NeuroMetrix, Inc.

Good morning and welcome to the Neurometrics third quarter 2021 earnings call. My name is Catherine 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 Security 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 neurometric, 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 the SEC's website at sec.gov. Neurometrics does not intend and undertake 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, Catherine, and thanks to those of you attending today's earnings call. Dr. Shah Ghazani, President and CEO of Neurometrics, is participating in this call. By way of background, Neurometrics is a Boston-based medical device company with extensive proprietary intellectual property. We are innovation-driven and focused on the development and global commercialization of noninvasive medical devices for the diagnosis and treatment of pain and neurological disorders. Our business model is based on recurring revenue from our installed customer base. During the third quarter, our revenue was $2.1 million. This was up slightly, or 1%, from Q3 of last year. Aftermarket revenue as a percentage of that total was 82% versus 80% in Q3 2020. DPN check, our diagnostic for peripheral neuropathy, contributed the majority of sales and grew 7% year-on-year. Its sales are primarily concentrated in U.S. Medicare Advantage. Outside the U.S., DPN Check in Asia, which is Japan and China, posted year-on-year growth in the consumables biosensors. Advanced electrodes, which are used in evaluating focal neuropathies, such as carpal tunnel syndrome, posted slight year-on-year growth and QWEL revenue declined from the prior year on reduced promotional spending. Our gross profit on revenue was $1.4 million. The gross profit margin rate was 70 percent versus 73.6 percent in Q3 of last year. This 3.6 percent margin contraction was due to unfavorable purchase price variances on electronic components due to the global parts shortage. We see increasing challenges in sourcing critical parts and components. Lead times are being stretched and costs are rising rapidly. The situation is industry-wide with no expected resolution or return to normalcy within the next several quarters. We expect further margin contraction in the near term and higher inventory balances as we increase stocking levels to maintain production. Our operating expenses totaled $2.1 million versus $1.8 million in Q3 of last year, an increase in OPEX of $376,000. R&D spending of $725,000 included new regulatory activities for our Quell Fibromyalgia Initiative. Sales and marketing spending of $442,000 included new personnel costs related to expansion of the DPN check commercial team. And G&A spending of $966,000 included 2021 equity awards and incentive compensation accruals. Our net loss for the quarter was $687,000 versus $257,000 in Q3 of last year. The net loss increased by $430,000, reflecting the previously described margin contraction and increased OpEx spending. On a per-share basis, our net loss per share was 12 cents versus 7 cents Q3 2020. With regard to the balance sheet in our capitalization, we ended the quarter with $23.2 million in cash on hand, 6.6 million shares outstanding, and stockholders' equity of $24.2 million. We used the remaining capacity under our ATM shelf registration in the third quarter of 2021 to raise $16.3 million gross in new funding. This third quarter equity raise effectively completed the recapitalization of the company, which began with the June 2019 business restructuring to reduce cash losses, position profitable growth, and to clean up and simplify our capital structure. Since that time, cash losses have been reduced significantly, and new product opportunities are under development, which I will discuss shortly. Our capital structure today is clean, common equity only, and debt free. We now have adequate capital to invest in these new opportunities and drive profitable growth. We will shortly file a new shelf registration statement, ATM. This feature is an important tool in the CFO toolkit for accessing capital at low cost should that be necessary or prudent in the future. We do not have immediate plans to deploy the ATM to any great extent. Dr. Ghazani will now address our overall strategy.

Thank you, Tom. I will provide updates on our product lines and identify several growth catalysts that shareholders may want to note. With regard to DPN Check, we have two updates. First, we are planning to launch the second-generation DPN Check device in the United States in the first quarter of 2022. We will be going into production this quarter. This is a culmination of a multi-year R&D effort. We will provide details on the device's technological features and customer benefits at the time of launch. However, in broad terms, we believe it will support further adoption within Medicare Advantage and solidify our first mover advantage. Now, due to production constraints created by the worldwide electronic component shortage, we will need to phase the second-generation device into the market over the course of 2022. Second, yesterday we announced the addition of Sue Bell to our management team as SVP, population health, and value-based care. Sue has 20 years of sales strategy and business development experience in Medicare Advantage. We believe that under Sue's leadership, we can substantially grow DPN check sales in Medicare Advantage and other value-based markets. For those unfamiliar with this terminology, value-based care is when reimbursement is more closely tied to the quality of care provided rather than simply for provision of services. Medicare Advantage is the largest value-based care model. DPNcheck has been adopted by a number of large Medicare Advantage insurers for use within some of their affiliated provider networks, so we have a good start. Moving to the QWEL neuromodulation platform. We are expanding beyond over-the-counter use for lower extremity chronic pain to prescription treatments for specific pain syndromes. Our lead prescription program is for fibromyalgia, a complex chronic pain condition with inadequate treatment options that affects up to 5% of the adult population in the U.S. In July, we received a FDA breakthrough designation for use of Coel to treat fibromyalgia symptoms in adults. And earlier this month, we announced that we had filed our de novo request for this clinical indication. If we are granted the de novo authorization, then we believe that Quell will be the first medical device indicated for treatment of fibromyalgia. Subject to FDA review timelines, we expect to launch in the second half of next year and should record initial revenue from this indication in the fourth quarter of next year. At this time, we are focused on the ongoing regulatory process for the Quell fibromyalgia indication and development of the go-to-market strategy. We will provide further information on our commercial approach and strategies as we get closer to launch. My last update is on the induced painful neuropathy, which is another one of our prescription programs. As a reminder, the National Cancer Institute is funding a multi-center, triple-blind, and randomized sham control trial of Quell in patients with CIPN. This condition is a disabling complication that occurs in over half of patients receiving chemotherapy. There are few treatment options for CIPN, and those that are used have limited effectiveness and may cause serious side effects. Based on the enrollment to date and target enrollment, we expect the trial to read out in the second half of next year, and if the results are positive, we will look to file a de novo request for this indication in the first quarter of 2023. If those timelines hold, we may be in position to launch for this indication by the end of 2023. So in summary, NeuroMetrics is a committed and operationally efficient organization with novel diagnostic and therapeutic products for unmet needs in the pain and neurology markets. Those are our prepared comments. We'd be happy to take questions at this point.

Thank you. To ask a question, you'll need to press star 1 on your telephone. To withdraw your question, press the pound key. Again, if you would like to ask a question, press the star, then the 1 key on your touchtone telephone. Please stand by while we compile the Q&A roster. Again, if you would like to ask a question, please press the star, then the one key on your touchtone telephone. And I'm showing no questions in the queue. I'd like to turn the call back to Dr. Ghazani for closing remarks.

Thank you very much. We appreciate your joining us this morning, and we look forward to updating you after the end of the year. Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect.