now Dr. Ghazani will address our overall strategy.

Thank you, Tom. First, I would like to comment on the recent activity in our stock. We appreciate the interest that was generated by the recent announcement that Qual received FDA breakthrough device designation. It is gratifying that new investors are learning about neurometrics and our efforts to improve patient health through our diagnostic and therapeutic products. Our business strategy is guided by three principles. The first is continued R&D investment in our technology platforms to drive market penetration and to open up additional markets. The second is transitioning the business to operating profitability and cash generation. And the third is establishing consistent and predictable top-line growth. I would take this opportunity to provide updates on each of these elements. First, with respect to R&D. Our R&D strategy is to develop unique proprietary medical devices that utilize non-invasive neurostimulation to diagnose and treat neurological conditions and pain. We seek to define new product categories and leapfrog existing technology. We develop products using our specialized in-house 10-person R&D team. We have two near-term R&D projects along with several nascent programs. Today, I'll focus on our near-term programs. We are in the late stages of our second-generation DPN check development project. As a reminder, DPN check is a proprietary, rapid, point-of-care test for nerve degeneration, such as due to diabetes, chemotherapy, and autoimmune diseases. Polyneuropathies, as these conditions are called, have an overall population prevalence of 5% to 10% that increases to over 25% in elderly individuals. Our current expectation is to launch the second generation device in the U.S. before the end of the year. This new DPN check captures our experience with the first generation device, which has been used for over 3 million patient tests. The next generation DPN check will solidify our first mover advantage and make it challenging for significant future competition to emerge. It will also further protect our growing high margin aftermarket consumables revenue stream, which accounts for about 80% of DPN check sales. Our next program relates to fibromyalgia. We are developing a prescription treatment for the symptoms of fibromyalgia based on our Quell technology. Fibromyalgia is a common chronic pain disorder that affects as much as 5% of the adult population. Although there are several FDA-approved drugs, they have side effects and poor adherence. The global fibromyalgia treatment market size is several billion dollars, with the U.S. being a large slice of that. On Tuesday of this week, we reported that Quell received the FDA Breakthrough Device designation for treatment of fibromyalgia symptoms in adults. This is an important recognition of the need for better treatments for people living with fibromyalgia and the potential for Quell to help address this unmet need. Under the program, the FDA will provide the company with priority regulatory review. In addition, there are government programs under consideration that, if adopted, may facilitate Medicare reimbursement following marketing authorization by the FDA. I would like to emphasize that at this point, the use of QUAL for fibromyalgia is investigational. We believe that the use of QUAL to treat fibromyalgia symptoms, not just pain, but symptoms, is a novel clinical application of non-invasive nerve stimulation and are therefore proceeding through the FDA de novo pathway. This regulatory category is designed for Class II medical devices that do not have a predicate to which they can be compared for substantial equivalence. Unlike most 510 submissions, de novo submissions often require randomized control trial data to demonstrate a probable clinical benefit. We anticipate filing our de novo application in the fourth quarter. Subject to FDA review timelines, it may be possible to launch in the second half of 2022. We will provide updates as this program progresses. Now moving on to the second element of our strategy, which is attaining profitability. We have communicated over the past two years that we are emphasizing attainment of profitability in cash generation. As covered by Tom in his discussions of the financials, we remain close to crossover. However, we're not quite there. We believe that we will continue to make progress over the next four to six quarters, and in the meantime, expect modest full cash usage. However, we do caution that the path to profitability may not proceed linearly, and we also may decide to make certain investments in our product lines to further enable growth. which could alter the timeline to profitability. Now, moving on to our third element of our strategy, which is growth. We believe that we can consistently grow revenue while remaining steadfast in our commitment to achieving profitability. We see growth coming from a number of sources. In the near term, we are bullish about our DPN check business, particularly in Medicare Advantage, where Medicare Advantage represents about 40% of all Medicare beneficiaries or currently about 25 million covered lives. The clinical value and return on investment of population-level polyneuropathy screening with DPN check is established within Medicare Advantage. Several of the largest Medicare Advantage insurers have already adopted DPN check in some of their networks, and we have a pipeline of candidates to implement DPN check this year and next. Moreover, the Medicare Advantage space itself is growing at nearly 10% annually. and our large existing insurance customers are actively acquiring physician practices, which often leads to new DP entry business soon after the acquisition. As evidence of our enthusiasm for this business, we are in the process of filling a VPS sales position to focus solely on Medicare Advantage, including building out a sales force as justified by the size of the business. We also see the Quell business returning to consistent growth with the launch of the prescription fibromyalgia indication in the second half of 2022. We also have clinical development programs ongoing in other prescription indications with chemotherapy-induced peripheral neuropathy and restless leg syndrome the furthest along. So in summary, Neurometrics has novel products that are targeting large opportunities within the neurology and pain markets. We are an innovative, committed, and operationally efficient organization that is structured to attain profitability while supporting growth. And those represent our prepared comments. We'd be happy to take questions at this point.

If you would like to ask a question, please press star, then 1. If your question hasn't answered and you'd like to remove yourself from the queue, please press the pound key. Again, to ask a question, please press star, then 1. One moment for questions. Our first question comes from Jerry Nury. with Little West 12th Street. Your line is open.

Good morning, and I want to congratulate you for rising to the moment where senior citizens in the United States across the world are suffering from diversified pain. I'm one, for instance, and it's very important that Medicare and hopefully Medicaid will honor your medical device. I saw in past years Jerry Lewis the Comet. He had a medical device and attached to his spinal cord and he pressed it and the pain went away but what replaced it was a very numb feeling that he disclosed during a telephone. And I'm wondering, because I don't know, is there A numb feeling when your device is on or you're totally back to normal, relaxed nerves with no pins and needles or thousand needles feeling in the part of the body that is activating to reduce the pain? Is it reduced with pins and needles is what I'm asking, a numb feeling.

So thanks for the question and the kind comments. So the way that Quell, which I believe is what you're referring to, operates is it does stimulate the nerves in order to induce an analgesic or pain-relief response that is a sensation that is experienced. You can feel it. To most individuals, it is not uncomfortable, but it is a sensation that is felt. Not numbness, but there is a feeling of stimulation.

Does it take away from your concentration in the day, or you can continue your workforce or your daily activities as a senior citizen retiree?

Yeah, so it does not, in fact, distract. And, in fact, it's used by many people overnight and doesn't even disrupt their sleep.

I'm waiting to experience it. I hope you put me on your list for clinical studies.

Okay. Thank you very much for the comment and the kind words.

Thank you.

There are no further questions. I'd like to turn the call back over to Dr. Shai Ghazani for any closing remarks.

Well, thank you very much for joining us on this Q2 conference call. We look forward to updating you over the balance of the year.

This does conclude the conference. You may now disconnect. Everyone, have a great day.