NeuroMetrix, Inc.

good morning and welcome to the neurometrics second quarter 2023 business and financial highlights update my name is mikey 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 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 near metrics 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 released 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 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.

Thank you, Mikey, and welcome to all of you who are joining Dr. Shai Gozani and myself for today's Q2 2023 update. By way of background, we are a commercial stage medical device company addressing unmet needs in chronic pain and in diabetes. Our products are non-invasive, they have no direct competition, and offer worldwide opportunity. Our business is based on a razor, razor blade model with aftermarket revenue as the primary financial objective. Our principal technologies are Quell, a wearable neuromodulation platform that has transitioned from over-the-counter to prescription, and DPN Check, a legacy screening technology for peripheral neuropathy, particularly diabetes-related neuropathy. We maintain a strong balance sheet with about 19.6 million in liquid assets. Those are cash and securities. Our capital structure is simple and debt-free. There are approximately 8.6 million common shares outstanding. Today we reported Q2 revenue of 1.7 million compared with 2.1 million in Q2 of last year. The reduction in revenue reflects uncertainty in the Medicare Advantage market. among healthcare insurers and providers caused by recent CMS changes in patient risk assessment rules. Our DPN check business, which sells into that market, experienced a net 16% drop from Q2 of last year. However, within that drop, there was a 30% gain in sales for China and Japan year on year. Other factors affecting the Q2 reduction in revenue were the quell transition to a prescription indication wherein growing fibromyalgia sales partially offset the drop in over-the-counter, and also the natural erosion of our legacy advanced electrode sales where we continue to support our existing users but do not promote the product and manage it for its cash flow benefits. Aftermarket sales across all products constituted 75% of revenue in the second quarter. Our gross profit was 1.1 million, compared with 1.5 million in Q2 last year, and the drop in gross profit links directly to the lower revenues. Importantly, our gross margin rate of 68% was consistent with Q2 of 2022. Operating expenses totaled 2.7 million, virtually unchanged from the prior year quarter. A small increase in OPEX of 80,000, or about 3%, reflected increased personnel costs offset by reduced spending on professional services. Our net loss was 1.5 million in the quarter or 19 cents a share versus 1.2 million or 17 cents per share in Q2 of 2022. Operating cash usage in the quarter was approximately 1.5 million. Our 19.6 million in liquid resources are projected to be adequate to support the next phase of our QWEL and DPN-check growth initiatives. And now for Dr. Ghazani's comments.

Thank you, Tom. Our growth strategy is primarily built on three core efforts. The first is to establish and grow the QWEL Fibromyalgia Indication in the U.S. market. The second is to advance the QWEL Neurotherapeutics Program which may lead to additional indications and an expanded addressable market. And the third is organic growth in the DPN Check Medicare Advantage business. And I'll now comment on each of these activities. First, with respect to our Qual Fibromyalgia business. Qual is our wearable neuromodulation platform. It is based on our proprietary adaptive transcutaneous electrical nerve stimulation technology and is the only daily multi-hour wearable treatment for chronic pain syndromes. It is FDA cleared for relief of lower extremity chronic pain, and last year received FDA de novo authorization as the first and only neuromodulation device indicated to help reduce the symptoms of fibromyalgia. This latter indication is available by prescription only. At this time, our commercialization efforts are exclusively focused on fibromyalgia indication. Fibromyalgia is a complex chronic pain syndrome that affects up to 15 million people in the U.S., The only FDA-approved drugs are pregabalin, duloxetine, and minasepram, which can have substantial side effects. There's a critical unmet need for additional safe treatments. The second quarter of this year was the second quarter of the commercial launch of quote fibromyalgia and followed a small amount of activity in December. This initial phase is strategic and intended to optimize the effectiveness of our prescription processing solution to refine the clinical and marketing messaging and to collect key performance indicators. Our commercial team has consisted of a single dedicated headcount, which is our national director of sales. We've partnered with a national online pharmacy to fulfill both initial prescriptions and refills. And at this time, fibromyalgia is only available on a cash-free basis. There were 123 unique prescribers during the second quarter compared to 92 in the first quarter. Our most common prescribers are rheumatologists, pain medicine specialists, and neurologists. The cumulative number of quell fibromyalgia prescriptions that have been written increased to 490 in the second quarter from 234 in Q1, with approximately 60% of written prescriptions being filled by patients. The cumulative number of month refills increased to 348 in the second quarter from 141 in the first quarter. As recently announced, we have expanded our sales force to drive further adoption. This stage of the commercialization process will focus on the Texas, California, and Florida markets, and then we expect to decide on our next expansion in the first half of next year. The second element of our growth strategy is to develop the Quell Neurotherapeutics pipeline beyond the initial fibromyalgia indication. The program that is the furthest along is a treatment of chronic chemotherapy-induced peripheral neuropathy, or CIPN, which affects as many as 30% of the approximately 1 million people in the U.S. who receive chemotherapy every year, is a chronic and debilitating side effect of cancer treatment, and there are no FDA-approved treatments for CIPN. Qual received FDA breakthrough designation for treating moderate to severe CIPN in January of 2022, based on a pilot study conducted at the University of Rochester. A NIH-funded, multi-centered, double-blinded, sham-controlled trial completed enrollment in the third quarter of last year, and we have now had an opportunity to review the results and have determined that they support an FDA 510K filing for a QELC IPN indication, which we expect to make in the fourth quarter of this year. Depending on the FDA review timeline and ultimate clearance decision, we believe that we should be in position to initiate commercialization in the second half of next year. Moving to DPN Check. DPN Check is our rapid point-of-care test for peripheral neuropathy, such as diabetic peripheral neuropathy, or DPN, which is the most common long-term complication of diabetes. DPN Check is the only point-of-care peripheral neuropathy test based on gold standard nerve conduction study technology. Our DPN Check business is comprised primarily of B2B sales into the US Medicare Advantage market and international sales in China and Japan through distribution partners. About 80% of our DPN check revenues come from domestic sales. This business has been growing for the past several years. However, in the past six months, substantial uncertainty was injected into the Medicare Advantage sector due to policy changes announced by the Centers for Medicare and Medicaid Services. We believe this uncertainty and other related factors led to our largest Medicare Advantage customer and several smaller customers suspending their medical screening programs, which included DPN check, among other tests. At this time, we do not know if this is a temporary or permanent decision. These Medicare Advantage changes are putting material downward pressure on DPN check revenues, although it is too early to determine the magnitude and direction of the impact. However, we expect that the DPN check business line will continue to generate positive cash flow by virtue of its attractive operating margins. We also believe there is a potential for resumed growth once we get through this period of uncertainty. And that represents our prepared comments, and we'd be happy to take questions at this point.

Thank you. As a reminder, to ask a question, you will need to press star 11 on your telephone. Please stand by while we compile the Q&A roster.

Once again, to ask a question, please press star 11 on your telephone. Your first question comes from the line of William Church from PGRA Capital Management.

Your line is open.

Hi, good morning. I was reading a study, University of Oxford Press, December 2022, talking about, the title was Using Artificial Intelligence to Improve Pain Assessment and Pain Management. And they mentioned some of the numbers you do in terms of Americans experiencing pain. They concluded, though, collective studies mentioned have demonstrated that AI has advanced understanding in multiple areas of clinical care, but none has fully discussed the application of AI-based intervention and their assessment. That was a statement or a question, because I'm thinking about pain, electric signals through the body's neural network and Quell's device alleviate those. And it just seems that with the history you have and are gathering, you're really at the front line in terms of trying to find a less non-invasive solution. And I don't know if that's AI or not AI, but it just seems to me like the data that you have and all the FDA clinical trials put your company in a pretty favorable position. As I said, I don't know if that's a statement or a question, but that's what I was thinking. Thanks.

Yeah, thank you. Thank you, Bill. So AI, we view as a tool to leverage the data sets that we're collecting by virtue of having our device on so many patients. So we have very rich data sets. We have used basic AI techniques, machine learning in the past, and continue to utilize that tool to improve the performance of our devices as well as the delivery of our solution to patients. So I think it's a good statement, and I think it sort of more – it reflects the fact that I think that it's a powerful utility that I think all medical device companies should be looking at, and we are among those.

Okay. Thank you. Congratulations on the rollout of the product, and it looks exciting. Thank you. Thank you, Bill.

Your next question is from the line of Jared Cohen from JM Cohen and Company. Your line is open.

Just a broad-based question because now I've seen a lot of, just on television and just on the Internet, a lot of other pain management devices, a lot of quirky ones advertised now on TV channels some lower, some higher than what the QWEL used to be advertised online for over-the-counter, I'm saying. And I just wanted to go see if you've seen those, because that was always the The problem you got, I think, feedback that it was always overpriced, over the price point was over too much, which I never thought. This is when it was priced at $250 and the electrodes were $30 each or whatever, depending on how much you used them for a month or less. I just wanted to get your feedback because I always thought it's a great device and frankly, it either worked for the person or not. quickly. There are no side effects. Yeah, thank you.

Thank you, Jared. So there is a lot of noise in the pain management, pain relief space. I think what you're seeing on TV and other, say, digital media, it reflects that. And I think that largely speaks to why we've taken this over, that we've transitioned over the last several years from a over-the-counter focus to what we would call our prescription nerve therapeutics effort, where we are focusing on specific disease states where we have compelling clinical trial data, such as fibromyalgia, such as that's emerging for CIPN, where we can work with and generally I would say convince physicians that this is a useful tool for them in their patients with those specific conditions. Really kind of reflecting your comment is sort of that's the reason we've gone away from that generalized pain management space to focusing on specific disease indications and also why we're going through physicians as opposed to trying to compete in the broad, kind of broad ether of over-the-counter pain relief, which I think is just very noisy and very difficult to rise above that.

above that noise so we feel based on our initial traction that we've experienced that this is a this is going to be a positive strategy to get quell into the hands of patients okay it leads me to my next question because going through positions you know quickly who treats fibromyalgia is it a neurologist or I've never been sure or is it just a Which type of doctor treats fibromyalgia?

Historically, fibromyalgia has been within rheumatology, although it's now understood to be a neurological condition. I would say the top three are rheumatologists, pain physicians, for the obvious reason that there's a lot of pain associated with it, and neurologists.

It's a prescription type Where does the prescription for the quell come from? Does it come from a pharmacy, or does the doctor give it to the patient themselves?

The prescription is sent to our pharmacy partner directly from the physician, either electronically or via fax, and then the pharmacy contacts the patient and completes the prescription and fulfills it, and then they ship the product to the patient.

And then it's billed through the patient's insurance company?

At this point, we're not working through insurance. That may be something we do in the future right now. Most online pharmacies, it's cash pay.

Okay. So it's still cash pay, but FSA reimbursable, I assume.

FSA and HSA reimbursable, it is.

Okay. All right. Then I won't ask. All right. I guess the last, did you, I've always forgotten, what's the broad market for fibromyalgia in terms of, is it what, five or six billion or more than that? Just out of curiosity. I know it's a lot, it's a broad question because I know on an annual basis what people charge for drugs and fibromyalgia on an annual basis is probably what, $10,000 or $12,000? Yes.

It was until those drugs became generic. So most of the widely used fibromyalgia drugs, which were branded Lyrica and Cybalta, are now generic. So the market from that perspective has come down. There are probably as many as 15 million patients, at least probably three to five million that are diagnosed and another 10 million that have fibromyalgia probably don't have the proper diagnosis. So it's a large market. I don't think there's a an easy number to put on it, but it's a very prevalent condition and represents – it's really one of the more common forms of chronic pain. So, large market, but don't have a good dollar number to give you at this point because of the change in the market related to the fact that the drugs became generic. Okay. All right. Thank you very much.

Sure thing, Terrence.

Once again, to ask a question, please press star 11 on your telephone. There are no further questions at this time.

I would now like to turn the conference back to Dr. Ghazani for closing remarks.

Thank you for joining us today on the conference call, and we look forward to keeping you updated over the balance of the year.

This concludes today's conference call. Thank you for participating. You may all disconnect. Have a great day.