Inventories consist of the following: 

Accrued expenses and compensation consist of the following:

 

In August 2014,June 2018, the Company entered into a 5-year operatingextended the lease agreement with one 5-year extension option foron its Woburn, Massachusetts manufacturing and order fulfillment facilities in Woburn, Massachusetts (the “Woburn Lease”). The through September 2025. As of September 2018, the Woburn Lease commenced December 15, 2014 and haswill have a monthly base rent of $7,598.$13,285 and a 5-year extension option. In September 2014, the Company entered into a 7-year operating lease agreement with one 5-year extension option for its principal corporate office and product development activitieslocation in Waltham, Massachusetts (the “Waltham Lease”). The term of the Waltham Lease commenced on February 20, 2015 and includes fixed payment obligations that escalate over the initial lease term. Average monthly base rent under the 7-year lease is approximately $37,792. These payment obligations were accrued and recognized over the term of occupancy. Under the Waltham Lease, the landlord was responsible for making certain improvements to the leased space at an agreed upon cost to the landlord. Total costs for the landlord improvements exceeded the agreed upon cost by $275,961. The landlord billed that excess cost to the Company as additional rent which has been included in other long term assets at June 30, 2017. This additional rent has been included in the net calculation of lease payments, so that rent expense is recognized on a straight-line basis over the term of occupancy.$37,788.

The Company is party to a Loan and Security Agreement, as amended (the “Credit Facility”), with a bank. As of June 30, 2017,2018, the Credit Facility permitted the Company to borrow up to $2.5 million on a revolving basis. The Credit Facility was amended most recently on December 29, 2016in January 2018, and expires onin January 15, 2018.2019. Amounts borrowed under the Credit Facility will bear interest equal to the prime rate plus 0.5%. Any borrowings under the Credit Facility will be collateralized by the Company’s cash, accounts receivable, inventory, and equipment. The Credit Facility includes traditional lending and reporting covenants. These include certain financial covenants applicable to liquidity that are to be maintained by the Company. As of June 30, 2017,2018, the Company was in compliance with these covenants and had not borrowed any funds under the Credit Facility. However, $507,381$226,731 of the amount under the Credit Facility is restricted to support letters of credit issued in favor of the Company's facilities landlords and a materials component supplier.landlords. Consequently, the amount available for borrowing under the Credit Facility as of June 30, 20172018 was approximately $2.0$2.3 million.

Preferred stock and convertible preferred stock consist of the following:

During the six months ended June 30, 2018, 7,927.05 shares of the common stockSeries F Preferred Stock were not affected by the Reverse Stock Split. The Company’sconverted into a total of 3,014,087 shares outstanding immediately prior to the split totaled 10,147,721, which were subsequently adjusted to 1,268,440 shares outstanding. Share, per share, and stock option amounts for all periods presented within the financial statements contained in the Quarterly Report on Form 10-Q, including the December 31, 2016 Balance Sheet amounts for common stock and additional paid-in capital, have been retroactively adjusted to reflect the Reverse Stock Split.

 

NeuroMetrix is a commercial stage, innovation driven healthcare company combining bioelectrical and digital medicine to address chronic health conditions including chronic pain, sleep disorders, and diabetes. Our business is fully integrated with in-house capabilities spanning product development, manufacturing, regulatory affairs and compliance, sales and marketing, and customer support. We derive revenues from the sale of medical devices and after-market consumable products and accessories. Our products are sold in the United States and selected overseas markets, and are cleared by the U.S. Food and Drug Administration, or FDA, and regulators in foreign jurisdictions where appropriate. We have two principal product lines:

 

 

Our core expertise in biomedical engineering has been refined over nearly two decades of designing, building and marketing medical devices that stimulate nerves and analyze nerve response for diagnostic and therapeutic purposes. We created the market for point-of-care nerve testing and were first to market with sophisticated, wearable technology for management of chronic pain. We also have an experienced management team and Board of Directors.

 

Chronic pain is a significant public health problem. It is defined by the National Institutes of Health as any pain lasting more than 12 weeks, in contrast to acute pain, which is a normal bodily response to injury or trauma. Chronic pain conditions include painful diabetic neuropathy, or PDN, arthritis, fibromyalgia, sciatica, musculoskeletal pain, cancer pain and many others. Chronic pain may be triggered by an injury or there may be an ongoing cause such as disease or illness. There may also be no clear cause. Pain signals continue to be transmitted in the nervous system over extended periods of time often leading to other health problems. These can include fatigue, sleep disturbance, decreased appetite, and mood changes which cause difficulty in carrying out important activities and contributing to disability and despair. In general, chronic pain cannot be cured. Treatment of chronic pain is focused on reducing pain and improving function. The goal is effective pain management.

 

Chronic pain is widespread. It affects over 100 million adults in the United States and more than 1.5 billion people worldwide. The global market for pain management drugs and devices alone was valued at $35 billion in 2012. The estimated incremental impact of chronic pain on health care costs in the United States is over $250 billion per year and lost productivity is estimated to exceed $300 billion per year. Estimated out-of-pocket spending in the United States on chronic pain is $20 billion per year.

 

The most common approach to chronic pain is pain medication. This includes over-the-counter drugs (such as Advil and Motrin), and prescription drugs including anti-convulsants (such as Lyrica and Neurontin) and anti-depressants (such as Cymbalta and Elavil). Topical creams may also be used (such as Zostrix and Bengay). With severe pain, narcotic pain medications may be prescribed (such as codeine, fentanyl, morphine, and oxycodone). The approach to treatment is individualized, drug combinations may be employed, and the results are often hit or miss. Side effects and the potential for addiction are real and the risks are substantial.

 

Reflecting the difficulty in treating chronic pain, we believe that inadequate relief leads 25% to 50% of pain sufferers to turn to the over-the-counter market for supplements or alternatives to prescription pain medications. These include non-prescription medications, topical creams, lotions, electrical stimulators, dietary products, braces, sleeves, pads and other items. In total they account for over $4 billion in annual spending in the United States on pain relief products.

 

High frequency nerve stimulation is an established treatment for chronic pain supported by numerous clinical studies demonstrating efficacy. In simplified outline, the mechanism of action involves intensive nerve stimulation to activate the body’s central pain inhibition system resulting in widespread analgesia, or pain relief. The nerve stimulation activates brainstem

 

 

DPNCheck is our diagnostic test for peripheral neuropathies, was made commercially available in the fourth quarter of 2011.neuropathies. DPNCheck revenues for fiscal years 20162017 and 20152016 were approximately $2.5$3.1 million, and $2.3$2.5 million, respectively. DPNCheck revenues for the six months ended June 30, 20172018 were approximately $1.6$2.4 million. Our U.S. sales efforts focus on Medicare Advantage providers who assume financial responsibility and the associated risks for the health care costs of their patients. We believe that DPNCheck presents an attractive clinical case with early detection of neuropathy allowing for earlier clinical intervention to help mitigate the effects of neuropathy on both patient quality of life and cost of care. Also, the diagnosis and documentation of neuropathy provided by DPNCheck helps clarify the patient health profile which, in turn, may have a direct, positive effect on the Medicare Advantage premium received by the provider. We believe that attractive opportunities exist outside the United States, includingDPNCheck is marketed in Japan where we launched DPNCheck withby our distribution partner Omron Healthcare in the third quarter of 2014;Fukuda Denshi; in China where we received regulatory approval and launched DPNCheck with our distribution partner Omron Healthcare in the fourth quarter of 2016;by OMRON Medical (Beijing) Ltd.; and in Mexico where our distributorby Scienta Farma received regulatory approval and initiated sales in the fourth quarter of 2015.Farma.

Our products consist of a medical device used in conjunction with a consumable electrode or biosensor. Other accessories and consumables are also available to customers. Our goal for these productscommercial objective is to build an installed base of active customer accounts and distributors that regularly order aftermarket products to meet their needs. We successfully implemented this model when we started our business with the NC-stat system and applied it to subsequent product generations including ADVANCE. Our recentmore recently developed products, Quell and DPNCheck, conform to this model. Other products in our development pipeline are based on the device plus consumables business model.

 

The following table summarizes our revenues:

 

 

Revenues include sales from Quell, DPNCheck and our legacy neurodiagnostic products. Quell was made commercially available during the second quarter of 2015 and sales of DPNCheck launched in the fourth quarter of 2011. During the second quarter of 20172018 total revenues increaseddecreased by approximately $1.7$0.6 million, or 62.8%13.0%, from the second quarter of 2016.

 

 

The following table summarizes our cost of revenues and gross profit:

 

Our cost of revenues increaseddecreased approximately $0.7 million, or 26.1% to approximately $2.6$2.0 million in the second quarter of 2017 as compared2018 from approximately $2.6 million in the comparable period in 2017. The gross profit rate increased to approximately $1.6 million48.0% in the second quarter of 2016. Gross profit decreased to2018 from 38.8% in the second quarterprior year. This reflected strengthening Quell margins due to favorable product mix as well as heavier weighting of 2017 from 40.6% in the second quarter of 2016. Gross profit reflects the mix effects of lower average selling prices for the expanding Quell retail and TV business. As we build our installed base of Quell users, we expect accelerating growth in electrode sales at higher margins. Also, we expect continued growth in Quell sales to improve manufacturing cost absorption, contributing to future margin gains.DPNCheck revenue.

The following table summarizes our operating expenses:

Research and development expenses for the quarters ended June 30, 20172018 and 20162017 were approximately $0.9$1.6 million and $1.1$0.9 million, respectively. The decreaseincrease of approximately $0.3$0.7 million relates primarily toencompasses a $0.4 million decrease in Quell development spending partially offset by a $0.1$0.5 million increase in clinical study spending.development spending on the next generation of Quell as well as costs to support the GSK Collaboration.

 

Sales and marketing expenses increased towere approximately $2.2 million and $2.9 million for the quarterquarters ended June 30, 2018 and 2017, from approximately $2.8 million for the quarter ended June 30, 2016.respectively. The $0.1 million increase in spending reflected an additional $0.2a decrease of approximately $0.7 million, or 37.1%, in television advertising, on-line advertising and paid search.promotional spending.

 

General and administrative expenses ofwere flat at approximately $1.2 million for the quarters ended June 30, 2018 and 2017. The small decrease of less than $0.1 million reflected a decrease in professional services expenses.

In January 2018, we entered into a collaboration (the "Collaboration") with GlaxoSmithKline ("GSK") in which we sold to GSK rights to our Quell technology for markets outside of the United States, including certain patents and related assets, and agreed to complete development milestones for the next-generation Quell technology. We retained exclusive ownership of Quell technology in the U.S. market. GSK agreed to payments totaling up to $26.5 million, of which $5.0 million was paid at closing and the balance due upon achievement of defined development and commercialization milestones. In addition, the parties agreed to jointly fund future Quell technology development during an initial period starting in 2019. Upon attainment of a development milestone, the Company recorded Collaboration income of $3.7 million, net of costs, for the quarter ended June 30, 2017 were flat compared to the quarter ended June 30, 2016.2018.

Other income includes interest income and warrant liability fair value of warrant liability

 

 

The following table summarizes our revenues:

 

 

 

 

The following table summarizes our cost of revenues and gross profit:

 

Our cost of revenues increased toof approximately $4.9 million decreased $0.4 million, or 8.1%, from $5.3 million in the comparable period in 2017. The gross profit rate increased to 43.6% in the first six months ended June 30, 2017 as compared to approximately $3.1 million in the six months ended June 30, 2016. Gross profit increased toof 2018 from 38.1% in the six months ended June 30, 2017 from 37.9% in the comparativefirst six months of 2016. The expansion in gross2017. Gross profit reflects growingrates improved for both Quell sales, particularly higher margin electrodes, offset by increased sales weighting toward retail channels which carry tighter gross margins. As we build our installed base of Quell users, we expect accelerating growth in electrode sales at higher margins. Also, we expect continued growth in Quell sales to improve manufacturing cost absorption, contributing to future margin gains.and DPNCheck.

The following table summarizes our operating expenses:

Research and development expenses for the six months ended June 30, 20172018 and 20162017 were approximately $1.8$2.9 million and $2.3$1.8 million, respectively. The decreaseincrease of approximately $0.5$1.1 million relates primarily to a $0.7encompasses an $0.8 million decreaseincrease in Quell development spending partially offset byand a $0.1$0.2 million increase in clinical study spending.personnel costs.

 

Sales and marketing expenses increased towere approximately $4.7 million and $5.5 million for the six months ended June 30, 2018 and 2017, from $5.2 million for the comparative six months of 2016. The approximately $0.3 million increase in spending reflected an additional $0.6 million in television advertising, on-line advertising and paid search partially offset by sales and marketing headcount-related cost reductionsrespectively, reflecting a decrease of approximately $0.2$0.8 million, from the comparative six months of 2016 as compared to the six months ended June 30, 2017.or 23.0%, in promotional spending.

 

General and administrative expenses ofwere approximately $3.0 million and $2.7 million for the six months ended June 30, 2018 and 2017, were flat comparedrespectively. The increase of approximately $0.3 million reflects additional spending of $0.2 million in professional services expense and $0.2 million in stock-based compensation.

In January 2018, we entered the Collaboration with GSK in which we sold to GSK rights to our Quell technology for markets outside of the comparativeUnited States, including certain patents and related assets, and agreed to complete development milestones for the next-generation Quell technology. We retained exclusive ownership of Quell technology in the U.S. market. GSK agreed to payments totaling up to $26.5 million of which $5.0 million was paid at closing and the balance due upon achievement of defined development and commercialization milestones. In addition, the parties agreed to jointly fund future Quell technology development during an initial period starting in 2019. Upon sale of rights to our Quell technology for markets outside of the United States and attainment of a development milestone, the Company recorded Collaboration income of $8.5 million, net of costs, for the six months of 2016.ended June 30, 2018.

Other income includes interest income and warrant liability fair value of warrant liability

 

Our principal source of liquidity is our cash and cash equivalents. Asresources which, as of June 30, 2017, cash and cash equivalents2018, totaled $3.6$7.1 million. Our ability to generate revenue to fundFunding for our operations largely depends on the success of our wearable therapeuticcommercial products for chronic pain and our diagnostic products for neuropathy.neuropathy, and on milestone achievement under the GSK Collaboration. A low level of market interest in Quell or DPNCheck, an accelerateda decline in our neurodiagnostics consumables sales, or unanticipated increases in our operating costs, or unanticipated setbacks toward the achievement of the GSK milestones would have an adverse effect on our liquidity and cash generated from operations.cash. The following table sets forth information relating to our cash and cash equivalents:

During the first quarter of 2017, we closed a securities purchase agreement relatingThe Company is party to a $7 million private offering (the "Q1 2017 Offering") providing for the issuance of (i) 7,000 shares of Series E convertible preferred stock at a price of $1,000 per share, and (ii) warrants to purchase 1,250,000 shares of our common stock, at an exercise price of $5.60 per share. After underwriting discounts, commission and expenses, net proceeds of the Q1 2017 Offering were $6.3 million.

During the six months ended June 30, 2017, our2018, cash and cash equivalents decreasedincreased by $0.3$3.1 million reflecting $6.6 million ofproceeds the GSK Collaboration funding offset by net cash usage for ongoingfrom business operations partially offset by net proceeds of $6.3 million from the Q1 2017 Offering.operations.

 

 CustomerDays sales outstanding reflect customer payment terms generallywhich vary from payment-on-order for Quell e-commerce salespayment on order to 3060 days from invoice date. The lower inventory turnover rate in the quarter ended June 30, 2018 reflects the combined effects of reduced Quell shipments and inventory build in anticipation of the new Quell product launch.

The following sets forth information relating to sources and uses of our cash: 

 

We held cash and cash equivalents of $3.6$7.1 million as of June 30, 2017.2018. We believe that these resources, as well as $7.0 million in gross proceeds from the Q3 2017 Offering, including the first tranche of $3.5 million which closed on July 12, 2017, and a second tranche of $3.5 million which is subject to shareholder approval and expected to close in September, andtogether with the cash to be generated from expected product sales and the potential achievement of development milestones under the Collaboration will be sufficient to meet our projected operating requirements into the second quarter of 2018.2019. We continue to face significant challenges and uncertainties and, as a result, our available capital resources may be consumed more rapidly than currently expected due to (a) decreases in sales of our products; (b) delays in achieving Quell development milestones and related payments from GSK; (c) changes we may make to the business that affect ongoing operating expenses; (c)(d) changes we may make in our business strategy; (d)(e) regulatory developments or inquiries affecting our existing products; (e)products and products under development; (f) changes we may make in our research and development spending plans; and (f)(g) other items affecting our forecasted level of expenditures and use of cash resources. Accordingly, we willmay need to raise additional funds to support our operating and capital needs in the second quarter of 20182019 and beyond. These factors raise substantial doubt about our ability to continue as a going concern.concern for the one year period from the date of issuance of these financial statements. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. We willmay attempt to obtain additional funding through public or private financing, collaborative arrangements with strategic partners, or through additional credit lines or other debt financing sources. However, we may not be able to secure such financing in a timely manner or on favorable terms, if at all. We filed a shelf registration statement on Form S-3 with the U.S. Securities and Exchange Commission (the "SEC") covering shares of our common stock and other securities for sale, giving us the opportunity to raise funding when needed or otherwise considered appropriate at prices and on terms to be determined at the time of any such offerings. However, pursuant to applicable SEC rules, we only have theour ability to sell shares under the shelf registration statement, during any 12-month period, inis limited to an amount less than or equal to one-third of the aggregate market value of our common stock held by non-affiliates. If we raise additional funds by issuing equity or debt securities, either through the sale of securities pursuant to a registration statement or by other means, our existing stockholders may experience dilution, and the new equity or debt securities may have rights, preferences and privileges senior to those of our existing stockholders. If we raise additional funds through collaboration, licensing or other similar arrangements, it may be necessary to relinquish valuable rights to our potential products or proprietary technologies, or grant licenses on terms that are not favorable to us. Without additional funds, we may be forced to delay, scale back or eliminate some of our sales and marketing efforts, research and development activities, or other operations and potentially delay product development in an effort to provide sufficient funds to continue our operations. If any of these events occurs, our ability to achieve our development and commercialization goals would be adversely affected.

As of June 30, 2017,2018, we did not have any off-balance sheet financing arrangements.

 

See Note 6, Commitments and Contingencies, of our Notes to Unaudited Financial Statements for information regarding commitments and contingencies.

 

The statements contained in this Quarterly Report on Form 10-Q, including under the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other sections of this Quarterly Report, include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, including, without limitation, statements regarding our or our management’s expectations, hopes, beliefs, intentions or strategies regarding the future, such as our estimates regarding anticipated operating losses, future revenues and projected expenses; our expectations for commercializationregarding achievement of our Quell product outsidemilestones under the United States;GSK Collaboration; our future liquidity and our expectations regarding our needs for and ability to raise additional capital; our ability to manage our expenses effectively and raise the funds needed to continue our business;effectively; our belief that there are unmet needs for the management of chronic pain and in the diagnosis and treatment of diabetic neuropathy; our expectations surrounding Quell and DPNCheck; our expected timing and our plans to develop and commercialize our products; our ability to meet our proposed timelines for the commercial availability of our products; our ability to obtain and maintain regulatory approval of our existing products and any future products we may develop; regulatory and legislative developments in the United States and foreign countries; the performance of our third-party manufacturers; our ability to obtain and maintain intellectual property protection for our products; the successful development of our sales and marketing capabilities; the size and growth of the potential markets for our products and our ability to serve those markets; our plan to make Quell more broadly available through retail distribution; our belief that there are significant opportunities to market Quell outside the United States; our estimate of our customer returns of our products; the rate and degree of market acceptance of any future products; our reliance on key scientific management or personnel; the payment and reimbursement methods used by private or government third party payers; and other factors discussed elsewhere in this Quarterly Report on Form 10-Q. The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” “plan” and similar expressions may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking. The forward-looking statements contained in this quarterly report are based on our current expectations and beliefs concerning future developments and their potential effects on us. There can be no assurance that future developments affecting us will be those that we have anticipated. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond our control) or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements. These risks and uncertainties include, but are not limited to, those factors described in the section titled “Risk Factors” below and in our Annual Report on Form 10-K. Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary from those projected in these forward-looking statements. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.

 

 

We do not use derivative financial instruments in our investment portfolio and have no foreign exchange contracts. Our financial instruments consist of cash and cash equivalents. We consider investments that, when purchased, have a remaining maturity of 90 days or less to be cash equivalents. The primary objectives of our investment strategy are to preserve principal, maintain proper liquidity to meet operating needs, and maximize yields. To minimize our exposure to an adverse shift in interest rates, we invest mainly in cash equivalents and short-term investments with a maturity of twelve months or less and maintain an average maturity of twelve months or less. We do not believe that a notional or hypothetical 10% change in interest rate percentages would have a material impact on the fair value of our investment portfolio or our interest income.

(a) Evaluation of Disclosure Controls and Procedures. Our principal executive officer and principal financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of June 30, 2017,2018, have concluded that, based on such evaluation, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

 

While we are not currently a party to any material legal proceedings, we could become subject to legal proceedings in the ordinary course of business. We do not expect any such potential items to have a significant impact on our financial position.

There have been no material changes in the risk factors described in “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2016.2017.

None.

Not applicable.

See the Exhibit Index on the page immediately preceding the exhibits for a list of exhibits filed as part of this quarterly report, which Exhibit Index is incorporated herein by this reference.

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.