NeuroMetrix Inc (NURO) 2009 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the NeuroMetrix First Quarter 2009 Earnings Conference Call. My name is Michelle, and I will be your coordinator for today.

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

I would now like to turn the call over to your host for today, Mr. Joseph Calo, Principal Financial Officer. Please proceed.

Thank you, Michelle. 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 that are considered forward-looking within the meaning of 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 our earnings release issued earlier today -- item 1a "Risk Factors" of our annual report on Form 10-K for the year ended December 31, 2008 and our other SEC filings. NeuroMetrix does not intend and undertakes no duty to update the information disclosed on this conference call.

Now I'd like to turn the call over to Dr. Shai Gozani, our President and CEO.

Thank you, Joe. Good morning. I would like to welcome you to the NeuroMetrix First Quarter 2009 Conference Call. I am joined today by Joe Calo, Principal Financial Officer; Joe Warrino, our Controller; and Walter Christensen, our Senior Vice President of Global Sales.

As Walt is in his first week, I will take any sales-related questions during the Q&A session.

NeuroMetrix is a science-based health care company that is transforming patient care for neurotechnology. Our goal is to develop into a diversified neurotechnology company focusing on the peripheral nervous system and spinal cord.

We sell our products in the US primarily through a direct sales organization, currently about 30 sales representatives that call on neurologists, physical medicine and rehabilitation physicians, orthopedic surgeons, endocrinologists, family and internal medicine physicians, and other physician specialties. In international markets, we sell our products through third-party distribution.

In this conference call we will discuss the following topics -- first, a review of our financial results for the first quarter; second, an update on our neurodiagnostic business; third, an international sales update; fourth, a product and R&D pipeline update; and then I will complete with a review of our business strategy on a go-forward basis.

I will now turn it over to Joe Calo, our Principal Financial Officer, for a review of our financial results for the first quarter of 2009.

Thank you, Shai. Here is a recap of our financial performance for the three-month period ended March 31, 2009, our first quarter of 2009.

Total revenues for the first quarter of 2009 were $6.8 million, down 22% from the $8.7 million in the first quarter of 2008 and down 5% sequentially from $7.2 million in the fourth quarter of 2008.

As a reminder, our fourth quarter revenues included approximately $500,000 in revenues deferred from previous quarters due to back orders of the ADVANCE EMG module, which were fulfilled in the fourth quarter of 2008. Also, I would like to remind you -- or remind everyone -- that our previous quarters and previous-year revenues have been recast to exclude revenues from discontinued operations resulting from the closure and sale of our Digiscope business in the fourth quarter of 2008.

As a further breakdown of our revenues, consumable revenues totaled $6.1 million and 90% of our total revenues in the first quarter of 2009. And medical equipment revenues totaled $700,000, or 10% of total revenues. This compares to $8 million in consumable revenues in the first quarter of 2008, or 91% of our total revenues, and $750,000 of medical equipment revenues, or 9% of our total revenues.

During the first quarter of 2009, overall gross margins were 71.6% compared to 67.8% in the fourth quarter of 2008, and 73.5% in the first quarter of 2008. The gross margin for consumables was 72.5% in the first quarter of 2009 compared to 71.5% in the fourth quarter of 2008, and 73.6% in the first quarter of 2008. The increase in first quarter of 2009 compared to the fourth quarter of 2008 is due to higher average selling prices and lower average costs.

Medical equipment gross margins for the first quarter of 2009 were 63.7% compared with 46% in the fourth quarter of 2008, and 72.3% in the first quarter of 2008. The increase in gross margin percent during the first quarter when compared to the fourth quarter was primarily due to higher average selling price and lower average costs during the first quarter, however, the decrease in medical equipment gross margins' percentage compared with the same period of 2008 was due to a lower average selling price resulting from the higher discounts.

The increased discount was mainly a result of the ADVANCE system transition pricing for certain existing customers, which we introduced in the second quarter of 2008.

Overall, gross margins were also impacted by transition pricing for the ADVANCE system when compared in the first quarter of 2009 to the previous-year period.

Total operating expenses in the first quarter of 2009 were $6.2 million compared to $9.2 million total operating expenses in the fourth quarter of 2008, which, in the fourth quarter of 2008 included a $3.7 million charge for the settlement of the previously disclosed investigation by the United States Department of Justice and the Office of Inspector General of the United States Department of Health and Human Services. And a gain of $131,000 resulting from the dissolution and deconsolidation of our previous joint venture with Cyberkinetics Neurotechnology Systems.

Total operating expenses for the first quarter of 2008 of $16.2 million included a $5.8 million charge for the impairment of goodwill.

Operating expenses for the first quarter of 2009 when compared with the fourth quarter of 2008 decreased $3 million, mainly due to the charge of the $3.7 million for the settlement of the DOJ that was included in the fourth quarter, and partially offset by increases in legal expense and stock-based compensation in the first quarter.

Operating expenses in the first quarter of 2009 decreased $10 million when compared to the same period of 2008. The reductions in operating expenses are mainly a result of a charge of goodwill impairment of $5.8 million in the first quarter of 2008, which did not recur in first quarter of 2009 in our continued expense control efforts including the reduction of our workforce in the second quarter of 2008.

The GAAP net loss in the first quarter of 2009 was $1.2 million compared to a net loss in the fourth quarter of 2008 of $4.1 million, which included a settlement of the $3.7 million, a writedown of our investment in Cyberkinetics of approximately $274,000 due to what we considered to be an other-than-temporary decline in the market value of this investment; a gain of $352,000 resulting from the sale of our Digiscope business; and a net gain of $131,000 resulting from the dissolution of our joint venture with Cyberkinetics.

In comparison, net loss for the first quarter of 2008 was $10.8 million, which included the charge for the impaired goodwill of $5.8 million, a writedown of our investment in Cyberkinetics of approximately $656,000, and a loss from discontinued operations relating to the sale of our Digiscope business of $729,000.

Basic and diluted net loss per share was $0.09 per share in the first quarter of 2009 compared to $0.30 per share in the fourth quarter of 2008. Included in that $0.30 per share is an impact of $0.25 per share for the anticipated payment of the government to resolve the investigation, the writedown of the Cyberkinetics investment, and the gains from the discontinued Digiscope operations and the deconsolidation of the joint venture with Cyberkinetics.

The basic and diluted net loss per share in the first quarter of 2008 was $0.79 per share including an impact of $0.53 per share for a charge for impaired goodwill, the writedown of Cyberkinetics investment, and the loss of the discontinued Digiscope operations.

Turning now to our financial position for March 31, 2009 -- cash, cash equivalents, and short-term investments totaled $15.9 million compared to $19.8 million as of December 31, 2008. This represents a decline of $3.9 million during the first quarter. The use of cash of $3.9 million was primarily driven by the payment to the DOJ for $3.7 million, and a $350,000 payment made for the purchase of certain assets from Cyberkinetics Neurotechnology Systems.

Working capital was $20.7 million as of March 31, 2009, compared to $21.6 million as of December 31, 2008. The decrease in working capital was primarily due to decreased cash, cash equivalents and short-term investment balances of $3.9 million and an increase of accounts payable of $900,000 offset partially by a reduction in accrued expenses of $4.1 million including the $3.7 million paid to the DOJ settlement.

Total assets were $27.4 million as of March 31, 2009, compared to $31.4 million as of December 31, 2008. The decrease is mostly related to the decrease in cash, cash equivalents, and short-term investments.

DSO increased to 48 days in the first quarter of 2009 compared with 46 days in the fourth quarter of 2008 and compared with 57 days in the first quarter of 2008. Our inventory turn rate per year was 1.5 times in the first quarter compared to 1.8 times in the fourth quarter and compared to 1.6 times in the first quarter of 2008.

The decrease in inventory turns from our last year-end is due to the decrease in unit sales during the first quarter of 2009.

As of March 31, 2009, there was no long-term debt on our balance sheet other than a capitalized lease obligation of about $57,000.

To summarize our first quarter 2009 financial performance, revenues totaled $6.8 million. We incurred a net loss of $1.2 million, and we ended the first quarter with $15.9 million in cash, cash equivalents, and short-term investments.

This concludes the financial update portion of the conference call. I will now turn the call back over to Shai.

Thank you, Joe. So now to proceed with the business update. First, with respect to our neurodiagnostic business -- so just to repeat the key numbers that Joe alluded to -- in the first quarter, we generated revenues from neurodiagnostic products of $6.8 million, which was down 22% from the same quarter of last year.

The breakdown was $700,000 in medical equipment revenues, and $6.1 million in consumables revenues. On a quarter-to-quarter comparison, this compares to our fourth quarter revenues of $7.2 million of which $1 million was for medical equipment sales, and $6.2 million in consumable revenues. And then, as Joe mentioned, in the fourth quarter our revenue included about $500,000 deferred revenue from the third quarter. So, on a sequential basis, it was approximately flat.

Medical equipment sales consisted of both NC-stat and ADVANCE devices and related modules. Consumable sales consisted primarily of our neuro-specific electrodes but also included EMG needles and other accessories.

The NC-stat sales were mostly into primary care physician practices. ADVANCE sales were directed at specialist physicians with peripheral nerve expertise. This market includes neurologists, physical medicine, and rehabilitation physicians, neurosurgeons, orthopedic and hand surgeons, and pain medicine physicians.

During the last quarter, our active customer count, which is a 12-month lookback at accounts actively using the NC-stat or ADVANCE system decreased by 189 counts to 5,006 physician practices and clinics as of the end of the first quarter of 2009.

The average consumables usage during the first quarter of 2009, however, was up about 3% from the prior quarter.

We believe that revenues from our neurodiagnostic products in the first quarter of 2009 were down from the same period in 2008 due to the overall reduction in health care capital purchasing, the continued uncertainty surrounding reimbursement for the NC-stat system, and the 40% reduction in our direct sales force in the second quarter of 2008.

As an update on the NC-stat reimbursement environment, we recently commented on reports of the CP Editorial Panel will establish a Category 1 CPT code for nerve conduction studies performed with preconfigured electrode arrays such as are utilized with the NC-stat system. We are encouraged by this direction, and we believe that this CPT code when issued could streamline the process for obtaining reimbursement for nerve conduction studies performed using the NC-stat system.

The amount of reimbursement from Medicare that physicians will receive under the CPT code remains to be determined. Further, medically appropriate indications for this code may be defined through local and national Medicare and medical policies. In this respect, we are encouraged that multiple Medicare fiscal intermediaries have determined that nerve conduction studies performed with the NC-stat are a covered service for one or more clinical indications.

We do expect that the operational characteristics of the NC-stat business will change when physicians begin utilizing the new code in 2010. We believe that first-study reimbursement could decrease, which could necessitate common reductions in nerve-specific electrode selling prices. However, we also believe that specific reimbursement codes and more favorable payor policies could lead to increased medically appropriate utilization. As such, we look forward to the opportunity to stabilize and eventually return the NC-stat business to growth.

We believe that nerve conduction studies have an important role in primary care and will actively support the family and internal medicine physicians currently using the NC-stat to optimize their clinical care of patients. We continue to believe that the primary care nerve conduction testing market in the US is $700 million on an annual basis and potentially larger if widespread testing for diabetic neuropathy is found to be clinically and economically valuable.

In addition to the NC-stat system, we are actively marketing the ADVANCE system which received FDA 510(k) clearance in May of last year, and we market that system into the neurology, physical medicine, and rehabilitation, neurosurgery, orthopedic and hand surgery, and pain medicine markets through our direct sales organization.

ADVANCE is a comprehensive platform for the performance of traditional nerve conduction studies in needle electromyography procedures. As of the end of the first quarter of 2009, 7% of our active customers were using ADVANCE. We are encouraged by the market reaction and customer feedback and have gained important insight into certain product enhancements that we believe could accelerate adoption.

Moving now to international sales -- our international sales are still limited at about $100,000 in the first quarter, however, we are making progress in building an international distribution network, which we believe will eventually lead to more substantial revenues.

We now have signed distribution agreements in the UK, France, Belgium, Netherlands, Spain, Portugal, Switzerland, Middle East, countries of the former Yugoslavia, Latin America, Mexico, Singapore, and Korea. So our distribution network is growing, and we recently trained many of these distributors. We have also initiated the regulatory registration process for the ADVANCE system in both China and Japan.

In terms of our product pipeline, our core mission is to develop and market products in three clinical areas related to the nervous system. The first is diagnosis and monitoring a peripheral nerve to the spinal cord dysfunction. The second is a delivery of anesthetic and therapeutic agents to peripheral nerves and spine, and the third is neurostimulation to promote repair and regeneration of peripheral nerves in the spinal cord.

These three areas have a common core scientific theme, which is the measurement, modulation, and repair of neural conduction. We are encouraged by the progression of our novel and nerve identification and localization system called ASCEND, which we believe will be used to provide regional anesthesia, pain control, and in the treatment of certain neuropathies.

ASCEND has two components -- a precision nerve-stimulation device, and a nerve signal detection device. We have filed 510(k) submissions on both of these components. There is limited data available on the US and international market for stimulation-based nerve localization equipment and consumables. Based on a variety of sources including surveys of physician practice habits, we estimate that the existing markets between $50 million and $100 million. More importantly, we believe that the market opportunity could be considerably larger if new technology improves on the procedure and makes it accessible to a greater number of physicians for a wider range of peripheral nerve and ultimately spinal cord indications.

We are assessing a number of commercial launch strategies and business plans for ASCEND. Our current belief is that we will launch into the regional anesthesia market in early 2010, and potentially other peripheral nerve specialist markets later in the year. Of course, this is pending regulatory approvals and production ramp up.

We recently announced the acquisition of certain technological intellectual property assets (inaudible) Cyberkinetics nor Technology Systems. The acquired assets include all of Cyberkinetics' rights and regulatory filings for the Andara Oscillating Field Stimulator for the treatment of acute spinal cord injury. This is an investigational device designed to stimulate spinal cord repair and restore sensation.

We also acquire development and commercialization rights to certain derivatives of the pharmacological agent for 4-aminopyridine that may be useful in the treatment of essential and peripheral nervous system injury and disease.

The addition of the Andara OFS neurostimulation platform to our product pipeline has the potential to diversify our business and help us become a leading neurotechnology company. The device is presently under review by the FDA under Humanitarian Device Exemption, or HDE, for the treatment of acute complete spinal cord injuries. These injuries affect about 4,000 people annually in the United States.

If approved by the FDA, we expect the Andara OFS device to have a selling price of between $25,000 and $50,000. Our expectation is that we would develop a small specialty sales team focused on the 100 largest spinal cord injury centers in the US.

The FDA has posed additional questions as part of the HDE review. We are presently reviewing these questions and performing additional and statistical analyses and scientific reviews. We hope to respond to the FDA on this matter by the end of the second quarter or early third quarter.

Although we expect that the FDA will review and provide an initial response within several months of our submission, we cannot provide further detail on timelines at this juncture. We also plan to explore international regulatory pathways for Andara including in Europe.

One of the assets we acquired was a right to several proprietary 4-aminopyridine derivatives developed and studied by scientists at the Purdue University Center for Paralysis Research and their collaborators at other universities. 4-AP has demonstrated efficacy in enhancing neuroconduction after spinal cord trauma as well as a demyelinating disease such as multiple sclerosis.

However, the clinical use of 4-AP may be limited by side effects. The proprietary 4-AP derivatives included in this acquisition may address some of these limitations. We have identified our lead compounds, and we are in the process of conducting safety testing required for an IND submission in a Phase 1 clinical trial.

Based on preclinical work, we believe that our lead compound has clinical potential for treating chronic spinal cord injury. Our current plan is to develop our lead compound through Phase 1. We are evaluating clinical targets, development strategies, and partnership opportunities beyond Phase 1. In developing this business opportunity, we believe that we can create shareholder value.

To summarize, then, our business strategy has five elements, as follows -- first, we are actively supporting the over 4,500 US physician practices using the NC-stat system. We will continue to work to bring clarity to reimbursement for nerve conduction studies using the NC-stat through our efforts with the AMA and by discussions with federal and commercial insurers. Through this, we hope to stabilize our core NC-stat business and then work towards growing this business again.

Second, we are seeking alternative US markets for the NC-stat that are not dependent on third-party reimbursement such as in industrial screening and wellness applications. Through this, we also hope to stabilize our core NC-stat business.

We are developing the market for ADVANCE and eventually for our proprietary pipeline products including ASCEND and Andara. We market these products to specialists primarily consisting of neurologists, physical medicine and rehabilitation physicians, neurosurgeons, orthopedic and hand surgeons, and pain medicine physicians. We believe that these markets in the aggregate are of a significant size and voice for expansion.

Fourth, we are expanding our international presence for the NC-stat, ADVANCE and our pipeline products. We view international sales as a significant growth opportunity.

And, finally, we are planning to develop the 4-AP derivatives we in-license from Cyberkinetics.

With that, we conclude our comments, and we'd be happy to take questions at this point.

(Operator Instructions) Bill Plovanic, Canaccord Adams.

A simple question here -- so -- in your discussions on the CPT code, do you have the recommendation of the society on this? Or what's going on? And then when do we expect to hear whether that code will be issued or not?

So, Bill, the situation here is as follows -- we noted that several months ago that a Category 1 code for nerve conduction studies using preconfigured electrode arrays, which, essentially, is a definition of NC-stat testing, was created by the AMA at its CPT Editorial Panel with support from a variety of professional medical societies including family practice, endocrinology and, ultimately, it was a consensus position of many societies. It is our expectation that that code will be published as a Category 1 CPT code January of 2010 and available as a result.

Currently, what is happening, as it would with any new CPT code, it's going through the pricing process, if you will. First it has to go through the [ROC], then it's sent over to CMS for finalization, and then CMS would publish the reimbursement for that code in the 2010 fee schedule, and that code would typically be published -- the fee schedule would be published in the fall.

Of '09 or of '10?

Of '09 -- for use January 1st of 2010.

Okay. And then I think you mentioned that what is the current ASP you are receiving, and then what do you think that the dollar amount you would get would be?

Our ASP presently is around $33, $34 and thereabouts, and it's been that way for a very long time. It really hasn't changed very much because we don't do any significant amount of discounting.

We don't have anything specific to say about what the ASP would be in the future because we don't know what the reimbursement rates are going to be.

However, our expectation is that a procedure that is performed primarily in a primary care/internal medicine environment would be benchmarked against other procedures in that environment and therefore would probably be lower than the current reimbursement. But in terms of how the business model will play out, I think that has to wait until we know the final code values and so forth.

(Operator Instructions) Juan Sanchez, Gruber McBaine.

It's Ladenburg. Hi, Shai, how are you?

Good, Juan, how are you?

Hi, Juan.

I have a question about cash. I mean, it seems that you didn't burn too much money this quarter when it comes to your operations. So I just want to get an estimate at the level of revenues that you had to generate in order to not to burn cash and what are your expectations for this year? And a second question is what's the cost, what's the price to customers for the ADVANCE system nowadays?

I'll let Joe take the first question.

Juan, the breakeven quarterly on a cash basis would be somewhere between $8 million and $9 million per quarter in revenue.

Do you think you are going to be able to sustain -- I mean -- Q1 level of revenue or do you think they will continue to go down given the current environment out there?

Well, Juan, as you know, we don't give specific forward guidance, particularly in this market environment with all the uncertainty that we are facing. But, obviously, we've been able to, over the past couple of quarters, slow the decline in revenue, and obviously we're working very hard to try to find a floor and then rebuild the business from there. But whether we're at that point or not, we're not ready to make any kind of statement on that front.

The other question is about the price of the ADVANCE and whether or not you're selling biosensors with the ADVANCE or not?

It depends on the markets. The sales of biosensors with ADVANCE -- not all customers are using the -- I think you're referring to the nerve-specific electrodes -- because some of them are using other forms of electrodes that we sell or others might sell. So it's much more of a mixed bag. There is utilization of nerve-specific electrodes, but there are also accessories that they're using, and it varies from very few -- for two customers that use very few nerve-specific electrodes to those that use quite a few. So it's a wide range.

What's the price to customers for the ADVANCE?

The list price is $8,500 list for the full system, and our ASPs are, I think --

(inaudible) so about $6,000.

Around $6,000 right now as an ASP.

The full system includes the EMG components or not?

That's correct.

And the last question is when it comes to the Navigator system, have you received comments back from the FDA that gives you some sort of optimism that the product will be approved or not?

I think you're using old terminology, but I think you're referring to ASCEND.

I am.

And we have received -- again, it's actually two concurrent 510(k)s. We have received feedback on one of them, which is -- was not troubling, by any means. So I don't think there is a fundamental issue here with gaining 510(k) approval or clearance, I should say. There may yet be a number of questions that have to be answered and work involved in undertaking that. But it is our expectation that these are legitimate 510(k) products and should make their way through that process.

Ted Huber, Deerfield Management.

Guys, did you have any deferred revenue in the first quarter?

Not from -- not in shipment. We always have some deferred revenue that's based on just ongoing operations; has to do with service agreements and things like that, but nothing -- if you're referring to the $500,000 back in the fourth quarter, there was nothing that was not shipped, no.

So if you back out the $500,000 from the fourth quarter, you actually had $100,000 sequential increase in revenues. Is that the right way to think about the business as you are adding in ADVANCE and the international distributors -- that you've stopped the erosion? Is that the right way to think about this?

Well, I think your calcuation is correct. If you look at them on a net revenue basis, there was a modest increase. There was also a modest increase in testing -- 3% from quarter-to-quarter. It's a one-quarter trend, so I think one has to be very careful given all the uncertainty that surrounds the general health care business market as well as our overall environment with respect to reimbursement. But it's obviously a better trend than we've had in the past.

Fair enough. And when you look at a couple of the pieces that might be growing -- first on ADVANCE. I know you've added features to that throughout Q1. Do you feel you are at a point where the salesforce can really go out and sell a full-on product into these specialist areas? And so, if that's the case, given the focused salesforce, do you expect ADVANCE to grow sequentially?

The answer to your question is we have added a lot of functionality, and we got to the point where we felt it was justified to spill out the salesforce and, in fact, now we have a dedicated -- as we announced in March, we will split the salesforce into three channels -- physician office, neuro interventional and neurology and physical medicine. So we've already implemented the split of neurology and physical medicine and, obviously, they are focused exclusively on selling ADVANCE into that highly specialized market. So we wouldn't have done that if we didn't feel that the product was ready to be successful in that market.

So I think the answer to your question is it is -- the product is at that point. It can benefit from some additional improvements and functionality. These are almost exclusively of the software variety and just a number of features that we're hearing the market would like. But we have split that out, and then we expect to split into the remaining two channels by the beginning of next quarter. So this is all -- yes, we do feel the product can stand on its own.

As far as sequential growth, we clearly expect ADVANCE to be a growing product and would be disappointed if we weren't seeing that kind of sequential growth, but, obviously, again, there's a lot of overall factors and a lot of sluggishness in the capital equipment purchasing market and credit markets that make some of these things a little bit difficult right now. But, otherwise, yes, I mean, we definitely view it as a growing business and should be able to demonstrate that.

And now with new sales leadership in place, could you envision adding to your distribution footprint with either distributors or other vehicles that don't really increase your fixed cost too much?

I absolutely think we'll look at that, and once Walter is up to speed -- he has a lot of experience using multiple-channel approaches and definitely looking at other ways to distribute the product currently. Obviously, internationally, that's our -- really, our only approach, but domestically there may be ways to do that -- to increase our access by using those alternative approaches -- so, yes, absolutely.

That being said, we definitely believe that the core selling effort has to be with a direct salesforce for a product like this.

All right. And then, Shai, on the international side, I don't recall the list that you gave last quarter, but I don't remember it being nearly as extensive -- the different countries you covered. Can you give us a sense of what you've added in the last quarter and do you -- what kind of stocking orders or the timing of getting these guys up and running -- what can you do to help us understand that?

Last quarter -- frankly, I don't have the exact quarter-to-quarter list. I know we -- several of these are new. I think there are a couple of issues. One is -- I mean, the stocking orders are relatively small. The only market that we have an ongoing business with recurring revenue is in the UK, and that was probably 80% of international revenue. So there we actually have a reasonable business that's growing, that has recurring revenue, a base of customers. These other countries, we really added either late fourth quarter or during the first quarter, and we just were in Europe -- I think it was in April, or it was in late March, for training. I think it was actually in April.

So we just -- it's one thing to get distributors on board; then you've got to get everybody together to train them. We also have identified a number of, again, software features that would be beneficial in the European markets. Some of these are, say, international markets, and these are things sometimes as simple as, you know, they have 50 hertz versus 60 hertz line frequencies, and so forth, and there are different kinds of signal interference, and just some little things that just have to be addressed, and we're just trying to knock those off and really get some momentum in this markets. We do feel, based on what we've been able to do in the UK, that there is significant potential here.

We are very enthusiastic about China and Japan. Characteristics of those markets are very intriguing for different reasons, but we are working through the rather lengthy registration processes in both and hope to have those completed by the end of the year, and then we'll be putting a lot of energy into both markets.

Again, one of the reasons that we've been a little bit slow on this is we haven't really had the opportunity to focus on it, and one of Walt's areas of expertise and focus, once he gets up to speed on the US and domestic operations, will be to put a lot of energy into international.

Great. Joe, I lost some of the detail on some of the one-offs that occurred in the quarter. Can you comment on of this $1.2 million net loss -- what of that is really kind of operational that would be a good go-forward type number at this revenue level?

It is all operational. There were one-offs in this quarter. All the one-offs I was reading were actually from the fourth quarter and the first quarter a year ago.

Okay, I wanted to confirm that. And then so what would the cash number be when you back out stock and depreciation out of that $1.2 million?

What would the cash --?

Well, yes, some of that $1.2 million are noncash expenses, right?

Oh, I see. Yes, you're right, yes. Okay. So it's closer to, say, $600,000 when you take out the stock-based compensation and the depreciation and amortization, things like that -- the noncash items.

So -- you indicated you would need to be at $8 million to $9 million revenue to break even. I guess I don't understand.

Yes, that was based on the $1.2 million loss.

Oh, okay. So cash -- I mean, a 70% gross margin -- dumb math, it seems like if you added a $1 million in revenue, you'd be awful close to cash breakeven. Is that fair?

Yes, that's fair.

(Operator Instructions)

Well, then, thank you very much. We appreciate your participating in this conference call and look forward to keeping you updated as we move through the year. Thank you and have a good day.