Item 1. Financial Statements
NeuroMetrix, Inc.
Balance Sheets
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018 (a)
|
|
(Unaudited)
|
|
|
Assets
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
7,200,795
|
|
|
$
|
6,780,429
|
|
Accounts receivable, net
|
972,352
|
|
|
1,082,957
|
|
Inventories
|
2,494,268
|
|
|
2,861,864
|
|
Prepaid expenses and other current assets
|
962,727
|
|
|
860,915
|
|
Total current assets
|
11,630,142
|
|
|
11,586,165
|
|
|
|
|
|
Fixed assets, net
|
375,561
|
|
|
407,339
|
|
Right to use asset
|
1,870,979
|
|
|
1,968,062
|
|
Other long-term assets
|
30,081
|
|
|
30,314
|
|
Total assets
|
$
|
13,906,763
|
|
|
$
|
13,991,880
|
|
|
|
|
|
Liabilities and Stockholders’ Equity
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
$
|
557,861
|
|
|
$
|
1,298,084
|
|
Accrued expenses and compensation
|
3,036,301
|
|
|
2,236,633
|
|
Accrued product returns
|
726,892
|
|
|
1,101,658
|
|
Deferred collaboration income
|
181,818
|
|
|
1,956,522
|
|
Total current liabilities
|
4,502,872
|
|
|
6,592,897
|
|
|
|
|
|
Lease obligation, net of current portion
|
1,211,480
|
|
|
1,301,172
|
|
Total liabilities
|
5,714,352
|
|
|
7,894,069
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
Preferred stock
|
—
|
|
|
—
|
|
Convertible preferred stock
|
15
|
|
|
18
|
|
Common stock, $0.0001 par value; 100,000,000 shares authorized at March 31, 2019 and December 31, 2018; 8,310,463 and 7,380,463 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively
|
831
|
|
|
738
|
|
Additional paid-in capital
|
197,157,649
|
|
|
197,113,646
|
|
Accumulated deficit
|
(188,966,084
|
)
|
|
(191,016,591
|
)
|
Total stockholders’ equity
|
8,192,411
|
|
|
6,097,811
|
|
Total liabilities and stockholders’ equity
|
$
|
13,906,763
|
|
|
$
|
13,991,880
|
|
(a) Amounts adjusted due to adoption of lease accounting standard (Note 1)
The accompanying notes are an integral part of these interim financial statements.
NeuroMetrix, Inc.
Statements of Operations
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Quarters Ended March 31,
|
|
2019
|
|
2018
|
|
|
|
|
Revenues
|
$
|
3,122,935
|
|
|
$
|
4,942,990
|
|
|
|
|
|
Cost of revenues
|
2,324,231
|
|
|
2,955,260
|
|
|
|
|
|
Gross profit
|
798,704
|
|
|
1,987,730
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
Research and development
|
855,081
|
|
|
1,279,564
|
|
Sales and marketing
|
2,025,288
|
|
|
2,504,741
|
|
General and administrative
|
1,619,490
|
|
|
1,804,143
|
|
|
|
|
|
Total operating expenses
|
4,499,859
|
|
|
5,588,448
|
|
|
|
|
|
Loss from operations
|
(3,701,155
|
)
|
|
(3,600,718
|
)
|
|
|
|
|
Other income:
|
|
|
|
Collaboration income
|
5,734,849
|
|
|
4,755,705
|
|
Other income
|
16,813
|
|
|
11,265
|
|
|
|
|
|
Total other income
|
5,751,662
|
|
|
4,766,970
|
|
|
|
|
|
Net income
|
$
|
2,050,507
|
|
|
$
|
1,166,252
|
|
|
|
|
|
Net income per common share applicable to common stockholders,
|
|
|
|
Basic
|
$
|
0.26
|
|
|
$
|
0.18
|
|
Diluted
|
$
|
0.15
|
|
|
$
|
0.08
|
|
The accompanying notes are an integral part of these interim financial statements.
NeuroMetrix, Inc.
Statements of Changes in Stockholders' Equity
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series B – F
Convertible Preferred Stock
|
|
Common
Stock
|
|
Additional
Paid-In
Capital
|
|
Accumulated
Deficit
|
|
Total
|
|
Number of
Shares
|
|
Amount
|
|
Number of
Shares
|
|
Amount
|
|
|
|
Balance at December 31, 2017
|
29,479.98
|
|
|
$
|
30
|
|
|
2,706,066
|
|
|
$
|
271
|
|
|
$
|
196,355,142
|
|
|
$
|
(191,338,054
|
)
|
|
$
|
5,017,389
|
|
Stock-based compensation expense
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
341,026
|
|
|
—
|
|
|
341,026
|
|
Issuance of common stock upon conversion of preferred stock
|
(11,666.35
|
)
|
|
(12
|
)
|
|
4,435,874
|
|
|
443
|
|
|
(431
|
)
|
|
—
|
|
|
—
|
|
Effect of adoption of ASC606
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
297,858
|
|
|
297,858
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,166,252
|
|
|
1,166,252
|
|
Balance at March 31, 2018
|
17,813.63
|
|
|
$
|
18
|
|
|
7,141,940
|
|
|
$
|
714
|
|
|
$
|
196,695,736
|
|
|
$
|
(189,873,944
|
)
|
|
$
|
6,822,524
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series B – F
Convertible Preferred Stock
|
|
Common
Stock
|
|
Additional
Paid-In
Capital
|
|
Accumulated
Deficit
|
|
Total
|
|
Number of
Shares
|
|
Amount
|
|
Number of
Shares
|
|
Amount
|
|
|
|
Balance at December 31, 2018
|
17,813.63
|
|
|
$
|
18
|
|
|
7,380,463
|
|
|
$
|
738
|
|
|
$
|
197,113,646
|
|
|
$
|
(191,016,591
|
)
|
|
$
|
6,097,811
|
|
Stock-based compensation expense
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
44,093
|
|
|
—
|
|
|
44,093
|
|
Issuance of common stock upon conversion of preferred stock
|
(2,445.90
|
)
|
|
(3
|
)
|
|
930,000
|
|
|
93
|
|
|
(90
|
)
|
|
—
|
|
|
—
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,050,507
|
|
|
2,050,507
|
|
Balance at March 31, 2019
|
15,367.73
|
|
|
$
|
15
|
|
|
8,310,463
|
|
|
$
|
831
|
|
|
$
|
197,157,649
|
|
|
$
|
(188,966,084
|
)
|
|
$
|
8,192,411
|
|
The accompanying notes are an integral part of these interim financial statements.
NeuroMetrix, Inc.
Statements of Cash Flows
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2019
|
|
2018
|
Cash flows from operating activities:
|
|
|
|
|
|
Net income
|
$
|
2,050,507
|
|
|
$
|
1,166,252
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
Depreciation
|
31,778
|
|
|
55,444
|
|
Stock-based compensation
|
44,093
|
|
|
341,026
|
|
Inventory provision
|
700,000
|
|
|
—
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
Accounts receivable
|
110,605
|
|
|
814,108
|
|
Inventories
|
(182,404
|
)
|
|
283,909
|
|
Prepaid expenses and other current and long-term assets
|
(101,579
|
)
|
|
343,177
|
|
Accounts payable
|
(740,223
|
)
|
|
(369,665
|
)
|
Accrued expenses and compensation
|
657,059
|
|
|
(868
|
)
|
Accrued product returns
|
(374,766
|
)
|
|
(553,439
|
)
|
Deferred collaboration income
|
(1,774,704
|
)
|
|
—
|
|
Net cash provided by operating activities
|
420,366
|
|
|
2,079,944
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
Purchases of fixed assets
|
—
|
|
|
(25,833
|
)
|
Net cash used in investing activities
|
—
|
|
|
(25,833
|
)
|
|
|
|
|
Net increase in cash and cash equivalents
|
420,366
|
|
|
2,054,111
|
|
Cash and cash equivalents, beginning of period
|
6,780,429
|
|
|
4,043,681
|
|
Cash and cash equivalents, end of period
|
$
|
7,200,795
|
|
|
$
|
6,097,792
|
|
The accompanying notes are an integral part of these interim financial statements.
NeuroMetrix, Inc.
Notes to Unaudited Financial Statements
March 31, 2019
|
|
1.
|
Business and Basis of Presentation
|
Our Business-An Overview
NeuroMetrix, Inc., or the Company, is a commercial stage, innovation driven healthcare company combining neurostimulation and digital medicine to address chronic health conditions including chronic pain, sleep disorders, and diabetes. The Company has two primary products. Quell is an over-the-counter wearable therapeutic device for chronic pain. DPNCheck® is a rapid point-of-care test for diabetic neuropathy which is the most common long-term complication of Type 2 diabetes.
In 2018, the Company entered into a collaboration with GlaxoSmithKline ("GSK"). The GSK collaboration established a framework for the joint development of the next generation of Quell, recently launched in the United States in September 2018, and the assignment of areas of marketing responsibility. The initial term of the GSK collaboration runs through 2020. Through
March 31, 2019
, GSK has paid the Company
$18.7 million
, committed to future performance milestone payments totaling up to
$6.2 million
, and agreed to co-fund Quell development costs starting in 2019.
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 suffered recurring losses from operations and negative cash flows from operating activities. At
March 31, 2019
, the Company had an accumulated deficit of
$189.0 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 million
as of
March 31, 2019
. 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. Accordingly, the Company may 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 from new products; (b) changes the Company may make to the business that affect ongoing operating expenses; (c) changes the Company may make in its business strategy; (d) regulatory developments affecting the Company’s existing 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 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 financing 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
, unaudited statements of operations for the
quarters
ended
March 31, 2019
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, 2018
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, 2019
are not necessarily indicative of the results that may be expected for the year ending
December 31, 2019
or any other period. These financial statements and notes should be read in conjunction with the financial statements for the year ended
December 31, 2018
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, 2019 (File No. 001-33351), or the Company’s 2018 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
as of
March 31, 2019
and
December 31, 2018
.
Two customers accounted for
32%
and
32%
of total revenues in the quarters ended
March 31, 2019
and 2018, respectively. Two customers accounted for
44%
and
45%
of accounts receivable as of
March 31, 2019
and
December 31, 2018
, 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. The Company recognized Collaboration income net of costs, within Other income in the Statement of Operations of
$5,734,849
and
$4,755,705
, for the quarters ended
March 31, 2019
and 2018, respectively.
Stock-based Compensation
Total compensation cost related to non-vested awards not yet recognized at
March 31, 2019
was
$208,741
. The total compensation costs are expected to be recognized over a weighted-average period of
1.8
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.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current period presentation.
Recent Accounting Pronouncements
In February 2016, the FASB issued Accounting Standards Update No. 2016-02,
Leases (Topic 842)
(“ASU 2016-02”). ASU 2016-02 required that lessees recognize virtually all of their leases on the balance sheet, by recording a right-of-use asset and lease liability. The Company adopted ASU 2016-02, using the modified retrospective method, upon its effective date of January 1, 2019. The impact of adoption was an increase to long-term assets and total liabilities of approximately $1.9 million as of January 1, 2019.
The following table summarizes the effects of adopting ASU 2016-02 on the Company's balance sheet as of March 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
Adjustments
|
|
Amounts under prior GAAP
|
|
|
|
|
|
|
Prepaid expenses and other current assets
|
$
|
962,727
|
|
|
$
|
44,852
|
|
|
$
|
1,007,579
|
|
Total current assets
|
$
|
11,630,142
|
|
|
$
|
44,852
|
|
|
$
|
11,674,994
|
|
Right of use asset
|
$
|
1,870,979
|
|
|
$
|
(1,870,979
|
)
|
|
$
|
—
|
|
Other long-term assets
|
$
|
30,081
|
|
|
$
|
34,363
|
|
|
$
|
64,444
|
|
Total assets
|
$
|
13,906,763
|
|
|
$
|
(1,791,764
|
)
|
|
$
|
12,114,999
|
|
Accrued expenses
|
$
|
3,036,301
|
|
|
$
|
(580,284
|
)
|
|
$
|
2,456,017
|
|
Total current liabilities
|
$
|
4,502,872
|
|
|
$
|
(580,284
|
)
|
|
$
|
3,922,588
|
|
Lease obligation - net of current portion
|
$
|
1,211,480
|
|
|
$
|
(1,211,480
|
)
|
|
$
|
—
|
|
Total liabilities
|
$
|
5,714,352
|
|
|
$
|
(1,791,764
|
)
|
|
$
|
3,922,588
|
|
The following table summarizes the effects of adopting ASU 2016-02 on the Company's balance sheet as of December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
Adjustments
|
|
Amounts under prior GAAP
|
|
|
|
|
|
|
Prepaid expenses and other current assets
|
$
|
860,915
|
|
|
$
|
44,852
|
|
|
$
|
905,767
|
|
Total current assets
|
$
|
11,586,165
|
|
|
$
|
44,852
|
|
|
$
|
11,631,017
|
|
Right of use asset
|
$
|
1,968,062
|
|
|
$
|
(1,968,062
|
)
|
|
$
|
—
|
|
Other long-term assets
|
$
|
30,314
|
|
|
$
|
44,578
|
|
|
$
|
74,892
|
|
Total assets
|
$
|
13,991,880
|
|
|
$
|
(1,878,632
|
)
|
|
$
|
12,113,248
|
|
Accrued expenses
|
$
|
2,236,633
|
|
|
$
|
(577,460
|
)
|
|
$
|
1,659,173
|
|
Total current liabilities
|
$
|
6,592,897
|
|
|
$
|
(577,460
|
)
|
|
$
|
6,015,437
|
|
Lease obligation - net of current portion
|
$
|
1,301,172
|
|
|
$
|
(1,301,172
|
)
|
|
$
|
—
|
|
Total liabilities
|
$
|
7,894,069
|
|
|
$
|
(1,878,632
|
)
|
|
$
|
6,015,437
|
|
Adoption of ASU 2016-02 had no impact on the Company's statements of operations, statements of changes in stockholders' equity and statements of cash flows.
For the
quarters
ended
March 31, 2019
and
2018
, the Company had no components of other comprehensive income other than net income itself.
|
|
3.
|
Net Income Per Common Share
|
Basic and dilutive net income per common share were as follows:
|
|
|
|
|
|
|
|
|
|
Quarters Ended March 31,
|
|
2019
|
|
2018
|
Net income applicable to common stockholders
|
$
|
2,050,507
|
|
|
$
|
1,166,252
|
|
|
|
|
|
Weighted average number of common shares outstanding, basic
|
7,741,463
|
|
|
6,345,719
|
|
Dilutive convertible preferred stock
|
6,222,746
|
|
|
7,380,895
|
|
Weighted average number of common shares outstanding, dilutive
|
13,964,209
|
|
|
13,726,614
|
|
|
|
|
|
Net income per common share applicable to common stockholders, basic
|
$
|
0.26
|
|
|
$
|
0.18
|
|
Net income per common share applicable to common stockholders, diluted
|
$
|
0.15
|
|
|
$
|
0.08
|
|
Shares underlying the following potentially dilutive weighted average number of common stock equivalents were excluded from the calculation of diluted net income per common share because their effect was anti-dilutive for each of the periods presented:
|
|
|
|
|
|
|
|
Quarters Ended March 31,
|
|
2019
|
|
2018
|
Options
|
488,494
|
|
|
336,817
|
|
Warrants
|
459,375
|
|
|
459,375
|
|
Total
|
947,869
|
|
|
796,192
|
|
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
Purchased components
|
$
|
1,710,368
|
|
|
$
|
1,767,674
|
|
Finished goods
|
783,900
|
|
|
1,094,190
|
|
|
$
|
2,494,268
|
|
|
$
|
2,861,864
|
|
The Company recorded an inventory related provision of $
700,000
in the quarter ended March 31, 2019 to adjust Quell Classic inventory to net realizable value. The provision was assigned in the amounts of
$335,000
and
$165,000
within purchased components and finished goods, respectively. The remaining $
200,000
related to components located at contract manufacturers was recorded in accrued expenses.
|
|
5.
|
Accrued Expenses and Compensation
|
Accrued expenses and compensation consist of the following:
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
Professional services
|
$
|
863,000
|
|
|
$
|
391,000
|
|
Lease obligation, current portion
|
580,284
|
|
|
577,460
|
|
Compensation
|
467,522
|
|
|
213,756
|
|
Technology fees
|
450,000
|
|
|
450,000
|
|
Contract manufacturer
|
320,000
|
|
|
160,000
|
|
Warranty reserve
|
116,000
|
|
|
129,837
|
|
Advertising and promotion
|
61,200
|
|
|
171,000
|
|
Other
|
178,295
|
|
|
143,580
|
|
|
$
|
3,036,301
|
|
|
$
|
2,236,633
|
|
Operating Leases
In June 2018, the Company extended the lease on its Woburn, Massachusetts manufacturing facilities (the “Woburn Lease”) through September 2025. The Woburn Lease has a monthly base rent of
$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 corporate office and product development activities 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 Waltham lease is
$41,074
.
Future minimum lease payments under non-cancellable operating leases as of March 31, 2019 are as follows:
|
|
|
|
|
|
2019
|
|
$
|
473,413
|
|
2020
|
|
641,193
|
|
2021
|
|
653,164
|
|
2022
|
|
247,347
|
|
2023
|
|
165,785
|
|
2024
|
|
165,785
|
|
2025
|
|
117,431
|
|
Total minimum lease payments
|
|
$
|
2,464,118
|
|
|
|
|
Weighted-average discount rate, 14.6%
|
|
$
|
672,354
|
|
Lease obligation, current portion
|
|
580,284
|
|
Lease obligation, net of current portion
|
|
1,211,480
|
|
|
|
$
|
2,464,118
|
|
Total recorded rent expense was
$166,024
and
$156,703
, for the quarters ended March 31, 2019 and 2018, respectively. The Company records rent expense on its facility leases on a straight-line basis over the lease term.
|
|
7.
|
Fair Value Measurements
|
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at March 31, 2019 Using
|
|
March 31, 2019
|
|
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
$
|
4,966,621
|
|
|
$
|
4,966,621
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Total
|
$
|
4,966,621
|
|
|
$
|
4,966,621
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2018 Using
|
|
December 31, 2018
|
|
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
$
|
4,284,928
|
|
|
$
|
4,284,928
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Total
|
$
|
4,284,928
|
|
|
$
|
4,284,928
|
|
|
$
|
—
|
|
|
$
|
—
|
|
The Company is party to a Loan and Security Agreement, as amended (the “Credit Facility”), with a bank. As of
March 31, 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 March 2019 and expires in
June 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
March 31, 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
March 31, 2019
was approximately
$2.3 million
.
Preferred stock and convertible preferred stock consist of the following:
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
Preferred stock, $0.001 par value; 5,000,000 shares authorized at March 31, 2019 and December 31, 2018; no shares issued and outstanding at March 31, 2019 and December 31, 2018
|
$
|
—
|
|
|
$
|
—
|
|
Series B convertible preferred stock, $0.001 par value; 147,000 shares designated at March 31, 2019 and December 31, 2018; 200 shares issued and outstanding at March 31, 2019 and December 31, 2018
|
$
|
1
|
|
|
$
|
1
|
|
Series D convertible preferred stock, $0.001 par value; 21,300 shares designated at March 31, 2019 and December 31, 2018; 13,526.93 and 14,052.93 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively
|
$
|
13
|
|
|
$
|
14
|
|
Series E convertible preferred stock, $0.001 par value; 7,000 shares designated at March 31, 2019 and December 31, 2018; 1,340.80 and 3,260.70 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively
|
$
|
1
|
|
|
$
|
3
|
|
2019 equity activity
During the
three
months ended
March 31, 2019
,
526.00
shares of the Series D Preferred Stock were converted into a total of
200,000
shares of Common Stock and
1,919.90
shares of the Series E Preferred Stock were converted into a total of
730,000
shares of Common Stock.
2018 equity activity
During the
three
months ended
March 31, 2018
,
3,739.3
shares of the Series E Preferred Stock were converted into a total of
1,421,787
shares of Common Stock and
7,927.05
shares of the Series F Preferred Stock were converted into a total of
3,014,087
shares of Common Stock.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion of our financial condition and results of operations in conjunction with our financial statements and the accompanying notes to those financial statements included elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements that involve risks and uncertainties. For a description of factors that may cause our actual results to differ materially from those anticipated in these forward-looking statements, please refer to the below section of this Quarterly Report on Form 10-Q titled “Cautionary Note Regarding Forward-Looking Statements.” Unless the context otherwise requires, all references to “we”, “us”, the “Company”, or “NeuroMetrix” in this Quarterly Report on Form 10-Q refer to NeuroMetrix, Inc.
Overview
NeuroMetrix is a commercial stage, innovation driven healthcare company combining neurostimulation and digital medicine to address chronic health conditions including chronic pain, sleep disorders, and diabetes. 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 have an experienced management team and Board of Directors. Our business is fully integrated with in-house capabilities spanning product research and 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 select overseas markets and are cleared by the U.S. Food and Drug Administration (FDA) and regulators in foreign jurisdictions where appropriate. We have two principal product lines:
•
Wearable neurostimulation therapeutic devices
•
Point-of-care neuropathy diagnostic tests
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. This contrasts with acute pain which is a normal bodily response to injury or trauma. 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. In individuals suffering from chronic pain, 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 can contribute 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 affects over 100 million adults in the United States and more than 1.5 billion people worldwide. 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. The most common approach to chronic pain management is pain medication. This includes over-the-counter (OTC) internal and external analgesics as well as prescription pain medications, both non-opioid and opioid. 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. Increasingly, federal, state and private-payer restrictions are being imposed on prescription opioids as a response to those risks. Reflecting the complexity of chronic pain and the difficulty in treating it, we believe that inadequate relief leads 25% to 50% of pain sufferers to seek alternatives to prescription pain medications. These alternatives include nutritional supplements, acupuncture, chiropractic care, non-prescription analgesics, electrical stimulators, braces, sleeves, pads and other items. In total these pain relief products and services account for approximately $20 billion in annual spending in the United States.
Nerve stimulation is a well-established category of treatment for chronic pain. This treatment approach is available through implantable spinal cord stimulation requiring surgery with its attendant risks. Non-invasive approaches involving transcutaneous electrical nerve stimulation (TENS) have achieved limited efficacy in practice due to device limitations, ineffective dosing and low patient adherence. Our Quell wearable technology for chronic pain addresses these limitations and has resulted in quality of life improvements for a majority of chronic pain sufferers who have used the product, which we have determined through post-market analysis of user data submitted to us for research purposes via the Quell App, clinical studies, and user reviews.
Diabetes is a worldwide epidemic with an estimated affected population of over 400 million people. Within the United States there are over 30 million people with diabetes and another 80 million people with pre-diabetes. The annual direct cost of
treating diabetes in the United States exceeds $100 billion. Although there are dangerous acute manifestations of diabetes, the primary burden of the disease is in its long-term complications which include cardiovascular disease, nerve disease and resulting conditions such as foot ulcers which may require amputation, eye disease leading to blindness, and kidney failure. The most common long-term complication of diabetes affecting over 50% of the diabetic population is nerve disease or diabetic neuropathy. Diabetic peripheral neuropathy (DPN) is the primary trigger for diabetic foot ulcers which may progress to the point of requiring amputation. People with diabetes have a 15-25% lifetime risk of foot ulcers and approximately 15% of foot ulcers lead to amputation. Foot ulcers are the most expensive complication of diabetes with a typical cost of $5,000 to $50,000 per episode. In addition, between 16% and 26% of people with diabetes suffer from chronic pain in their feet and lower legs.
Early detection of DPN is important because there are no treatment options once the nerves have degenerated. Today’s diagnostic methods for DPN range from a simple monofilament test for lack of sensory perception in the feet to a nerve conduction study performed by a specialist. Our DPNCheck technology provides a rapid, low cost, quantitative test for peripheral nerve disease, including DPN. It addresses an important medical need and is particularly effective in mass screenings of populations that are likely susceptible to DPN. DPNCheck has been validated in numerous clinical studies.
In 2018, the Company entered into a collaboration with GlaxoSmithKline ("GSK"). The GSK collaboration established a framework for the joint development of the next generation of Quell, recently launched in the United States in September 2018, and to be launched by GSK internationally, and the assignment of areas of marketing responsibility. The initial term of the GSK collaboration runs through 2020. Through March 31, 2019, GSK has paid the Company $18.7 million in milestone payments GSK has committed to future performance milestone payments totaling up to $6.2 million, and agreed to co-fund Quell development costs starting in 2019.
Results of Operations
Comparison of Quarters Ended
March 31, 2019
and
2018
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended March 31,
|
|
|
|
2019
|
|
2018
|
|
Change
|
|
% Change
|
|
(in thousands)
|
|
|
Revenues
|
$
|
3,122.9
|
|
|
$
|
4,943.0
|
|
|
$
|
(1,820.1
|
)
|
|
(36.8
|
)%
|
Revenues include sales from Quell, DPNCheck and our legacy neurodiagnostic products. During the
first
quarter of
2019
total revenues decreased by
$1.8 million
, or
36.8%
, from the
first
quarter of
2018
. Quell revenues of
$1.6 million
were the largest contributor to total revenue. They were
$1.8 million
, or
52.6%
, below the comparable
2018
period primarily due to the reduction of advertising promotion and curtailment of most retail and direct response television distribution channels. DPNCheck revenues were
$1.2 million
in the
first
quarters of
2019
and
2018
. Our legacy products contributed
$0.3 million
of revenue in the
first
quarters of
2019
and
2018
.
Cost of Revenues and Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended March 31,
|
|
|
|
2019
|
|
2018
|
|
Change
|
|
% Change
|
|
(in thousands)
|
|
|
Cost of revenues
|
$
|
2,324.2
|
|
|
$
|
2,955.3
|
|
|
$
|
(631.1
|
)
|
|
(21.4
|
)%
|
|
|
|
|
|
|
|
|
Gross profit
|
$
|
798.7
|
|
|
$
|
1,987.7
|
|
|
$
|
(1,189.0
|
)
|
|
(59.8
|
)%
|
Our gross profit margin was
25.6%
in the
first
quarter of
2019
versus
40.2%
in the same period in the prior year. The lower gross profit margin in 2019 is due in part to a charge of $0.7 million to write down Quell Classic inventory to net realizable
value. Excluding this charge the gross profit margin for the first quarter of 2019 was 48% which reflects the higher margin benefit from Quell 2.0 as well as the increased share of the revenue from the DPNCheck business.
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended March 31,
|
|
|
|
2019
|
|
2018
|
|
Change
|
|
% Change
|
|
(in thousands)
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
$
|
855.1
|
|
|
$
|
1,279.6
|
|
|
$
|
(424.5
|
)
|
|
(33.2
|
)%
|
Sales and marketing
|
2,025.3
|
|
|
2,504.7
|
|
|
(479.4
|
)
|
|
(19.1
|
)%
|
General and administrative
|
1,619.5
|
|
|
1,804.1
|
|
|
(184.6
|
)
|
|
(10.2
|
)%
|
Total operating expenses
|
$
|
4,499.9
|
|
|
$
|
5,588.4
|
|
|
$
|
(1,088.5
|
)
|
|
(19.5
|
)%
|
Research and Development
Research and development expense in the
first
quarter of
2019
decreased by
33.2%
from the same period in the prior year due to co-funding of certain Quell development projects under the GSK Collaboration.
Sales and Marketing
Sales and marketing expense in the
first
quarter of
2019
declined by
19.1%
from the same period in the prior year due to the reduction of advertisement promotion during the quarter and corresponding drop in advertising spending by $0.8 million. This was partially offset by increased marketing consulting fees of $0.3 million.
General and Administrative
General and administrative expense declined by
10.2%
from the same period in the prior year primarily due to a decrease of $0.2 million in stock-based compensation expense.
Collaboration income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended March 31,
|
|
|
|
2019
|
|
2018
|
|
Change
|
|
% Change
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
Collaboration income
|
$
|
5,734.8
|
|
|
$
|
4,755.7
|
|
|
$
|
979.1
|
|
|
20.6
|
%
|
Collaboration income includes the benefit of milestones achieved and funded by GSK under our Quell Collaboration.
Other income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended March 31,
|
|
|
|
2019
|
|
2018
|
|
Change
|
|
% Change
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
$
|
16.8
|
|
|
$
|
11.3
|
|
|
$
|
5.5
|
|
|
48.7
|
%
|
Other income primarily includes interest income.
Liquidity and Capital Resources
Our principal source of liquidity is cash and cash equivalents of
$7.2 million
at
March 31, 2019
. Funding for our operations largely depends on revenues from the sale of our commercial products for chronic pain and neuropathy, and on achievement of milestones under the GSK collaboration. A low level of market interest in Quell or DPNCheck, a decline in our consumables sales, unanticipated increases in our operating costs, or unanticipated setbacks toward the achievement of the GSK milestones would have an adverse effect on our liquidity and cash.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
|
Change
|
|
% Change
|
|
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
7,200.8
|
|
|
$
|
6,780.4
|
|
|
$
|
420.4
|
|
|
6.2
|
%
|
During the
three months ended
March 31, 2019
, our cash and cash equivalents increased by
$0.4 million
reflecting
$0.4 million
cash provided by operating activities, which included the net proceeds of $4.0 million provided by the GSK collaboration.
We are party to a Loan and Security Agreement with a bank. As of
March 31, 2019
this credit facility permitted us to borrow up to
$2.5 million
on a revolving basis. Amounts borrowed under the credit facility bear interest equal to the prime rate plus 0.5% and are collateralized by cash, accounts receivable, inventory, and equipment. The credit facility includes traditional lending and reporting covenants. We were in compliance with these covenants at
March 31, 2019
.
In managing working capital, we focus on two important financial measurements:
|
|
|
|
|
|
|
|
Quarters Ended March 31,
|
|
Year Ended
December 31,
|
|
2019
|
|
2018
|
|
2018
|
|
|
|
|
|
|
Days sales outstanding (days)
|
30
|
|
36
|
|
39
|
Inventory turnover rate (times per year)
|
3.5
|
|
5.9
|
|
3.5
|
Days sales outstanding reflect customer payment terms which vary from payment on order to 60 days from invoice date. Inventory turnover rate in Q1 2019 of 3.5 times includes the effect of a $0.7 million inventory provision recorded in the quarter. Excluding this provision, our turnover rate declined to 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:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2019
|
|
2018
|
|
(in thousands)
|
Net cash used in operating activities (excluding collaboration income)
|
$
|
(3,539.7
|
)
|
|
$
|
(2,675.8
|
)
|
Net cash provided by collaboration income
|
3,960.1
|
|
|
4,755.7
|
|
Net cash provided by operating activities
|
$
|
420.4
|
|
|
$
|
2,079.9
|
|
During the
three
months ended
March 31, 2019
, our operating activities excluding collaboration income consumed
$3.5 million
of cash offset by
$4.0 million
of collaboration income.
We have suffered recurring losses from operations and negative cash flows from operating activities. These factors raise substantial doubt about our 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. We held cash and cash equivalents of
$7.2 million
as of
March 31, 2019
. We believe that these resources, future GSK collaboration milestone payments, and the cash to be generated from future product sales will be sufficient to meet our projected operating requirements through 2019. Accordingly, we may need to raise additional funds to support our operating and capital needs in 2020. 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) changes we may make to the business that affect ongoing operating expenses; (c) changes we may make in our business strategy; (d)
regulatory developments affecting our existing products; (e) changes we may make in our research and development spending plans; (f) delays in the timing of achieving GSK milestones; (g) the final outcome of the Federal Trade Commission civil investigative demand enforcement action involving quell; and (h) other items affecting our forecasted level of expenditures and use of cash resources. We 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. 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 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 the instructions to Form S-3, we only have the ability to sell shares under the shelf registration statement, during any 12-month period, in 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.
Off-Balance Sheet Arrangements, Contractual Obligation and Contingent Liabilities and Commitments
As of
March 31, 2019
, we did not have any off-balance sheet financing arrangements.
Recent Accounting Pronouncements
In February 2016, the FASB issued Accounting Standards Update No. 2016-02,
Leases (Topic 842)
(“ASU 2016-02”). ASU 2016-02 required that lessees recognize virtually all of their leases on the balance sheet, by recording a right-of-use asset and lease liability. We adopted ASU 2016-02, using the modified retrospective method, upon its effective date of January 1, 2019. The impact of adoption was an increase to long-term assets and total liabilities of approximately $1.9 million as of January 1, 2019.
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, 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.