NeuroMetrix Inc (NURO) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Second Quarter 2007 Earnings Conference Call for NeuroMetrix. (OPERATOR INSTRUCTIONS) I would now like to turn the presentation over to your host for today's call, Mr. Brad Smith, Chief Financial Officer. Please proceed.

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 1A, Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2006 and other SEC filings. NeuroMetrix does not intend to, and undertakes no duty to, update the information disclosed on this conference call.

With that, I would like to now 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 Second 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 second quarter of 2007. I will then turn it over to Gary for a discussion of sales and marketing (S&M) metrics and updates and Brad for analysis of financial results.

NeuroMetrix is a medical device company advancing patient care 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 and parts of the spine frequently are 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 5,400 physician practices and clinics, representing approximately 16,000 physicians throughout the United States. To date, over 900,000 patients have been tested using the NC-stat.

Our technology enables a broad group of physicians, from internal medication, endocrinology, rheumatology, family medication, orthopedic surgery, neurosurgery, pain medication, neurology, and other specialties to objectively and accurately diagnose neuropathies.

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 through a comprehensive customer survey, physicians are highly satisfied with the clinical outcomes and enhanced patient care associated 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 January of 2007, we launched our S&M efforts for the DigiScope, a product we licensed from EyeTel Incorporated. The DigiScope is an automated retinal imaging system used by internal medication, endocrinology and family medicine physicians to detect diabetic retinopathy, the leading cause of blindness in working-age adults.

We are presently focused on marketing the system to our installed base of customers and we also inherited over 100 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 $1.0 billion in the United States, including potential nerve conduction testing for Carpal Tunnel Syndrome, low back and leg pain in 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 second quarter of 2007, our revenues were down 18% from the same period one year ago at $11.5 million and we're down 2.0% sequentially from the first quarter of this year. The revenue decline was due to a declining average biosensor usage per customer and due to fewer new customers acquiring the NC-stat.

During the second half of 2006, FI Medicare Fiscal Intermediaries issued articles or local coverage determinations, also called LCD's, instructing physicians using the NC-stat to submit for reimbursement under a miscellaneous CPT Code with the number 95999, rather than using traditional nerve conduction codes, which are 9590003 and 9590004.

One of these carriers, First Coast Service Options, which covers Florida and Connecticut, reversed their decision and effective June 30, 2007 resumed reimbursing for nerve conductions performed with NC-stat under the traditional CPT Codes. In taking this position, FCSO indicated that the AMA CPT Panel was the appropriate arbiter of reimbursement coding for advances in nerve conduction equipment such as the NC-stat.

This year, we have seen a significant number of commercial payors taking adverse positions regarding reimbursement of the NC-stat, including regional Blue Cross Blue Shield carriers, who have indicated that the NC-stat is experimental and investigational. We believe this position lacks any scientific or clinical legitimacy, given that that the NC-stat has been widely used for over seven years and is supported by numerous peer-reviewed publications.

We believe that our revenues in the second quarter of 2007 were adversely impacted by these decisions and the associated uncertainty they created. Specifically, our customers received lower levels of reimbursement, experienced higher levels of claim denials and had to submit additional paperwork to support medical necessity. To address these issues, we have a comprehensive reimbursement strategy in place, which includes direct discussions with Medicare and commercial payors, various appeal processes, physicians advocacy at the individual and professional society level, product development efforts and clinical studies.

In addition, the AMA's CPT Panel has convened a work group that includes representatives of family practice, endocrinology, rheumatology, orthopedics, neurology and physiatry professional medical associations. The work group is tasked with reviewing the current state of nerve conduction procedures and equipment and determining whether clarifications or updates the CPT Codes are appropriate. The work group convened in early June 2007 during the AMA CPT Panel meeting and we had an opportunity to present and provide them with the relevant information on the NC-stat.

There are a number of potential outcomes of this AMA CPT Panel process. Among these are that the panel could decide that the traditional CPT Codes are appropriate for the procedure performed by the NC-stat, the Panel could decide that one or more new Category 1 CPT Codes are needed, or the panel could determine that the NC-stat should be built under a new Category 3 code, which represents emerging technology. The decision coming out of this AMA process, which is expected later this year or in early 2008, should provide clarity to our customers.

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 reiterate that, number one, the NC-stat FDA labeling in as conventional nerve conduction equipment, that the NC-stat meets the most stringent technical specifications for this type of medical instrumentation. That the diagnostic accuracy and clinical utility of the NC-stat has been demonstrated in approximately 45 published peer-reviewed articles, abstracts and posters. And the NC-stat has been used in FDA registration trials for pharmacological agents and in large-scale epidemiological studies encompassing thousands of the patients sponsored by the NIH and other agencies and finally, over 900,000 patients have been tested with NC-stat.

We've also continued making progress on important products in our R&D pipeline. We are 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 the assessment of neuropathies.

We submitted a 510(k) filing with the FDA during the first quarter of 2007. We recently responded to a request for additional information from the FDA and are in dialog to address any remaining questions. We anticipate launching this product 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 supports the performance of needle EMG studies. This is an important progression for our Company, as we integrate our accurate and proven 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, and physical and rehabilitative medication. We will market NeuroMetrix's [spread] in needle EMG electrodes and other consumables as part of our needle EMG offering.. We also look forward to advancing the clinical utility of needle EMG procedures over the coming years, through application of our expertise in neurophysiology and similar processing.

We are also pleased with the progress we have made in our minimally invasive neurotherapeutic platform, which is currently under development. This core technology is a neuroelectrical guidance system that helps physicians position drug delivery devices, such as hypodermic needles and catheters, safely and quickly in very close proximity to specific nerves. We believe that this technology will spawn an array of products that will target the regional anesthesia, pain medication and physician office markets.

We are presently developing the first products in this series. Our initial product introductions, which we hope will occur in late 2008, will target the regional anesthesia and pain medication markets. Based on our preliminary decisions with anesthesiologists, we believe there's a substantive need for improvements in nerve localization products and approaches used by these physicians. After establishing our technology in anesthesia, we plan to proceed into the physicians office market.

We expect that our minimally invasive neurotherapeutic products will resemble our neurodiagnostic products and that there will be three key components. First, there will be consumables in the form of sterile kits that will include a needle electrode and other drug delivery disposables; second an electronic instrument; and third, a telemetry link to our onCall System. We are also studying the possibility of distributing related pharmacological agents.

All of the aforementioned depends on the successful completion of certain product development efforts, clinical studies and obtaining relevant FDA clearances.

During the second quarter of 2006, we received a subpoena from the Office of Inspector General of the Department of Health and Human Services requesting documents from us in connection with an investigation of potential violations of the Federal Anti-Kickback Statute and False Claims Act. We are also the subject of an investigation by, and recently received a subpoena from, the U.S. Department of Justice. We are cooperating with the government in these investigations. At this point, we will not comment further on these ongoing investigations.

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

Thank you, Shai, and I want to thank all of you for joining us on the call today.

As Shai has noted and is evidenced by many key indicators, we are coming off a quarter which marks both the continued adoption of 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 Q2 2007, we expanded our active our active customer count to over 5,400 active NC-stat customers. As detailed here, we continue to expand the customer base, due to the strong clinical benefits the NC-stat provides.

Testing with the NC-stat System in the second quarter of 2007 declined year-over-year by approximately 4.0% to 276,000 biosensors, compared with 287,000 in the second quarter of 2006. Our average customer delivered approximately $7,100 in annual biosensor revenue, based on their usage, during the second quarter of 2007. This is compared with approximately $7,800 in the first quarter of 2007. While this is clearly a contraction from previous quarters, it also illustrates that our customers continue to adopt and utilize our technology, as evidenced by the increase in active users.

The distribution of our testing by our customers in the second quarter of 2007 was as follows. 70% of testing was performed by internal medication and primary care basic accounts and 30% came from within our specialty care segment. Here, 43% of testing within the specialty care segment came from the orthopedic market, which represents 13% of out total testing volume.

Endocrinologists and rheumatologists represent 27% of our specialty care physicians testing and 8.0% of our overall testing. And 30% of testing within the specialty care segment were performed by other specialty care physicians, including those in pain management, occupational medication, neurology and physiatry. So, to summarize, the overall testing featured a modest decline of 4.0% year-over-year to 276,000 biosensors.

New NeuroMetrix customers delivered annualized revenue of approximately $12,000 per account during Q2 2007, based on their usage. This details that despite reimbursement challenges, our new customers continued 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 Q2 2007, which is comparable to levels from a year ago. This breakdown reflects the diversification of our business and 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 50 highly experienced regional sales managers, five sales directors, and one national director dedicated to selling the NC-stat System, the DigiScope and to supporting our existing customer base. 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 in ability for our Company to deliver clinically directed products to the market.

As noted in our last conference call, for some of the issues that exist in the market place relative to the reimbursement landscape, we've seen many distributor reps, which we describe as "independent sales agents", stand on the sideline and not continue to appropriately market our technology. This is often due to their reluctance to introduce technologies, admit any reimbursement uncertainty, or they do not want to take on any perceived risk to their ongoing supply of business. As such, the support we have received from distribution has waned, while our distribution costs have remained both consistent and significant.

At one point in time, NeuroMetrix generated over 80% of our new customers through distribution. Today we now secure less than one out of two new customers through distribution. Upon examining these dynamics, along with the significant costs incurred in maintaining our distribution approach, NeuroMetrix has decided to exit out of all of our existing distributor relationships. We do not expect this change to have a significant impact upon our customers, as all of our customers receive their product direct from NeuroMetrix today.

Furthermore, as noted, we have already made a significant progression towards accruing the majority of our new customers on our own. However, it is possible that our sales to existing customers and our accrual of new customers could be adversely affected. We believe the time is right to transition away from a model supported by sales agents to a business model that is entirely direct to customer. Through this, we will redeploy the significant resources directed towards distribution.

We are making these changes as we speak and we'll galvanize our direct model in the coming weeks. We expect the transition out of these relationships and the related expenses to occur predominantly in the third and fourth quarter of 2007. Once again, this direction is built upon the size and strength of our existing field organization, that our investment in distribution is no longer commensurate with the diminishing returns, and our desire to reinvest this significant investment back into our business.

I also wanted to expand on the important topic of the reimbursement landscape. First and foremost, the NC-stat is an FDA-cleared technology supported by the strong clinical language 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 are comparable to those obtained using the standard nerve conduction measurement equipment. As detailed here, the NC-stat System performed standard nerve conduction measurements." This is further supported by 45 published medical journal articles, abstracts and scientific posters, which detail the accuracy, validity and utility of the NC-stat System.

In the second half of 2006 and into 2007, several Medicare carriers issued draft or final LCDs or Local Coverage Determinations, which included select potential concerns for NeuroMetrix. These LCDs were issued by Trailblazers, CIGNA Medicare, NHIC, National Heritage, and First Coast. They contain constraints towards physician requirements when performing NCS tests, which technicians can perform NCS under a physician's supervision, links between NCS and needle EMG and even a position that the NC-stat was fundamentally considered experimental and investigational and that it would not be covered.

Of key importance, all of these Medicare carriers implemented final policies that featured limited-to-no-restrictions towards physicians' abilities to perform NCS tests with the NC-stat System.

We also note here that select Medicare carriers, Noridian Trailblazer, CIGNA and NHIC featured articles, which indicate that customers must bill for the NCS procedures performed using the NC-stat under a miscellaneous CPT Code. As such, our customers can specifically 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 with our system under these codes. When appropriately reimbursed, physicians can still offer this important diagnostic test to their patients.

We have also heard from customers in select regions that more claims are being denied based on the assessment of medical necessity. It's not clear that these denials are justified. We continue to believe that that 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 support the appeal of these articles.

In October 2006, First Coast was the first Medicare carrier to issue an article, which reported that tests performed with the NC-stat were to be billed under miscellaneous code 95999 within their region. First Coast also issued a draft LCD for NCS tests in early Q1 of '07. Their draft policy was characterized by significant restrictions on NCS testing through the miscellaneous code and also creating a mandating link between needle EMG studies and nerve conduction.

First Choice reversed their position effect June 30, 2007 and have clarified they will again be reimbursing for the NC-stat under the standard established CPT Codes for NCS testing. We view this as an advance for NeuroMetrix and our customers, as this decision reinforces that qualified physicians can perform NCS tests with the NC-stat System and bill for these procedures under the standard established CPT Codes for nerve conduction studies.

As Shai has noted, the American Medical Association, or AMA, has formed a workgroup to examine the codes for NCS testing and assess all equipment for nerve conduction testing, including the NC-stat System. While this process is already underway, we anticipate direction from the AMA in late '07 or early '08.

We believe the NC-stat System meets and should be reimbursed according to the standard CPT Codes for NCS for several reasons. These include the FDA's evaluation and clearance of the NC-stat System for performing nerve conduction, that standard CPT Codes for nerve conduction described the services performed with the NC-stat System, that the Medicare Physician B Schedule details the codes and corresponding RVUs for a 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, an NCS test performed with the NC-stat should be billed under the standard established CPT Codes for NCS.

On the commercial payor front, we've seen a number of commercial payors, including regional Blue Cross plans, develop policies which may restrict performing NCS tests with the NC-stat. These restrictions have been centered upon which physicians can perform NCS tests, a mandated link between needle EMG and NCS, and a claim that the NC-stat is experimental and investigational.

These positions stand in contrast to the direct review and decisions by many Medicare carriers that have been employed in the past year and also in contrast to all state guidelines in many medical positions held throughout the nation.

Based upon these assessments, along with the strong patient care benefits captured when using our technology, we believe our customers should be able to perform medically appropriate NCS tests and appropriately bill for them along and across the commercial payor landscape. As such, we believe that our customers and their patients will pursue these rights under the well-established regulations and appeal processes.

On a noteworthy front, we have progressed in the launch of our new product, the DigiScope. We view the DigiScope as a major advance for our company. It transforms NeuroMetrix into a platform company where we allow physicians to diagnose and treat neuropathies and neurovascular diseases. The DigiScope was developed in collaboration with Wilmer Eye Institute at Johns Hopkins. It is an FDA cleared diagnostic device that primary diabetes care physicians, most notably primary care, family medicine, internal medicine, and endocrinology, can use for the early detection of diabetic retinopathy.

As background, it is estimated that 21 million people in the U.S. 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 exams and appropriate interventions such as laser procedures. For this reason, the American Diabetes Association and many prominent commercial payors recommend that patients with diabetes receive annual dilated eye exams. Despite this recommendation, less than 50% of the patients with diabetes have annual eye exams. The DigiScope addresses this clinical providing many primary care and diabetes care physicians with a powerful, Gold Standard technology as a point of care.

As noted, we estimate the annual U.S. market opportunity exceeds $700 million annually. EyeTel's business experience was to generate between $10,000 and $12,000 in revenue per accounting 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 $45 per retinal scan, with the retinal scan revenue reoccurring in successive years.

With our responsibilities for sales and marketing (S&M), service and billing and collecting through this business, NeuroMetrix plans to book gross revenues while capturing 50% margins on the installation and retinal scan fees for all new customers. Clearly, we believe that DigiScope can drive approximately 20 to 25% operating margins, which is very consistent with our long-term goals.

We formally trained our field force on the DigiScope in January. Through Q2, we now have approximately 65 DigiScope customer agreements that we have closed through our efforts. Over two-thirds of our field sales force has sold a DigiScope unit to date. Based upon the prior EyeTel experience, our new customers should deliver approximately $600,000 in annualized revenue growth during the first year alone. These efforts also bring our total base of accounts to over 175 active DigiScope customers.

We believe this represents a solid start to our commercial launch with the DigiScope. We believe that DigiScope represents an important advance for our business. NeuroMetrix has significantly expanded its product offering and the clinical value we deliver to endocrinologists, internists and primary care physicians. With our best in class market approach and field organization of nearly 60 sales professionals, NeuroMetrix has already gained solid traction towards delivering this innovative diagnostic solution to our expansive base of physicians throughout the nation.

As a closing comment, we acknowledge that the challenges are impacting our business and have caused our business to contract over recent quarters. However, we remain confident in our position, remain very enthused by the strong advancements we have made as a Company and look forward to reporting back on future developments, as we continue to develop our standard of care within the market place.

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

Thank you, Gary. So here's a recap of our performance for the quarter ended June 30, 2007.

Total revenues for the second quarter of 2007 were $11.5 million, down 18% from the second quarter of 2006. Revenues in the second quarter of 2007 were down 2.0% sequentially, from the first quarter of 2007.

Biosensor revenues totaled $10 million or 87% of total revenue in the second quarter of 2007 and diagnostic device revenue totaled $1.2 million, or approximately 11% of total revenue. This compares with $12 million in biosensor revenue in the second quarter of 2006, or 86% of total revenue, and approximately $1.9 million of diagnostic device revenue, or 14% of total revenue.

Revenues from the DigiScope were approximately $$200,000 in the second quarter of 2007 and represented 2.0% of total revenues. As Gary indicated, we received a license from Eye-Tel to sell the DigiScope into the physician office market and launched the product in the first quarter of 2007.

The total number of active NC-stat customer accounts is based on a 12-month look-back period, increased to approximately 5,400 accounts in the second quarter of 2007. But the average usage per account decreased from approximately $9,800 in the second quarter of 2006 to $7,100 in the second quarter of 2007. The ratio of shipments to usage was relatively unchanged in the comparable periods.

Revenues for the six months ended June 30, 2007 were $23.2 million, a decline of 10% from $25.8 million for the six months ended June 30, 2006. During the second quarter of 2007, overall gross margins were 73.3%, compared to 75.8% in the second quarter of 2006.

The gross margin for biosensors was 73.4% in the second quarter of 2007, compound to 74.9% in the second quarter of 2006. The average selling price (ASP) was relatively unchanged from period to period, at a approximately $35 per biosensor, but the gross margin was impacted by the mix of biosensors sold, by lower sales volumes, and by higher product warranty costs.

Device gross margins for the second quarter of 2007 were 80.7%, compared to gross margins of 81.4% in the second quarter of 2006 and this decrease in device gross margin percentage was due to a slightly lower ASP of the devices. Overall gross margins were impacted by a 20.3% gross margin realized on DigiScope revenues, up modestly from the first quarter of 2007.

The majority of revenues in the second quarter were from existing customers we acquired from Eye-Tel and the revenue split for eye scan fees and for the up-front installation and training fees on these accounts is 75% to Eye-Tel and 25% to NeuroMetrix. In late 2007, this revenue split reverts to 50/50, which is the same revenue split, which is applicable to any new customers we bring on. We expect that the gross margin on DigiScope, as a result, will continue to improve as we bring our new customers throughout 2007 and as we revert to the 50/50 split.

Total operating expenses in the second quarter of 2007 were $10.2 million, compared to $9.7 million in the second quarter of 2006. We had a significant increase in professional fees, up approximately $1.2 million from the second quarter of 2006, as a result of legal fees pertaining to the governmental investigations, as well as reimbursement matters.

Offsetting this was a reversal of $1.7 million of sales tax liability originally recorded at the end of 2006. This reversal is the result of receiving amnesty from a number of states and receiving relief from other states in the form of a limited look-back period as well as waivers of penalties. The net loss in the second quarter of 2007 was $1.3 million, compared to restated net income of $1.2 million in the second quarter of 2006 and compared with a net loss of $1.4 million in the first quarter of 2007.

The net loss for the six months ended June 30, 2007 was $2.7 million, compared to the restated net income of $1.1 million for the six months ended June 30, 2006. Basic and diluted net loss per share was $0.10 in the second quarter of 2007, compared to basic and diluted net income per share of $0.10 and $0.09, respectively, in the second quarter of 2006.

Basic and diluted net loss per share was $0.21 for the six-month period ended June 30, 2007, compared to basic and diluted net income per share of $0.09 for the six months ended June 30, 2006.

Our cash, cash equivalents and short-term investments totaled $37.1 million, as of June 30, 2007 and that compares with $38.6 million at the end of the first quarter at the end of March 2007 and compared with $40.3 million as of December 2006. During the second quarter of 2007, we had $1.6 million in cash used in operations, due to our net loss and due primarily to working capital changes.

Working capital was $40.7 million as of June 30, 2007, compared with $41.9 million as of year-end 2006. The decrease in working capital was due to decreased cash and investment balances, offset by investment in inventory and a decreased inventory and a decrease in current liabilities, primarily accrued expenses, which related to the reversal of our sales tax liability.

Total assets were $52.7 million of June 30, 2007, compared with $55.7 million at the end of 2006. Our day sales outstanding, or DSO, was 51 days at the end of June 2007, down from 55 days in the first quarter of 2007, but up modestly from 49 days in the fourth quarter of 2006.

Our inventory turn rate per year was 2.5 in the second quarter of 2007, compared with 3.0 in the first quarter of 2007 and compared with 4.4 in the fourth quarter of 2006. The inventory turn rate was impacted by the investment that we made in ADVANCE devices and by lower revenues. As of June 30, 2007, there continues to be no long-term debt on our balance sheet, other than a capitalized lease obligation of less than $30,000.

So, to summarize, our second quarter of 2007 revenues were down 18% from the same quarter in 2006, down 2.0% from the first quarter of 2007 and we incurred a net loss of $1.3 million in the second quarter of 2007 and finally, we ended the second quarter with $37.1 million in our cash and investment position.

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

Thank you, Brad. The second quarter of 2007 continued to present our Company with challenges, due to the developments in the reimbursement environment. We have seen additional commercial payors question the NC-stat, but on the one hand one of the Medicare carriers who had placed the NC-stat into a miscellaneous code has referred it to reimbursing the NC-stat under the traditional nerve conduction codes.

We recruited leading reimbursement experts to help us develop and execute our strategies. We look forward to working collaboratively with Medicare and commercial payors, our physician customers, professional medical societies and the AMA to address these reimbursement issues. Most importantly, we are grateful for the opportunity to provide for over 5,400 physician practices and approximately 16,000 physicians using the NC-stat 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 ADVANCE and our minimally invasive neurotherapeutic platform.

Our business strategy is built upon a platform of strengths, which include our demonstrated ability to build centers of care, our existing customer base of over 5,400 physicians practices, our provide product development expertise and our highly effective S&M organization. We are in the process of updating our growth strategy to future 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 acquisition in the near-term. Therefore, as we transition to the Q&A session, we are pleased to discuss the second quarter of 2007 business details and relative metrics. However, we continue to maintain a policy of not providing specific guidance on future financial performance.

We look forward to your questions. Thank you.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Bill Quirk with Piper Jaffray. Please proceed.

Thanks. Good morning, guys, a handful of questions today. First off, I guess for Gary, does the cancellation of the distributor contracts effectively end the trailing commission that you guys are currently paying on the biosensors or does that remain in effect as long as these guys I guess continue to service the accounts, if you will?

Bill, thanks for the question. As a backdrop, there's not a uniform answer to that. It varies based on the relationships that we had established with our various business partners. So, some we're exiting in the relatively near-term and some we're carrying forward predominantly through Q3 and some into Q4.

Okay, so it would be reasonable to assume, now, that the trailing commission is total percentage should be going down to some degree, here, as we move forward with this?

Oh, absolutely and ultimately, with our direction, there will no longer be any outstanding investments in this arena after we complete the transition to an entirely direct model.

Okay, good. Secondly, Shai, concerning the questions from FDA on ADVANCE, would you characterize these as routine or is there anything in there that could potentially trigger some additional clinical work, etc?

Bill, I would generally consider these routine, but we're still in dialog with them and we'll have to see, but nothing out of the ordinary.

Okay, understood and then a couple of reimbursement questions, if I may? First off, is to your mind, how many people internally you have working on this and are we fully staffed for what we see out there or should we expect that we could add a few additional people here as the year progresses?

The staffing for our reimbursement function is what we believe to be appropriate. We are fully staffed with all the positions we have and we also note that our staff goes well beyond the internal resources, but also the expert team that we have assemble throughout the country to support us, leading experts and reimbursement from both a legal and healthcare perspective. So we believe we've got the right team and the right staff in place to continue to March forward and address the challenges ahead.

Okay, understood and then just a last question for me and I'll jump back in the queue, if we look forward to what is assumed to be, probably, February on a decision by AMA concerning the appropriate coding for NC-stat and presumably, ADVANCE. In the event, guys, that we end up with a new code and I assume they'll call it "automated nerve conduction testing" or something, what's the next move here? Do we immediately start lobbying CMS to establish a reasonable payment level? Or do we have to go payor by payor at that point? I mean, I guess my suspicion would be, first and foremost, go after CMS.

The direction, if the AMA is to establish a new level one CPT Code for, as you said, automated nerve conduction, that would then be assigned to the right committee and I don't believe there's a lot of lobbying involved. We've certainly done and analysis on our behalf that would say that the rates established for present nerve conduction or future rates may be very tough to say and we're certainly not commenting on that. But I don't believe there's really a lobbying process, Bill, per se, as much as it'll progress through system and then the rates will be assigned by the right committee and then, from there, we look to see that implemented, not only by CMS but throughout the payor landscape.

So either way, the AMA process should bring a lot of clarity and ultimately, a clear direction for not only our business but for nerve conduction testing in general.

Okay, great. Thanks very much, guys.

You bet.

Jeffrey Frelick, Lazard Capital Markets.

Just a couple questions, first one for Brad. The impact of removing distribution, Brad, could you remind us, will this benefit more on the COGS line or SG&A?

Thanks for the question, Jeff. We have always reflected this as a S&M expense, so it will affect our operating expenses. It does not affect our gross margin.

Okay, thanks, and then a question for Gary. Gary, can you maybe help us understand? Obviously the outcome of the AMA Panel would be kind of a big push for helping out with the sales, but if we're just looking to pick up, say an incremental 50 to 100 instrument a quarter from these levels, is there something, I guess, that's a little drag on the business? Was it distribution recently, in the past quarter or two that you think maybe you're correcting that now by removing them out of the equation? Is it still some reimbursement issues? Is it pricing? Can you give us maybe just some color there, Gary?

Sure and thanks for the question, Jeff. Overall, as we look at the performance in Q2 and compare that to past quarters, as we noted, we were certainly pleased with some of the key indicators that came out of Q2. Overall dynamics that would be impacting our position and future growth, clearly the number one area out there would be the reimbursement landscape. And as that is clarified and we believe the AMA proceed will provide a great deal of clarity on that front, that will be, to us, the keynote on moving the business forward.

The decision in direction on distribution relates to a number of factors that we've highlighted. Number one is the significant investment we are making and is that commensurate with the return. Two, that we have one product that is partially through distribution, the NC-stat, and as noted, less than one out of two new customers were coming through distribution today.

We also have the DigiScope platform, which was being sold direct to the market through NeuroMetrix and our sales team. So we have really quite a mixed when you look at it and it's difficult to run a business when you have such a mixed model. With clarity and direction comes, I think, clarity in execution and so we believe that's an important progression for the business also. So I hope that gives you a little bit of a flavor on our view on the quarter and also some of the key areas that you highlighted.

Okay and last question for Shai. Shai, is there anything that you can maybe just shed with respect to the presentation at the AMA Panel? Did you think the Panel was well prepared, had a good handle on the NC-stat System? Did they ask good questions during the presentation? Anything would be appreciated.

I think the Panel was knowledgeable and very well prepared and the questions were very detailed, primarily along the technology and clinical lines and were appropriate and we believe we addressed them.

And as a little bit more color there, Jeff, it wasn't just NeuroMetrix who was involved. There were many other manufacturers of nerve conduction equipment and I think I think it was noteworthy in that some manufactures make what is considered to be "traditional" equipment. Some manufacturers make traditional and automated and NeuroMetrix is there and we have not only today what we consider to be equipment that performs traditional measurements, but also future advances. So there was a broad mix of representation from industry and I think it became very apparent that nerve conduction is nerve conduction and we'll see how it progresses in the AMA workgroup and ultimately, in the direction from the Panel.

Okay, thanks for the color, guys.

You bet.

Juan Sanchez, Punk Ziegel & Co.

Good morning, guys.

Good morning, Juan.

I'll try two questions, in terms of the distributing and (inaudible - heavily accented language) geographic activity distribution of your sales force. Are you putting more effort on friendly territories or are you going after unfriendly territories to try to help doctors (inaudible) Medicare and private payors? And the second question would be about the (inaudible) needle. I mean, how much work do you have to do within the next year before you submit your request to the FDA?

Juan, I'll take on the first question and toss the other to Shai. On distribution and the question is are we going to emphasize more in friendly versus unfriendly. Our view is that our technology has appropriate applications throughout the country and if you look at the patient volume presenting to every physician on any day, throughout the land and our target markets, they see a plethora of patients who where appropriate utilization of our technology may advance their care.

So, we're not receding or rescinding our approach in any given market. I think one of the challenges we had with distribution is that when there noise or potential issues in the market place, we saw that they backed away dramatically from appropriately marketing our technology. And that caused us to have more of a mixed model, even more than I highlighted a little bit earlier in this call.

So I think that what this really does for us is it allows us to say we have one focus. It's on the physician and the patients that they serve. We're approaching that across all markets throughout the U.S. as we have in the past and that we're going to make the appropriate investments in our organization to continue to create a new standard of care throughout the market. Not only for the NC-stat, but also for the DigiScope and other future technologies that we look to bring to the market.

Juan, taking on your second question, I'm not prepared to provide specific timelines on clinical studies and FDA submissions and so forth. But we have made very good progress on our neurotherapeutic platform and feel comfortable that we'll be in position in the not-to-distant future to submit our submission. It really is going to be a series of submissions of increasing complexity to the FDA, using the 510(k) process.

So we're well on our way, but again, I'm not prepared to provide a specific timeline at this point. We are, as I noted in my presentation, looking for a late 2008 release of the first versions of these neurotherapeutic products.

Thank you very much.

Thank you, Juan.

Dave Turkaly, SIG.

Thanks. In terms of the distributor contracts, will there be any kind of onetime impacts in terms of looking ahead? Is there the possibility that they have any inventory or how will the unwinding of those actually work on the financials, looking ahead?

I'll give us a little quick color. The relationship with our distributors allows us to make this transition in that all of our customers receive their product direct today from NeuroMetrix. So there's nothing in the "channel" that our distributor partners have had or will have on a move-forward, as we move to an entirely direct model.

So there's no issues there and regarding the relationships, these are not going to be a onetime termination fee. We're exiting out of these relationships in a manner commensurate with how we approached our business partners all along, which is what we believe is the best in class manner. We're doing it in a way that's best for not only NeuroMetrix but also in an appropriate manner for our customers and quite importantly, for our business partners.

So, we're taking it from a customer perspective back and making sure that we do the right things as we exit out of these relationships for ourselves and for them.

Great and then, if you look at the number of new accounts or the total accounts, 5,400, that's a couple hundred increase, at least, was there an increase in the ASP of the device? And can you comment on those 200 net adds? Were they in any specific territory or is there any color you could add to where they came from?

Dave, I'll comment on the ASP and the devices and I'll let Gary comment on the second part of that. The ASP on the devices was actually down, modestly, during the quarter and that's actually why our gross margin on the devices was down slightly in the second quarter.

And regarding the accrual of customers, we've seen our success continue across all markets throughout the country. So no regional variances to our accrual efforts there, Dave.

Okay and then last, I think you said 60 sales reps. Can you break that down into kind of reps versus managers and what was that number last quarter? Is that up or -- did you hire people or is that a lower number? Thanks.

Sure, Dave. It's a slight expansion. We have today, as of today, 50 regional and territory managers onboard, five regional sales directors and one national director. So we're approaching 60 and that number is slightly up prior quarters and we continue to evaluate having the right field coverage to get the job done with our customer, on a quarter-by-quarter basis. But no doubt one of the largest and most significant sales forces in the physician office arena from our vantage.

Great. Thanks a lot.

Thank you.

Jonathan Block, SunTrust Robinson Humphrey.

Thanks, guys, good morning.

Good morning, Jon.

Just a couple question, I guess first one, Gary, just with the Company's decision to sell direct. I'm just looking at the model here. What do you think a good number is to use for new accounts? And I know specifically you dong guide, but I guess my question here is just over the past three quarters we've seen a pretty decent deceleration in the number of new accounts. Is that a function of you preparing to step away from distribution or again, for modeling, should maybe we expect a little bit of a further step down?

Obviously we won't provide guidance on a move-forward, but what I can tell you is that over the past recent quarters we've seen a wind down on the performance and production of distribution and as such, that's certainly impacted our business. And when you overlay that at the investment that we made in distribution or the resources deployed against distribution has remained both consistent and significant. It clearly forced the Company to take a hard look at our direction here.

Okay great and then I guess just more big picture. If you guys can help me out with something, with ADVANCE? I guess the first question there. We're still suspecting approval, is it Q3? Is that correct?

As I noted, Jon, I mean, right now we did receive additional information, requests from the FDA, which we provided and are in dialog with them. So it really is a function of FDA timelines and they seem to be quite busy these days. So I can't predict the time in which it would be approved, but we would -- we're in dialog and it could definitely be approved this quarter, but it really depends on their turnaround times.

Okay and then just to build off that question, I guess if and when ADVANCE is approved and let's just assume a launch there, if you can help me out? If a neurologist were to buy ADVANCE in a current state where there is a miscellaneous code in place, how does that work? In other words, will they be able to bill and get reimbursed or would it sort of revert onto the current standing that NC-stat is currently under? In other words where they would have to bill, probably, under 999 instead of 003 to 004 or will be viewed differently because it has the needle capability?

Actually, most of those policies don't really -- they talk about automated nerve conduction. They really don't speak to the needle EMG capabilities of the device. Some of the policies may speak to, particularly on the commercial side, the need to do needle EMGs concurrently with nerve conduction.

But as far as the Medicare covers determinations, they really don't tie in, for the most part, needle EMG with nerve conduction. They do refer to automated nerve conduction. It is our understanding, I mean, that ADVANCE is a standard platform. It has full range of functionality from completely manual to completely automated. So it would be our understanding that it would not be covered by those articles or LCDs.

Okay. So, again, Shai, I'm sorry, a neurologist would be able to bill both for the needle component, which is a separate code and the traditional nerve conduction setting component?

Right. Put another way, there is absolutely no difference whatsoever between ADVANCE and any product on the market, including its performance of nerve conduction as well as needle EMG.

Okay, got it and just a last one. Brad, maybe this is a good one for you. Just on a run rate, on the G&A I get. I know no guidance here, but I just want to make sure I have it correct. A good number maybe to use, going forward, or at least a correct run rate would just be certainly add back in the roughly $1.7 million that we got, as a function of the amnesty? Is that correct?

Yes. I mean, as you can imagine, it's difficult for us to project the level, the magnitude of professional fees as we go forward, but that's certainly a good assumption in terms of adding back that onetime adjustment that we made in the quarter for the sales tax liability.

Okay and did you split out the professional fee? I think you mentioned it was --?

No we don't. I mentioned the increase for the quarter. When we get our 10-Q filed, we'll certainly talk about the changes in the components of our G&A expenses. But we mentioned that our overall professional fees relating to governmental investigations as well as reimbursement matters increased about $1.2 million in the quarter.

Okay, great. Thanks, guys.

Thanks.

Bill Quirk, Piper Jaffray.

Hey guys, thanks, just one quick follow-up. Shai, when should we expect to see any data concerning ADVANCE?

Data in terms of, for example, clinical studies?

Exactly, clinical studies, performance data, etc.

Well, that is not required for the 510(k). The NC-stat automation algorithms are the same ones that are implemented in ADVANCE. So, to the extent that there would be a question about how the ADVANCE system automatically analyzes data, all of the NC-stat clinical studies would be pertinent. Needle EMG is a subjective procedure. There's no automation, so you really wouldn't provide clinical data there. So, essentially, it's like any piece of equipment on the market. There is not specific clinical data for the other instruments and we wouldn't expect clinical data for ADVANCE other than the improvements, if you will, over the traditional approaches, such as automation, which have already been validated for NC-stat.

So, with respect to the actual clinical outcomes, if you will, specific on the nerve conduction side, we should assume that the data should be on par with what we see from NC-stat, correct?

That is correct and we will -- that's absolutely correct. It is actually using the same algorithms.

Understood. Thanks, Shai.

Sure.

We're showing no more audio questions at this time.

Thank you very much. We appreciate your interest and attention. We look forward to updating you as we go through the remainder of the year. Thank you very much.

Thanks again.

Thank you.

Thank you for your participation in today's conference. This concludes our presentation. You may now disconnect and have a good day. 16