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spk02: Good morning and welcome to the Neurometrics second quarter 2024 business and financial update. My name is Amy and I will be your moderator on the call. On this call, the company may make statements which are not historical facts and are not 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 risks and uncertainties, including the factors described, under the heading Risk Factors. and 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 undertake no duty to update the information disclosed on this conference call. I'd now like to introduce Neurometrics Senior Vice President and Chief Financial Officer, Mr. Thomas Higgins. Mr. Higgins?
spk03: Thank you, Amy, and welcome to our Q2 2024 business update. For those of you unfamiliar, we are a commercial stage medical device company developing and commercializing neurotechnology devices to address unmet needs in the chronic pain and diabetes markets. Our products are wearable or handheld devices enabled by proprietary consumables. and software solutions including mobile apps, enterprise software, and cloud-based systems. We have two commercial products. Quell is our wearable Neuromod platform currently addressing chronic pain related to fibromyalgia and also related to lower extremity chronic pain. There are multiple emerging indications including CIPN, long COVID, chronic low back pain, chronic overlapping pain conditions, and others. DPN Check is our point of care screening test for peripheral neuropathy, particularly focused on diabetes. Our business model is razor razor blade with aftermarket sales as the primary financial objective and currently representing about two thirds of our revenue. At current scale, we are adequately funded with approximately 16.4 million in liquid assets and quarterly cash usage of about 1.4 million which we plan to further decrease going forward. Our capital structure is simple, it's debt-free, and common stock-based. Today we reported Q2 revenue of $769,000. This was a drop from $1,656,000 in the second quarter of 2023, and this drop was anticipated. The DPN check product line accounted for the entire revenue decline. As previously discussed, CMS rule changes in Medicare Advantage initiated early last year, 2023, encompassed a two-year phase-out of risk adjustment compensation to healthcare providers for a range of patient screenings, including peripheral neuropathy. This is the second and final year of that timetable. As would be expected, many providers have curtailed this activity. We are working to identify domestic DPN check interest in potential new markets and are pursuing several attractive opportunities. The ultimate outcome of our efforts is uncertain at this point. The QWEL product line, however, continues to post revenue growth. QWEL revenue in Q2 of 192,000 was a year-on-year gain of 47%. While QWEL revenue is a relatively small contributor, Its growth rate provides an encouraging indication of future potential. Our careful strategic launch of quail fiber myalgia in 2023 and earlier this year has been quite effective in building market knowledge while controlling spending on sales and marketing activities. The legacy product, Advanced for Peripheral Neuropathy, completed a planned phase-out and was terminated as of July 31st, 2024. Gross profit in the quarter was $492,000. This reflects a gross margin rate of 64%, which at 360 basis points lower was generally in the margin range of the second quarter of last year. Individual product gross margins in the quarter were stable for DPN check, which is in the 80% range, and improving for QWEL, where growth has pushed the margin rate into positive territory at 36 percent and trending upward. Of course, the overall margin of 64 percent was adversely impacted by the effect of reduced sales volume on indirect cost absorption. Operating expenses in the quarter totaled $2.3 million, down about $422,000 or down 15 percent from the prior year quarter. This spending drop reflects the effects of a Q1 2024 reduction in force, which going forward will reduce personnel costs by over a half a million dollars per quarter. The savings in Q2 were partially offset by professional service costs associated with our ongoing strategic review process. Net loss in the quarter was $1,488,000 or 74 cents a share, a small improvement of about $50,000 from a net loss of $1.5 million in the second quarter of last year. Operating cash usage in the quarter was approximately $1.4 million, lower again by about $90,000 from Q2 of 2023. Working capital at the end of the quarter was $16.9 million, and we ended the quarter with liquid assets of $16.4 million. And now for the comments of Dr. Shai Ghazani, our founder and CEO.
spk05: Thank you, Tom. Let me start by providing an update on the review of strategic options that we announced in February of this year. Our goal was and remains to consider all reasonable opportunities to maximize shareholder value. Over these past six months, we have invested considerable time, effort, and resources in this process. And in terms of specific activities, we have been conducting an extensive survey of potential transactions in collaboration with our financial advisor. And several of these have led to detailed diligence. However, thus far, the Board has determined that none of these opportunities are in the best interest of shareholders at this time. As Tom noted, we implemented a substantial reduction in force at the end of the first quarter that lowered operating expenses on a going forward basis by over half a million dollars per quarter. This helps bring our revenue and OpEx into better alignment. We are actively exploring opportunities to monetize non-core assets to further offset cash consumption, when here we are particularly focused on international markets that are not core to our U.S. focus. And in April, we engaged in discussions with one of our large shareholders that resulted in the addition of Joshua Horowitz as a new independent director, and we also at that time terminated our at-the-market ATM equity facility. Our plan is to continue the strategic review process while also efficiently operating the business and seeking to return to growth. There can be no assurance that this process will result in the company pursuing or consummating a particular transaction or other strategic outcome. And at this point, we have not yet set a specific deadline for completing the process. Returning now to our operating business. As Tom noted, we reported good year-over-year growth in our quail business of 47% to around $200,000 in the second quarter. While the absolute number is modest, there are a number of encouraging signs. First, the growth was entirely from quail fibromyalgia. In fact, the over-the-counter business decreased as it has been in a commercial pause. We are now planning to restart the OTC business, which will give us two sources of growth going forward. We're planning to have both parts of the QWEL business, fibromyalgia and OTC, active by the fourth quarter. Second, in addition to revenue, we saw good growth in the number of QWEL starter kits sold. There were 540 sold in the quarter, which was 165% year-over-year growth, and we had 3,682 one-month refills. of qual electrodes, which was 13% growth. Again, this is with a planned drop in the OTC business that we should be able to reverse shortly. And third, we're starting to see uptake of qual fibromyalgia in the Veterans Administration Health System. This is an exciting opportunity as the device and refills are attractively reimbursed. We are operating just a few VA centers at this time, but we'll be looking to grow steadily the rest of the year and expect to make the VA a core focus in 2025. We believe that we now have clarity on how to move forward with our CIPN indication. CIPN standing for Chemotherapy Induced Peripheral Neuropathy. We will make a de novo submission for CIPN by the fourth quarter of this year, with a potential commercial launch by the end of 2025, if everything falls into place. If obtained, this indication will introduce quality technology as the device is likely to have a new branding into the large and commercially attractive oncology market. As noted by Tom, the DPN Check business suffered an expected year-over-year drop due to substantial changes to Medicare Advantage announced early last year. 2024 is the final year of a phase-out of risk adjustment compensation for many types of patient screening, including peripheral neuropathy. While we expect that some of our MA customers will continue to utilize DPN Check next year and beyond, it is imperative that we rotate into other markets. We are working on a number of attractive opportunities that have the potential to scale up the business again, but we are still at least several quarters from meaningful revenue from these newer channels. Hopefully, nevertheless, we hope to provide updates and announcement of pilots over the balance of this year as indicators of our progress. And on the scientific and clinical side, there were several prominent DPN-CHF abstracts presented at the Japanese Diabetes Society meeting in May 2024 and the ADA scientific meeting in June of 2024. Those are our prepared comments, and we'd be happy to take questions now.
spk02: Thank you. At this time, we will conduct the question and answer session. As a reminder, to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced.
spk01: To withdraw your question, please press star 11 again.
spk00: Please stand by.
spk01: And our first question comes from the line of Jared Cohen with JM Cohen and Company.
spk02: Your line is open.
spk04: Yeah, just a quick question. Just long-term, I mean, I know you've talked about this so far for a long time, but how are you really going to grow the quail business since the DPM business is really dropping off to be somewhat substantial? Because years ago, If I'm correct, the Quell business was running on a quarterly basis over a million dollars a year. And I think you had grown it to, and on a gross margin basis, you had changed the business around that it was running at a gross margin even over 50%. How can you get that? I know it's going to, as you said, to the veterans market and all that and opening up new markets. Fiber Miagio is still relatively, you're growing that. But, yeah, how can you get it back to that and beyond? I mean, it takes time. I know that. But you've now been in the prescription market for two years, and you're still just not even back. You're still way less than you were two, four years ago. So if you could just elaborate a little bit more. And it takes money also, so.
spk05: Yeah, thanks for the question, Jared. So we've been in the prescription market for about six quarters. But as we've stated previously, and really since we launched the product, we're being very methodical and deliberate in this. So we have not invested heavily on the commercial side. We have one director of sales as our commercial team. We really want to understand the business and how to grow it efficiently before we invest significant cash in building that business. So the answer to your question is the growth opportunity is there, but we wanted to be extremely careful about how we approach this market and wanted to understand it very thoroughly before we invested. So as an example, we've been understanding the VA market and now that we have a clear idea how to penetrate the VA, we're starting to add contract reps. So not direct sales rep, but contract reps who are compensated on a variable basis. So there's no structural costs associated with that. And we believe that that will rapidly grow as well as in the commercial market. So the answer to your question is the growth opportunity is there, but we've been very, again, very methodical going to that market. very methodical in deciding how to make the investments. And we're at the point now where I think we're ready to start increasing those investments and we'll see concomitant growth.
spk04: Okay. And I guess it's just going about what the product's always been about. I mean, it's not a cure, but there's really the side effects are very minimal, right? It's just a pain relief product, right? Or how do you position it?
spk05: It's symptom relief. So it's a quail fibromyalgia has a broad indication for relief of quail fibromyalgia symptoms beyond pain, but obviously pain is, this is a big one. The feedback from the market has been, has been excellent. Um, so we're, we're quite, we're quite confident that the product is effective in fibromyalgia, both from our clinical work and now from our commercial experience. Um, and as you said, there is no, you know, there really are very few options for these patients. Um, particularly with the safety profile that called fibromyalgia offers. And then beyond fibromyalgia, as we noted, we're ready to restart the over-the-counter business for low extremity chronic pain, which is a business we think we can grow cost-effectively to complement called fibromyalgia. And then we have the additional indications that we've talked about, including for chemotherapy. So We're quite optimistic, but we're going to be methodical in how we build these businesses, and so it will take time, but we should see on a quarter-by-quarter basis strong signs of growth and improved gross margins.
spk04: Okay. I know you probably don't want to talk about it, but the OTC market, are you going to do it differently than what you did before in terms of whether you go through stores or online or so forth, or you're still trying to figure that part out?
spk05: No, I mean, that will be pretty much exclusively online. Through our e-commerce site, we will consider going back on Amazon. But we're really looking carefully at margins. And the attractiveness of bricks and mortar retail, which we were in, as you know, is access and distribution, but the margins are not nearly as attractive. So at least for the foreseeable future, it will be purely e-commerce.
spk04: Okay. All right. Thank you very much.
spk05: Sure, Darren.
spk02: If you'd like to ask a question, please press star 1-1 on your telephone. Again, that is star 1-1 on your phone.
spk00: And I'm showing no further questions at this time.
spk02: I would now like to turn it back to Dr. Ghazani for closing remarks.
spk05: Thank you very much for joining us today, and we look forward to keeping you updated as we get through the balance of the year. Thank you.
spk02: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
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