NeuroMetrix Inc (NURO) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2006 NeuroMetrix, Inc. earnings conference call. My name is Jackie, and I will be your operator for today's conference. (OPERATOR INSTRUCTIONS). I would now like to turn the presentation over to your host for today's conference, Mr. Brad Smith, CFO. You may go ahead, sir.

Thank you, and 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 "believe," "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, including those set forth in Item 1.A., Risk Factors, of our annual report on Form 10-K for the year ended December 31st, 2005, and our quarterly report on Form 10-Q for the quarter ended September 30th, 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 non-GAAP adjusted diluted net income 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 at 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 everyone. I would like to welcome you to the NeuroMetrix (technical difficulty) 2006 conference call. I'm joined today by Gary Gregory, our Chief Operating Officer; Brad Smith, our Chief Financial Officer, and [Mark Doucette], our Controller. I'll start today's conference call by providing you with an overview of NeuroMetrix and some brief highlights of developments during the fourth quarter of 2006. I will then turn it over to Gary for a discussion of our key sales and marketing metrics and updates, and Brad for a summary and analysis of financial results.

NeuroMetrix is a medical device company advancing medicine through the design, development and sale of proprietary products used to diagnose and treat neuropathies and neurovascular diseases. Neuropathies are disorders of peripheral nerves in parts of the spine 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 now used in over 4,900 physician practices and clinics, representing approximately 15,000 physicians throughout the United States. Our technology enables a broad group of physicians from internal medicine, endocrinology, rheumatology, family medicine, orthopedic surgery, pain medicine, neurology, and other specialties to objectively and accurately diagnose neuropathies at the point of service.

Our physician customers are finding that their ability to diagnose neuropathies earlier and more accurately is positively impacting the way in which they manage their patients and make important therapeutic decisions. Diabetic retinopathy is a common neurovascular complication of diabetes, and is a leading cause of blindness among working-age adults. During the fourth quarter, we announced an exclusive license to the DigiScope product from Eyetel for the detection of diabetic retinopathy by primary diabetes care physicians. We recently launched our sales efforts for the DigiScope product and our marketing system initially to our large installed base of customers.

We believe the market opportunity for neuropathies is as much as $1 billion in the United States, including potential nerve conduction testing for carpal tunnel syndrome, low back and leg pain, and diabetic peripheral neuropathy. We believe the market opportunity for the detection of diabetic retinopathy is as much as $700 million. The American Diabetes Association recommends an annual dilated eye exam for patients with diabetes to provide early detection of retinopathy before serious complications develop.

During the fourth quarter of 2006, our revenues increased 37% to $14.2 million compared to $10.3 million for the same period in 2005. However, revenue declined approximately 7% from the third quarter of 2006. Revenues declined from the third-quarter levels due to lower biosensor sales, and due to fewer new customers being signed up during the fourth quarter of 2006 as compared to the third quarter of 2006.

During the second half of 2006, several Medicare carriers issued policies requiring customers using the NC-stat System to submit for reimbursement under miscellaneous code called CPT 95999, rather than codes for traditional nerve conduction testing. We believe that our revenues in the fourth quarter of 2006 were impacted by the decisions from these Medicare carriers and by customers' uncertainty around the level of reimbursement under this miscellaneous code. We continue to explore a number of options with regard to these reimbursement questions, and have retained a group of experts to assist us.

We would like to highlight the following relevant facts. First, our FDA clearances contain intended use language indicating the NC-stat is conventional nerve conduction testing equipment. The NC-stat System meets or exceeds the most stringent technical specifications for this type of medical instrumentation. The diagnostic accuracy and clinical utility of the NC-stat System has been demonstrated in over 40 published peer-reviewed articles, abstracts and posters. 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, the National Institute for Occupational Safety and Health, and the CDC.

We now have over 4,900 physician offices representing approximately 15,000 physicians using the NC-stat and providing important clinical benefits to their patients. Over 750,000 patients have been tested using the NC-stat system.

Furthermore, primary care, internal medicine and other physicians are adopting many new diagnostic technologies at the point of service. And we believe these physicians and their clinical staff have the competence and training to effectively use these technologies.

Finally, although there is justifiable concern about overuse and abuse of diagnostic technologies, including nerve conduction, these (multiple speakers) are not evident in NC-stat utilization. Our most recent data based on 2006 usage of the NC-stat system is that the average NC-stat customer is testing approximately 1.5 patients per week.

To continue, we have also been making progress on important products in our R&D pipeline. We're now in the late stages of our multiyear third-generation diagnostic platform development effort. This product is called [Advance], and we believe it represents a major engineering, scientific, and clinical advance in assessment and, ultimately, treatment of the range of neuropathies. We recently submitted a 510(k) filing with the FDA for the Advance system, and assuming a clearance, we anticipate a midyear 2007 launch of this new platform.

As a reminder, Advance has a number of important innovations and features which reflect our engineering expertise applied to our deep understanding of customer and market needs developed over seven years. Included among these innovations and features are the following -- key technical and engineering specifications that we believe meet or exceed those of all electrodiagnostic devices on the market; secondly, novel signal processing algorithms that provide physicians with very high quality and detailed nerve conduction data to incorporate into their diagnostic assessment -- we have already filed two patents on these algorithms with several more in the pipeline.

Third, a user interface consisting of a high-resolution color touchscreen that allows physicians and their clinical staff to conduct accurate nerve conduction studies and other electrodiagnostic tests and even more straightforward manner -- consistent with the current NC-stat, this user interface provides for real-time data review, including waveforms.

Next, in addition to providing backwards compatibility with our current biosensors, NC-stat Advance will support several new nerve conduction biosensors to be released this year as well as in subsequent years. And finally, NC-stat Advance will support the performance of needle EMG studies. This is an important progression for our Company as we integrate accuracy of NCS technology in the NC-stat with needle EMG for the first time within this platform. We're very enthusiastic about this expanded capability, in particular because it will support our planned expansion into the neurology market.

We had several additional peer-reviewed publications, including a study out of the Boston Veterans Administration Hospital confirming the analytical validity of the NC-stat nerve conduction system in the [lower extremity] published recently. And furthermore, another study was published in the Journal of the American Board of Family Medicine, again recently, showing the NC-stat nerve conduction studies of over 600 family medicine, primary care, and internal medicine physicians for carpal tunnel syndrome was applied to the appropriate patients, followed evidence-based testing guidelines, and generated relevant diagnostic outcomes.

To conclude, as previously disclosed, during the second quarter of 2006, we received a subpoena from the Office of the 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're fully cooperating with the OIG, and have provided them with information they requested. The government has not instituted any proceedings in any way against us in connection with this matter, and we're not aware of any further developments pertaining to the matter.

We generated $55.2 million in revenues in 2006, a 61% increase over 2005, and we generated $7.3 million in positive cash flows from operations during 2006, including $2.2 million in the fourth quarter. In a very positive note, we entered 2007 with over $40 million in cash and investments on our balance sheet.

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

Thank you, Shai. I want to reiterate our thanks to each of you for joining our call today. As Shai has noted, and evidenced by many key indicators, we're coming off another quarter that demonstrates our Company's continued efforts towards establishing the NC-stat system as the standard of care and NeuroMetrix as the leading company in neuropathic diseases.

In Q4 2006, we expanded our customer count to 4,929 active customers, demonstrating a continued ability to secure and establish new customers across the internal medicine, primary care segment, and the specialty care segment. This represents customer growth of over 50% in our active customer base in the past 12 months alone.

Testing with NC-stat system in the fourth quarter of 2006 grew year-over-year by approximately 51% to 310,300 biosensors compared with 206,300 in the fourth quarter of 2006. Through this performance, our average customer delivers approximately 8,800 in annual biosensor revenue based on their usage during the fourth quarter of 2006.

The distribution of testing by our customers in the fourth quarter of 2006 is as follows. 70% of total testing was performed by our internal medicine primary care base of accounts, and 30% came from within our specialty care segments. Here, 39% of total testing within specialty care came from the orthopedic market, which is 12% of our overall testing. Endocrinologists and rheumatologists represent 28% of our specialty care physicians and 8% of our total testing. And 33% of 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 define solely as internal medicine and family practice clinics, grew 84% year-over-year, illustrating our progress in this market segment. Total testing in this segment grew from 118,000 to 216,000. Testing within the specialty care physicians segment, which includes all other physicians specialties, namely endocrinology, rheumatology, orthopedics, occupational medicine, pain management, neurology and physiatry, grew year-over-year by 6% from 88,000 tests to 94,000 tests.

So to summarize, overall testing grew by 50% year-over-year to over 310,000 biosensors. This growth was manifested across our key market segments, which validates our continued progress in both the primary care and specialty care markets.

Of additional importance, new NeuroMetrix customers delivered annualized revenue of over $15,000 per account during Q4 2006 based on their usage. We remain pleased with these results, as it details that our new customers continue to adopt and utilize our technology within their practice. As a final note towards our progression in customer testing, testing for diabetic peripheral neuropathy and low back and leg pain now represents approximately 60% of the total testing in the fourth quarter compared with 55% one year ago. This position, which is split roughly 55% for low back pain, and 45% for DPN, details the Company's continued progression from our original foundation built on 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 an organizational front, we now have 48 highly experienced regional sales managers and four sales directors. We're also considering plans for further expanding our field sales organization, and will finalize our direction regarding this expansion during the first half of 2007.

We now also have over 1300 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 sales leads for our sales team. This extension of our sales organization is a key component of our market approach which allows us to better secure and service our customers.

In January, we signed an agreement with Henry Schein Caligor to act in a lead generation and service capacity for NeuroMetrix. Henry Schein is a national distributor with a field force of over 350 individuals dedicated to selling a broad array of products to physician practice groups. We completed the training of their entire field organization in the month of January, and are now launching our business partnership across the nation.

We look to have as strong success with Henry Schein as we have had with PSS, or Physician Sales and Service. We continue to remain enthusiastic about the strength of our relationship with PSS, which we formally launched in Q2 2006. To illustrate, nearly 1 in every 2.5 PSS reps are in the game, and have sold one or more NC-stat systems with their NeuroMetrix region manager. This is exceptionally high, as most manufacturers would consider 1 in 4 reps being in the game as a benchmark of success. These results detailed the strength of our business partners, our business partner model, marketing approach, and the NeuroMetrix field sales organization.

On the international front, we are finalizing our research on the reimbursement landscape for performing NCS tests in key international markets. The key areas of our research have been centered upon the coverage, coding, and payment levels for physicians performing NCS procedures on both the public and private payer front within each country.

The initial findings from our research show that select markets such as the United Kingdom, Germany, and Spain represent potential initial opportunities for NeuroMetrix. We will provide further updates as our strategy and direction on the international market front progresses. At present, we clearly remain focused on the U.S. market opportunities as we estimate that we've only reached approximately 5% of the potential U.S. market.

We also want to cover some basic information which may offer some insights toward the reimbursement landscape. First and foremost, as Shai has noted, the NC-stat is a system that is FDA-cleared technology supported by the strong line which held within our FDA clearance, and I quote -- clinical data submitted in the 510(k) demonstrates that nerve conduction measurements obtained using the NC-stat system are comparable to those obtained using conventional nerve conduction measurement equipment. As detailed here, the NC-stat system performs standard nerve conduction measurements. This is further supported by over 40 published medical journal articles, abstracts and scientific posters which detailed the accuracy, validity and utility of the NC-stat system.

Furthermore, as reported by our customers, we believe the technology has been routinely reimbursed by over 600 payers, including all Medicare carriers and nearly all commercial and workers' compensation payers throughout the nation.

Through the course of 2006, several Medicare carriers issued draft LCDs, or local coverage determinations, which included select potential concerns for NeuroMetrix. These draft LCDs were found within Palmetto, TrailBlazers, Cigna Medicare and the NIHC [regions]. We're pleased that the majority of these draft LCDs across Palmetto, Cigna, and NIHC were modified and/or not implemented with many elements that represented potential [current] for NeuroMetrix and our customers. In particular, Cigna issued a draft LCD implying that needle EMGs should be performed with the majority of nerve conduction studies. Cigna's final LCD was modified so that the decision to perform NCS and/or needle EMG should be left up to the physicians' clinical judgment.

Furthermore, NHIC's final policy was modified to address language regarding cumbersome constraints towards physician requirements when performing NCS tests, which technicians can perform NCS under a physician's supervision, an implied link between NCS and needle EMG, and a statement that the NC-stat was fundamentally considered investigational and experimental and would not be covered.

While we were not surprised, we were pleased to NHIC eliminate language regarding these areas of concern, and most notably, that they moved entirely away from their position considering the NC-stat as an experimental nerve conduction system.

First Coast has recently issued a draft LCD for neurodiagnostics NCS tests, and as consistent with the others' aforementioned draft LCDs, we expect both our companies and our customers to provide considerable comments towards any areas of potential concern within this draft LCD.

We also note here that several Medicare carriers, including First Coast, Noridian, TrailBlazer, Cigna and NHIC have recently implemented articles which indicate that the customer must bill for NCS procedures performed using the NC-stat under a miscellaneous CPT code 95999. As such, we have been [informed] that our customers can still perform medically appropriate tests, submit their claims electronically, and seek reimbursement under this code.

To date, our customers have experienced various levels of reimbursement when performing NCS tests with our system under these codes in the First Coast region. However, based upon the emerging nature of the landscape here, we will refrain from making specific comments on the exact level of reimbursement attained within First Coast or any other involved areas until this has been more formally grounded.

In response, we have retained a team of reimbursement experts to assist us in assessing and challenging these coding articles. Based upon their review, we believe that the NC-stat system meets, and should be reimbursed according to standard CPT codes for NCS for several reasons. We believe these include the FDA's evaluation clearance of the NC-stat system for performing nerve conduction; that the standard CPT codes for NCS describe the services performed with the NC-stat system; that the relevant CPT codes are consistently followed by the CMS carriers; that the Medicare physician fee schedule details the codes and corresponding [RBUs] for a procedure; and finally, that the HIPAA Act includes requirements pertaining to the establishment of a single uniform code set.

Based upon these reasons, we believe our customers should be able to perform medically appropriate NCS tests and appropriately bill them under standard NCS codes. As such, our customers and our Company will pursue these rights under the regulations and appeal processes established by CMS.

Currently, we're working with these payers to ensure that they understand our products, the nature of our FDA approval position, our array of clinical articles detailing the equivalency of the NC-stat to other NCS equipment, and to also ensure that they hear from our customers who use the NC-stat as a valuable asset to advance their patient care.

Finally, we do not plan on commenting on this conference call about our strategy with regard to specific payers. However, we do note that we are working with experts in the field to navigate through these reimbursement challenges for our Company and our customers.

On a noteworthy front, we have formally launched our new exclusive agreement with Eyetel Imaging. This agreement grants NeuroMetrix an exclusive license to market, brand, sell, and service Eyetel's DigiScope technology and business throughout the physician office arena.

We view this as a major advance for our Company. It transforms NeuroMetrix into a platform foundation where we have progressed from allowing physicians to diagnose and treat neuropathies to a Company where we allow physicians to diagnose and treat neuropathies and neurovascular diseases. The business relationship is initially founded upon the DigiScope, which was developed in collaboration with the Wilmer Eye Institute at Johns Hopkins and is an FDA-cleared diagnostic device that primary -- diabetes care physicians, which includes primary care, family practice, internal medicine and endocrinology, can use this technology for their early detection of diabetic retinopathy.

As background information, it's estimated that 21 million people in the United States have diabetes. Diabetic retinopathy, which is a major complication of diabetes, is a silent, progressive, and debilitating position which is the leading cause of blindness among working-age Americans. Virtually all patients with diabetes will develop some level of diabetic retinopathy during the course of their lives.

Fortunately, blindness due to diabetic retinopathy can be prevented in the vast majority of patients through the early detection and diagnosis by annual dilated eye exams and appropriate interventions such as laser procedures. For this reason, the American Diabetes Association and many prominent commercial payers recommend that patients with diabetes receive annual dilated eye exams.

Despite this recommendation, less than 50% of patients with diabetes have annual eye exams. The DigiScope addresses this clinical problem by providing primary care physicians with the powerful gold-standard technology at the point of care.

Based upon the present and expanding patient demographics confronting patients with diabetes, we estimate that the annual U.S. market opportunity exceeds $700 million annually. Eyetel's recent business experience is to generate between 10 and $12,000 in revenue per account in year one alone. This is built off of a 3- to $4,000 installation fee, $150 per month in what is essentially a rental fee, and a $45 per retinal scan, with the retinal scan revenue recurring in successive years. With our sole responsibilities for sales, marketing, service, billing, and collection for this business, NeuroMetrix plans to recognize and book complete revenue recognition while capturing 50% margins on the installation and retinal scan fees.

Clearly, this is accretive to our business. And we believe it will drive approximately 20 to 25% operating margins, which is consistent with our long-term Company goals.

We formally trained our entire field sales force on the DigiScope last week, and have already secured our first new DigiScope customers. These DigiScope customers are also existing NC-stat customers, and have elected to bring the new technology into their practice. This represents the opportunities held within our market position, our exclusive license and this technology, and it details that our field sales force is poised to deliver innovative technologies such as the DigiScope to our base of customers.

To summarize here, we believe the securing of this exclusive licensing agreement with Eyetel represents an important advance for our business. Through this agreement NeuroMetrix will significantly expand its product offering and the clinical value we deliver to primary care physicians. With our best-in-class market approach and field organization of over 50 sales professionals, NeuroMetrix looks to deliver this innovative diagnostic solution to physicians throughout the nation, including our current base of over 4,900 practices and approximately 15,000 physicians.

As a closing comment, we're confident in our position as the market leader in this arena, remain very enthused by the strong advancements we've made as a Company, and look forward to reporting back on future developments as we continue to expand and deliver our new standard of cares within the marketplace.

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

Thank you, Gary. Here's a recap of our financial performance for the fourth quarter. Total revenues for the fourth quarter of 2006 were $14.2 million, compared with revenues of $10.3 million for the fourth quarter of 2005, representing an increase of 37%. Revenues in the fourth quarter of 2006 were down approximately $1.1 million or 7% from third-quarter 2006 levels due to lower biosensor sales and due to fewer new customers being signed up during the fourth quarter.

Biosensor revenues totaled $12.3 million, or 87% of total revenue, in the fourth quarter of 2006, and diagnostic device revenues totaled $1.9 million, or 13% of total revenues. This compares with $9 million in biosensor revenues in the fourth quarter of 2005, or 87% of total revenue, and approximately $1.3 million of diagnostic device revenue, or 13% of total revenue.

The increase in revenues in the fourth quarter of 2006 compared with the fourth quarter of 2005 is a result of an increase in the number of active customer accounts to approximately -- over 4,900 as of December 2006 compared with approximately 3,300 active accounts as of December 2005 and as a result of expansion of our direct sales force.

Revenues for the 12 months ended December 31, 2006 were $55.2 million compared with $34.3 million for the same period in 2005, representing an increase of 61%. Biosensor revenues of $47.7 million represented 86% of total revenue, while diagnostic device revenues of $7.5 million represented 14% of total revenue.

During the fourth quarter of 2006, overall gross margins were 74.9% compared with 74.5% in the fourth quarter of 2005. Looking at these gross margins a little more closely, the biosensor gross margin was 73.7% in the fourth quarter of 2006 compared to 74.1% in the fourth quarter of 2005. The average selling price was relatively unchanged from period to period at approximately $35 per biosensor. The gross margin of biosensors was impacted by the mix of sensors sold and a higher percentage of lower extremity testing.

Device gross margins for the fourth quarter 2006 were 82.9% compared to gross margins of 77.2% in the fourth quarter of 2005. This increase was due to an increase in the average selling price of the devices and a modest reduction in the cost of the devices.

Gross margins for the 12 months ended December 31, 2006 and 2005 were 75.5% and 74.2%, respectively. Biosensor gross margins for the 12 months ended December 31, 2006 were 74.4% compared with 74.1% the same 12-month period in 2005. Device gross margins were 82.5% for the 12 months ended December 31, 2006, and 74.9% for the same period in 2005. Increased ASPs for the devices offset by changes in the mix of biosensor sales attributed to the increased gross margins. We continue to work effectively with our two outside manufacturers, Parlex for our biosensors, and Sunburst EMS for our diagnostic devices.

Total operating expenses in the fourth quarter of 2006 were $9.9 million compared to $7.1 million in the fourth quarter of 2005. Total operating expenses for the 12 months ended December 31, 2006 and 2005 were $37.8 million and $25.3 million, respectively. The increase in operating expenses during the fourth quarter and for the 12 months ended December 2006 was driven by the expansion of our sales force, and was also impacted by recognizing non-cash stock-based compensation expense of $653,000 in the fourth quarter of '06 and $2.7 million for the 12 months ended December 2006. And this resulted primarily from the adoption of FAS 123R. By comparison, stock-based compensation was $147,000 and $406,000 for the three- and 12-month periods in 2005.

Net income calculated on a GAAP basis in the fourth quarter of 2006 was $1,208,000 compared with $805,000 in the fourth quarter of 2005. Excluding stock-based compensation expense of $653,000 in Q4 '06 and $147,000 in Q4 '05, non-GAAP adjusted net income was $1,861,000 in the fourth quarter of 2006 compared with $952,000 in the fourth quarter of 2005.

Net income on a GAAP basis for the 12 months ended December 2006 was $5,300,000 compared with $938,000 for the 12 months ended December 31, '05. Excluding stock-based compensation expense of $2,653,000 and $406,000 for the 12 months ended December 31, 2006 and 2005, respectively, our non-GAAP adjusted net income was $7,952,000 through for the 12 months ended December 31, 2006, compared with $1,345,000 for the same period in 2005.

Turning to our EPS, basic and diluted net income per share was $0.10 and $0.09, respectively, in the fourth quarter of 2006 compared to basic and diluted net income per share of $0.07 and $0.06 respectively in the fourth quarter of 2005. Excluding non-cash stock-based compensation expense for the three months ended December 31, 2006 and 2005, our non-GAAP adjusted diluted net income per share was $0.14 in the fourth quarter of 2006 and $0.07 in the fourth quarter of 2005.

Basic and diluted net income per share was $0.42 and $0.40, respectively, for the 12 months ended December 31, 2006, and $0.08 and $0.07 respectively for the 12 months ended December 31, 2005. Excluding non-cash stock-based compensation expense of [2 point] -- 2,653,000 and $406,000 for the 12 months ended December 31, 2006 and 2005 respectively, our non-GAAP adjusted diluted net income per share was $0.61 and $0.10 for the 12 months ended December 31, 2006 and 2005.

Focusing now on our financial position as of the end of 2006, our cash, cash equivalents, and short-term investments totaled $40.3 million as of the end of 2006 compared with $32.3 million as of the end of 2005. During the fourth quarter we had $2.2 million in positive cash flows from operations. And for the 12 months ended December 31, 2006, we had positive cash flows from operations of approximately $7.3 million.

Working capital was $44.3 million as of December 31, 2006 compared with $34.7 million as of year end 2005. The large increase of working capital was due to primarily the increased cash and investment balances, but also increases in accounts receivable and inventories as a result of the growth of the business during 2006. Inventories increased in the fourth quarter of 2006 as a result of the initial production of third generation diagnostic devices to be marketed under the name Advance.

Inventories also increased as a result of increased production of biosensors at Parlex and also as a result of demand slowing somewhat in the fourth quarter.

Total assets were $55.7 million as of December 31, 2006 compared with $42.9 million as of the end of 2005. Our days sales outstanding or DSO was 49 days as of December 31, 2006 compared with 42 days at the end of the third quarter and compared with 40 days in 2005.

Our inventory turn per year was 4.4 in the fourth quarter compared with 4.5 for 2005. As of December 31, 2006, there was no long-term debt on our balance sheet.

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

Our fourth quarter of 2006 presented new challenges for our organization due to developments on the reimbursement front. As we mentioned previously, we have recruited leading reimbursement experts to help us develop and execute our strategies. We look forward to working collaboratively with Medicare and commercial payers, our physician customers, and professional medical societies to address these issues. Most importantly, we are grateful for the opportunity to provide over 4,900 physician practices and approximately 15,000 physicians using the NC-stat system with this important clinical product that advances their patient care.

We have expanded our product offering with exclusive sales and marketing license of the DigiScope product and continue to advance products through our development pipeline, including our third-generation device and other products.

We look forward to keeping you updated on our progress as we continue to build the standard of care and expand into additional diagnostic and therapeutic applications. We believe we're establishing NeuroMetrix as a premier brand in the assessment of neuropathies and neurovascular disorders, with the ultimate goal of providing products to treat neuropathies and related conditions as well.

Due to uncertainty related to reimbursement under the miscellaneous 95999 code and the timeline for addressing these and related issues, it is difficult to predict biosensor usage and new customer accrual. Therefore, as we transition to the question-and-answer session, we are pleased to discuss the fourth quarter 2006 business details and relevant metrics. However, we do continue to maintain a policy of not providing specific guidance on future financial performance. We look forward to your questions.

(OPERATOR INSTRUCTIONS). [Dave Cherklie], Susquehanna.

Thanks. In terms of the new accounts, can you maybe possibly comment on -- I think there's probably close to 400 added -- where they came from? Were any of them from geographies where the 999 is in effect?

You bet, Dave. The accrual of our customer base, which we certainly were pleased by in Q4 on many fronts occurred throughout the country. So it's noteworthy that we accrued in areas where we had the 95999 article in effect, and areas where we had LCDs that were in question throughout Q4. And to exemplify, one of our individuals in December in Florida alone accrued a record level of customers for him in that region. So we continue to build our business with customers, and the value proposition stands tall in any area of the country today.

And I guess -- as much as you may be willing to talk about, I guess in terms of the payment, is there -- from your experience, is there any kind of standard payment out there for any of these areas? Let's say even First Coast as maybe a specific example, but do you anticipate that there will be some sort of average level that they will look for? Or do you think it's going to be all over the board in terms of how they are reimbursing for the test there or anywhere else? Is there even -- do you guys even have kind of an idea of whether it's going to be all one level per the test or biosensors going forward, or it will vary based on the indication?

Well, our assumption is within a given region, for example, First Coast, there should be a homogenous rate for the performance of a nerve conduction study -- i.e. a given unit equals a given rate. And that's based upon the fact that when they go into a miscellaneous code, CMS has requirements established where they're supposed to either do what is called a crosswalk, which is walk a comparable procedure in a corresponding payment across over to the miscellaneous code, or do a gap fill analysis, where they're supposed to say, well, this is the work involved, this is the time involved, this is the cost, and there's the respective payment for the code.

So we certainly expect in a given region, i.e. First Coast, TrailBlazers, NHIC, that that will be established payment and standard payment. But it is difficult at this point in time to say whether that will be the same rate from First Coast to Noridian to TrailBlazers. (multiple speakers) Right now, the data is just too fresh for us to be able to really lock in on exactly what the payment levels are.

Okay. And I imagine when we look at kind of the revenue trends, that some of it is coming from the areas -- so some of the people [think the] 999s don't go into effect until this year; only First Coast from last year. But I guess at least initially, it would appear that the decisions may be impacting outside of the regions -- or do you think there's some impact in, say, like the TrailBlazer/Noridian/NHIC areas, even though the decisions may not have actually gone into effect at this point?

To look at Q4, for example, First Coast and Noridian were in effect during the course of Q4. TrailBlazers was announced for a January 1 start, but was certainly announced during the fourth quarter. So the impact on Q4 was evidenced by those announcements and those articles being in effect. The impact on Q1 will certainly be a carryover in all five of those regions, there's no doubt about it.

And the key question in the customer's mind is, what is my payment level? And that payment level may be certainly a rational and positive level that allows them to continue to test in a manner commensurate with the past. It may not be. We will certainly determine that. But the net-net on that is that we certainly believe that our procedures, our technology performs the procedures described in the CPD codes, and long term, will center the equation back on the appropriate codes. But in the interim, we will see what the payment levels are, and our customers and our Company will adjust accordingly.

Last one from me, on the PSS medical front -- I know you said -- you gave a metric out in terms of how many of their guys have placed systems. From your standpoint, then, everything on that front is still very solid? And I guess you might have indicated you had another distributor as well. But from your point of view, these decisions haven't had an impact on that relationship?

Well, two answers to that. One is the relationship is certainly progressed, as has our business with PSS. And it's evidenced by our continued results with them and their organization, with over 1 out of every 2.5 representatives in the game, and having sold an NC-stat system with their NeuroMetrix counterpart.

The reality is, though, as with any business partner, they're evaluating how to work through the reimbursement dynamics in a 95999 area. And part of that is an educational process not only for our customers but for our business partners. And it's very rational -- if you look at the number of patients that a physician sees on a daily basis, on a weekly basis with these clinical conditions, that there is plenty of patient opportunity, if you will, to clinically and appropriately use our technology. And that's outside of Medicare. And when you factor in Medicare -- we'll see what the payment levels are.

But obviously all that is a bit of an educational process which we're doing on a daily basis, not only with our current customers, our perspective customers, but also our business partners so that they stay focused and continue to march forward. But as a whole, the PSS relationship has been a very, very strong success, and Henry Schein represents another 350 new business partners, representatives out there taking our technology to the market and to perspective customers throughout the land.

Bill Quirk, Piper Jaffray.

Gary, just wanted to (technical difficulty) the utilization theme for a minute if I can. Can you give us a little color outside of the regions that either had an LCD in the works this quarter, or for that matter, had announced their [intent] (technical difficulty) something. Did utilization rates materially change the regions outside that during the quarter?

Well, overall, we saw a slowdown in our growth and testing and customer testing on a by-customer basis. So it would be a natural assumption that we did see an altering of utilization rates. And you know, a customer sees an article, and sees that they're supposed to fill [under] miscellaneous code, and they don't want know what the reimbursement is. And that's going to have an impact.

That had an impact in regions outside of the five in question?

Oh, I'm sorry, Bill; pardon me. There's no doubt that there's a bit of a ripple effect, but it really isn't relevant. If a customer is in Illinois, and they're looking at their -- they're looking at one, their LCD, and two, their commercial payer environment, from an economic perspective, what's happening in California may come into their view, but it shouldn't substantially alter their utilization of the technology.

And the reality is that they're using our technology first and foremost because of the clinical outcomes. If the economic runway is there, then they're in good standing. So I'd say as a whole, it has not. It certainly creates a little bit of a noise on an accrual front, as evidenced by our numbers in Q4, but on a utilization basis, it's not pronounced outside of the 95999 areas of the country.

That certainly make sense. Shai, a couple questions for you if I can. With respect to the new staffing on the reimbursement side, how recently were these hires. I seem to recall that we added some consultants during the third quarter as well.

We have actually -- what we're referring to is primarily an array of consultants and experts that we have added to our team to address these issues. From a specific hiring front, internal employees, we basically have maintained our current staff.

Okay, understood, but then have we added, I guess, more consultants, if you will, through the fourth-quarter period as it [relates] --

Yes, we did.

Great. And then additionally, as we kind of think about strategy going forward, and I certainly recognize that you don't want to lay all your cards on the table here, but if we think about the specific payers that are making some noise here, are we seeing some increased receptivity from them to sitting down, walking through data, etc.? Or should we be thinking about the next action here as some type of -- something on a legal front, i.e. (technical difficulty)

First and foremost, we do work with all payers, Medicare and commercial, on a collaborative basis, and have reached out to many. And we have had meetings, and they have been receptive to understanding the technology and its role and so forth. So that is definitely part of our strategy.

Simultaneously, there are well-defined, as you know, appeals processes for providers as well as for companies working with providers and patients to appeal particular decisions and so forth. And we're pursuing those at the same time. So it's really -- it's not an either/or strategy. It's both.

So to be clear, are the payers including some that have already moved to a 95999 -- have they been receptive to sitting down and talking to you guys about that decision, or for that matter, your case, if you will, on this whole side?

Yes, some have.

And then lastly, just a quick housekeeping question, Brad -- do we expect to release the tax reserve in the first quarter of 2007, and so we should think about using fully taxed numbers going forward? Or what's the latest thinking there?

Well, as you can see from our results, we did not have a tax provision in the fourth quarter, other than just that relating to alternative minimum tax. Due to the fact that we've actually -- when you look at it on a tax basis, we've had cumulative losses over the past three years when you look at a pretax book income and then you add back permanent book tax differences. And on that basis, we did not record any regular tax or fully taxed numbers in the fourth quarter. And we're just going to have to look at it as we move forward, quarter by quarter, and depending upon where that cumulative position looks. So at this point that's really the only guidance I can provide you with, Bill.

So in the immediate term here, we should not be thinking about adjusting our numbers for fully taxed purposes.

Right.

Thank you.

Jeff Frelick, Lazard Capital Markets.

Question for Gary -- Gary, with respect to PSS, the 1 in 2 PSS reps selling an NC-stat system this quarter, I believe was up from the 1 in 4 last quarter. Is that a reflection -- I guess it all accounts for maybe close to 60% of NC-stats placed in the quarter. Is that a reflection of PSS now being fully trained? You went kind of to the [international] sales meeting. Is this the first full quarter of really having PSS ramped up? And is this kind of more of what we should expect going forward -- this type of quarter from PSS?

Jeff, to clarify, that 1 in 2.5 reps is a cumulative look from the launch of our partnership forward. So that's an indicator of how many of their representatives has sold the units since we launched our relationship. And most manufacturers who are in our game and sell equipment as well as disposables or just equipment really have a targeted benchmark of 1 out of 4 reps in a year getting involved in the game and selling a piece of equipment. And here we have approximately 40% of their organization already three quarters into it having sold a unit.

So I think it's a strong statement to not only the strength of PSS and their relationships, but our business partner model, our marketing approach, and our ability to drive products through this distribution model with our field sales organization. But that's a cumulative look and not just a Q4 snapshot.

And then with respect to the add of Henry Schein, I believe they also have a large in-house sales force. Do you have access to that as well?

We do. We launched with their field sales organization. They do have a significant telesales arm, and it's quite successful. And they have really asked us to embark upon exploring how we can make that work together.

But our real excitement is that we signed the agreement and we literally trained their entire organization in a 30-day timeframe. And they're all up and running it out there, and beginning to make it happen with NeuroMetrix.

And then can you give us a look, Gary, on maybe how the sales funnel looks here beginning of '07 versus '06? Obviously, you have increased the field rep count within NeuroMetrix and added distributors. But also, you're kind of combating the issues with the miscellaneous codes. Can you give us a sense of how the funnel looks?

We obviously don't provide guidance, so we're not going to be able to comment on how robust the funnel looks. But I can tell you that one of the things that we've done -- if a representative is now selling under -- some uncertainty under a miscellaneous code, for example, we've educated and equipped our team on how to approach customers and really look in a very, very rational manner at their total base of patients, and look at the clinical application of our technology for private payers and for Medicare, and how does this make sense for you -- customer.

So that is a process that we've gone through. And we've completed that with our field sales organization. As such, now we carry that forward to our customers and to our distributors or business partners, and away we go. So while I can't comment on the funnel in our pipeline, I can tell you that we look to continue to bring this wonderful technology to customers throughout the entire country.

Just a last question for Shai. Clinical trial for the smart needles -- is that still slated to begin sometime in '07, and if so, could you maybe give us an idea of the timing?

We have two studies on track for this year related to that technology. That's correct.

Will that begin kind of the first half, Shai, or more later in the year?

The first one will be in the first half of the year, and the second will be in the second half of the year.

Charles Olsziewski, Oppenheimer.

A couple of questions. One, obviously the local -- the LCDs that have been handed down so far are pretty well-publicized and talked about. And there's been I guess discussion that Palmetto has been put on hold. Are there any other intermediaries that you're aware of that are, say, over the next six months looking to move forward with LCDs? And has there been any rumblings at all on the third-party or private insurance side regarding reimbursement?

On the LCDs, we're not aware of any that are forthcoming. First Coast just issued a recent draft. And we're actually enthused by that, because now we are in a formal notice and comment opportunity with First Coast to provide insights on their view towards neurodiagnostics from not only our Company, but more importantly, from the customers that we have in those states as well as from the professional societies who have a strong interest in seeing their constituents, their physicians to be able to continue to see the landscape and execute against it appropriately.

On a private front, we're not making any comments. But we will definitely take note that we're monitoring half that very carefully and closely. And today, we haven't seen any major changes in the reimbursement landscape.

And on the last note is it relates to the LCD landscape -- if there any changes out there, you'll see them as quickly as we do. And we're going to be on each and every one of them. But I think we've proven in 2006 an ability to work with the respective Medicare carriers on questions held within the LCDs, and as noted earlier today, a majority of those were appropriately adjusted to reflect what we think are the rights of physicians to perform nerve conduction tests with our technology and other technologies available in the market.

Okay. And another question regarding Advance. You mentioned that given the ability to support the performance of needle EMG, that this dovetails nicely with your planned expansion into neurology. And you also talked about evaluating whether you are going to expand your sales function still further. Is it possible that that incremental expansion of your sales force with those sales individuals would focus exclusively on the neurology market, dovetailing with, say, a mid-'07 launch of Advance?

I think realistically, our market is the physician office arena today. And that includes neurologists, physiatrists, orthopods, occupational medicine, pain management, endocrinology, rheumatology, and the primary care segment. So our plans for expansion will be more on a regional basis, where you might take Philadelphia and now have two individuals out of Philadelphia focused on all of those markets versus a dedicated force calling on neurology, or for that matter, orthopedics or endocrinology. We really view the opportunity to bring value to customers, and deliver value through our technologies as a key and primary strategy for us and move forward.

And just finally on international -- you talked about UK, Germany and Spain looking attractive based on the research you've done. Can we infer from that the other markets you have looked at within Europe just don't fit the profile that would be amenable to you for entry into those markets regarding reimbursement?

At present, the markets that we highlighted -- and thanks for noting that -- are ones the clearly create potential opportunities for NeuroMetrix. The other markets, it's really more of a to-be-determined. But initial indicators are not as overt with our current product offering. And that's an important element to underscore.

Jonathan Block, SunTrust Robinson Humphrey.

Just a couple of questions. First with NC-stat Advance, can you maybe give us some detail? Do you expect maybe some pushback from the neuro community? I believe XLTEK briefly mentioned that when they sort of dipped their toe into the primary care physician office and then tried to circle back and go back to neurologist community, they had some issues. And if you do expect it, how you would want to tackle it?

First, I should just be clear. The product is actually going to be branded Advance. It is a distinct product from the NC-stat. So I think I misspoke during my presentation, so I apologize for that.

So as far as Advance is concerned, we're not -- we're aware of XLTEK's reporting on that potential conflict. We actually have had some success even selling the NC-stat to the neurology community. We primarily target the neurologists who do not already have EMG equipment. So it is actually a fresh market. So we really do not anticipate that as being a significant issue.

You don't just -- on a percentage basis, what percent of the neurologists out there do not currently have EMG equipment? Just to try to get a size of the market.

We've done research. And if you look at the neurologists who do not have equipment but might be a partner of one who does have equipment, it's probably on the high end, 25% of the total neurology and physiatry universe, which is 13,500 doctors. So as a quick corollary to that, we have approximately 15,000 doctors using our technology. So there's still a good market, though, to be had in that 25% of the 13,500.

Great. And then just in terms of the regions where you have the ongoing LCDs, I'm just curious -- did you run into any issues or problems with a doc that may have bought a system, and then returned it when they had some push back, in terms of submitting claims?

Well, you know, we certainly had a couple of customers who -- if they purchased the system on a Thursday and the article came out on a Tuesday, they called our representative and had some questions. I will tell you, our performance on quote-unquote returns was fairly comparable with any other quarter. So there wasn't a significant altering of the landscape there. We were pleased by that. And it's not a surprise because of the ubiquitous nature of these clinical conditions and the fact that they continue to test not only commercial payers, but presumably, Medicare patients as well.

Okay, and just real quick, shifting over to DigiScope. Any thoughts there? I know you guys don't provide specific guidance, but are we talking about maybe 5% penetration run rate end of the year, 15 --? Where do you think you guys can get to with that opportunity?

We don't provide guidance. And the only thing I can comment on is that we have 5,000 existing customers out there, or close to, I should say. And our first target will be to take this technology to our existing customer base, who have seen the strong utility of the NC-stat system, and here is a highly aligned clinical platform that goes right into their care pathway.

So that's our first target market, but in terms of our penetration and goals for the years, we're not in a position to make comment for 2007.

Two more real quick ones, if I may. Brad, on the DSOs, a little bit of a spike there. Could you provide some color?

We certainly saw a slowing of customer payments, likely due to some of these reimbursement concerns, especially in the markets that were impacted. I would point out, we did see an increase of seven days when you look at fourth quarter compared to third quarter. But I would point out that when you look at the overall level of our DSO, it's certainly favorable when you look at other companies that are selling to the physician office market.

Okay, and just the last question. Just to give a shot here, I think with the docking station, you guys obviously have a ton of granularity on utilization. Can you provide us with some metrics of what you experienced maybe pre- and post-LCDs in the First Coast region? (multiple speakers) So in other words, utilization per doc, Florida and Connecticut, and then what you experienced post-October, maybe amongst that same population among -- of doctors?

I'll take that one. On an aggregate level, we saw a decline. And certainly in some practices, we saw a decline as well. We're not commenting on utilization-specific areas versus others. But there's no doubt that when an article like that is issued, and we certainly inform our customers of the article, they have questions. And that will have an impairment on their testing as they figure out the questions. And we certainly provide a support in that.

But as a whole, we saw slowdown in testing on an aggregate per-customer basis. But again, this is kind of transitional period in each one of those regions that it emerges in.

(OPERATOR INSTRUCTIONS). [Kevin Cotler], [Broadband Capital].

(multiple speakers) new to the story, and I know you're not giving guidance, but I had two questions. Basically, as far as the R&D spending in '07, could you provide just a little guidelines? I mean, in terms of dollar -- dollar, quarter to quarter, and that in sales of marketing and G&A just to give us a flavor of where this is trending?

Well, as far as R&D, we are very committed to approximately a 10% of revenue R&D spend. This Company was built on a legacy of product development, and actually intend to continue that, and see our future in the Advance system as well as the new products, and then bringing in products from the outside such as the DigiScope. So we have no intention of backing off. So I would look for a ballpark 10% target for the Company.

And then as far as the other metrics, Brad, you might want to comment on the sales and marketing and G&A.

For the quarter, we were at approximately 40% for sales and marketing, and approximately 20% for G&A. And obviously, as we move forward, it's going to -- the percentage is going to depend upon our level of revenue. But --

That's why I'm asking the question. From my perspective, you could say R&D is targeted at 10%, but you have been running at between 8.5 and 9. So if you feel that the third or fourth quarter is representative of what you're going to be spending, I just want to know that, because people have all different types of projections out there. And I think the key to your story right now is that you don't wind up going into losses, and that you have your cash balance continues to grow. And if it continues to grow, then we believe in management, and you'll bring in some new products or you'll develop new products.

So for example, on sales and marketing, you're running at around a 5.8, $5.7 million run rate, you know -- is that something that we could see at $6 million in '07 even though sales on a worst-case scenario might be trending down or flattening out? That's what I'm just trying to get a flavor of.

I appreciate the question, Kevin. We're just not giving any kind of guidance on absolute numbers for the year. We're going to be making the right investments in this business, as we move forward, be that, as Shai indicated, on the product development front; as Gary indicated, on the sales force front, with NC-stat and with our new launch of DigiScope so we can support the sales and marketing efforts for those products, as well as supporting the infrastructure of the Company. We just can't give any additional guidance beyond that.

I understand (multiple speakers) you don't know where your sales are going, but just at least on the R&D line, you couldn't just say, okay, the level of fourth quarter is a fair level to be at --?

I understand the interest in the question. Just as kind of a corporate policy, we have tried to target 10% R&D because we feel that's the appropriate level of investment in R&D. And obviously, it may go up a little bit one quarter; it may go down a little bit the other quarter, but that's our general target, and we feel that's going to drive product development forward.

Okay, two other things. Just on the new -- the Eyetel, you gave some numbers as far as -- what, $4,000 to install it. At the accounts [we] currently have, it generates 10 to $12,000 per account. Per year.

Right, in year one.

And you said -- just the fee per scan, what was that?

That's $45.

Okay. And I guess given the number of accounts you have, or -- how many salespeople do you have, 50 or --

48 regional managers and four regional directors.

48 -- is this some unbelievably conservative number? Should we be assuming one or two per rep per quarter or per month? I know you're not giving guidance, but there has got to be some ballpark. I just want to see if the Street estimates out there are even close to what you think the lowest-case scenario, worst-case area would be. To me, it sounds like a great product.

I would concur on couple of fronts. One, it's a great product. Two, we have a lot of customers out there that it makes a lot of sense for them to expand their clinical offering for their patients, and that NeuroMetrix has proven an ability to take and deliver technology to the market that is innovative and game-changing for patients, and most notably, on a day-in, day-out basis for the physicians who use those technologies. We're just not in a position to give you color on what the outlook is per man, per month in 2007.

But it's a good question. And I think as we report in future quarters, you'll get a good understanding of our take in this product, introducing it into our portfolio, educating our field, and ultimately, educating customers and having them come [aboard] and take advantage of it.

Right, I think you guys have to at least provide us with some real baseline numbers, because at the end of the day, if you hit them or you don't hit them, we're still going to come back and ask the question why if it was such a great product, it didn't work out. So it would just alleviate some of this risk that people perceive in the story, which probably isn't there.

My final question relates to just business development stuff. I don't know if you specifically said this on the conference call, and I know you talk about Advanced, which sounds really interesting. But either on R&D internally that you are developing, any other products or any other milestones we could look forward to? And then two, on the business development side, would you be willing to say at some point in the first half or second half when we will have another business development type deal like the Eyetel?

Well, on the R&D front, we clearly expect during the course of this year to update the market on obviously the Advanced system, which will be going to market; our therapeutic product, as well as additional sensors. So there will be significant R&D activity as well as product introductions this year from our internal pipeline. We're very much looking forward to that, and we will clearly provide the market with updates as we proceed.

On the business development front, we're actively involved in business development. We cannot necessarily predict whether we will have a DigiScope-like product, but we're actively pursuing that angle, and hopefully we will find such products. But clearly, until such time as we've identified those opportunities, we really can't speak to them.

Could you at least just say -- is your plate full? Are all three of you running around just because you have so many opportunities? Or is it -- they're tough to come by?

Our plate is definitely full on many fronts. But we're very knowledgeable about this market. We're definitely looking at key opportunities, and this is a select space. We're looking at bringing clinical, game-changing technology into the physician office. So it's not a huge array of product. So one has to be very selective. But you have to go very deep in every opportunity.

So we'll obviously update the market as this progresses. And hopefully, we will be able to find such opportunities.

And now, I would like to turn the call over the Shai for closing comments.

Thank you very much. I wanted to give you my appreciation and the Company's appreciation for joining us today. And we look forward to update as we move through the year. Thank you. (multiple speakers)

Thank you, ladies and gentlemen, for your participation in today's presentation. This does conclude today's conference. You may now disconnect, and have a wonderful day.