The accompanying notes are an integral part of these interim financial statements.

 

NeuroMetrix, Inc.

Statements of Changes in Stockholders' Equity

(Unaudited)

The accompanying notes are an integral part of these interim financial statements.

NeuroMetrix, Inc.

Statements of Cash Flows

(Unaudited)

 

The accompanying notes are an integral part of these interim financial statements.

 

NeuroMetrix, Inc.

Notes to Unaudited Financial Statements

March 31, 20192020

Our Business-An Overview

 

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. The Company has sufferedreported recurring losses from operations and negative cash flows from operating activities. At March 31, 2019,2020, the Company had an accumulated deficit of $189.0$195.4 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 $7.2$2.8 million as of March 31, 2019.2020. The Company believes that these resources future GSK collaboration milestone payments, and the cash to be generated from future product sales will be sufficient to meet its projected operating requirements through 2019.into the first quarter of 2021. Accordingly, the Company maywill need to raise additional funds to support its operating and capital needs in 2020.the first quarter of 2021 and beyond. 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, including related to the COVID-19 pandemic, and the uncertainty of future revenues from new products; (b) the effect of the COVID-19 pandemic on the Company's ability to obtain parts and materials from the Company's suppliers while continuing to staff critical production and fulfillment functions; (c) changes the Company may make to the business that affect ongoing operating expenses; (c)(d) changes the Company may make in its business strategy; (d)(e) regulatory developments affecting the Company’s existing products; (e)(f) changes the Company may make in its research and development spending plans; (f) delays in the anticipated timing of achievement of GSK milestones;and (g) the final outcome of the Federal Trade Commission civil investigative demand enforcement action involving Quell; and (h) other items affecting the Company’s forecasted level of expenditures and use of cash resources. The Company may attempt 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.

Unaudited Interim Financial Statements

The accompanying unaudited balance sheet as of March 31, 2019,2020, unaudited statements of operations, changes in stockholders' equity and cash flows for the quarters ended March 31, 20192020 and 2018, unaudited statements of changes in stockholders' equity for the three months ended March 31, 2019 and 2018 and the unaudited statements of cash flows for the three months ended March 31, 2019 and 2018 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, 20182019 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 three months ended March 31, 20192020 are not necessarily indicative of the results that may be expected for the year ending December 31, 20192020 or any other period. These financial statements and notes should be read in conjunction with the financial statements for the year ended December 31, 20182019 included in the Company’s Annual Report on Form 10-K, as filed with the Securities and Exchange Commission, or the SEC, on January 24, 201928, 2020 (File No. 001-33351), or the Company’s 20182019 Form 10-K.

 

Revenues

Revenues include product sales, net of estimated returns. Revenue is measured as the amount of consideration the Company expects to receive in exchange for product transferred. Revenue is recognized when contractual performance obligations have been satisfied and control of the product has been transferred to the customer. In most cases, the Company has a single product delivery performance obligation. Accrued product returns are estimated based on historical data and evaluation of current information.

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$70,000 as of March 31, 20192020 and December 31, 2018.2019.

 

Two customers accounted for 32% and36% of total revenues in the quarter ended March 31, 2020. Two customers accounted for 32% of total revenues in the quartersquarter ended March 31, 2019 and 2018, respectively. Two2019. Three customers accounted for 44%62% and 45%two customers accounted for 42% of accounts receivable as of March 31, 20192020 and December 31, 2018,2019, respectively.

Collaboration income

Collaboration income is recognized within Other income when contractual performance obligations, outside the ordinary activities of the Company, have been satisfied and control has been transferred to a collaboration partner. Collaboration income for each performance obligation is based on the fair value of such performance obligation relative to the total fair value of all performance obligations multiplied by the overall transaction price. A deferred collaboration income liability is recorded when payments are received prior to satisfaction of performance obligations. A collaboration receivable is recorded when amounts are owed to the Company under the collaboration agreements and related support services. The Company recognized Collaboration income net of costs, within Other income in the Statement of Operations of $5,734,849zero and $4,755,705,$5,734,849, for the quarters ended March 31, 20192020 and 2018,2019, respectively.

Stock-based Compensation

Total compensation cost related to non-vested awards not yet recognized at March 31, 20192020 was $208,741.$408,144. The total compensation costs are expected to be recognized over a weighted-average period of 1.80.8 years.

Use of Estimates

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.

 

For the quarters ended March 31, 20192020 and 2018,2019, the Company had no components of other comprehensive income (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 income (loss) per common share because their effect was anti-dilutive for each of the periods presented: 

Inventories consist of the following: 

 

 

In June 2018, the Company extended theThe Company's lease on its Woburn, Massachusetts manufacturing facilities (the “Woburn Lease”) extends through September 2025. The Woburn Lease has2025 with a monthly base rent of $13,918$13,846 and a 5-year extension option. In September 2014, the Company entered into a 7-year operatingThe Company's lease agreement with one 5-year extension option foron its corporate office and product development activities in Waltham, Massachusetts (the “Waltham Lease”). The term of the Waltham Lease commenced onfacilities, now inactive and offered for sublet, extends through February 20, 2015 and includes fixed payment obligations that escalate over the initial lease term. Average2022 with an average monthly base rent underof $41,074 and a 5-year extension option. At March 31, 2020, the Company recorded an impairment reserve of $487,000 that reduced the right of use asset for Waltham lease is $41,074.idle facility costs.

Total recorded rent expense was $166,024$166,904 and $156,703,$166,024, for the quarters ended March 31, 20192020 and 2018,2019, respectively. The Company records rent expense on its facility leases on a straight-line basis over the lease term. Weighted average remaining operating lease term was 3.4 years as of March 31, 2020.

Research and development expense in the first quarter of 20192020 decreased by 33.2%37.6% from the same period in the prior year due to co-fundinga decrease of certain Quell development projects under the GSK Collaboration.personnel related costs of $0.3 million.

 

Sales and marketing expense in the first quarter of 2019 declined2020 decreased by 19.1%79.1% from the same period in the prior year due to thea $1.2 million reduction of advertisement promotion during the quarter and corresponding drop in Quell advertising spending and a $0.1 million reduction in trade show spending. In addition, personnel related costs decreased by $0.8 million. This was partially offset by increased marketing consulting fees of $0.3$0.2 million.

General and administrative expense declinedin the first quarter of 2020 decreased by 10.2%22.7% from the same period in the prior year primarily due to a decreasereduction of $0.2 million in stock-based compensation expense.

Collaboration income includes the benefit ofdevelopment milestones achieved and funded by GSK under ourthe Quell Collaboration.

Other income primarily includes interest income.

Liquidity and Capital Resources

Our principal source of liquidity is cash and cash equivalents of $7.2$2.8 million at March 31, 2019.2020. Funding for our operations largely depends on revenues from the sale of our commercial products for chronic pain and neuropathy, and on achievement of milestones under the GSK collaboration.products. 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 towardand the achievementcontinuing effects of the GSK milestones wouldCOVID-19 pandemic could have an adverse effect on our liquidity and cash.

 

During the three months ended March 31, 2019,2020, our cash and cash equivalents increaseddecreased by $0.4$0.3 million reflecting $0.4$0.8 million cash provided byused in operating activities, which includedpartially offset by the net proceeds of $4.0$0.5 million provided by the GSK collaboration.from common stock sales under our ATM program.

 

In managing working capital, we focus on two important financial measurements:

Days sales outstanding (DSO) reflect customer payment terms which vary from payment on order to 60 days from invoice date. InventoryDSO was reduced during the three months ended March 31, 2020 due to increased collection and lower receivables with terms. During the quarter ended March 31, 2019, receivables included extended terms for a large DPNCheck customer that has since been collected.

The inventory turnover rate of 2.1 in Q1the first quarter of 2020 reflected lower Quell sales. The inventory turnover rate during the quarter ended March 31, 2019 of 3.5 times includes the effecteffects of a $0.7 million inventory provision recorded in thethat quarter. Excluding this provision, ourthe turnover rate declined towas 2.2 during the quarter ended March 31, 2019. This reflected lower Quell sales and increased inventory on hand.

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

During the three months ended March 31, 2019,2020, our operating activities excluding collaboration income consumed $3.5$0.8 million of cash offset by $4.0$0.5 million in net proceeds from sales of collaboration income.common stock.

 

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 March 31, 2019,2020, we did not have any off-balance sheet financing arrangements.

Recent Accounting Pronouncements

 

Cautionary Note Regarding Forward-Looking Statements

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, the effect of the COVID-19 pandemic on our operating capabilities, 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; 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; the final outcome of the FTC civil investigative demand enforcement action; 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” 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.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

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.

Item 4. Controls and Procedures

 

(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 March 31, 2019,2020, 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.

 

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

While we are not currently a party to any material legal proceedings, other than the FTC matter noted below, 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.

Item 1A. Risk Factors