NeuroMetrix Inc (NURO) 2006 Q2 法說會逐字稿

Good day and welcome ladies and gentlemen to the second-quarter 2006 NeuroMetrix earnings conference call. My name is Audrey and I will be your conference coordinator for today. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session toward the end of today's conference. (OPERATOR INSTRUCTIONS) As a reminder, ladies and gentlemen, this conference is being recorded for replay purposes.

I would now like to turn the call over to Mr. Brad Smith, Chief Financial Officer. Sir, you may begin.

Good morning everyone. Before we begin, I would like to briefly discuss the use of forward-looking statements on this conference call. Statements we make on this call may include 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 that include words such as belief, may, will, estimate, continue, anticipate, intend, expect, plan, or other similar expressions are forward-looking statements. Any forward-looking statements reflect current views of NeuroMetrix about future results of operations and other forward-looking information. You should not rely on forward-looking statements because our actual results may differ materially from those indicated by these forward-looking statements as a result of a number of important factors such as those set forth an Item 1-A, risk factors, of our annual report on Form 10-K for the year ended December 31, 2005 and our quarterly report on Form 10-Q for the quarter ended March 31, 2006, and our other SEC filings. NeuroMetrix does not intend to and undertakes no duty to update the information disclosed on this conference call.

Additionally on this conference call, we may refer to certain non-GAAP financial measures such as non-GAAP adjusted net income and net loss and non-GAAP adjusted diluted net income and loss per share. You can find a tabular reconciliation of these non-GAAP financial measures to the most directly comparable GAAP numbers in our earnings release on our website @www.NeuroMetrix.com under the investors tab.

I would now like to turn the call over to Dr. Shai Gozani, our CEO.

Thank you, Brad, and good morning. I would like to welcome you to the NeuroMetrix second-quarter 2006 conference call. I'm joined today by Gary Gregory, our Chief Operating Officer; Brad Smith, our Chief Financial Officer; and Nicholas Alessi, our Director of Finance. I will start today's conference call by providing you with an overview of NeuroMetrix and some brief highlights of developments in the second quarter of 2006. I will then turn it over to Gary for a discussion of our key sales and marketing metrics and Brad for a summary and analysis of financial results.

NeuroMetrix is a medical device company establishing a new standard of care through the design, development and sale of proprietary products used to diagnose neuropathies which are diseases of the peripheral nerves and parts of the spine. Neuropathies are frequently caused by or associated with diabetes, low back and other spinal disorders and carpal tunnel syndrome as well as other clinical disorders.

Our neuropathy diagnostic platform, called the NC-stat System is used in over 4000 physician practices and clinics representing approximately 12,000 physicians throughout the United States. Our technology enables a broad group of primary care and specialty care physicians to effectively, accurately and objectively diagnose neuropathies in their office. Our customers are finding that their ability to diagnose neuropathies earlier and more accurately is impacting the way in which they manage their patients and make important therapeutic decisions.

We believe that the market opportunity we are addressing could be $1 billion or more annually in the U.S. alone given the millions of patients and individuals with diabetes, low back problems and carpal tunnel syndrome. There are now over 21 million people in the U.S. with diabetes and another 41 million who are pre-diabetic. Neuropathies affect 60 to 75% to people with diabetes and lead to pain, foot ulcers, amputation and in the elderly, a significantly increased risk of falls. The earlier and accurate detection or confirmation of diabetic neuropathy and other neuropathies in people with diabetes leads to more effective patient management and treatment decisions and ultimately results in improved clinical outcomes.

Low back and leg pain and carpal tunnel syndrome which together account for over 10 million physician office visits annually in the U.S. alone are also closely associated with nerve damage and effective clinical management of these conditions often requires early and accurate diagnosis of neuropathies. The NC-stat System is improving the way in which thousands of physicians provide care for their patients.

The key highlights for our second quarter of 2006 include the following. We generated revenues of $14 million, an increase of 73% compared with the second quarter of 2005 revenue. Our gross margin percentage was 75.8% in the second quarter of 2006, an improvement over the second quarter of the prior year.

We improved our bottom-line results in the second-quarter and increased our total cash and investment balances by $2.4 million during the quarter. The number of customers using the NC-stat System and the usage of NC-stat System continued to experience growth on a year-over-year basis in the second quarter of 2006. As I mentioned, we now have over 4000 active customer locations and approximately 287,000 biosensors were used by our customers in the second quarter representing a 66% year-over-year growth.

We've continued making progress on products and development including our next generation diagnostic platform and expect to file a 510-K with the FDA in 2006. This product includes important technological advances and captures clinical and market experience gained through the initial launch of the NC-stat. We believe that this system is particularly suited to our continued expansion in both primary care and specialty care markets. We've also advanced our drug delivery platform which further connects the diagnosis and ultimate treatment of neuropathies.

As previously disclosed, during the second quarter of 2006 we received a subpoena from the Office of Inspector General of the Department of Health and Human Services requesting documents from us in connection with an investigation of potential violations of the Federal Anti-Kickback Statute and False Claims Act. We are fully cooperating with the OIG. We are providing them with information they have requested and the government has not instituted proceedings in any way against us in connection with this matter. We are not aware of any further developments pertaining to the OIG matter.

I will now turn it over to Gary who will outline our performance as reflected in certain key operating metrics.

Thank you, Shai, and thanks to each of you for joining our call today. As Shai has noted, we are coming up another strong quarter that demonstrates the continued progress of our Company toward our objectives of establishing the NC-stat System as a standard of care and NeuroMetrix is the leading company in neuropathic diseases.

In Q2 2006, we expanded our customer account to 4068 active customers demonstrating a continued ability to secure and establish new customers across the primary care and specialty care segments. This represents customer growth of approximately 50% in the past twelve months alone. Testing with the NC-stat System in the second quarter of 2006 grew year-over-year by approximately 66% to 287,000 biosensors compared with 173,100 in the second quarter of 2005. Through this performance, our average customer now delivers close to $10,000 in annual biosensor revenue based on their usage during the second quarter of 2006.

The distribution of testing by our customers in the second quarter of 2006 is as follows. 72% of total testing was performed by our primary care accounts and 28% came from within our specialty care segments. Here 50% of total testing within the specialty care came from within the orthopedic market and 50% of total testing within the specialty care segments were performed by other specialty care physicians including those in occupational medicine, pain management, neurology and physiatry. Testing within the primary care market which we broadly defined as internal medicine, family practice, diabetology, endocrinology and rheumatology grew by 102% year-over-year illustrating our progress in this expansive market segment. Testing by all specialty care physician segments which includes orthopedics, occupational medicine, pain management, neurology and physiatry, grew by 15% year-over-year.

So to summarize, overall testing grew by 66% year-over-year to 287,000 biosensors. This growth was manifested across all of our key market segments which validates our continued progress in both primary care and specialty care markets.

Of additional importance, new NeuroMetrix customers delivered an annualized revenue of approximately $16,250 per account during the Q2 2006 period based on their uses. We're very pleased with this positive progression relative to previous quarters as it demonstrates that our new customers continue to adopt our technology within their practice.

As a final note toward our progression in customer testing, testing for diabetic peripheral neuropathy and low back and leg pain now represents approximately 58% of the total testing in the second quarter of 2006 which compared with 50% one year ago. This position which is roughly split 33% for low back pain and 25% for diabetic peripheral neuropathy, or DPN, details the Company's continued progression from our original foundation built upon testing for carpal tunnel syndrome to our present position of allowing all physicians to test for and more effectively diagnose patients presenting with major clinical conditions such as hand and wrist pain, low back and leg pain and diabetic neuropathy with the NC-stat System.

On a related DPN clinical front, in addition to the numerous drugs presently on the market which address painful diabetic neuropathy, there are two drugs to treat DPN in Phase III clinical trials. On is by Lilly and Company and the other by ESI and [Dynapine]. And there are also several other companies advancing drugs through clinical trials. It's important to note that results from these trials should emerge within the next 12 to 18 months. The potential for these therapeutic agents further reinforces the market and clinical opportunities that exist for NeuroMetrix both in the present and in the future.

On an organizational front, we completed the expansion of our sales force in the second quarter of 2006 and now have 46 highly experienced regional sales managers. We now also have well over 1000 independent sales agents on the front line who have been trained in selling the NC-stat System and are calling on physician practice groups to generate qualified leads for our sales team. This extension of our sales organization is the key component of our market approach which allows us to better secure and service our customers.

During the second quarter, we signed and launched our agreement with Physician Sales & Services to act in a lead generation capacity for NeuroMetrix. PSS is the largest national physician office distributor with nearly 700 sales reps selling a broad array of products to physician practice groups. We have now trained the majority of PSS sales reps across the country and are already closing new accounts through and with the assistance of the PSS team. We are very enthusiastic about the potential this relationship holds for our business.

On the international front, we continue to evaluate the international opportunities for the NC-stat System. Our goals for 2006 is to gain a more thorough understanding of the size of the market, the reimbursement environment, our distribution and launch strategy. Assuming a favorable outcome of our analysis, we will consider the possibility of an OUS market launched in 2007.

As a final noteworthy reminder on the international front, we have already received the CE Mark for approval of the NC-stat System. As evidenced by our strong Q2 performance, we remain highly focused on the significant U.S. opportunity at the present time. We're confident in our position as a market leader in the arena and as importantly, look forward to reporting back on future Company developments as we continue to establish a new standard of care within the marketplace.

I will now turn it over to Brad Smith who will discuss our financial results for the second quarter of 2006.

Thank you, Gary. And again welcome everyone on the call today. Our total revenues for the second quarter of 2006 were $14 million compared with revenues of $8.1 million for the second quarter of 2005 which represents an increase of 73%. Biosensor revenues totaled $12 million or 86% of total revenue in the second quarter of 2006 and our diagnostic devise revenues totaled $1.9 million or 14% of total revenue. This compares with $7.1 million in biosensor revenue in the second quarter of 2005 or 88% of total revenue, and approximately $960,000 of diagnostic device revenue or 12% of total revenue.

The increase in revenues in the second quarter of 2006 is a result of an increase in the number of active customer accounts to over 4000 as of June, the modest growth in average revenue per new account and the expansion of our direct sales force. Revenues for the six months ended June 2006 were $25.8 million compared with $14.9 million for the same period in 2005 representing an increase of 74%. The biosensor revenues of $22.3 million represented 87% of total revenue while diagnostic device revenues of $3.5 million represented 13% of total revenue.

We anticipate some impact of seasonality in the third quarter of 2006 due to fewer working days by physicians but we expect to grow the business through the seasonality and we remain confident about our business.

During the second quarter of 2006, our overall gross margins were 75.8% compared to 74.1% in the second quarter of 2005. Looking at gross margins more closely, the biosensor gross margin was 74.9% in the second quarter of 2006 compared to 74.2% in the second quarter of 2005. The average selling price was relatively unchanged from period to period at approximately $35 per biosensor. The cost of biosensors decreased modestly from 2005 to 2006 and our gross margins were favorably impacted by the mix of biosensors sold.

Device gross margins for the second quarter of 2006 were 81.4% compared to gross margins of 73% in the second quarter of 2005. This increase was driven by the increase in the average selling price of our devices as we've taken the list price up.

We continue to work very effectively with our two outside manufacturers, Parlex for disposable biosensors. We anticipate a formal agreement with them shortly. And Sunburst EMS for our diagnostic devices.

Total operating expenses in the second quarter of 2006 were $9.4 million compared to $6.2 million in the second quarter of 2005. Total operating expenses for the six months ended June 2006 and 2005 were $18.4 million and $11.9 million respectively. The increases in operating expenses during the second quarter of '06 and year-to-date was driven by first and foremost the expansion of our sales force; and secondly, it was impacted by our recognition of non-cash stock-based compensation expense of $627,000 in the second quarter of '06 and $1.4 million for the six months ended June 2006. And this large increase compared to $72,000 and $148,000 for the same period in 2005 was driven by the adoption of FAS 123(R).

Our net income calculated on a GAAP basis in the second-quarter of 2006 and I will note that as we talk about GAAP versus non-GAAP the difference here is stock-based compensation expense. The net income calculated on a GAAP basis for Q2 of '06 was $1.5 million compared to a net loss of $40,000 in the second quarter of 2005. Excluding stock-based compensation expense of $627,000 in the second quarter of '06 and $72,000 in the second quarter of '05, our non-GAAP adjusted net income was $2.2 million in the second-quarter of '06 compared with non-GAAP adjusted net income of $32,000 in the second quarter of 2005.

Our net income on a GAAP basis year to date, first six months of 2006, was 1.7 million compared to a GAAP net loss of $636,000 for the same period in 2005. Excluding stock-based compensation expense of $1.4 million and $148,000 for the six months ended June 2006 and 2005 respectively, our non-GAAP adjusted net income was $3 million year to date through June 2006 compared to a non-GAAP adjusted net loss of $489,000 for the six months ended June 2005.

Turning to EPS, our basic and diluted net income per share was $0.12 in the second quarter of 2006 compared to basic and diluted net income of zero cents or breakeven in the second quarter of 2005. Excluding non-cash stock-based compensation expense again of $627,000 and $72,000 for the six months ended June 2006 and 2005 respectively our non-GAAP adjusted diluted net income per share of $0.16 in the second quarter of 2006, and again, zero cents or breakeven in the second quarter of 2005.

Looking at the six-month period, our basic and diluted net income per share of $0.13 for the six months ended June 2006 compared to basic and diluted net loss per share of $0.05 in the same period in 2005. Excluding non-cash stock-based compensation expense of $1.4 million and $148,000 for the six months ended June '06 and '05 respectively, our non-GAAP adjusted diluted net income per share is $0.23 for the six months ended June 2006 and a loss of $0.04 for the same period in 2005.

I'd like to now shift over to the balance sheet and talk about our financial position as of June 30th, 2006. Our total cash, cash equivalents and short-term investments were $34.7 million as of June 30th, 2006 compared with $32.3 million as of December 2005. During the first six months of 2006, we had positive cash flow from operations of approximately $1.7 million and I would note that all that was in the second quarter of this year. There were also proceeds of approximately $1 million from the exercise of stock options and from shares issued under our employee stock purchase plan. And additionally, there was an investment offsetting that in capital equipment of approximately $300,000 for the first six months of '06.

Our working capital at the end of June totaled $38.9 million compared favorably to the $34.7 million as of year-end 2005. The large increase in working capital obviously due to our big increase in cash and investment balances and increases in accounts receivable and inventories as a result of the growth in our business.

Total assets were $47.7 million as of June compared to $42.9 million at the end of 2005.

Our DSO was 38 days as of June 2006 compared to 39 days in the first quarter and 40 days for all of 2005 and our inventory turn was 4.5 compared with 4.1 in the first quarter and a comparable number of 4.5 for all of 2005. We continue to have no long net long-term debt on our balance sheet as of June 2006.

So to recap, we're pleased with our financial performance for the second quarter of 2006. To reiterate, we had revenue growth of 73% during the second quarter of 2006. We had to GAAP net income of $1.5 million and excluding stock-based compensation expense of a slightly over $600,000, our non-GAAP adjusted net income was $2.2 million.

This concludes the financial update portion of the conference call and I'd like to now turn it back over to Shai.

Thank you, Brad. We are obviously pleased with our second quarter of 2006 performance and consider it further validation of in-office neuropathy diagnostic opportunity. Our neuropathy diagnostic solution is rapidly becoming a standard of care throughout the marketplace. The NC-stat System has FDA clearance of standard instrumentation for the performance of nerve conduction studies, which serve as the gold standard method for evaluating neuropathies. The NC-stat System meets or exceed the most stringent technical specifications for this type of medical instrumentation.

Furthermore, the diagnostic accuracy and clinical utility of the NC-stat System has been demonstrated in 13 published peer reviewed articles, all in well-regarded clinical and scientific journals, and well over 20 abstracts presented at leading clinical conferences including annual meetings at American Diabetes Association and several neurology associations.

The NC-stat has also been used in FDA registration trials for pharmacologic agents and in large-scale epidemiological studies encompassing thousands of patients sponsored by the NIH, NIOSH, and the CDC. It is for all these reasons that the NC-stat System has become a standard of care in the evaluation and management of patients at risk for neuropathies.

In conclusion, we have now delivered eight consecutive quarters of strong topline growth. We have transitioned the Company to profitability and cash flow positive. Our customer base has grown approximately 50% in the last 12 months to over 4000 active accounts, which represents an estimated 12,000 physicians at the end of the second quarter of 2006. This number is comparable to the number of neurologists and physical medicine and rehab physicians who use traditional equipment to perform nerve conductive studies.

Biosensor usage by our customers continued to grow as we added new accounts and experienced increased usage per account. We have completed the planned growth of our sales force for the year and are enthusiastic about the addition of Physician Sales & Service, and we have advanced our product development efforts in many areas, including our third-generation device.

We look forward to keeping you updated on our progress as we continue to build the standard of care and ultimately expand into additional diagnostic and therapeutic applications. We believe that we are establishing NeuroMetrix as the premier brand in the assessment of neuropathies, with the goal of ultimately being able to deliver products and treat neuropathies as well.

As we transition to the question-and-answer session, I would like to note that we are pleased to discuss the second-quarter 2006 business details and relevant metrics. However, we continue to maintain a policy of not providing specific guidance on future financial performance. We look forward to your questions.

(OPERATOR INSTRUCTIONS) Bill Quirk with RBC Capital Markets.

Thanks, good morning. Congratulations on a very solid quarter, guys. First question, on the competitive front, we did see the introduction of a new competitor here into the market. Obviously it looks to us like they have a fairly limited product offering but Shai or Gary maybe you could just talk a little bit about the competitive dynamic whether or not you see any changes as a result of this, etc.?

Thank you, Bill. I'll take some of that and then I will pass it over to Gary. I think first of all we would like to just focus on our product and its FDA approvals as well as the technology. As you know, we have the only FDA approval as an alternative to traditional testing methods. And a very significant history in this marketplace that is now over six years. We are very confident in the superior nature and capability of our technology. I will let Gary address the question of competitive dynamics in the marketplace.

You know it is a good question and I appreciate your asking it, Bill. The landscape that we look at first and foremost is that we now have 12,000 physicians using our technology day in/day out throughout the U.S. and to me that stands as a very important number because it details our progression in creating this new standard of care with our market leadership position.

As Shai noted, it also details our position against the traditional methodology for accessing and diagnosing neuropathies most notably through neurologists and physiatrists who number approximately the same amount of physicians. So clearly there is strong evidence of a new standard of care being developed and led by NeuroMetrix.

The follow-on is that as you look at the landscape of other "competitive entrants", there really is no one who offers either a full line of testing capabilities. Some companies have a very, very limited FDA approval status as only being adjunct to doing traditional nerve conduction which our technology certainly does as do others that have been used by neurologists and physiatrist for the long period of time. But they don't offer the full range of capabilities as well in diagnosing or allowing physicians to diagnose low back pain and diabetic neuropathies which is evidenced by our numbers is nearly 60% of our overall testing and a key component of the value proposition to physicians.

So the bottom-line on this is we've clearly established ourselves as not only a market leader but as a technology which integrates biophysiology, bioelectronics, neurophysiology and information technology in a way that no other firm we believe can parallel in any foreseeable future. We're excited about our position and I think it is firmly evidenced in our performance.

Understood. Secondly and maybe this is a Gary question as well. If we take a look at utilization per device and I'm thinking specifically about the base that's been installed for at least a quarter. It looks like those instruments are running about 1.2 tests per week. I seem to recall that historically you've talked about getting this up in the 4 perhaps even 5 tests per week type of range. Is this still something we should be thinking about obviously longer term here, Gary?

Yes, Bill. The numbers that we are running off of first is the top-line our goal is still one a day. And if you look at the presentation of these conditions low back and leg pain close to 10% of all patients who present to a primary care physician office present with low back, leg pain and then when you add in hand and wrist pain and diabetic neuropathy, you are well over 10% of all patients who walk in a physician office primary care physician's door.

So one test a day or 20 odd patients a month is absolutely our goal and one that we are marching toward. The numbers that we're looking at detail that new customers with an average annualized biosensor value and that is just based on their usage -- so it doesn't include any initial orders -- their usage is over $16,000. So we are showing well over two patients a week and we are marching towards that number of five a week. So we are really bullish about capitalizing on the upside opportunity in what we affectionately call around here is the North opportunity not only building our basic customers but driving the dollar value per account North and at $16,250 per account, we are very pleased with that number.

Good news. No question. Lastly, Shai, I'm sorry I didn't get your OIG comments. Would you remind just repeating those please?

There really is no update, Bill. I was just noting that we've complied completely with the request for information by the OIG and are unaware of any updates. And just to reinforce Gary's point, we think that there are clinically appropriate -- on a clinically appropriate basis one patient a day in most of the practices that we sell into so we think there is tremendous upside opportunity in medically necessary nerve conduction testing.

And then nothing in terms of the OIG in terms of timing there, Shai? It's kind of a black box if you will. We've answered the questions and we're just going to wait for them to come back to us?

That is correct, Bill.

Thanks very much, guys. Congrats again.

Amit Hazan with SunTrust.

Good morning guys and congratulations on a very nice quarter. I wanted to ask first about low back pain testing. It looks like that was clearly the most significant grower even though they all seem to grow very well. I'm just wondering if you can give us a little but more granularity on what is going on in that department?

I think the important thing to look at, Amit, is the overall utilization of our technology not only on low back pain but also on diabetic neuropathy. And the reason why I offer that is first of all, these are two phenomenally large markets as evidenced by the numbers that we've talked about in this call alone. The other thing that is important to note is that it is somewhat difficult to categorize with absolute granularity whether a test is done for low back pain, that test may be done on a diabetic patient. The concomitance of low back pain and leg pain and also of carpal tunnel syndrome in patients with diabetes is as high as 40% of all patients.

So while our numbers indicate and the categorization of the testing is for low back pain in the monitor in the system that it's being employed on on a given patient, that patient may also be a diabetic patient. But we're very excited with our progression on low back pain and for that matter on diabetic neuropathy. At 33% of all tests for low back pain, we think it really illustrates the strong progression of a new standard of care in using our technology to diagnose and ultimately treat patients who present with these conditions on a daily basis.

Okay, that is very helpful. And just moving along through the system itself and the increased pricing earlier this year, I'm just wondering it looks like you had a nice steady ASP increase. If you saw any push back at all there and if we should continue to see an increase in ASP toward the 5000 that you are listing at now? And then in addition to that if you can talk about the new product and what the gross margins on that product might be?

On the ASP front, thanks for noting the progression on the pricing and the margins. And we are pleased by it. I think it indicates that there certainly was some elasticity, if you will, in our price point on the system itself. We certainly can offer some modest upfront incentives to have customers act now. So whether or not that ASP will continue to climb through the course of the year or whether we've kind of for lack of other words matured on that progression is to be determined. I think that is to play out in future quarters but we are very pleased with the customers have responded and responded well to what we think is an incredible value proposition, a very modest capital investment and strong payback on the system in a very short amount of time.

So 4500 is a good number to use if we're looking at it kind of going forward?

I think that it is tough to say whether are not that we will stay firm or if there is any flexibility or ability to increase that at this point in time.

Okay. And then just one question for Brad. I'm just wondering, it seems like that that biosensors utilized number that you give each quarter it seems to be narrowing the gap toward the reported biosensors sold number that we get. And I'm just wondering if you can give us an idea of what's going on there? Are you having better controls in your ability to deliver product on time?

Actually, it's not that. We deliver -- we turn orders around -- like 98% of our orders within 24 hours get delivered to the customer. So we have a very efficient fulfillment function today. But it is really less I guess of what is driving it than -- it's been fairly consistent. If you look at the relationship between the censorship versus sensors used, it has been an up-and-down quarter-to-quarter but over say the last eight quarters, it has been relatively consistent.

And just maybe to back up and answer your question on the gross margins which you posed. At 81% gross margin for devices that are outsourced to a third party, with the next generation devices we could see some pullback in those gross margins. But I would remind you, a, we expect it to relatively modest and the higher cost of goods would be offset to some degree by higher ASP. But I would also point out and again remind everyone the percentage of our revenue coming from the devices is obviously -- this past quarter was 14%. So it is a much more modest part of our revenue and therefore the effect on our gross margin is somewhat muted.

Okay, wonderful. Thanks very much, guys. Have a good day.

Juan Sanchez with Punk, Ziegel.

Congratulations on a great quarter. I just wanted to hear your comments in terms of how the relationship with PSS Medical is going and what kind of impact do you think this relationship is going to have in the near-term and also in the long-term?

Terrific, Juan, and thanks for the question. The first data point, if you will, on PSS is that we are very enthused about this relationship. They have nearly 700 sales representatives out there and they are by virtue of their size of sales coverage and also their size and business within the physician office market, they are the market leader. Our relationship, as you know, was signed and launched last quarter and we've now trained a vast majority of their representatives to be able to go out and effectively generate leads and drive our business together.

Regarding the relationship, I think the biggest thing to note with the PSS relationship is that it offers the ability for our representatives to not only affectively secure in essence accrue new customers each and every quarter but it also because we are now much more efficient on those efforts allows our representatives to focus on the account management opportunities and driving appropriate utilization of our technology with physicians. And as we talked about earlier today, we are only at just over two patients per week and our goal is one per day or five per week which is definitely within the confines of clinically appropriate utilization of our technology by physicians.

The reality is we are creating a new standard of care and we need to get in front of those physicians on a repeated basis to help them truly understand the clinical utility of our technology. This relationship really secures what we believe is our ability to not only secure new customers but to also drive appropriate utilization in the market.

Thank you. And second question will be about your thoughts in terms of expanding further expanding the size of the salesforce or do you think you are going to stay with 46 for the rest of the year? That is it.

The backdrop on sales expansion as you well know we've continued to build our sales force in a manner that is commensurate with the business and further generates strong streamlined integration into our organization and into our customer base. And last but not least, delivers a positive and now profitable results for our Company. We've expanded the sales force from 8 to 10 to 15 to 22 to 30 to now 46. And there is clearly plans on the horizon for the Company to expand our sales force further as we create this wonderful new standard of care throughout the marketplace.

The question on timing is not to be answered at this point in time because we number one don't disclose that and number two, are continually valuating it. And we evaluate it amongst a number of key metrics that enable us to better determine that now is the time to go ahead and further expand the organization to further expand our results and opportunities and penetration in the market.

And the last question is for Shai. Shai, do you want to talk a little bit about the drug delivery system, I mean the smart needle? What will be the first market this needle will go after?

We are only starting to talk about it, Juan. We're right now in a developing the prototypes and moving toward the initial human trials for that. The expectation is that we would go directly into humans and skip animal trials will continue to update the market the investors as we move forward. We have not locked in on specifically the initial target market. It could very well be carpal tunnel syndrome which is probably one of the most common places for a near nerve injection. I think that is definitely at least will be a component of the initial target market. There may be other indications as well early on.

Thank you, guys. And congratulations again.

Ryan Rauch with Jefferies.

Hi, guys, congratulations on a great quarter. Good to see you working this quarter. Just kidding. I was just curious and remind me is the PSS deal exclusive or could you potentially sign a deal with maybe a Henry Schein or a McKesson or somebody else?

Yes, that relationship has an open end if you will, for us. And they recognize that while there is a market leader, as we continue to expand our work, we may look at other national distributors or other distributors that we continue to add on a regular basis. Right now we are running full steam ahead with them and are really pleased with the partnership foundation that we've developed but there are no limits on our ability to add other business partners in any way, shape or form.

Got you. And I apologize if you walked through it but there's always every few months there is always some rumblings about reimbursement, whether it be Aetna or somebody else. CMS proposed 2% to 4.5% reimbursement decline. Can you just walk through maybe Brad or Gary or Shai just where do you stand with reimbursement and your success rate with all the major carriers?

I'd be happy to, Ryan. Basically the reimbursement situation for NC-stat is very positive. We believe that over 600 payors have reimbursed our customers and on a routine basis, our customers are clearly being reimbursed. Obviously as for any medical device company in today's reimbursement environment, there are from time to time reimbursement issues that come up that have to be addressed, many of them often are just the way customers code, the way they code their insurance claims or other very straightforward administrative issues. Sometimes they pertain to the misunderstandings of the technology and so forth. That is just par for the course in this type of business. On the whole we are very satisfied. We continue to work with payors to explain our technology who continue to do studies demonstrating the viability and strength of our technology and are very positive about the situation.

As far as the CMS proposed changes, I would note they are just proposed changes. The final word will come out later this year. There has a been an increase in reimbursement for these codes over the past five years of nearly 30%. So we are very confident that regardless of where it ends up this year -- and again I think the word on that remains to be told -- the situation will be fine for us going into 2007.

Got you and then Brad you've been a little shy on this call. I mean, there is seasonality in the third quarter but is it fair to say and I apologize if you already gave this information, that you expect revenues to be up sequentially in the third quarter? Is that a fair assumption?

The statement we made is and by the way, similar to the statement we made in the third going into the third quarter of 2005 I would remind everyone that we may see some seasonality; it's just driven by the number of working days by physicians. And we do expect to grow our business through them.

Okay, thanks a lot. Have a wonderful day.

Charles Olsziewski with Oppenheimer & Co.

Someone said my name right. Wow. Amazing. Good afternoon or good morning. Just a quick question staying with the reimbursement. Brad, what is your mix on reimbursement generally speaking? And has it changed a lot in say the last 18 months?

I'll take that if you don't mind. And this is Gary. While we don't comment specifically on what our overall reimbursement mix is, one thing that is evident as we move from a company that was focused traditionally on orthopedics and occupational medicine which was far more heavy on the workers' compensation to the diagnosis of low back and leg pain, diabetic neuropathy and carpal tunnel, in all settings most notably what we define to be the primary care setting, we've definitely seen a migration of our payor mix from heavier on workers' compensation to now a well-founded balance between Medicare, Commercial payors, workers' compensation and even Medicaid.

So we don't comment specifically on our mix but the good news is as Shai mentioned, over 600 payors have paid for the NC-stat. Today the landscape is any MD or DO can perform these procedures according to Medicare guidelines and Commercial payors have customarily filed suit and they certainly do want the NC-stat System. So we are very pleased with the reimbursement landscape. And that it allows physicians to appropriately perform these tests and be reimbursed appropriately for doing them.

It is also worth adding we are not involved obviously, just to be clear, in billing by our customers. We would not really have direct information on their specific payors. Obviously we can sometimes deduce just by talking to them. But we really are not involved other than providing them with basic published information on expected coding practices.

Okay, great. Thanks.

(OPERATOR INSTRUCTIONS) Oliver Marti with Columbus Circle Investment.

Great, thanks. A couple of questions. One, in terms of the PSSI agreement, they have what roughly 750 reps?

Actually it would be under 700.

So 700. Can you -- what kind of metric can you give us in terms of how many of them are trained on the system?

Well we've completed training across almost their entire sales organization. There is a training under way today and one tomorrow. But fundamentally we're on the homestretch of training their organization.

Okay, fantastic. And is there any metric and I apologize if this was talked about on the call earlier, but is there in a metric that you can you guys are following in terms of referrals that have been generated from PSSI reps or is that too early right now?

Yes, I think it is a little early to comment on that and we don't disclose specifically how many leads generated are required in order to secure a new customer. But what I can tell you is that clearly as a market leader, the representatives have strong access, strong relationships and a strong ability to deliver a very, very robust value proposition that we have with NeuroMetrix. So we are pleased with the early indicators on the relationship and it's a very, very well-run company that holds a lot of potential in a partnership with NeuroMetrix. So we are very pleased so far. And a lot more to be determined as we march forward with them.

Could you just remind me, if I'm a PSSI rep, what do I get for a referral?

Well the relationship is not just on referral, it's also on the ongoing business. And we are not in a position to disclose the compensation mechanics that they use. But our technology, they are rewarded for not only generating the lead -- I mean in fact I should catch myself -- they are not rewarded for generating a lead, they are rewarded when a sale is made and when revenue is secured for a customer. It's not only for the upfront sale but the ongoing revenue. So that has them not only engaged in securing customers but also servicing those accounts which is important when you have a base of over 4000 customers out there. That is a key element. I hope that clarifies it for you.

That does. And then just on the balance sheet a little bit. Just remind me the NOLs you guys have?

We have over $30 million, Oliver, in NOL carryforwards and over $13 million in potential future tax benefit from those NOLs. And right now we have a full valuation allowance against those. We've had four quarters of profitability in a row and we'll evaluate that as we go forward.

I guess that is my question, is when do you assume you're going to be moving to an income statement tax rate?

To be determined. It will depend on balance of the year. We will certainly look at it in a serious way at the end of the year. Whether it is end of the year or sometime next year when we actually start to take that onetime benefits to the P&L for the recognition of the differed tax asset and then start to report fully tax numbers.

And just the cash balance?

$34.7 million in the bank including cash, cash equivalents and short-term investments and that is an increase of $2.3 million from the second quarter alone.

Great. Nice quarter.

[Edward Ho] with [Dolorian Capital].

Congratulations, guys. Great quarter. I have a question regarding the salesforce. You guys have had revenue growth commensurate with the number of salesforce that you put up maybe 50%. Is there a point in time where if PSS becomes very successful that you accelerate and/or add more salesforce growth relative to the base? To handle all the lead generations that you could have these conversion rates.

I think the short answer on that is a definite yes. And we've, as you know, we've done that and the past and we will definitely do it in the future as we build not only our efforts with our business partners who generate leads, PSS and others, but as importantly commensurate with the number of accounts that we have out there that we need to actively service and drive appropriate utilization with. So there is no doubt that we will continue to evaluate further expansion of our salesforce and it's a dynamic equation based on our ongoing results and continued performance.

Okay and I had a follow-up. You guys have pretty much raised prices on the systems. Is there a point in time where you are going to maybe inflation adjust or see consumables upwards?

We've always maintained the price to the consumables or the biosensors at a steady level and our expectation is that we will continue to do that. So we are not anticipating that at this point.

Okay, thank you very much.

At this time, sir, there are no further questions inside the queue.

Then thank you very much for joining us on the second-quarter 2006 conference call. We appreciate your time and interest and look forward to updating you as we continue through the year. Thank you very much.

Ladies and gentlemen, at this time you all may disconnect. Your conference call has ended. Have a great day.