NeuroMetrix Inc (NURO) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the NeuroMetrix third quarter 2007 earnings call. My name is Jen, and I will be your coordinator for today.

(OPERATOR INSTRUCTIONS)

As a reminder, this conference call is being recorded for replay purposes.

I will now turn the presentation over to Mr. Brad Smith, CFO. Please proceed, sir.

Good morning. 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 our 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 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 third 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 a brief overview of NeuroMetrix, several highlights from the third quarter of 2007 and a product development update. I will then turn it over to Gary for discussion of sales and marketing 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 proprietary products used to diagnose and treat neurological disorders. Our focus to date has been on detection of neuropathies, which are disorders of the peripheral nerves in parts of the spine frequently caused by or associated with diabetes, disk disease, spinal stenosis, carpal tunnel syndrome, chemotherapy and other clinical disorders.

Our neuropathy diagnostic platform, called the NC-stat System, is now used in over 5,500 physician practices and clinics, representing approximately 16,000 physicians throughout the United States. Earlier this month we passed the 1 million patient mark with the NC-stat. This important milestone reinforces the extensive clinical benefits that the NC-stat provides the physicians and their patients.

Earlier this year we began marketing the DigiScope, manufactured by EyeTel Imaging, Inc., which is a diabetic retinopathy detection device. Diabetic retinopathy is a common neurovascular complication of diabetes and is the leading cause of blindness among working-age adults. The DigiScope is used by internal medicine, endocrinology and family medicine physicians in the routine care of their patients with diabetes. We believe that the market opportunity for detection of neuropathies is as much as $1 billion in the United States. We further believe that the market opportunity for the detection of diabetic retinopathy is as much as $700 million.

With regard to our performance in the third quarter of 2007, our revenues of $11.3 million were down 26% from the same period one year ago and were down 2% sequentially from the second quarter of 2007. The revenue decline was due to a decline in average biosensor usage per customer and due to fewer new customers acquiring the NC-stat. We believe that our revenues in the third quarter of 2007 were adversely impacted by reimbursement uncertainty for nerve condition studies performed using NC-stat equipment. Specifically, our customers received lower levels of reimbursement, experienced higher levels of claims 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 payers, various appeal processes, physician advocacy at both the individual and professional society level, product development efforts and clinical studies. Furthermore, the AMA CPT panel has convened a workgroup that is tasked with reviewing the current state of nerve conduction procedures and equipment and determining whether clarifications or updates to the CPT codes are appropriate. We anticipate one or more recommendations will be brought forth by the working group for consideration by the AMA CPT panel as early as the scheduled February 2008 meeting. Gary will provide further details during his remarks.

I would now like to update you on product -- on our product development pipeline. We are deeply committed to developing innovative proprietary products for the diagnosis and treatment of neurological disorders. ADVANCE is the brand name for the traditional neurodiagnostic platform we have been developing for the past several years. ADVANCE is unique in that it will offer the broadest spectrum of diagnostic functionality on the market, which will allow a wide array of physicians, including neurologists, orthopedic and neurosurgeons, endocrinologists, rheumatologists and other physicians to perform nerve condition studies and needle electromyography procedures in accordance with their clinical judgment and the needs of their patients.

ADVANCE will be backwards compatible with most of the existing line of NeuroMetrix precision electrodes. Furthermore, we expect to release additional electrodes and EMG needles specifically for ADVANCE in the first half of 2008. We have outsourced production of our branded EMG needles to a leading high-volume needle manufacturer. These EMG needles are optimized for and matched to ADVANCE. We believe that sales of these needles will start next year.

We submitted an FDA 510(k) filing for ADVANCE during the first quarter of 2007. We are in the process of responding to a second additional information letter from the FDA in our dialog to address any remaining questions. In connection with the broad labeling we are seeking, the FDA requested limited additional data, which we are generating and should complete in 2007. At that point we will submit our complete additional information letter response. We anticipate launching this product upon receiving FDA clearance in 2008. ADVANCE will be offered with a number of accessories, including a custom design [cart]. We have not finalized pricing for ADVANCE and its accessories. However, we expect the list price to be higher than NC-stat.

We are pleased with the progress we have made in our minimally invasive neurotherapeutic platform which is currently under development. This core technology is a proprietary neuroelectrical guidance system that is designed to help 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 medicine and physician office market. We are presently developing the first product in this series. Our initial product introduction, which we hope will occur in late 2008 or early 2009, will target the regional anesthesia market.

The use of nerve localization instrumentation and needles is a standard of care for nerve block procedures, which are increasingly the preferred form of anesthesia for many surgical procedures, particularly within orthopedics. While the current generation of technology is generally effective, it is limited with respect to both accuracy and usability. Based on discussions with anesthesiologists, we believe there is a need for improvements in nerve localization products that may be provided by our proprietary technology. After establishing our technology in anesthesia, we plan to proceed into the broader market for select clinical conditions such as the treatment and management of carpal tunnel syndrome and common pain conditions.

We expect that our minimally invasive neurotherapeutic products will resemble our neurodiagnostic products in that there will be three key components -- consumables that will included proprietary nerve localization and drug delivery needles; electrodes and other disposables; and an electronic instrument linked to our on-call information system. We are also studying the possibility of distributing related pharmacological agents. We have identified a manufacturing partner for our proprietary nerve localization and drug delivery needles.

All of the aforementioned goals depend on the successful completion of certain product development efforts, clinical studies and obtaining relevant FDA approvals, which we believe will be 510(k)s.

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 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 reflected in 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 as evidenced by many key indicators, we're coming off a quarter which marks both 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 that they care for on a daily basis.

In Q3 2007, we expanded our customer count to over 5,500 active NC-stat customers. As detailed, 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 third quarter of 2007 declined year over year by approximately 15%, to 258,000 biosensors, compared with 302,000 biosensor in the third quarter of 2006. However, testing declined by 7% from Q2 2007 levels of approximately 276,000 biosensors.

Our average customer delivered approximately $6,500 in annual biosensor revenue based on their usage during the third quarter of 2007, which represents just under one patient per week per practice. While this is clearly a contraction from previous quarters, it illustrates that our customers continue to utilize our technology for their patient care.

The distribution of our testing by customers in the third quarter of 2007 was as follows. 70% of total testing was performed within the primary care market, which we define as internal medicine and family medicine, and 30% came from within our specialty care segments. Here, 38% of testing within the specialty care came from the orthopedic market, which represents 12% of our total testing volume. Endocrinologists and rheumatologists represent 20% of our specialty care physician testing and 7% of our overall testing. And 34% of testing within the specialty care segment was performed by all other specialty care physicians, including those in pain management, occupational medicine, neurology, physiatry and oncology, as well as corporations who use our technology for pre- or post-employment screening, and also research entities that use the NC-stat System as a key component of their clinical studies and outcome trials.

Testing within the primary care market was 179,000 biosensors in Q3 2007, and testing within the specialty care physician segments, which includes all other physician specialties, represented 78,000 sensors in Q3 '07.

So, to summarize, the overall testing declined by 7% quarter over quarter, to 258,000 biosensors.

Based on their usage in Q3, new NeuroMetrix customers delivered annualized revenue of approximately $12,000 per account. This details that despite the reimbursement challenges, our new customers continued to adopt and utilize our technology within their practice.

On an organizational front, we now have approximately 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 of 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, NeuroMetrix decided to exit out of all existing distributor relationships. This was primarily due to our declining return on the significant investment we were making and this extension of our field organization, and also due to our desire to redirect this significant investment within our company. This is a noteworthy progression for our company, as we now maintain complete control over the entire marketing and sales process. As such, NeuroMetrix directly manages all sales and service efforts, which is consistent with the vast majority of market-leading companies throughout the medical device arena.

I also wanted to provide an update on the important topic of the reimbursement landscape. First and foremost, the NC-stat is an FDA-cleared technology support by the strong 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 standard nerve conduction measurement equipment." As detailed here, the NC-stat performs standard nerve conduction measurements and holds the same FDA equipment classification as other leading NCS/EMG equipment. This is further supported by 45 published medical journal articles, abstracts and scientific posters which detail the accuracy, validity, reliability and utility of the NC-stat System.

Furthermore, as reported by our customers, we believe the technology has historically been reimbursed by a majority of payers throughout the U.S. Today all Medicare carriers allow for all competent physicians to perform NCS tests. Most Medicare carriers clearly do not hold any restrictions towards the use of any FDA-approved NCS equipment, including the NC-stat System, while select Medicare carriers specifically cover the use of the NC-stat in their LCDs or articles under a miscellaneous code. And, as reported by our customers, many workers' compensation and commercial insurers continue to reimburse physicians for NCS tests performed with the NC-stat System. This diverse base of coverage can allow all customers to appropriately utilize the NC-stat System across a broad array of payers, ranging from Medicare to workers' compensation to private payers.

As Shai noted, the AMA CPT panel created a workgroup to review the codes for nerve conduction testing and assess all FDA-approved NCS equipment, including the NC-stat System. This process is well underway, and we anticipate that one or more recommendations will be brought forth for consideration by the AMA CPT panel as early as the scheduled February 2008 meeting.

The workgroup recommendations could range from a number of possible directions, including, number one, maintaining the present level on CPT codes for NCS and firmly aligning all FDA-approved NCS equipment under the present codes; number two, the creation of a new level 1 code set for select NCS procedures and/or NCS equipment; and, number three, the creation of a new Level 3 code set for select NCS procedures and/or NCS equipment.

We believe that the NC-stat System meets and should be reimbursed according to the present level 1 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 the present CPT codes for NCS describe the services performed with the NC-stat System, that the Medicare Physician Fee Schedule details the codes and the corresponding RVUs for a procedure, that the HIPAA act includes a requirement pertaining to 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 present established CPT codes for NCS.

We also believe that if the AMA were to create a new code set for select NCS procedures or NCS equipment, that this would be categorized as a level 1 CPT code set. This belief is based upon the criteria that the AMA has established towards what constitutes a level 1 code. The AMA criteria includes the following five elements, which is supported by our assessment towards how NCS, all FDA-approved equipment and the NC-stat align to the AMA's level 1 code criteria for either the present NCS codes or even a new level 1 code set.

The first area is the product or service -- the procedure or service has FDA approval for the specific use. And, to elaborate, all FDA-approved NCS equipment measure the same standard NCS parameters and fall within the established FDA classifications. Also, the NC-stat measures standard NCS parameters and holds FDA clearance as comparable to all other major NCS equipment.

The second criteria is that the distinct procedure or service is performed by many physicians. Currently over 28,000 physicians perform and utilize NCS today using a variety of FDA-approved NCS equipment. Over 15,000 of these physicians use the NC-stat System, making the NC-stat System one of the most widely used pieces of NCS equipment in the U.S.

The third criteria is the clinical efficacy of the procedure or service must be well established and documented in U.S. peer review literature. To elaborate here, the NCS is a well-established procedure and supported by the longstanding existence of level 1 CPT codes. The FDA has cleared the NC-stat to perform NCS and NCS parameters. The NC-stat is further supported by over 45 published clinical studies, abstracts and scientific posters.

The fourth criteria is that the suggested procedure or service cannot be a fragmentation of existing codes. Towards this, the present CPT codes accurately and fully describe the services performed with the NC-stat System and all other FDA-approved equipment. As such, it should be reported under the existing codes and is not a fragmentation. The creation of any new NCS codes merely on the basis of which equipment is used would be a fragmentation and therefore unacceptable according to AMA CPT guidelines.

The last criteria is that the suggested procedure or service must not be related to a procedure or service already having a specific existing CPT code. Towards this, NCS is a proven, established level 1 code set, and the NC-stat System merely contains select improvements over some existing FDA-approved NCS equipment and clearly does not represent extraordinary circumstances, nor does it warrant the creation of a new level 1 code set.

As a final note here, we look forward to the direction established by the AMA workgroup and the CPT panel regarding NCS procedures and all FDA-approved equipment, which may emerge as early as the forthcoming February 2008 meeting.

On the commercial payer front, we've seen a number of commercial payers, including many regional Blue Cross plans, develop policies which restrict performing NCS tests with the NC-stat. These restrictions have been centered upon a claim that the NC-stat is experimental and investigational. We view this as a fundamental restriction towards which physicians can perform NCS tests. This position stands in direct contrast to the review and decisions many Medicare carriers have employed in the past year and a half; to all state laws in which there are no physician restrictions for performing NCS; to the longstanding AMA policies, which do not support restrictions on the basis of physician specialty; to the positions held by many leading medical societies; and, finally, to the established FDA regulations.

Regarding the NC-stat being experimental and investigational, we firmly believe that the counters to this stance are clear and compelling. These include our FDA clearance as equivalent to other NCS technologies, the 45 published works detailing our accuracy, validity and utility of the NC-stat System, the NC-stat System's use in worldwide clinical studies by renowned organizations such as the CDC, NIH, NIOSH and also pharmaceutical companies such as Lilly and Company, that over 1 million patients have been tested with the NC-stat System and that the system is used by over 16,000 physicians across 5,500 physician practices. Furthermore, every Medicare carrier in the nation covers the performance of NCS tests with the NC-stat System.

Based upon these reasons, along with the strong patient care benefits captured when using our technology, we believe our customers should bill -- 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 appeal processes.

On the international front, we conducted research on the reimbursement landscape for performing NCS tests in key international markets. Our research was centered upon the coverage, coding and payment levels for physicians performing NCS procedures on both a public and private payer front within each country. Our findings detail that certain markets such as the United Kingdom, Germany and Spain represent potential initial market opportunities for NeuroMetrix. We're pleased to announce the formal launch of our international business efforts, starting within the United Kingdom. Here we have already seen the sale, placement, training and testing of new customers in both the orthopedic and primary care markets within the U.K.

As background information, the United Kingdom represents a market of approximately 60 million in population, which is approximately one-fifth of the United States. Today the vast majority of all electrodiagnostic procedures are performed by approximately 125 clinical neurophysiologists, who practice within approximately 110 hospital-based departments across the U.K. In their system, many patients suspected of having carpal tunnel syndrome must wait six months or longer for an NCS test performed by a clinical neurophysiologist. Our research indicates that approximately 85% of the population reside within the National Health Service, or NHS, which is the U.K. state-run healthcare program, while the remaining 15% fall under private insurance.

There are no restrictions towards which physician can perform NCS tests in the U.K. Also, our research indicates that the reimbursement levels for performing NCS tests are favorable for physicians under both the NHS and private payer systems. However, most physicians must gain approval from the NHS in order to be reimbursed for performing NCS tests.

The NHS began a practice-based initiative in late 2006 to move low-risk procedures out of the hospital and dramatically reduce waiting times for procedures such as NCS tests. To exemplify, their goal is to cut in half the average time required to diagnose and treat patients presenting with CTS. Under this initiative, physicians can petition the NHS and establish their being reimbursed for performing NHS -- or for performing NCS tests. We've seen physicians in both the surgical and primary care arenas gain approval from NHS to perform nerve condition studies with the NC-stat System, and they will reportedly be reimbursed at levels comparable to clinical neurophysiologists. It is very noteworthy that through their practice-based initiative, the NHS is also looking to capture the clinical benefits and health system efficiencies available by having capable physicians perform nerve condition studies in a point-of-care setting.

While we are in the early stages of our launch efforts in the U.K., we are very encouraged by the opportunities held within this notable market. The international efforts will serve as a complement to our U.S. market opportunities, where we believe we have only reached approximately 7% of the potential practices across the U.S.

On the DigiScope front, NeuroMetrix holds an exclusive license through EyeTel Imaging to market and sell the DigiScope technology to primary diabetes care physicians, which we define as primary care, family medicine, internal medicine and endocrinology. The combined business experience from EyeTel and NeuroMetrix is to generate between $10,000 and $12,000 in revenue per account in year one alone. Through Q3 2007 we have now closed nearly 125 new DigiScope customer agreements, with our total base of active DigiScope customers now approaching 250. This details a solid start to our commercial efforts with the DigiScope, as approximately three in every four NeuroMetrix region managers has sold a DigiScope unit to date. Based upon prior experience, these customers should deliver over $1 million in annualized business growth during the first year alone.

We believe the launch of the 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 family medicine physicians. With our best-in-class market approach and field organization of over 55 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 the challenges that are impacting our business and that have caused our business to contract over the past several 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 standards of care within the marketplace.

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

Thank you, Gary. Here's a recap of our financial performance for the third quarter, which is the three months ended September 30, 2007.

Total revenues for the third quarter of 2007 were $11.3 million, down 26% from $15.3 million in the third quarter of 2006. Revenues in the third quarter were down 2% sequentially, from $11.5 million in revenue in the second quarter of 2007. Our biosensor revenues totaled $10.1 million, or 89% of total revenue, in the third quarter of 2007, and diagnostic device revenues totaled $900,000, or 8% of total revenue. This compares with $13.1 million in biosensor revenues in the third quarter of 2006, or 86% of total revenue, and approximately $2.2 million of diagnostic device revenue, or 14% of total revenue.

Revenues on the DigiScope, used by physicians for the detection of diabetic retinopathy, were approximately $270,000 in the third quarter of 2007, or 3% of total revenues. We received a license from EyeTel to sell the DigiScope in the physician office market and launched this product in early 2007, and we've signed up over 100 new customers since product launch.

The total number of active NC-stat customer accounts, which is based on a 12-month lookback period, increased to 5,523 in the third quarter, but the average usage per account decreased to approximately $6,500. The growth in new accounts slowed in the third quarter of 2007 due to reimbursement challenges we have been facing.

Revenues for the nine months ended September 30, 2007 were $34.5 million, a decline of 16% from $41.1 million for the nine months ended September 30, 2006. During the third quarter of 2007, overall gross margins were 73.0%, compared with 75.5% in the third quarter of 2006. The gross margin for biosensors was 73.9% in the third quarter of 2007, compared to 74.0% in the third quarter of 2006. The average selling price was relatively unchanged from period to period, at approximately $35 per biosensor.

Device gross margins for the third quarter of 2007 were 77.6%, compared to gross margins of 84.6% in the third quarter of 2006. The decrease in device gross margin percentage was due to the lower average selling prices of the devices, which was approximately $3,800 in the third quarter of 2007, and due to lower volumes.

Overall gross margins were also impacted by a 25% gross margin realized on DigiScope revenues, up from approximately 20% in the second quarter of 2007. Revenues in the third quarter were from a mix of existing customers we acquired from EyeTel and from new customers we signed up, and the revenue split for all the eye scan fees and upfront installation and training fees on the existing EyeTel customers is 75% to EyeTel and 25% to NeuroMetrix. Consistent with the original terms of our agreement, this revenue split reverted to a 50/50 split effective October 1, 2007, and is the same revenue split that's applicable to all new customers. We expect that the gross margins on DigiScope will continue to improve as we bring on new customers throughout 2007 and as a result of more favorable revenue split on existing accounts.

Total operating expenses in the third quarter of 2007 were $12.2 million, compared to $10.2 million in the third quarter of 2006. We had a significant increase in professional fees, up approximately $1.5 million from the third quarter of 2006, as a result of legal fees pertaining to the government investigations and reimbursement matters. Our year-to-date operating expenses through September 30, 2007 increased significantly compared to the same period in 2006 as a result of this increase in professional fees, offset partially by a reversal of $1.7 million in sales tax liability recorded in the second quarter of 2007.

The net loss in the third quarter of 2007 was $3.6 million, compared to the restated net income of $2.1 million in the third quarter of 2006 and compared with a net loss of $1.3 million in the second quarter of 2007. The net loss for the nine months ended September 30, 2007 was $6.2 million, compared to the restated net income of $3.2 million for the nine months ended September 30, 2006.

Basic and diluted net loss per share was $0.28 in the third quarter of 2007, compared to the restated basic and diluted net income per share of $0.17 and $0.16, respectively, in the third quarter of 2006. Basic and diluted net loss per share was $0.49 for the nine-month period ended September 30, 2007, compared to the restated basic and diluted net income per share of $0.26 and $0.25, respectively, for the nine months ended September 30, 2006.

Turning now to our financial position as of September 30, 2007, our cash, cash equivalents and short-term investments totaled $35.5 million as of September 30, 2007, compared with $37.1 million as of June 30, 2007, and compared with $40.3 million as of the end of 2006.

During the third quarter of 2007 we used $1.5 million in operations due to the net losses, offset by noncash items. So our burn rate in the third quarter was comparable to the first two quarters of this year.

Working capital was $37.9 million as of September 30, 2007, compared with $41.9 million as of year end 2006. The decrease in working capital is due to decreased cash and investment balances offset by an investment in inventory and a decrease in our current liabilities, principally accrued expenses due to the reversal of sales tax liability.

Our days sales outstanding, or DSO, was 50 days as of September 30, 2007, down from 51 days in the second quarter and compared with 55 days in the first quarter. We saw an overall improvement in our past due receivables during the third quarter of 2007.

Our inventory turn rate per year was 2.4 in the third quarter of 2007, comparable with the rate that we saw in the second quarter of 2007 and compared with a turn of 3 in the first quarter of 2007.

As of September 30, 2007, there continued to be no long-term debt on our balance sheet, other than a capitalized lease obligation of approximately $20,000.

With that, that concludes the financial update portion of the conference call.

I'd like to now turn it back over to Shai.

Thank you, Brad.

The third quarter of 2007 continued to present our company with challenges due to the reimbursement environment for nerve condition studies performed with NC-stat equipment. We have recruited leading reimbursement experts to help us develop and execute our strategies. We look forward to working collaboratively with Medicare and commercial payers, our physician customers, professional medical societies and the AMA to address these reimbursement issues.

Most importantly, we are grateful for the opportunity to provide the over 5,500 physician practices and approximately 16,000 physicians using the NC-stat with this important clinical product that advances their patient care. We are also proud that 1 million patients have benefited from our technology over the past eight years.

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.

Due to uncertainty related to the prevailing reimbursement environment, we cannot accurately predict biosensor usage and new customer acquisition in the near term. As we transition to the question-and-answer session, we are pleased to discuss the third quarter 2007 business details and relevant metrics. However, we will not provide any further guidance on future financial performance.

We look forward to your questions.

Thank you.

(OPERATOR INSTRUCTIONS)

Your first question comes from Dave Turkaly, with SIG.

Thanks, and thanks for the detail on the call. When you looked at the recommendations for the panel that could come in February, can you remind us if, depending on which of those they select, what time frame after that you think any change could be implemented in terms of whether that would be the following fiscal year for them as well?

Sure, sure. Thanks, Dave. A couple of notes -- number one, obviously it's the AMA's process to manage and determine the timeline, but under the three scenarios, if the CPT panel were to receive recommendations and make a decision in the -- at the February meeting, number one, if they decide that the code is the code, that would then be reported potentially as early as March of 2008. If they decide that there is a new level 1 code series or even a level 3 code series established for NCS procedures or select NCS equipment, then that would go from the AMA over to the RUC, and the RUC reportedly would assign values through the course of 2008, and those would be put forth for a January 1, 2009 start. So it could be as soon as end of Q1 2008, but certainly could go well beyond that, all depending on the AMA and RUC schedule.

Okay. And then in terms of any sales force update, I know in the past we've gotten kind of sort of a head count number. Is there any update that you guys can give us on that front?

Yes, presently, Dave, we have approximately 50 field representatives, region managers and territory managers and account managers out in the field, all with basically the same responsibilities. They report into five regional sales directors, who report into a national director. So that number has been fairly consistent through the past couple of quarters.

Okay. And then the last one, I know you mentioned specifically Blue Cross Blue Shield, that some of the commercial guys are saying it's experimental. I mean, is it just that one, or are there others? I know the Medicare front it's kind of easier to get a handle on what's going on, given that you can look at the different intermediaries and kind of what their decisions have been, but on the commercial front it's a little more difficult. Would you say it's really -- is it one or is it multiple? And it sounds like it might be specifically BCBS, but any color there would be helpful.

Sure. Absolutely. Our -- in general, the technology, as we've covered, is reimbursed by many different payer types, ranging from Medicare through workers' compensation through the commercial payer front. And certainly while we provide general guidance on billing and coding, we cannot provide guidance on specific payer policies and coverage, for a variety of reasons. The policies vary by provider agreement and patient health plans. These are highly variable and can also change. And last but not least, as a manufacturer they're not always accessible to us.

There certainly are a number of commercial payers who do have policies like the Blue Cross Blue Shield regional plans that restrict access to the NC-stat and require the physician to send them on to a specialist. But our access to those is not perfect, because we're a manufacturer. So we rely on reportings back from customers. And the commercial payer landscape today is a pretty varied landscape, and we certainly look for the direction coming out of the AMA to help clarify that, not only for our company but for the payer community and for our providers who utilize our technologies.

Great. Thanks.

Thank you, Dave.

Your next question is from David Clair, with Piper Jaffray.

Hey, guys, Dave Clair here. How are you?

Hi, Dave.

How are you, Dave?

Hey, just you mentioned in your press release that you presented to the AMA CPT editorial panel working group. Can you give us any color on initial feedback or questions the group had?

Well, we presented to the workgroup in the June -- at the June meeting, which was the first in-person meeting of the workgroup. And the questions at that time were primarily related to the technology and its clinical use. Other manufacturers were also called to that meeting and presented as well. So it was a general information session for the workgroup to ask questions and learn about the various types of equipment on the market and how they were being used clinically.

So you didn't present in October? Or, I'm sorry, when --

That's correct. We did not present at the last meeting.

Okay. Okay. And then just kind of on the whole launch in the United Kingdom, can you give us any information on how many systems were placed, or revenue contribution there?

Yes, we don't -- we're not in a position to provide specific details on the U.K. launch, but as noted we're pleased to begin our international efforts. They have begun. They're taking root not only in the orthopedic market but also in the primary care arena. And it's a 60 million patient population, or 60 million population market, about the fifth of the U.S. And we have a pretty firm handle on the reimbursement landscape, and our customers are helping us better understand not only the market but how we can best approach it and turn that into a strong base of business for our company and ultimately strong solutions provided to providers and physicians in the U.K. So apologize for not providing more granularity on that, but we're clearly underway with our launch. It's begun. It's begun across a number of specialty markets, if you will. And we're very enthused by it.

When do you expect to go into Germany and Spain?

That's -- those are questions actively being assessed as we speak, and we look to provide updates on a quarterly basis on our progression on the international launch, the -- not only efforts in the U.K. but in other potential markets as well.

Okay, fair enough. And in the press release also you mentioned that you expect revenues to kind of continue to decline, and I'm assuming in the near term here. You know, I know you don't want to give any guidance going forward, but can you kind of give us a little bit of when you expect kind of a rebound to positive growth here?

Yes, Dave, it's Brad. It's -- we've seen obviously several quarters in a row now where we've had revenue declines. They've been modest the last couple of quarters. But we do expect that revenues could decline further here over the next few quarters leading into a decision coming out of the AMA CPT panel. But when things may rebound depends on what comes out of the whole AMA process, the time frame for that, how long it takes to implement and so forth. So we really cannot give any further guidance beyond what we've already given.

Okay.

The only other thing we might add to that is obviously the long-term prospects of the Company and our revenue also are related to the diversification of our portfolio, and as Shai had talked about, the ADVANCE will be forthcoming, and product development efforts well beyond that, which certainly will impact the long-term revenue and forecast of our company.

Okay. And then just on kind of the whole sales and marketing line, I was expecting a little bit lower due to the kind of getting rid of the whole distributor network that you guys had and kind of going direct. Is that -- is this kind of the same level we should expect going forward, or are we going to see some benefit to the P&L?

Dave, we will see some benefit from the P&L going forward. We did not in the quarter because we entered into agreements with most of the independent sales agencies to continue to help us for some period of time and supporting customers and so forth. So we do expect to see about a roughly 50% reduction in the expense associated with our independent sales agency network in the fourth quarter, and then effectively in the first quarter of 2008 and beyond that cost of distribution, if you will, will be gone.

Okay. And then just a couple of housekeeping questions here. On the biosensor revenue split, can you kind of give us a breakout between carpal tunnel, lower back and diabetic?

Sure. Let me grab some quick data here. Testing for DPN and low back and leg pain represents approximately 58% of the total testing --

Okay.

-- in Q3 '07. So it continues to show our diversified position of allowing physicians to diagnose for the complete variety of clinical conditions, ranging from carpal tunnel to low back and leg pain to diabetic neuropathy and other clinical conditions.

Okay. And, sorry, last question here, can you let us know the number of returns during the quarter?

We don't comment on the number of returns. I mean, it was -- it's been reasonably flat over the last several quarters. We've not seen any kind of significant increase in the number of returns.

All right. Thanks a lot, guys.

Thanks, Dave.

Thank you.

Your next question is from Jeffrey Frelick, with Lazard Capital.

Hi. Good morning, guys.

Good morning, Jeff.

Good morning, Jeff.

Shai, maybe can you comment a little bit with respect to maybe just kind of a follow-up to the previous question? Have you had any follow-up interaction with the working group since your first meeting, or have you heard anything from the current customers regarding questions or comments maybe the workgroup has been seeking?

We are a resource to the workgroup, and we were obviously in that mode at the June meeting and have continued to be a resource as they proceeded, as I'm sure the other manufacturers have. So from time to time we've been asked questions and asked for information and been requested information and we've been providing that. That's basically the general summary of our interactions.

Okay. And then maybe for Gary, can you comment kind of on the current sales funnel, now that you've taken more of a direct sales approach, such as the quality of those sales leads, cycle times, any color just on how the sales organization's handling the transition?

Sure. Absolutely, Jeff. You know, the big picture, the transition obviously occurred in Q3, and we were pleased with how we made that transition as an organization. It was a notable one, even though less than one out of two customers were being accrued through distribution when we made that decision and that transition. We certainly had to reengineer our orientation from a direct and distribution model as it relates to lead generation to an entirely direct model.

That transition took hold and took root in Q3, and its impact on the long term obviously we won't provide guidance on, but I think it's noteworthy that we're now in a mode where we're fundamentally an entirely direct company. We control our own destiny, from not only lead generation, but as always on a marketing, sales and service front. And we're pleased with how the organization has made that move forward, and it's consistent with what we've seen from other market leading companies who are an entirely direct model approach within or across the medical device arena.

So in terms of lead time and so forth, difficult to comment and probably wouldn't provide clear guidance on that anyway, but we are very bullish on the fact that we've made this transition. It was the right one for the organization and it's the right one for our business on a move-forward basis.

Okay, thanks. And maybe just one quick one for Brad. Brad, any updates on the claims in the level 2 appeal, number of claims?

I'll take that one on, Jeff, if you don't mind. This is Gary.

Okay.

Fundamentally we're not giving clarity on where we are on claims and so forth, but I'll give you a little big picture. The big picture is that as it relates to overall LCDs, we certainly reserve the right to challenge any LCDs, or for that matter any payer decisions that may not be congruent with policies, regulations, etc. So that's one option for our company to initiate with the support of customers and/or patients.

On a practice level, certainly any time a physician practice encounters a denial of payment, we can be a resource to them, and we certainly help support their efforts to pursue appropriate reimbursement as they see fit. So we are a key resource in that. A number of our customers have embarked upon appealing any potential denials that they've received. And we'll remain in that mode for -- on a go-forward basis. So not a lot of clarity, I realize, but certainly on a big picture, we're supporting both our providers and their patients' rights to gain access to the technology and for the providers to be appropriately reimbursed for them -- for the procedures performed.

Okay. Thanks, guys.

Thank you.

Thank you, Jeff.

Your next question is from Jonathan Block, with SunTrust Robinson Humphrey.

Hi, guys. Good morning.

Hi, Jon.

Good morning, Jon.

Just, Brad, I guess let's start with you. In terms of sensor revenues here in the U.S., can you just talk to, I guess, ASPs? So, in other words, were ASPs stable around $35, and if so were the number of sensors shipped, was that number closer to about 285,000?

Yes, the average price was pretty much unchanged, as it has been. Actually you could look back like the last eight quarters at roughly $35 per sensor. So, yes, if you take the biosensor revenue divided by 35, that gives you a pretty good sense of what the shipments were for the quarter. And, of course, you saw the usage number, 258,000 sensors. So the ratio of shipments to usage was -- I'd say certainly in the range that we've seen over the last year or two. It was -- that ratio was higher in some of the quarters in 2006, but it's been fairly steady since then.

And an obvious note is that when a new customer comes on board, they're buying biosensors with the initial order of the system and often do not have a chance to begin testing with that initial order when they embark upon taking on our technology.

Okay, great. Thanks. That's helpful. And then just, I guess, I don't think you've given us the details in terms of OUS pricing, but just directionally is that -- is it north of where we are in the U.S., or is it south of that number?

You know, the first data point is that we had to evaluate the reimbursement landscape, and from our research we see reimbursement in both the private payer segment as being up to $700 per procedure and in the NHS segment up to $300 U.S. per procedure. So when you see those levels you can naturally understand that our pricing positions that we hold in the U.S. can apply to the United Kingdom market. We're still finalizing our exact pricing positions based on assessing the marketplace. But it's definitely consistent if not potentially north of where we are in the United States.

Okay. Thank you. And just two more, if I may. In terms of operating expenses, they were a little north of where we were. You referenced sort of the spend in terms of legal. I guess, Brad, does that continue until we have resolution? I think as we saw with some of these ortho companies, I mean, resolution still may be a ways out. So can you help me with, is this prep work in terms of expenses or, again, is this going to remain for quite some time?

Yes, I mean, no color beyond what we said, Jon, just they're expenses that we're incurring in connection with the government investigations, as well as these reimbursement challenges that the Company is facing right now. And, you know, yes, I mean, we anticipate that those costs will be there, but we can't really give any additional direction as to are they going to be higher or lower at this point.

Okay. And last one, I guess, we had the AMA meeting in October. Like you said, one's on tap for February. Can you just share with us maybe your level of conviction that a formal proposal takes place at the Feb. meeting? Because I believe if I look at sort of the timeline -- for example, if there's a new code, as you mentioned, Gary, it defaults over to the RUC. I think if it doesn't default over to the RUC after February, it might be difficult in terms of physician fee schedule for '09. So did anything change in October? Do you still seem pretty convinced that we're going to have a formal proposal one way or the other in February?

Well, obviously it's the AMA's to manage. So we can't comment on what our confidence is that they'll draw resolution in the February meeting. But I will offer a couple of things. One is that this is an area of importance for the AMA. They formed the workgroup for nerve condition studies and NCS equipment, all FDA-approved NCS equipment, I might add, to help draw clarity on this issue. And in getting to know the AMA process, they do look to be decisive in their orientation, as appropriate, to resolve issues that are outstanding on any technology front that may exist out there. So we don't have any color or confidence, because it's not our process to manage. But we certainly know that the workgroup work continues, it continues appropriately, and that the AMA is focused on providing clarity on this matter. So hopefully that gives you a little bit of flavor. But our focus is on this, and we hope that they take continued steps as they have to date to draw resolution in the not-too-distant future.

Okay, great. Thanks, guys.

Thank you.

Your next question is from Vivian Wohl, with Federated Kaufman Fund.

Good morning. I have two questions. One is, is this in front of the [NICE] group in the U.K.? That's my first question. And my second question for Shai is that at the recent anesthesia meeting, the new technology out of SonoSite, their new ultrasound box, was targeting anesthesiologists for nerve blocks, and so I'm wondering how that approach, which is obviously very different, would compare to yours in terms of simplicity and accuracy, if you have any thoughts on that.

Regarding the U.K., could you repeat the question?

Well, the NICE committee opines on cost-effectiveness of technologies and whether they want to pay for them.

Right.

So I'm wondering in the U.K. if this has a recommendation from NICE or needs to.

Yes, at this point in time there is no -- there is no stated recommendation. We are encouraged by NHS' active role in trying to move low-risk procedures out of the hospital and what they've set up to do that. And that practice-based initiative is very favorable, as we view it, to the solution that we deliver to the marketplace. Beyond that there's no other clear statement made by the referenced organization or any others.

Vivian, with regard to your question on use of ultrasound, to date the standard of care in nerve blocks is -- has been nerve stimulation, and our technology is an expansion on that. I think there is a lot of excitement around the use of ultrasound, as well, in performance of nerve blocks. We've actually met with some of the leading anesthesiologists who are promoting the ultrasound methods, and they're quite excited about what we're doing, and really the takeaway is that these are complementary techniques, very much like nerve conduction, EMG is complementary to MRI in the assessment of spinal conditions. One is obviously functional. The other is anatomic. In an absolutely analogous fashion, our techniques and the standard of care in nerve blocks is functional, because it's based on actually identifying electrically nerves. And then of course you've got ultrasound, which is anatomic. So they're really complementary techniques. I think there may even be opportunity to integrate them to yield optimal outcomes. So I look at it as a very positive development, and as that technology develops and gets further traction we'll look for opportunities to integrate and potentially even work with some of those companies, or at least work with the technology and find ways that the two approaches can be integrated.

Thanks.

Thank you.

Ladies and gentlemen, this does conclude our question-and-answer session for today.

I'll turn the call over to Shai Gozani for closing remarks.

Thank you very much. We appreciate your interest and attention, and we look forward to updating you as the year concludes. Thank you, and have a good afternoon.

Thanks much.

Bye-bye.

We thank you for your participation in today's conference. This concludes the presentation, and you may now disconnect. Have a good day.