NEUROMETRIX, INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)
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.Our Business Our mission is to reduce the impact of neurological disorders and pain syndromes on individuals and on population health through innovative non-invasive medical devices. Our business is fully integrated with in-house capabilities spanning research and development, manufacturing, regulatory affairs and compliance, sales and marketing, product fulfillment and customer support. We derive revenues from the sale of medical devices and after-market consumable products and accessories. Our products are proprietary and encompass point-of-care neuropathy diagnostic tests and wearable neurotherapeutic devices. DPNCheck is our testing technology for peripheral neuropathies. It is designed to address unmet physician needs in the assessment of peripheral neuropathy risk, particularly in value-based care models such as Medicare Advantage. The technology is well-suited to this task given its ease of use, rapid testing, quantitative results, and overall high sensitivity and specificity. DPNCheck has been evaluated in numerous clinical studies. It contributes attractive gross margins and has posted average revenue growth exceeding 20% over the past five years through December 31, 2021. We believe there is significant, accessible opportunity to expand DPNCheck usage. Towards that goal, we are investing in commercial resources and in the technology itself. Our next generation DPNCheck technology, targeted for commercial launch in late 2022, will further enhance the user experience and improve our manufacturing efficiency. Quell is our wearable neuromodulation technology for chronic pain and associated syndromes. Patients control and personalize the technology via a mobile phone app and their utilization and certain clinical metrics may be tracked in the Quell Health Cloud. Quell has been sold over-the-counter (OTC) for the management of lower extremity chronic pain. Its technological sophistication, combined with our extensive consumer experience and the compelling results of recent clinical studies provide the opportunity to leverage the technology platform into a portfolio of Quell-based prescription (Rx) wearable neurotherapeutics. The first product in that portfolio is a Quell fibromyalgia indication which received De Novo authorization for marketing from the FDA in May 2022. 9
ADVANCE is our legacy neurodiagnostic technology primarily used for the diagnosis and screening of Carpal Tunnel Syndrome (CTS). The technology has been marketed since 2008. While we no longer market ADVANCE devices, we continue to provide disposable electrodes to a loyal base of hand surgeons and manufacturers for industrial health use. Recent Developments Breakthrough Device Designation for Quell fibromyalgia indication - In 2021, Quell received Breakthrough Device Designation (BDD) from the FDA for a fibromyalgia indication. A pivotal clinical study of Quell for fibromyalgia was completed, and the indication was authorized for marketing by the FDA under a De Novo regulatory filing. We plan a limited commercial launch in late 2022 to guide our marketing approach. We plan a similar approach with other disease indications involving chronic pain and associated syndromes. These include chemotherapy induced peripheral neuropathy (CIPN) and, potentially, chronic overlapping pain conditions (COPC) and restless leg syndrome (RLS). Sales of the current OTC version of Quell to new customers ended in
October 2022in advance of the launch of the Quell fibromyalgia indication. Our focus continues to be on the development of a Quell prescription portfolio for disease-specific indications where we have unique product offerings without direct, non-pharmaceutical competition. Breakthrough Device Designation for Chronic Chemotherapy CIPN indication - In January 2022, Quell received BDD from the FDA for reducing moderate to severe symptoms of chemotherapy induced peripheral neuropathy that have persisted for at least six months following the end of chemotherapy. A National Cancer Institute(NCI) funded, multi-center, double blind, randomized, sham-controlled trial of Quell in CIPN is currently ongoing. The study is expected to complete by the end of 2022. Depending on the outcome of the trial, we hope to be positioned for an FDA filing in 2023. Equity sales - We secured $1.95 millionin net proceeds from equity sales in the first half of 2022. We maintain a debt-free, primarily common stock equity capital structure, and adequate funding resources to support operations and our growth initiatives. COVID-19 - The COVID-19 pandemic adversely affected our business. It is difficult to quantify the disruption to our markets and customers; however, we believe the effects were more pronounced in the diagnostic testing markets for DPNCheck and ADVANCE, and less pronounced in the consumer retail markets for Quell. Generally, we see continued purchases of testing consumables by existing diagnostic customers but with less predictability than in the past. Also, our growth via new customer acquisition has been lower due to marketing challenges resulting from COVID-19 restrictions. We have been able to maintain our business operations during the past two years while prioritizing employee safety. On-premises staffing in production and fulfillment has successfully met our business requirements. Other functional areas including R&D, sales and marketing, and administration have been a blend of on-premises and remote work. These functional areas have been disadvantaged to a degree by the pandemic. We plan to continue with our present blend of staff activity until we have greater clarity on the opportunities and risks of a more personally interactive business model. The extent to which COVID-19 affects future operations will depend on new developments, which are uncertain and cannot be predicted with confidence, including the pandemic duration and potential new strains of the virus, severity, vaccination effectiveness, and treatments available to those with severe COVID-19 symptoms. Also uncertain are the potential effects on our business of the economic impacts from the pandemic recovery including inflation, electronic parts and components availability, labor availability and costs, and other issues. 10
Results of Operations
Comparison of quarters ended
Quarter ended September 30, Increase (Decrease) 2022 2021 Amount Percent Revenues
$ 1,968,003 $ 2,064,359 $ (96,356)(4.7) % Gross profit $ 1,274,432 $ 1,444,526 $ (170,094)(11.8) % -% of revenues 64.8 % 70.0 % (5.2) % Operating expenses $ 2,987,423 $ 2,132,497 $ 854,92640.1 % Other income, net $ 106,737 $ 882 $ 105,85512,001.7 % Net loss $ (1,606,254) $ (687,089) $ 919,165133.8 % Net loss per common share $ (0.23) $ (0.12) $ 0.1191.7 % Revenues Revenues for the third quarter of 2022 decreased by $96 thousandor 4.7% from the third quarter of 2021. DPNCheck contributed the majority of revenues in both quarters. It posted a revenue reduction of 6% in the third quarter of 2022, attributable to lower biosensor shipments. Quell revenue increased in the third quarter of 2022. Our legacy ADVANCE revenues also declined due to continuing erosion of the customer base. Gross Profit Gross profit for the third quarter of 2022 decreased by $170 thousandor 11.8% from the third quarter of 2021. The decrease reflected the decline in revenues exacerbated by increases in cost of goods sold to secure essential electronic components for the manufacture of our devices.
Operating expenses increased in the third quarter of 2022 by
$855 thousandor 40.1% from the third quarter of 2021. The increase reflects investment in our DPNCheck initiatives to drive future growth, including the expansion of our commercial capabilities and bringing to market our next generation testing technology. The increase also includes regulatory and development costs related to the Quell disease-specific indications portfolio. Research and development spending in the third quarter of 2022 of $1,075 thousandwas $350 thousandhigher than the third quarter of 2021 attributable to expanded outside engineering services. Sales and marketing spending of $810 thousandincreased by $368 thousandover the third quarter of 2021. The increase was mainly attributable to personnel costs of $247 thousandgreater than the prior year quarter reflecting costs of both the DPNCheck and Quell Fibromyalgia commercial teams. General and administrative costs of $1.1 millionin the third quarter of 2022 increased by $137 thousandprimarily due to higher personnel costs. Net loss The net loss in the third quarter of 2022 increased by $919 thousandfrom the third quarter of 2021. Similarly, net loss per common share increased to $0.23per common share in the third quarter of 2022 from $0.12per common share in the third quarter of 2021. The increase in the number of our common shares outstanding in the third quarter of 2022 partially offset the per share effect of a greater net loss in that period.
Comparison of the nine months ended
Nine months ended September 30, Increase (Decrease) 2022 2021 Amount Percent Revenues
$ 6,408,695 $ 6,433,330 $ (24,635)(0.4) % Gross profit $ 4,520,129 $ 4,678,987 $ (158,858)(3.4) % -% of revenues 70.5 % 72.7 % (2.2) % Operating expenses $ 8,405,428 $ 5,959,116 $ 2,446,31241.1 % Other income, net $ 160,560 $ 1,673 $ 158,8879,497.1 % Net loss $ (3,724,739) $ (1,278,456) $ 2,446,283191.3 % Net loss per common share $ (0.53) $ (0.28) $ 0.2589.3 % Revenues Revenues for the nine months ended September 30, 2022decreased by $25 thousandor 0.4% from the nine months ended September 30, 2021. DPNCheck contributed the majority of revenues in both periods. It posted revenue growth of 7.6% in the nine months ended September 30, 2022, primarily attributable to increased biosensor shipments both domestic and international. Quell revenue declined in the nine months ended September 30, 2022with lower advertising spending and an emphasis on product line profitability. Our legacy ADVANCE revenues also declined with the continuing erosion of the customer base.
Gross profit for the nine months ended
September 30, 2022decreased by $159 thousandor 3.4% from the nine months ended September 30, 2021. Gross profit as a percent of revenue decreased by 2.2 percentage points between the comparable periods primarily due to incremental costs to secure essential electronic components for the manufacture of our devices.
Operating expenses increased in the nine months ended
September 30, 2022by $2.5 millionor 41.1% from the nine months ended September 30, 2021. The increase includes a research and development benefit in 2021 of $450 thousandfrom reversal of previously accrued technology fees upon the expiry of the relevant statute of limitations. Excluding the one-time research and development benefit in 2021, the increase in operating expenses between the periods was $1.9 millionor 33%. The increase in spending reflects investment in DPNCheck initiatives to drive future growth, including the expansion of DPNCheck commercial capabilities and product initiatives for the Medicare Advantage market. The increase also reflects regulatory and product development investments related to the emerging Quell portfolio for disease-specific indications. Research and development spending in the nine months ended September 30, 2022of $2.7 millionwas $1.1 millionhigher than the nine months ended September 30, 2021. Adjusting for the one-time technology credit in 2021, the research and development spending increase of $650 thousandor 40% encompasses product development efforts for both DPNCheck and Quell. Sales and marketing spending of $2.2 millionincreased by $1.1 milliondue to the addition of a new commercial team for DPNCheck and pre-launch spending related to Quell Fibromyalgia. General and administrative costs of $3.5 millionincreased by $214 thousandor 6.6% primarily due to inflation.
The net loss for the nine months ended
September 30, 2022increased by $2,446 thousandfrom 2021. Similarly, net loss per common share increased to ( $0.53) per common share in the nine months ended September 30, 2022from ( $0.28) per common share in the nine months ended September 30, 2021. The increase in the number of common shares outstanding in the nine months ended September 30, 2022partially offset the effect of a greater net loss in that period.
Cash and capital resources
The following table contains certain key performance indicators that we believe describe our liquidity and cash flow position:
September 30, December 31, 2022 2021 2021
Cash, cash equivalents and held-to-maturity securities
$ 23,213,537 $ 22,572,104Working capital $ 21,599,577 $ 23,823,901 $ 22,822,162Current ratio 12.8 14.7 17.7 Days sales outstanding 28.6 24.0 14.1 Inventory turnover 2.9 2.4 2.7 Our primary sources of liquidity are cash, cash equivalents, held-to-maturity securities, revenues from the sales of our products, and net proceeds from equity sales. Our expected cash outlays relate to funding operations. We believe that our resources are sufficient to fund our cash requirements over at least the next twelve months from the date of issuance of the financial statements. As of September 30, 2022, we held $20.8 millionin cash, cash equivalents, and held-to-maturity securities. Working capital was $21.5 million, and the current ratio was 12.8. The Company had no term debt or borrowings. Days sales outstanding (DSO) reflect our customer payment terms which vary from payment on order to 60 days from shipment date. The increase in DSO at September 30, 2022in comparison with December 31, 2021reflects the timing of shipments during the nine months ended September 30, 2022. The inventory turnover rate reflects changes in stocking levels relative to cost of revenues in the prior year quarter and prior year-end. Cash Flows Nine months ended September 30, 2022 2021 Change Net cash provided by (used in): Operating activities $ (3,806,422) $ (1,561,242) $ 2,245,180Investing activities (18,944,558) (125,039) 18,819,519 Financing activities 1,950,881 19,673,605 (17,722,724) Net change in cash and cash equivalents $ (20,800,099) $ 17,987,324Operating activities Operations cash usage in the nine months ended September 30, 2022increased by $2.2 millionfrom the comparable period in 2021. This reflects the increased net loss and variances in the components of working capital.
Investing activities in the nine months ended
September 30, 2022primarily reflect the deployment of cash to purchase investment grade, held-to-maturity securities in the amount of $18.9 million. The cash deployed is invested short term, and while it is not forecasted to be essential to the Company's near-term operations requirements, provides a cushion if necessary.
Sales of shares during the nine months ended
We maintain a shelf registration statement covering the sales of shares of our common stock and other securities, and 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. Pursuant to the instructions to Form S-3, we 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.
Critical accounting policies and estimates
The discussion and analysis of our financial condition and results of operations are based upon our unaudited financial statements, which have been prepared in accordance with generally accepted accounting principles for interim financial information. The preparation of these unaudited financial statements requires us to make estimates and assumptions about future events that affect the amounts reported in our financial statements. Actual results may differ from these estimates. The critical accounting policies and the significant judgments and estimates used in the preparation of our unaudited financial statements for the three and nine months ended
September 30, 2022, were consistent with those discussed in our Annual Report on Form 10-K for the year ended December 31, 2021. 14
Caution 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 our commercialized neurostimulation and neuropathy diagnostic products; 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 Statesand 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 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.
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