NeuroMetrix, Inc.

Good morning and welcome to the Neurometrics First Quarter 2022 Earnings Conference Call. My name is Livia 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 are predictive in nature that depend upon or refer to future events or conditions of forward-looking statements. Any forward-looking statements reflect current views of Neometrics 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 uncertainties, including the factors described under the heading Risk Factors in the company's periodic filings with the SEC available on the company's investment relations website at neometrics.com and on the SEC's website at sec.gov. Neometric does not intend and undertakes no duty to update the information disclosed on this conference call. And I'd like to introduce Neometric's Senior Vice President and Chief Financial Officer, Mr. Thomas Higgins.

Thank you, Olivia, and thanks to those of you attending today's quarterly call. Dr. Shai Ghazani, President and CEO of Neurometrics, will be participating in the call also. By way of background, we are a Boston-based medical technology company with a mission to reduce the impact of neurological disorders and pain syndromes on individuals and on population health. Our technologies are non-invasive, and we hold extensive proprietary intellectual property. Our business model is one of recurring revenue from an installed customer base, And our principal products are DPN Check, a diagnostic technology providing rapid point-of-care detection of peripheral neuropathy, and Quell, an over-the-counter wearable neurostimulation technology that is indicated for symptomatic relief of lower extremity chronic pain. Revenues in our first quarter of 2022 were $2.3 million, up 6.8% from Q1 of last year. On a sequential basis, revenues increased by 26.5% from Q4 2021. DPNcheck contributes the majority of our revenue, and it delivered 16% quarterly growth year on year. Within DPNcheck revenue, high margin aftermarket sales, which are primarily single patient use biosensors, represented nearly 87% of revenue versus 81% a year ago. The primary focus of the DPN Check business is the domestic Medicare Advantage sector. In this sector, revenue growth was 15% year-on-year and 52% sequentially from the seasonally slow fourth quarter of last year. The growth was driven by price increases during 2021 and biosensor unit volume increases, which reflected increased testing by our customers. Our recently deployed Medicare Advantage commercial team will play a crucial role in maintaining and accelerating Medicare Advantage growth in 2023 and forward, and this reflects the typically long sales cycles with MA payers, Medicare Advantage payers, and providers. Outside of the U.S., our DPN check sales to Japan and China grew 19% year-on-year, with the growth being attributable to biosensor unit volumes. Quell revenue in the first quarter declined slightly from the prior year. We continue to manage advertising spending at reduced levels to ensure a positive product line contribution. And revenue from our legacy advanced diagnostic technology declined as we continue to support a contracting customer base with electrodes. Gross profit on revenue was $1.8 million in the quarter, up from $1.6 million comparable quarter last year. Our gross margin rate improved to 77.9% this quarter versus 73.3% Q1 last year. We view this margin improvement as an anomaly. The quarter benefited from the release of inventory reserves plus unusually low purchase price variance on sourcing electronic parts. Looking forward, we expect a continuing struggle to secure the parts we need for our products. Our historical subcontractors have capacity constraints due to a combination of high demand, labor issues, and part shortages. Lead times from part manufacturers are often being quoted out a year or longer, and secondary markets for products are demanding higher prices. This global supply challenge in electronic parts won't be resolved in the near future, And industry expectations vary widely, but consensus seems to be that the current environment will be with us at least well into 2023. And so we will likely see a degree of volatility in our gross margins in future quarters, primarily contraction in those margins. The range and timing are currently unpredictable. Operating expenses in the quarter totaled $2.8 million versus $1.6 million Q1 last year. The largest element of the year-on-year variance was a $450,000 one-time credit for technology fees that was recorded in Q1 of last year, depressing that quarter's spending. This distorted the underlying R&D spending rate in that period, and absent the 2021 credit, year-on-year R&D spending increased by about 4%. Sales and marketing spending increased by $465,000 year-on-year, primarily reflecting personnel costs for the development of the DPN check commercialization team. And G&A spending increased by $174,000, primarily relating to personnel costs. Inflationary pressure is being experienced across the range of our variable operating expenses. We have successfully managed its effects on our employees with minimal turnover, and without disruption to our operations. This challenging environment is forecast to continue into the foreseeable future. Net loss for the quarter was $959,000 versus $60,000 in Q1 of last year. On a per share basis, the net loss was 14 cents versus 2 cents in Q1 of 2021. Regarding the balance sheet, we ended Q1 with cash and investments of $23.8 million. The company has a simple debt-free capital structure with approximately 7 million common shares outstanding. We're well capitalized, and our liquid assets are adequate to fund our growth initiatives during 2022 and beyond. And now for Dr. Ghazani's comments. Thank you, Tom.

I will start by providing some additional commentary on our Q1 results. Our overall year-over-year revenue growth of 7% was entirely driven by our DPN check business, which grew about 16%. This growth was mostly organic, reflecting increased utilization by our existing customers and the benefits of higher prices implemented in 2021. Over the course of the first quarter, we built our value-based care commercial team, which focuses on DPN check utilization and Medicare Advantage, to four individuals that are highly experienced in Medicare Advantage sales, marketing, and clinical operations. This team is led by Sue Bell, our SVP, Population Health and Value-Based Care, who joined in October of 2021. The sales cycle in this market is long, and therefore the bulk of the impact from the new commercial team will be felt starting in 2023. However, we are pleased with the sales activities and the quality and depth of the pipeline. Revenue for our other two product lines, Quell and Advance, contracted in Q1, as they are currently managed to provide a positive operating contribution. Our expectation is that both of these products will remain a drag on growth this year. However, we are planning for Quell to resume growth in 2023, subject to a positive regulatory outcome, which I'll discuss. As we have noted over the past couple of years, we are transitioning Quell from a non-specific, over-the-counter treatment for chronic lower extremity pain to a focused prescription neurotherapeutic platform, starting with the treatment of the symptoms of fibromyalgia. We received FDA breakthrough designation for this indication in July of 2021, and it is currently being reviewed by the agency under a de novo request, which was submitted in October of 2021. We've had several interactions with the FDA and expect a decision in the next several months. However, there is no specific timeline which the FDA must meet. If we receive this indication, then QWEL will be the first and only non-pharmacologic treatment for individuals with fibromyalgia. We are planning to conduct a limited launch in the fourth quarter of this year and proceed to a full launch in 2023, with exact timing still to be determined. If these events occur as planned, then QWEL revenue will resume growth in 2023. Moving on now to near-term milestones. The most important is the one I just alluded to, which is receiving the FDA de novo authorization to market QUEL for the treatment of fibromyalgia symptoms. As I noted, we are expecting to hear in the next several months. Another important upcoming milestone is for the NIH and National Cancer Institute-funded randomized controlled trial of QUEL in chemotherapy-induced peripheral neuropathy, or CIPN, to complete enrollment. We're not certain of the exact timing as patient recruitment has been challenging throughout the study due to COVID-19. However, it seems that the study will wrap up by mid-year. Public disclosure of the study results will take some time, but preliminary findings could come out before the end of the year and definitely in the first half of 2023. Another upcoming milestone is formal launch of our second generation DPN check device. We have started production and will be strategically deploying the new device in pilot trials with large potential customers. A full market launch will follow once we have confidence in the supply chain. We hope to meet this goal before the end of the year, but it will depend on our ability to procure components in this highly challenging supply environment. Another DPNcheck-related milestone is launch of the DPNcheck Cloud, which is a data analytics platform that will allow our customers to easily monitor and optimize DPNcheck implementation and address key population health questions through a family of web-based dashboards. We anticipate launching DPNcheck Cloud by the end of summer and expect that it will positively impact biosensor utilization starting in 2023. Although we do not provide financial guidance, we can reinforce the directional guidance that we provided at the last earnings call. In terms of the overall 2022 revenue, we expect it to increase relative to 2021, driven by the growth in the domestic DPN check business. This will be partially offset by a temporary decrease in quo revenue as the business transitions from over-the-counter to prescription narrow therapeutics. as well as a continued downward trend in advanced revenue, which is a legacy business that lacks attention due to our focus on other priorities. We expect a modest increase in operating expenses, reflecting investment in our DPN check and quote growth initiatives. And we anticipate a modest increase in net loss due to relative timing of these investments and the resulting revenue growth, which as I've noted, will come mostly in 2023. Finally, cash will decrease due to negative income. However, we expect to end the year with about $20 million on the balance sheet. And at this time, we're not planning to execute financings out of opportunistic use of an ATM facility. And that summarizes our prepared comments, and we'd be happy to take any questions at this point.

Ladies and gentlemen, if you'd like to ask a question at this time, you will need to press the Start Ender 1 key on your touchscreen telephone. Again, if you'd like to ask a question, please press star 1. Sean, we have a question from Bill Trish with CTRA. Your line is open.

Yes, good morning. Thanks for taking my call. Do we have any update with regard to the Baylor study with regard to the COVID-induced long-term pain?

Good morning, Bill. That study has just started enrollment. So the first patients have been enrolled in the study.

Okay. Okay. Do you have a timeframe that we're looking at?

Well, I would say that enrollment will go through this year and probably into early next year. You know, it depends on the pace. I mean, they have a very large population of patients with long COVID. So hopefully that will proceed quickly. But it's always hard to predict. pace of enrollment, but hopefully the bulk of it should be completed this year. Okay. Thank you.

And as a reminder, if you'd like to ask a question, please press star 1. I'm showing no further questions at this time. I would now like to turn the call back over to Dr. Ghazani for any closing remarks.

Well, thank you very much for listening in on our Q1 conference call, and we look forward to keeping you updated over the balance of the year.

Ladies and gentlemen, that's our conference for today. Thank you for your participation. You may now disconnect.