NeuroMetrix Inc (NURO) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the NeuroMetrix First Quarter 2007 Earnings Conference Call. My name is (Oneika), and I will be your operator for today.

At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded for replay purposes.

At this time, I would now like to turn the call to Mr. Brad Smith, Chief Financial Officer; please proceed, sir.

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 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.

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 first quarter 2007 conference call. I am joined today by Gary Gregory, our Chief Operating Officer; Brad Smith, our Chief Financial Officer, and Mark Doucette, our Controller.

I will start today's conference call by providing you with an overview of NeuroMetrix and some brief highlights of developments during the first quarter of 2007. I will then turn it over to Gary for a discussion of our 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 innovative products used to diagnose and treat neuropathies and neurovascular diseases. Neuropathies are disorders of the 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 5,200 physician practices and clinics, representing approximately 15,000 physicians throughout the United States. To date, over 800,000 patients have been tested using the NC-stat. Our technology enables a broad group of physicians from internal medicine, endocrinology, rheumatology, family medicine, orthopedic surgery, neurosurgery, 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. As reported to us, a recent comprehensive customer survey, physicians are highly satisfied with the clinical outcomes and enhanced patient care associate with NC-stat utilization.

Diabetic retinopathy is a common neurovascular complication of diabetes, and is the leading cause of blindness among working-age adults in the United States. In late January, we launched our sales and marketing efforts for the DigiScope, a product we licensed from Eyetel, Inc. The DigiScope is an automated retinal imaging system used by internal medicine, endocrinology, and family medicine physicians to detect diabetic retinopathy. We are presently focused on marketing the system to our large installed base of customers, and we also inherited about 125 DigiScope customers from Eyetel. We are encouraged by our early success and the positive feedback we have received from physicians using this innovative product.

We believe that 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.

With regard to our performance in the first quarter of 2007, our revenues were flat from the same period one year at $11.8 million. Revenue declined approximately 17% from the fourth quarter of 2006 due to a decline in average biosensor usage per customer, and due to fewer new customers acquiring the NC-stat.

During the second half of 2006, five Medicare carriers issued articles or local coverage determinations, also known as LCDs, requiring physicians using the NC-stat to submit for reimbursement under a miscellaneous CPT code, with carries the number 95999, rather than using traditional nerve conduction testing. We believe that our revenues in the first quarter of 2007 were significantly impacted by the decisions and the associated uncertainty they created. Specifically, our customers received lower levels of reimbursement and had to submit additional paperwork.

Furthermore, we believe that our customers received a higher level of denials for medical necessity in affected States. More recently, we have seen additional unfavorable developments with the NC-stat reimbursement by commercial, in particular certain Blue Cross/Blue Shield carriers have taken the position that the NC-stat is experimental and investigational. We believe this position lacks scientific and clinical legitimacy.

To address these issues, we have a comprehensive reimbursement strategy in place which includes direct discussions with Medicare and commercial payers, various appeal processes, physician advocacy at the individual and professional society level, product development effort and clinical studies. We are assembling a knowledgeable group of external experts to assist our internal team.

On a very positive note, First Coast Service Options, or FCSO, the Part-B Medicare Intermediary for Florida and Connecticut has stated in their most recent LCD that the NC-stat is to be reimbursed under the traditional nerve conduction codes, not the miscellaneous code as they had previously indicated in an article published in October of last year. In so doing, FCSO has appropriately determined that the issue of nerve conduction coding is a matter for the AMA. In fact, the AMA CPT panel has convened a work group with broad participation by an accepted professional medical associations and electrodiagnostic equipment manufacturers to study nerve conduction coding.

We are optimistic that the scientific and clinical foundation upon which the NC-stat is built will prevail and physicians using this technology will receive consistent and appropriate reimbursement. Specifically, we would like to highlight the following. First, the NC-stat has FDA clearance as conventional nerve conduction testing equipment. Secondly, the NC-stat meets of exceeds the most stringent technical specifications for this type of medical instrumentation. Third, the diagnostic accuracy and clinical utility of the NC-stat has been demonstrated in approximately 45 published peer-review articles, abstracts, and posters. The NC-stat has been used in FDA registration trials for pharmacologic agents, and at large scale immunological studies encompassing thousands of patients sponsored by the NIH, National Institute for Occupational Safety and Health and the CDC.

We now have over 5,200 physician offices representing approximately 15,000 physicians using the NC-stat providing (foreign) clinical benefits to their patients, and as I mentioned before, over 800,000 patients have been tested with the NC-stat.

Finally, although there is justifiable concern of overuse and abuse of diagnostic technologies, including nerve conduction studies, these issues are not evident in NC-stat utilization.

We have also continued 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 of neuropathies. We submitted a 510(k) filing with the FDA during the first quarter, and expect to launch this product into the specialists' market around mid-year upon receiving FDA clearance.

Advance has a number of important innovations and features that reflect our engineering expertise applied to our understanding of customer and market needs developed over seven years. Among its many innovations, Advance will support the performance of needle EMG studies. This is an important progression for our Company as we innovate our accurate improved NCS technology with needle EMG for the first time within this platform. We are enthusiastic about this expanded capability in particular because it will support our further expansion into specialist markets, such as neurology, neurosurgery, any physical and rehabilitative medicine.

We are also pleased with the progress we have made in our nerve injection system. We believe this product will enable primary care and specialist physicians to effectively and safely treat neuropathies such as Carpal Tunnel Syndrome by injecting small doses steroids and local anesthetics in very close proximity to the nerves.

We have completed a pilot study control subjects and will now move into formal clinical studies. We expect to file sequentially more involved FDA (inaudible) case submissions that will lead to a commercial lease in late 2008 with substantive revenue generation the following year.

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 are fully cooperating with the OIG, and have provided them with information they requested. We recently became aware that we had a subject under investigation by the Department of Justice. We do not have any additional updates on these investigations, nor do we know if they are connected.

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 which marks the continued adoption of our technology by customers and also a number of reimbursement issues that are challenging the business. However, we remain confident about our products and the benefits we bring to physicians and the patients they care for on a daily basis.

In Q1 2007, we expanded our customer count to 5,200 active NC-stat customers. While the growth in new customers has slowed somewhat over the past quarters, we continue to expand the customer base due to the strong clinical benefits that the NC-stat delivers.

Testing with NC-stat system in the first quarter of 2007 grew year-over-year by approximately 15% to 293,200 biosensors compared with 255,500 in the first quarter of 2006. However, testing declined by 5% from the Q4 2006 levels of approximately 310,000 biosensors. Our average customer delivered approximately 7,900 in annual biosensor revenue based on their usage during the first quarter of 2007. This is compared with approximately in the first quarter of 2006 and 8,800 in the fourth quarter of 2006. While this is clearly a contraction from previous quarters, and reflects a more cautious approach to testing, it also illustrates that our customers continue to adopt and utilize our technology as evidenced by the increase in active users.

The distribution of testing by our customers in the first quarter of 2007 was as follows; 69% of total testing was performed by our internal medicine and family medicine base of accounts, and 31% came from within our specialty care segments. Here, 40% of testing within specialty care came from the orthopedic market, which represents 13% of our total testing volume. Endocrinologists and rheumatologists represent 28% of specialty care testing, and 9% of our total testing volume. It's important to note that endocrinology practices now represent approximately 1 in 4 are taking advantage of our technology today. And 32% of testing within specialty care segments were performed by other specialty care physicians, including those in pain management, occupational medicine, neurology and physiatry.

Testing within the primary care market, which we define as internal medicine and family practice clinics, grew by 34% year-over-year, illustrating our progress in this market segment. Total testing in this segment grew from 150,000 to 201,000 biosensors. Testing within the specialty care physicians segment, which includes all other physicians' specialties, ranging from orthopedics, endocrinology, rheumatology, occupational medicine, pain management, neurology and physiatry, declined by 12% and 13,000 sensory year-over-year from 105,000 to 92,000 biosensors. So to summarize, the overall testing grew by 15% year-over-year to 293,200 biosensors.

New NeuroMetrix customers delivered annualized revenue of approximately $12,000 per account during Q1 2007 based on their usage. This details that despite reimbursement issues, our new customers continue to adopt and utilize our technology within their practice.

Testing for diabetic peripheral neuropathy and low back and leg pain represents approximately 55% of the total testing in Q1 '07, which is comparable to level from a year ago. This breakdown reflects the diversification of our business from a base of testing for Carpal Tunnel Syndrome during the first years post our commercial launch. It also demonstrates our present position of allowing all physicians to 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 52 highly experienced regional sales managers, five sales directors, and one national director dedicated to selling the NC-sat system, the DigiScope and supporting our existing base of customers. Of important note, to our knowledge this represents the largest sales force in the physician office arena outside of distribution and pharmacologics and represents a key asset and ability for our Company to deliver clinically-directed products to the market.

Our distribution network continues to be a useful extension of our sales organization. However, in areas encountering reimbursement issues, we have noted that the distributor representatives will often stand on the sideline and not continue to appropriately market our technology. We plan to address this issue in the coming months. As customary, we will continue to monitor the independent sales network as we progress in the year.

We have now moved forward since our last conference call in any decisions on the international front, particularly given our focus on the US market at present. We will provide updates in the future on our plans for the potential sale of our products in Europe and in other regions throughout the world.

I also wanted to expand on the important topic of the reimbursement landscape. First and foremost, the NC-stat system is an FDA-cleared technology supported by FDA labeling, and I quote, "Clinical data submitted in the 510(k) demonstrates that nerve conduction measurements obtained using the NC-stat 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 reimbursed by the majority of payers throughout the United States.

In the second half of 2006 and into 2007, several Medicare carriers issued draft and final LCDs, or local coverage determinations, and coding articles, which included select potential concerns for NeuroMetrix. These LCDs, which were issued by Palmetto, TrailBlazers, Cigna Medicare, NHIC, or National Heritages, Meridian and First Coast. The limited which positions could perform NCS tests, which technicians could perform NCS under physician supervision, the length between NCS and needle EMG, and a position that the NC-stat was considered experimental and investigational and that it would not be covered. Of key importance, all of the Medicare carriers implemented final policies that they should limit to no restrictions towards physicians' abilities to perform NCS tests with the NC-stat system.

We also note that select Medicare carriers, including First Coast, Meridian, TrailBlazers, Cigna and NHIC issued articles which indicate that customers must bill for NCS procedures before using the NC-stat under a miscellaneous code, 95999. As such, our customers can perform medically appropriate NCS tests with the NC-stat system. They can also submit their claims electronically, and seek reimbursement under this code.

To date, our customers have experienced various levels of reimbursement when performing NCS tests under these codes and to exemplify, in the TrailBlazer's region, our on-average customers are receiving reimbursement of $35 per unit, which results in a typical range from $40 to $80 in net revenue per patient after the cost of biosensors and before any discounting. With these levels of reimbursements, physicians can still offer this important diagnostic test to their patients and add practice revenue, albeit at a lower level than they have been receiving under the codes for the established NCS-CPT levels.

We have also heard from customers in select regions that more claims are being denied based on assessment of medical necessity. The reason for these denials is not apparent.

We continue to believe that the standard established codes for nerve conduction testing are the right codes for the NC-stat. As such we have retained a team of reimbursement experts to assist us in addressing the outstanding coding articles and to help support customers appeals through the use of the miscellaneous code, lower payment levels received and/or claim denials. We will continue to support the appeal process, and at present have over 100 claims in a Level-1 appeal, and many in a Level-2 appeal, and we plan to continue to march forward with these appeals to protect the rights of our customers and to protect our business.

Of important note, in October 2006 First Coast was the first Medicare carrier to issue an article which reported that NCS, as performed with the NC-stat would be billed under a miscellaneous code. First Coast also issued a draft LCD for neurodiagnostics and NCS test early in Q1 '07. Their draft LCD policy was characterized by significant restrictions on NCS tests by formally placing the NC-stat system under the miscellaneous code and by also creating a mandated length between NCS and needle EMG studies.

As Shai has mentioned, we are pleased to report that First Coast has reversed their position, and will be reimbursing for NC-stat under the standard established CPT codes for NCS testing, most notably 95900, 95903, and 95904 effective June 30, 2007. We view this as an advance for NeuroMetrix and for our customers, as this decision reinforces that qualified physicians can perform NCS tests with the NC-stat system and go for these procedures under standard established CPT codes for NC studies.

As Shai noted, the American Medical Association CPT Panel will be examining the codes for nerve conduction testing and assessing all equipment for nerve conduction testing, including the NC-stat system. While this process is already underway, we don't know what the timeframe will be for the panel to make any final decisions. We believe that the NC-stat systems meets and should be reimbursed according to standard CPT codes for NCS along several reasons. These included the FDA's clearance of the NC-stat for performing nerve conduction studies, that the standard CPT codes for NCS describe the services performed with the NC-stat system, that the Medicare Physician Fee Schedule details the codes and corresponding RVUs for procedure, that the HIPAA Act includes requirements pertaining to the establishment of a single uniform code set, and also by our 2002 documentation from CMS that NCS tests performed with the NC-stat should be billed under the standard established CPT codes for NCS.

On the commercial payer front, we are working with these payers to ensure they understand the nature of our technology, our FDA 510 clearances, our array of clinical articles, and also how our technology is utilized in a conservative and clinically appropriate manner. We are also ensuring that they hear from our customers who use the NC-stat as a valuable asset to advance their patient care. We have seen a number of commercial payers, including select regional Blue Cross carriers develop policies which may restrict the performance of NCS tests with the NC-stat system. These restrictions have been centered upon three areas; number one, which physicians can perform NCS tests; number two, a mandated length between needle EMG and NCS; and number three, the plan that the NC-stat is experimental and investigational. These positions stand in contrast to the direct review decisions and positions held by virtually all Medicare carriers, and also in contrast to all State guidelines and many medical positions held throughout the nation.

To elaborate, regarding which physicians can perform and are credentialed to perform NCS tests, Medicare policies and all Medicare carriers do not allow for or have any restrictions toward which physicians can perform NCS tests. This is further supported by State laws by which there are no physician restrictions for performing NCS tests across every State in the nation.

This is also supported by the longstanding AMA policies, which do not support the credentialing or restriction towards performing diagnostic procedures on the basis of physician specialty.

Regarding a mandated length between needle EMG and NCS, all evidence-based medicine guidelines established today do not support a length between needle EMB and NCS. Furthermore, there are no Medicare carriers that have taken such a mandated position across the US. This issue has also been closely examined by many Medicare carriers in the past year, and all have stated their stances when examining both the scientific evidence and physician rights for employing their clinical judgment.

Finally, the position of mandating an unnecessary invasive and expensive clinical procedure upon all patients represents a questionable policy and/or position.

Regarding the NC-stat being experimental and investigational, we firmly believe that the counter-stances are clear and compelling. These include our FDA clearance, the 40-plus published reports detailing the accuracy, validity, and utility of the NC-stat system, the NC-stat system's use, and worldwide clinical trials by renowned organizations such as the CDC, NIH, (NIAGE), and also pharmaceutical companies, such as Lily and Company that over 800,000 studies have been performed with the NC-stat system and the system is used by over 15,000 physicians a cross 5,200 practices.

Furthermore, the NC-stat system is reimbursed by every Medicare carrier in the nation with many specifically spelling out the approval of the NC-stat system in their policies. Based upon these reasons, along with the strong patient benefits when utilizing our technology, we believe our customers should be able to perform medically appropriate NCS tests and appropriately bill for them across the commercial payer landscape. As such, our customers and our Company will pursue these rights under the well-established regulations and appeals processes.

On a very noteworthy note, in late January we formally launched our new product, the DigiScope for which we hold an exclusive license with Eyetel Imaging to sell the product to the primary care, primary diabetes care marketplace. We view this as a major advance for our Company as it transforms NeuroMetrix into a platform Company where we allow all physicians to diagnose and treat neuropathies and neurovascular diseases. The business relationship is founded upon the DigiScope, which was developed in collaboration with the Wilmer Eye Institute at Johns Hopkins and is an FDA-cleared diagnostic device physicians across primary care, family practice, internal medicine and endocrinology, can use for the early detection of diabetic retinopathy.

As background information, it is estimated that 21 million people in the US have diabetes. Diabetic retinopathy, which is a major complication of diabetes, is a silent, progressive, and debilitating condition 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 diagnosis by annual dilated eye examinations 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.

As noted, we estimate that the annual U.S. market opportunity exceeds $700 million annually. Eyetel's recent business experience is to generate between $10,000 and $12,000 in revenue per account in year one alone. This is built off of a $3,000 to $4,000 installation and training fee, $150 per month in what is essentially a rental fee, and a $45 per retinal scan fee, with the retinal scan revenue recurring in successive years. With our sole responsibilities for sales, marketing, service, billing, and collecting for this business, NeuroMetrix plans to book gross revenues, while capturing a 50% split on revenues on the installation and retinal scan fees for all new customers.

Clearly, we believe the DigiScope could drive 40% gross margins, and approximately 20% to 25% operating margins, which is very consistent with our long-term goals. The synergy between our present product portfolio and the DigiScope platform is clear; the technology is firmly aligned to our market focus towards endocrinology, internal medicine, and family medicine practices. Furthermore, the best in class skills and processes we have developed to market and sell the NC-stat system are firmly aligned to the requirements to drive appropriate clinical utilization of the DigiScope throughout the marketplace.

We formally trained our entire field sales force on the DigiScope in January during our National Meeting, and we've closed over 25 new DigiScope customer agreements during the first quarter. This details a very solid start to our commercial efforts with the DigiScope as nearly 1 in every 2 NeuroMetrix region managers have sold the DigiScope unit to date. This also brings our total to over 150 active DigiScope customers.

So to summarize, we believe the launch of the DigiScope represents an important advance for our business, and we have already begun to capitalize upon the market and customer opportunity sales here.

As a closing comment, we acknowledge the challenges that are impacting our business and that have caused our business to contract over the past 2 quarters. However, we remain confident in our position to 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 develop our standards of care within the marketplace.

I'll now turn it over to Brad Smith, who will discuss our financial results for the first quarter of 2007.

Thank you, Gary. Here's a recap of our financial performance for the first quarter. Total revenues for the first quarter of 2007 were $11.8 million, which is unchanged from the first quarter of 2006. Revenues in the first quarter of 2007 were down approximately $2.4 million or 17% from fourth quarter 2006 levels.

Biosensor revenues totaled $10.3 million, or 87% of total revenue, in the first quarter of 2007, and diagnostic device revenues totaled $1.3 million, or 11% of total revenues. This compares with $10.3 million in biosensor revenues in the first quarter of 2006, or 87% of total revenue, and approximately $1.5 million of diagnostic device revenue, or 13% of total revenue.

Revenues from the DigiScope used by physicians for the detection of diabetic retinopathy were approximately $200,000 in the first quarter of 2007. This product was launched in late January at our National Sales meeting.

While revenues were flat year-over-year, although the total number of active accounts increased from approximately 3,600 at the end of the first quarter of 2006 to approximately 5,200 at the end of the first quarter of 2007, the average usage per account decreased from approximately $9,200 to $7,900.

Revenues were also impacted in the first quarter of 2007 by a decline in the ratio of biosensors shipped to biosensor users. The decline in revenue sequentially from the fourth quarter in 2006 was the result of lower average usage by customers and fewer new accounts signed, and we believe this was impacted by the reimbursement issues we are currently facing.

During the first quarter of 2007, overall gross margins were 73.7% compared to 75.6% in the first quarter of 2006. The gross margin for biosensors was 73.8% for the first quarter of 2007 compared to 74.9% in the first quarter of 2006. The average selling price is relatively unchanged from period-to-period at approximately $35 per biosensor, but the gross margin was impacted by the mix of biosensors sold and by lower sales volumes.

Device gross margins for the first quarter 2007 were 82.0% compared to gross margins of 80.3% in the first quarter of 2006. The increase in device gross margin percentage was due to an increase in the average selling price of the devices given the increase in the list price.

Overall gross margins were also impacted by the 18.2% gross margin released on DigiScope revenues. This was due to the fact that the majority of revenues in the quarter were from existing customers acquired from Eyetel in connection with the signing of our agreement with them. Based on the terms of our agreement with Eyetel, we remit a portion of the revenues to them, and the percentage remitted on these existing accounts is higher for the first 9 months of our agreement than what we are required to remit to Eyetel for new customer accounts. We expect that the gross margins on DigiScope will improve as we bring on new customers throughout 2007.

Total operating expenses in the first quarter of 2007 were over $10.5 million compared to $9.3 million in the first quarter of 2006. The increase in operating expenses during the first quarter of 2007 was due to the expansion of our sales force that took place in 2006, and due to increased professional fees associated with reimbursement matters and the government investigations which Shai made reference to.

The net loss in the first quarter of 2007 was $1.377 million compared to the restated net loss of $103,000 in the first quarter of 2006. Basic and diluted net loss per share was $0.11 in the first quarter of 2007 compared to basic and diluted net loss per share of $0.01 in the first quarter of 2006.

Turning now to our financial position as of March 31, 2007, cash, cash equivalents, and short-term investments totaled $38.6 million as of the end of March 2007 compared with $40.3 million as of the end of 2006. During the first quarter, we had $1.6 million in cash used by operations due to the net loss and also due to investment in inventories of Advance, our third-generation diagnostic device.

Working capital was $41.1 million as of March 31, 2007 compared with $41.9 million as of the end of 2006. The decrease in working capital was due to decreased cash and investment balances, offset by the investment in inventories and a decrease in payables.

Our DSO, or days sales outstanding was 55 days as of March 31, 2007 compared with 49 in the fourth quarter of 2006. Our inventory turn rate per year was 3.0 in the first quarter of 2007 compared with 4.3 for the year ended December 31, 2006. The inventory turn rate was impacted by the investment in Advance devices and by lower revenues.

As of March 31, 2007, there was no long-term debt on our balance sheet.

So to summarize, revenues were flat in the first quarter of 2007 compared with the first quarter of 2006, and were down $2.4 million, or 17% sequentially from the fourth quarter of '06. We incurred a net loss of $1.4 million in the first quarter 2007 compared to the net loss of approximately $100,000 in the first quarter of 2006, and finally we ended the first quarter of 2007 with $38.6 million in cash and investments.

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

Thank you Brad; the first quarter of 2007 continues to present our Company with challenges due to developments in the reimbursement environment. We have seen commercial payers question the NC-stat; on the other hand, one of the Medicare carriers who had placed the NC-stat in a miscellaneous code has reverted to reimbursing the NC-stat under the traditional nerve conduction codes.

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 positioned customers, professional medical societies and the AMA to address these reimbursement issues. Most importantly, we are grateful for the opportunity to provide over 5,200 physician practices and approximately 15,000 using the NC-stat system with this important clinical product that advances their patient care.

We have expanded our product offering with the launch of the DigiScope and continue to advance products through our development pipeline, including our third-generation neurodiagnostics platforms and other products.

Our business strategy is built upon a platform of strengths, which include our demonstrated ability to develop standards of care, our existing customer base of over 5,200 physician practices, our best-in-class sales and marketing, and our proven product development expertise. We are in the process of updating our growth strategy to further build upon these strengths. We look forward to providing our shareholders with additional details in the coming months.

Due to the uncertainty related to the prevailing reimbursement environment, we cannot accurately predict biosensor usage and new customer acquisitions in the near term. Therefore, as we transition to the question-and-answer session, we are pleased to discuss the first quarter 2007 business details and relevant metrics. However, we continue to maintain a policy of not providing specific guidance on future financial performance.

Finally, as we have no additional information, the OIG and DOJ matters beyond that provided earlier in this conference call and in our recently filed 10K, we will not take questions on this topic.

We look forward to your questions; thank you.

(OPERATOR INSTRUCTIONS).

Bill Quirk, Piper Jaffray.

Thanks and good morning; I know it's a little too early to speculate on what the AMA may do, but maybe we can just walk through scenario here. Should the AMA decide to give an automated nerve conduction studies a separate code, is the onus then on NeuroMetrix and other who might fall under that code to go out and get reimbursement or have that established? Maybe Gary, you can walk us through that.

My pleasure Bill and thanks for the question. The AMA process is certainly underway as we know it and the first element is that it's going to be featured within a work group, and that work group will assess the issues, and then depending on where they come on the issue of -- I might add all nerve conduction equipment -- they'll bring potential recommendations for the CPT panel. At that point in time, the panel will either elect to make a decision on any potential changes or no changes whatsoever. Certainly as noted many times over, we believe that our technology is firmly aligned to the standard established CPT codes.

If a new code were to be created for a different subset of nerve conduction or creating a new subset I should say of nerve conduction, and we were to be placed in that, then the process is very, very well established in which the CPT panel will then turn that over to the (RUT) Committee, and the RUT Committee will assign appropriate values and ultimately will establish the pricing for that code, so it's a very well established and straightforward process. Our stance is that we firmly believe we are aligned to the current codes for all the reasons that were covered earlier today, and that's where the CPT panel will, work group and panel, will come out on this issue, but if they don't and we are placed into a new category, if you will, then the process is very straightforward and well established.

Okay and just thinking about timing, I understand that it's a little up on the air, but given the timing of the Physician Fee Schedule when that comes out, or at least the draft version, and the timing of the worker meeting, which I believe is going to be coming up here later on in June, Gary would it be reasonable to think that if in fact we were to see a CPT code change, it wouldn't take effect until next year?

Actually, it goes even beyond that Bill. If there were to be a CPT code change, the panel would have to make a decision, there's a meeting in June, October, and February, the process would probably not be a direction before October, and that would be a recommendation from the work group to the panel or it could be February, and that's assuming that there is a direction that emerges from the work group.

In either of those scenarios, that means that we're put onto the 2008 schedule, it means that there would be no changes to the present CPT codes until January of 2008; I hope that's clear.

Did you mean January of 2009?

Pardon me, thank you very much. So it would be October of this year, or February meeting and then it rolls into January of 2009; thanks so much.

No that makes sense; and then just a couple of other questions then I'll jump back in the queue. With respect to First Coast decision or perhaps reversal is a better way to put it, was this something that, I mean I assume that your consultants have been talking to them and making sure that the appropriate date is in front of them; is this something that you guys can take credit for or your consultants can take credit for?

Well there's on doubt that the credit on this issue belongs to a host of individuals. First and foremost is First Coast, they looked very aggressively at all of the information that was provided to them, the clinical data, the comments that were provided by their (CAT) members, by the medical professional societies, by their constituents, in essence the providers through Florida and Connecticut. They also received an ample array of information from NeuroMetrix and they also received an ample array of information from some of our experts who were working with our Company. And as such, I really commend First Coast and the medical directors and their leadership for the decisions they made; they're evidence-based, they're well-grounded from our vantage, and they certainly are from our vantage an advance on not only a very sound policy for neurodiagnostics but also an important one to clarify that it does in fact perform standard nerve conduction and belong under the standard established CPT codes.

And presumably you're taking the decision to the other players Gary.

There is no doubt that this information and their review, as all of these Medicare decisions, are going to be carried forward to the entire payer community. I think it's noteworthy and it's certainly one that we're doing every time all of these Medicare carriers have made a decision whether it's on a link between needle EMG and NCS which physicians can perform these tests, or their view on the NC-stat, absolutely Bill.

Okay and then just last question from me is actually a question for Brad; was there any change to pricing at all for biosensors in the quarter, or I guess doing our math over here it looks like maybe there were some customer returns in the quarter; is that fair Brad?

Actually the average ASP bill was relatively unchanged for the quarter, and we still, as we look back over like the last 8 quarter, the ASP has averaged right around $35, down just modestly for the quarter.

Sure, due to mix presumably. So I guess the, in order to get to the numbers then, did you take any customer returns or is this just kind of slowdown in some ordering patterns by the customers as they're burning through their inventory?

Yes, we view it as a slowdown in some of the ordering, so we did see, we've looked at the ratio between shipments and usage going back many quarters and that ratio was down somewhat during this quarter again likely due to a slowdown in the usage, the per amount that we saw.

Understood; thanks guys.

Juan Sanchez, Punk Ziegel.

Good morning guys; I have a question about Advance; I mean how does it really fit in your strategy to fight all this negative policies against the Company, I mean but the major difference with the Advance science is that the (inaudible) strategy to (inaudible) these guys how this actually works.

Sure, well I think first of all, we believe as we've clearly noted that the NC-stat meets all the criteria for reimbursement under the traditional nerve conduction codes, and obviously now First Coast agrees with us and we're working with AMA to further ensure that.

Advance is obviously a more elaborate nerve conduction platform, the most notable differentiation if you will between Advance and NC-stat is the needle EMG capability that comes with Advance, and that's noteworthy because it allows us to more effectively go into some of the specialist markets, particularly neurology, physiatry and neurosurgery that we would like to proceed into because those are excellent markets.

So we don't really look at Advance as a solution, if you will, to the reimbursement; the NC-stat should be reimbursed under the traditional codes. We really see Advance as a next-generation platform that allows us to expand that market for our testing.

And a question for Brad; did you guys pay during this quarter the taxes that you owed to some States or is that something you have to pay in the future?

We did have one payment during the quarter. We're in the process of still evaluating under the GAAP rules, you have to record the liability, you can't offset that with any potential benefit that you might get through negotiating with States. And we anticipate that we will get some of these benefits. I don't want to set any expectation on what that level will be, but you can anticipate that those payments for the most part are going to be made later in the year.

And the last question is do you see any major differences in the way all the LCDs are being enforced in different States, for example is Florida being more difficult or is it in Texas or in California?

Yes, good question Juan; first and foremost obviously the enforcement of the LCD in Florida will change effective June 30, but we definitely have seen some variations in the approach on the LCD and that direction is coming from the regional Medicare carriers. So we've seen both variances in the reimbursement under the miscellaneous code and also in how they're directing customers to bill under the codes, but fundamentally, we view the progression with First Coast as an important one because when you look at all the issues we're facing, it really comes down to the codes on the Medicare front and now we're down to only 4 of 16 carriers who have us under the 95999 code.

Thank you very much.

Dave Turkaly, Susquehanna Capital.

Thanks; First Coast were they the ones that did not have a draft LCD when they originally put it into the 999; is that correct?

Exactly Dave, they were the first ones with the 95999 article unattached to an LCD, and then as they went through the process this year, early this year of issuing a draft LCD and a corresponding article, they gained the feedback that is appropriate within the established Medicare processes, and that's when they obviously went through not only the draft process, the comment period but now issued their final LCD.

Do you guys have any in terms of some of these medical directors, I guess if they have relationships with each other or if they talk at all, I mean is there any update there? You mentioned the 4 out of 16 I imagine with a reversal here and you have an interesting Datapoint to talk to any of the other 12 about, but I guess I'm just trying to figure out what, how are they able to do that first one without doing an LCD, and then any update you can give us on the other 12 in terms of have you seen any other new draft popping up? Thanks.

You bet; first of all, how they issued the article without a corresponding LCD was a bit of a surprise to us. According to the expertise and insights we've been given from our outside counsel and consultants, that's a very unique and uncustomary approach, and some might even question if that's an appropriate approach to be taken by a carrier. But nonetheless, the bottom line is that when they went through, First Coast went through the process; they really laid in all of the data and I really commend First Coast on how detailed and thorough they were in their approach and process. They did a very, very strong job and I think it's a testament to the overall Medicare process.

On a roll forward basis, there is not doubt that the Medicare carriers, the CBMs talk to one another as they gain insights and ideas and lessons learned from one another. This certainly is something that we view as an asset, and we're taking advantage of the opportunity to communicate with them both directly and I might say indirectly through our customers on the appropriate utilization, the NC-stat system the technology and what it delivers for patient care.

So we're continuing the dialog, and where this goes from here, it's tough to predict; certainly in 2007 outside of First Coast, there have been no other draft LCDs issued and we're pleased by that, and there's been several cycles where we could have seen a draft LCD emerge. But the bottom line is that so far the only activity on the draft front was First Coast, and once again, the LCD supported a lot of the things that we've had in other LCDs and that's physicians' rights to perform these procedures, which technicians can perform them, eliminating an artificial link between the needed EMG and NCS.

And last but not least, the NC-stat and its status as an FDA-approved technology with outstanding documentation behind it, and finally on First Coast, what is the appropriate code for the NC-stat system.

Great, and thanks for all that detail. Switching over to the commercial side, how many of the Blue Cross/Blue Shields have a decision out there now and is it the same, I recall (Cigna) had a policy in the past but in the release today you mentioned some of them had some negative, I mean do they have the ability to say hey we're not going to pay for this at all, or do they do the same type thing where it's going to, they may pay at a lower rate and how many of them have already issued some sort of statement on NC-stat?

We're not counting on specifics on individual payers on the commercial side, but what I can give you, I can give you some important color here Dave. Number 1, they have the ability to issue directives, as does any payer throughout the land first and foremost. Second, the process is often not as rigorous as Medicare and I think one of the things that is very noteworthy is the Medicare process, when they go through the draft LCD, the comment period and the final decision allows all constituents, providers, societies, companies like ourselves to provide comment, and I think that's a very valuable asset in the process.

So some of these decisions have come out as an example saying we're experimental, investigational without any comment provided. So then we have to go in and through our customers, through our resources provide comment to them and last but not least, one asset that we have, a resource that we have in this is there is a very documented defined appeal process for any commercial payers. And that appeal process is established across every State throughout the Union and that gives our customers and patients and even our Company vehicles to help them better understand the landscape, the technology, and the appropriate utilization of this technology by physicians.

So bottom line is that there's a clearly defined process and while some of these decisions would say that we're experimental investigational we find very surprising based on our position across so many fronts are out there and we have to use the resources available to help them better understand the position and make appropriate decisions.

Great and then just one last one with maybe 1 or 2 parts; in the areas where you're in 999 currently, anecdotally are you able to place any new systems in those territories covered? Have you gotten any, specifically any returns in those areas where you're currently under the 999 code?

Absolutely Dave, first and foremost it's very, very important to note that any MD or DO can perform these procedures NCS test, NC-stat system across every State in the Union. In fact, in the 95999 areas, they specifically cull out their approval of the NC-stat system. So there is on question that we've been adding customers across every State in the country and continue to do that.

In terms of returns, the return ratio in what we call niner States versus non-niner States doesn't have a variance of note because our representatives are fully educated, detailed and directed to always sell with the utmost of integrity, so they detail all of the facts and our customers make the decisions based on whether it's under the standard established codes or miscellaneous code. So that goes into the decision making process up front, and we really don't see a dramatic variation between niner and non-niner on the return quotient.

Great thanks.

Jeff Frelick, Lazard Capital Markets.

Good morning guys; can you just give us a little clarification on the difference between a Level-2 appeal and a Level-1?

Absolutely, the first level appeal this would be relative to Medicare, I'll take on, the first level appeal is the provider sending an appeal back to the carrier; the second level of appeal is an elevated appeal that goes to what they call a quick, qualified, independent contractor. The third level of appeal goes to the ALJ or Administrative Law Judge, which is an entity of, under CMS's direction but certainly renowned for fairness and weighing all of the evidence in the decision making. The process is 30 days for the first level, 30 days for the second level, and 90 days for the third level, although an extension could be granted in the interim on level 3 of up to 60, 90 days and last but not least, you sometimes have delays going from step 1 to step 2, or level 1 to level 2 in the process by customers.

But the bottom line is it's a very, very well defined process and it's also a very, very open process in terms of when you get to the Administrative Law Judge and you have a very, very qualified decision maker who looks at the science and the evidence to make the decisions.

Okay thanks a lot Gary. And then with respect to the Advance, what launched, or had the needle EMG study capabilities on launch or will that follow on shortly after?

It's going to have to get FDA clearance with the needle EMG capability. We may follow it closely from commercial perspective; we may launch it without the needle EMG and then the needle EMG module shortly thereafter. It's really just a timing issue in terms of manufacturing ramp-up.

Okay, if there's a, not too far behind right Shai?

Correct.

And then with respect to just on DigiScope, can you give us a sense just on the demo activity with DigiScope and is it more, have more of a geographical slant to it?

At present there is not a geographical slant that's for sure, and I think there's not doubt that the demo activity in the pipeline is growing as we continue to get our arms around the technology, the positioning of it and how we deliver this to our customers. In many respects the DigiScope is where we were 4 or 5 years ago with the NC-stat; the Company was moving along at a couple million dollars annualized revenue and they were figuring out the positioning and marketing of it, and with our work with them, they've really done a good job of distilling that and refining it and we're taking it to market.

So it's moving along nicely but we still have some work to do that's for sure.

Is it fair to say Gary that the funnel activity is much more (inaudible); here we are 5 months after launch?

Well we do it as only a couple of months after launch because the real launch was late January, and the early work was just to get an assessment and also to transition the existing customers that Eyetel had build so well, so handsomely in their commercialization prior.

Okay, thanks a lot.

Jonathan Block, SunTrust Robinson Humphrey.

Hey guys good morning; in terms of other local Medicare providers that have a template in place if you could just help; me, so what would it take for them to revert over to the traditional codes? In other words, do they need to release another draft and then there's a common period and then a final, or can they just sort of come out with a bulletin?

Well, it's an article, so an article can be changed at any point in time. You can also change any LCD if you lower restrictions; if you expand restrictions you have to go through the formal draft and comment process.

Okay, and in terms of First Coast, you said these go into effect I believe the end of June but we shouldn't hear anything from AMA or anything be finalized from AMA until the beginning of 2009 so what happens; do the First Coast codes stay in place until January '09 or is it until we get some initial word form AMA?

Well the First Coast, which will go in effect at the end of June will stay in place until they may change their direction, which we certainly don't anticipate, or until the AMA alters the direction on what are the standard established codes for NCS and the NC-stat and that is as we talked about, some time out. So that's the runway on that front.

Okay great, and Greg while you provided a lot of detail, I just missed a couple things; can you circle back and just address what some of your customers are experiencing in terms of reimbursement in some of the temp-code territories. I know it obviously varies and I believe you broke out a rough example; if you could just go through that.

Yes and just for clarity a minor note but it's a miscellaneous code versus a temporary code. The miscellaneous code, the reimbursement in TrailBlazers has been approximately $35 a unit, and First Coast it was approximately $36 a unit so there's some uniformity there. What that represents on a per patient basis net revenue of approximately $40 to $80 after the cost of supplies, and that's before we might employ any potential discounting at that customer level; so $40 to $80 per study for the, for net revenue on that exam with our technology.

So maybe I'm missing something but Brad referenced a $35 ASP, they're getting reimbursed $35; how are we getting the $40 to $80 profit?

Yes that's a good question; the way it works is that for example on a Carpal Tunnel study, they would have 2 units on a median nerve. They would have a motor and a sensory so if it was $35 they would be securing $70 for that nerve if you will, 2 units minus the cost of the biosensor $45 and there's your delta. They'll use different numbers of units whether they're assessing motor or sensory nerve conduction measurements.

Okay great, and just one last one; is Schein contributing or did they now or did they contribute or want to; and then if you could just sort of update us where the headcount stands and if you guys are experiencing any kind of turnover in the sales force. Thanks very much.

You bet; our field organization is at 52 plus 5 plus 1; 52 front-line sales individuals, 5 managers, 1 national director. Henry Schein is contributing in a nice manner, and as I noted with some of the reimbursement issues, some of our distributor reps have gotten on the sidelines but with the launch of Henry Schein they certainly have been in the game and contributing favorably and we've been pleased by that.

In terms of turnover, we haven't had turnover in a long time we had a little bit. Some of it I think might be very appropriate when you have a king of length in job; the average medical rep only stays with the Company 3 years and we had a highly tenured group and not a lot of turnover. Some of it was forced and some of it was unforced but it was at a very manageable level and frankly, we're very, very pleased with the talent that we've always had in this organization; it's one of the best I've ever been affiliated with and that's true today as it was yesterday.

Great thanks guys.

Charlie Jones, Next Generation Research.

Good morning; thank you for taking my questions. What percentage of Blue Cross/Blue Shield companies have or are changing their policies towards NC-stat? Is it just in the state that changes LCD policies or it more random than that?

It's not a direct correlation, that's for sure. And in terms of percentages we're not commenting at this point in time, but it's a number that is notable enough for us to stand up and to take notice and definitely put the resources against it to help in the education process not only for the Blue carriers but also for our customers. The key here of course as we noted earlier is the Medicare landscape is straightforward and any MO or DO across the entire country can utilize our technology. And as we all know, as Medicare goes, customarily the commercial payers follow. So that's a broad stroke on that one. Hope that helps.

Yes Shai can you give us an update on the anesthetic delivery device and specifically have you finished a prototype and when could we see you start a trial for that product.

We do have a prototype; we've done pilot studies in human volunteers, and we're moving into more formal clinical studies as we speak. So kind of as I noted, the timeline would be that we would be looking for an '08 launch for the initial indications with measurable substantive revenue generation in the '09 calendar year.

Thank you and then Brad were there any unusual items in G&A or was this just the additional required consultant and legal expenses?

Yes Charlie, that was the biggest impact in the professional fees.

And do you expect your reimbursement-related expenses such as consultants and lawyers fees to increase from current levels, or is this a good level to be at?

We anticipate continuing with these kinds of levels throughout the year. Obviously, there are many factors that could impact that, but yes we would anticipate roughly the same levels.

And then on the sales and marketing side Gary, is this again, you've had a decrease in revenue but kind of maintained a similar sales and marketing, is this probably a good level to be at if we're expecting similar ranges of revenue?

Well it is a good level to be at and for a couple of reasons; number 1 we're playing for the long term and we have created what we view to be a best-in-class marketing and sales organization. Number 2, we have new products to sell, most notably the DigiScope and we have the forthcoming launch of the Advance and that platform could take us in directions that we haven't gone in before. So at present we do it to be absolutely the right level of direct field representation for our Company.

Let me add onto that Charlie; our focus is on investing and growing the business and growing the market, and we're absolutely willing and able to make those investments.

So if we were looking for a step up in revenue in the second half of the year, would we see a commensurate increase in sales and marketing Gary?

I think our organization is at the right level at present, but we evaluate it on a quarter-by-quarter basis as we have going back to 2002 when we went from 7 to 10 to 16 to 22 to 36 to 48 to now 52 front-line regional managers.

Thanks for taking my questions.

Cindy (Glass), (inaudible) Capital.

Hi, couple questions I guess; first if you could go back to the AMA work group, is there, can you give a little bit of visibility as to how that process works? Do industry or company representatives have input in that process? Presumably they're hearing a lot from the neurology community, but are they also hearing from family or general practice centers?

Absolutely Cindy; the process is a well defined and broad one, and the AMA work group is composed of, to our knowledge, over 30 members and representatives from virtually all the specialty societies who would be involved in performing nerve conduction studies using our technology or other what would be called traditional technology. So we have everyone from neurology and physiatry to orthopedics, hand surgeons, endocrinology, rheumatology, internal medicine, family practice, and even potentially pain management and occupational medicine.

So there is a broad, broad base of physician specialties represented. And they have also I think quite to the credit of the AMA elected to bring in all manufacturers involved in never conduction equipment, and I might add are providing the vehicle to provide information to the work group. So it's a very defined a thorough process and that will absolutely serve the AMA well and the work group, and ultimately potentially the CPT panel in coming up with the right direction for nerve conduction studies.

Great and then just 2 other quick questions on that. I think you said they might make a proposal in October or potentially February. Does that mean that you've reason to believe they won't make a proposal as to the upcoming June 7 to 9 meeting?

I thin it's safe to say based on our understanding of the process that the upcoming June meeting will be more of an information sharing and exchange and then it's up to the work group to bring back recommendations if they cannot align on those in either October or February and help with that is certainly to be determined by the work group, but to our knowledge the June meeting is information sharing and I guess to really establish the process and employ it moving forward on correct decision making.

Got it, and then just one other one that; it sounds like if they eventually elect to change the code, then it would go into effect in 2009, but I'm, wondering if they choose to keep the current codes that are out there, would those just go into effect immediately or what would happen in the interim between now and 2009?

Well those current codes are in effect today, so if they weren't to make any changes in their direction, the current codes, 959900, 903, 904, would remain in effect for all nerve conduction equipment that are aligned in the descriptions and have FDA clearance to those procedures performed. So if no decision is made, it would stay under the standard established code.

Got it, okay thank you, and then just one other quick question; (inaudible), it sounds like you did, about $200,000 or $250,000 in the quarter. Can you give any more visibility as far as the ramp of that and what we should be thinking about for full-year '07 or '08 or any kind of guidance you want to give as far as what that market could look like and what timeframe we should start to see meaningful revenues?

Cindy as customary, I apologize we don't provide any guidance on a move-forward basis. We are certainly with over 25 closed agreements, we're encouraged by our initial launch of the technology and encouraged by the prospects that this holds for our business on the long-terms basis, near and long-term basis.

Is this something that you'll break out every quarter as definitive sales?

Yes, we plan on breaking it out every quarter and providing some of the metrics similar to what we're provided on today's conference call as we move forward.

Okay great, thank you very much.

At this time, I would now like to turn the call back over to Mr. Shai Gozani for closing remarks.

Thank you; we appreciate you joining us on our conference call and we look forward to updating you on our strategies and, during the course of the year. Thank You and good afternoon.

Ladies and gentlemen, this concludes the presentation. You may now disconnect. Thank you and have a good day.