The accompanying financial statements have been prepared on a basis which assumes that the Company will continue as a going concern and which contemplates the realization of assets and satisfaction of liabilities and commitments in the normal course of business. In recent years, theThe Company has suffered recurring losses from operations and negative cash flows from operating activities. At June 30, 2018,2019, the Company had an accumulated deficit of $189.3$192.3 million. These factors raise substantial doubt about the Company’s ability to continue as a going 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. The Company held cash and cash equivalents of $7.1$5.0 million as of June 30, 2018.2019. The Company believes that these resources, together withfuture GSK collaboration milestone payments, and the cash to be generated from expectedfuture product sales and the potential achievement of additional development milestones under the Collaboration with GSK, will be sufficient to meet its projected operating requirements intothrough 2019. Accordingly, the Company will need to raise additional funds to support its operating and capital needs in 2020. The Company continues to face significant challenges and uncertainties and, as a result, the Company’s available capital resources may be consumed more rapidly than currently expected due to (a) decreases in sales of the Company’s products and the uncertainty of future revenues;revenues from new products; (b) delays in achieving Quell development milestones and related payments from GSK; (c) changes the Company may make to the business that affect ongoing operating expenses; (d)(c) changes the Company may make in its business strategy; (e)(d) regulatory developments or inquiries affecting the Company’s existing products and products under development; (f)products; (e) changes the Company may make in its research and development spending plans; (f) delays in the anticipated timing of achievement of GSK milestones; (g) the final outcome of the FTC civil investigative demand enforcement action involving Quell; and (g)(h) other items affecting the Company’s forecasted level of expenditures and use of cash resources. Accordingly, theThe Company may need to raise additional funds to support its operating and capital needs in 2019 and beyond. These factors raise substantial doubt about the Company’s ability to continue as a going 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. The Company intendsattempt to obtain additional funding through achievement of milestones under the GSK collaboration, public or private financing, collaborative arrangements with strategic partners, or through additional credit lines or other debt financing sources to increase the funds available to fund operations. However, the Company may not be able to secure such financingfunding in a timely manner or on favorable terms, if at all. Furthermore, if the Company issues equity or debt securities to raise additional funds, its existing stockholders may experience dilution, and the new equity or debt securities may have rights, preferences and privileges senior to those of the Company’s existing stockholders. If the Company raises additional funds through collaboration, licensing or other similar arrangements, it may be necessary to relinquish valuable rights to its potential products or proprietary technologies, or grant licenses on terms that are not favorable to the Company. Without additional funds, the Company may be forced to delay, scale back or eliminate some of its 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 its operations. If any of these events occurs, the Company’s ability to achieve its development and commercialization goals would be adversely affected.

The accompanying unaudited balance sheet as of June 30, 2018,2019, unaudited statements of operations for the quarters and six months ended June 30, 2019 and 2018, unaudited statements of changes in stockholders' equity for the six months ended June 30, 2019 and 20172018 and the unaudited statements of cash flows for the six months ended June 30, 20182019 and 20172018 have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. The accompanying balance sheet as of December 31, 20172018 has been derived from audited financial statements prepared at that date, but does not include all disclosures required by accounting principles generally accepted in the United States of America. In the opinion of management, the financial statements include all normal and recurring adjustments considered necessary for a fair presentation of the Company’s financial position and operating results. Operating results for the quarter and six months ended June 30, 20182019 are not necessarily indicative of the results that may be expected for the year ending December 31, 20182019 or any other period. These financial statements and notes should be read in conjunction with the financial statements for the year ended December 31, 20172018 included in the Company’s Annual Report on Form 10-K, as filed with the Securities and Exchange Commission, or the SEC, on February 8, 2018January 24, 2019 (File No. 001-33351), or the Company’s 20172018 Form 10-K.

 

Accounts receivable are recorded net of the allowance for doubtful accounts which represents the Company’s best estimate of credit losses. Allowance for doubtful accounts was $25,000 as of June 30, 20182019 and December 31, 2017.2018.

 

Two customers accounted for 31% and one customer accounted for 20% of total revenues in the quarters and six months ended June 30, 2019, respectively. Two customers accounted for 24% and 29% of total revenue forrevenues in the quarterquarters and six months ended June 30, 2018, respectively. One customerThree customers accounted for 16% of total revenue62% and two customers accounted for the quarter and six months ended June 30, 2017. Customers that individually account for greater than 10%45% of accounts receivables totaled 64% and 66% of accounts receivablesreceivable as of June 30, 20182019 and December 31, 2017,2018, respectively.

Total compensation cost related to non-vested awards not yet recognized at June 30, 20182019 was $298,650.$139,588. The total compensation costs are expected to be recognized over a weighted-average period of 2.31.3 years.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make significant estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during reporting periods. Actual results could differ from those estimates.

Certain prior period amounts have been reclassified to conform to the current period presentation.

 

The following table summarizes the effects of adopting ASU 2016-02 on the Company's balance sheet as of December 31, 2018, and for interim periods therein. The Company is in the process2018:

For the quarters and six months ended June 30, 20182019 and 2017,2018, the Company had no components of other comprehensive income or loss(loss) other than net income (loss) itself.

Basic and dilutive net income (loss) per common share were as follows:

Shares underlying the following potentially dilutive weighted average number of common stock equivalents were excluded from the calculation of diluted net (loss) income (loss) per common share because their effect was anti-dilutive for each of the periods presented: 

Inventories consist of the following: 

Accrued expenses and compensation consist of the following:

 

In June 2018, the Company extended the lease on its Woburn, Massachusetts manufacturing facilities (the “Woburn Lease”) through September 2025. As of September 2018, theThe Woburn Lease will havehas a monthly base rent of $13,285$13,918 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 locationactivities 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-yearWaltham lease is $37,788.$41,074.

The following tables present information about the Company’s assets and liabilities that are measured at fair value on a recurring basis for the periods presented and indicates the fair value hierarchy of the valuation techniques it utilized to determine such fair value. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities. Fair values determined by Level 2 inputs utilize data points that are observable such as quoted prices, interest rates, and yield curves. Fair values determined by Level 3 inputs are unobservable data points for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability.

 

The Company is party to a Loan and Security Agreement, as amended (the “Credit Facility”), with a bank. As of June 30, 2018,2019, the Credit Facility permitted the Company to borrow up to $2.5 million on a revolving basis. The Credit Facility was amended most recently in January 2018,June 2019 and expires in JanuarySeptember 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, 2018,2019, the Company was in compliance with these covenants and had not borrowed any funds under the Credit Facility. However, $226,731 of the amount under the Credit Facility is restricted to support letters of credit issued in favor of the Company's landlords. Consequently, the amount available for borrowing under the Credit Facility as of June 30, 20182019 was approximately $2.3 million.

Preferred stock and convertible preferred stock consist of the following: 

InDuring the six months ended June 30, 2018, the Company issued shares of fully vested common stock in partial settlement of outstanding management incentive compensation. The 2018 issuance totaledinvolved 214,791 shares with aan aggregate value of $294,264, reflecting the $1.37 closing price of the Company’s common stock as reported on the Nasdaq Capital Market on April 12, 2018.

During the six months ended June 30, 2018, 3,739.3 shares of the Series E Preferred Stock were converted into a total of 1,421,787 shares of Common Stock. As of June 30, 2018, 3,260.70 shares of Series E Preferred Stock remained outstanding.

 

NeuroMetrix is a commercial stage, innovation driven healthcare company combining bioelectricalneurostimulation 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:

In 2018, the Company entered into a collaboration with GlaxoSmithKline ("GSK"). The GSK collaboration established a framework for fiscal years 2017the joint development of the next generation of Quell, recently launched in the United States in September 2018, and 2016 were approximately $3.1to be launched by GSK internationally, and the assignment of areas of marketing responsibility. The initial term of the GSK collaboration runs through 2020. Through June 30, 2019, GSK has paid the Company $19.5 million in milestone payments. GSK has committed to future performance milestone payments totaling up to $5.5 million and $2.5 million, respectively. DPNCheck revenues for the six months ended June 30, 2018 were approximately $2.4 million. Our U.S. sales efforts focus on Medicare Advantage providers who assume financial responsibility and the associated risks for the health careagreed to co-fund Quell development 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,starting in turn, may have a direct, positive effect on the Medicare Advantage premium received by the provider. DPNCheck is marketed in Japan by our distribution partner Fukuda Denshi; in China by OMRON Medical (Beijing) Ltd.; and in Mexico by Scienta Farma.2019.

 

 

Revenues include sales from Quell, DPNCheck and our legacy neurodiagnostic products. During the second quarter of 20182019 total revenues decreased by approximately $0.6$1.4 million, or 13.0%37.2%, from the second quarter of 2017.2018. Quell revenues of approximately $2.1$0.8 million a decline of approximately $1.0were the largest contributor to the decrease in total revenue. Quell revenues were $1.2 million, or 31.9% from60.6%, below the comparable 20172018 period reflected our decisionprimarily due to defer certainthe reduction of advertising spending, which was reduced by 37.1% from the comparable 2017 quarter. We intend to utilize this deferred spending to support the product launchpromotion and curtailment of the next generation of Quellmost retail and direct response television distribution channels. DPNCheck revenues were $1.3 million in both the second halfquarters of 2019 and 2018. DPNCheck revenues of approximately $1.3 million increased by approximately $0.5 million, or 57.9% from the same period in 2017. Our legacy products contributed approximately$0.3 million and $0.4 million inof revenue for the second quarter of 2018, as compared to approximately $0.5 million in the second quarterquarters of 2017.

 

 

Our cost of revenues decreased approximately $0.7 million, or 26.1% to approximately $2.0 milliongross margin was (33.5)% in the second quarter of 2018 from approximately $2.6 million in the comparable period in 2017. The gross profit rate increased to2019 versus 48.0% in the second quarter of 2018 from 38.8%same period in the prior year. This reflected strengtheningThe negative gross margin in 2019 results from a charge of $1.9 million to write down Quell margins dueinventory to favorable product mix as well as heavier weightingnet realizable value. Excluding this charge the gross profit margin was 47.0% and 48.0% for the second quarters of higher margin DPNCheck revenue.2019 and 2018, respectively.

Research and development expenses forexpense in the quarters ended June 30, 2018 and 2017 were approximately $1.6 million and $0.9 million, respectively. The increasesecond quarter of approximately $0.7 million encompasses a2019 decreased by 36.0% from the same period in the prior year due to GSK's co-funding $0.5 million increase in certain development spending oncosts and $0.1 million decrease in Quell outside engineering costs, partially offset by $0.2 million in employee severance and relocation costs associated with the next generation of Quell as well as costs to support the GSK Collaboration.business restructuring.

 

Sales and marketing expenses were approximately $2.2expense in the second quarter of 2019 decreased by 37.6% from the same period in the prior year due to a reduction in advertising and promotion spending by $0.6 million. In addition, personnel costs decreased by $0.3 million, partially offset by $0.1 million in employee severance and $2.9 million forrelocation costs associated with the quarters ended June 30, 2018 and 2017, respectively. The spending reflected a decrease of approximately $0.7 million, or 37.1%, in promotional spending.business restructuring.

 

General and administrative expenses were flat at approximately $1.2expense in the second quarter of 2019 increased by 33.7% from the same period in the prior year primarily due to an increase of $0.3 million for the quarters ended June 30, 2018in outside professional service costs and 2017. The small decrease of less than $0.1 million reflected a decrease in professional services expenses.employee severance and relocation costs associated with the business restructuring.

In January 2018, we entered into a collaboration (the "Collaboration") with GlaxoSmithKline ("GSK") in which we sold toCollaboration income includes milestones achieved and funded by GSK rights tounder 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, 2018.

Other income primarily includes interest income and warrant liability fair value changes.income.

 

 

 

 

Research and development expenses forexpense in the six months ended June 30, 20182019 decreased by 34.7% from the same period in the prior year due to GSK's co-funding of $1.0 million in certain development costs and 2017 were approximately $2.9a $0.1 million and $1.8 million, respectively. The increase of approximately $1.1 million encompasses an $0.8 million increasedecrease in Quell development spending and aoutside engineering costs, partially offset by $0.2 million increase in personnel costs.employee severance and relocation costs associated with the business restructuring.

 

Sales and marketing expenses were approximately $4.7 million and $5.5 million forexpense in the six months ended June 30, 2018 and 2017, respectively,2019 decreased by 27.8% from the same period in the prior year reflecting a decrease of approximately $0.8reduction in advertising and promotion spending by $1.7 million. This was partially offset by a $0.2 million or 23.0%,increase in promotional spending.marketing consulting fees and $0.1 million in employee severance and relocation costs associated with the business restructuring.

 

General and administrative expenses were approximately $3.0 million and $2.7 million forexpense in the six months ended June 30, 2018 and 2017, respectively. The2019 increased by 7.0% from the same period in the prior year primarily due to a $0.4 million increase of approximately $0.3 million reflects additional spending of $0.2 million in professional services expensecosts and $0.1 million in employee severance and relocation costs associated with the business restructuring, partially offset by a $0.2 million decrease in stock-based compensation.compensation expense.

In January 2018, we entered the Collaboration withincome includes milestones achieved and funded by GSK in which we sold to GSK rights tounder 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 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 ended June 30, 2018.

Other income primarily includes interest income and warrant liability fair value changes. The change in fair value of warrant liability was zero and $0.2 million for the six months ended June 30, 2018 and 2017, respectively.

Our principal source of liquidity is our cash resources which, asand cash equivalents of $5.0 million at June 30, 2018, totaled $7.1 million.2019. Funding for our operations largely depends on revenues from the successsale of our commercial products for chronic pain and neuropathy, and on milestone achievement of milestones under the GSK Collaboration.collaboration. A low level of market interest in Quell or DPNCheck, a decline in our consumables sales, 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. The following table sets forth information relating to our cash resources: