You should read the following discussion of our financial condition and results of operations in conjunction with our selected financial data, our financial statements, and the accompanying notes to those financial statements included elsewhere in this Annual Report on Form 10-K. 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 section titled "Risk Factors", contained in Item 1A of this Annual Report on Form 10-K.

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 of nearly 20% over the past five years. 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 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 is currently 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 will be a Quell fibromyalgia indication which is currently under FDA regulatory review as a De Novo request.

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 is currently the subject of an FDA De Novo request, the outcome of which is expected during the second half of 2022. A positive FDA decision could lead to commercial launch in the second half of 2022. 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). We intend to end sales of the current OTC version of Quell in advance of the launch of the Quell fibromyalgia indication. Our focus would then be on the development of a Quell prescription portfolio for disease-specific indications where we would have unique product offerings without direct, non-pharmaceutical competition

Equity sales - We secured $19.4 million in net proceeds from equity sales in 2021. This was an important aspect of our 2019 initiative to restructure the Company for profitable growth. The initiative encompassed reductions in staffing and


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facilities, attaining positive operating returns in all product line, expansion of our commercial capabilities, leveraging our core technologies, and a recapitalization of the Company. We ended the year debt-free, with a common stock only equity capital structure, and adequate cash resources to support operations and our growth initiatives.

GSK Collaboration Termination - Our GSK collaboration for Quell OTC was formally terminated in 2021. GSK returned to us all Quell rights in markets outside the United States, including technology improvements and intellectual property. We agreed to royalty payments to GSK ranging between 5% and 8% for a ten-year period based on net OTC sales of Quell devices in those foreign markets. As a result, we now have exclusive, world-wide control of the Quell technology, intellectual property, and marketing rights.

COVID-19 - The ongoing COVID-19 coronavirus pandemic continues to adversely affect our business. It is difficult to quantify the disruption to our markets and customers; however, we believe the effects have been more pronounced in the diagnostic testing markets for DPNCheck and ADVANCE, and less pronounced in consumer retail markets for Quell. Generally, we see continued purchases of testing consumables by existing customers but with less predictability than in the past. Also, our growth via new customer acquisition has been lower due to the 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 situation.

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, severity, vaccination effectiveness, and treatments available to those with severe COVID-19 symptoms. Also uncertain are the potential effects on our business of the eventual economic recovery from the pandemic including inflation, electronic parts and components availability, labor availability and costs, and other issues.

Results of Operations

Comparison of Years Ended December 31, 2021 and December 31, 2020


                                        Fiscal Year                       Increase (Decrease)
                                  2021               2020                 Amount            Percent

Revenues                     $  8,253,493       $  7,377,975       $          875,518        11.9  %
Gross profit                 $  5,921,660       $  5,249,558       $          672,102        12.8  %
-% of revenues                       71.7  %            71.2  %
Operating expenses           $  8,206,267       $  7,344,462       $          861,805        11.7  %
Other income, net            $      3,150       $      2,709       $              441        16.3  %
Net loss                     $ (2,281,457)      $ (2,092,195)      $          189,262         9.0  %
Net loss per common share    $      (0.45)      $      (0.69)      $            (0.24)      (34.8) %

Revenues

Revenues for 2021 increased by $876 thousand or 11.9% from 2020. DPNCheck contributed the majority of revenues in both years. It posted revenue growth of 21.7% in 2021 attributable to new Medicare Advantage customers and to sales price increases. Quell revenue declined in 2021 with lower advertising spending and an emphasis on product line profitability. Our legacy ADVANCE revenues also declined with the continuing erosion of the customer base.






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Gross Profit

Gross profit for 2021 increased by $672 thousand or 12.8% from 2020. The increase reflected growth in revenues plus increased weighting of our higher margin DPNCheck business within total revenues. The effect of the increased DPNCheck weighting is also reflected in the 2021 gross profit percentage of revenues which expanded by 50 basis points to 71.7%.

Operating Expenses

Operating expenses increased in 2021 by $862 thousand or 11.7% from 2020. 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 early regulatory costs and a market analysis related to potential Quell disease-specific indications.

Research and development spending in 2021 of $2,596 thousand benefited from a $450 thousand reversal of previously accrued technology costs upon the expiry of the relevant statute of limitations. It also reflected costs of $400 thousand related to component inventory for our Quell technology intended for use in development of new products for disease specific pain indications. Engineering consulting services declined by $547 thousand from 2020; however, 2020 benefited from $602 thousand in cost reimbursement under a collaboration agreement. Clinical, regulatory and development costs increased by $229 thousand in 2021. Sales and marketing spending of $1,620 thousand included $183 thousand in Quell marketing consulting related to a Quell technology-based product for fibromyalgia symptoms. General and administrative costs of $3,990 thousand included $550 thousand in personnel costs related to annual bonus accrual and the restoration of previously reduced executive compensation. It benefited from $126 thousand in sublet payments for its former corporate headquarters.

Net loss

The net loss in 2021 increased by $189 thousand or 9.0% from 2020. Similarly, net loss per common share was reduced to ($0.45) per common share in 2021 from ($0.69) per common share in 2020 reflecting the offsetting effects of the increased net loss per common share and the increased common shares outstanding as a result of equity sales during 2021.

Liquidity and Capital Resources

The following table contains certain key performance indicators we believe depict our liquidity and cash flow position:


                                Years Ended December 31,
                                 2021               2020

Cash and cash equivalents   $  22,572,104      $  5,226,213
Working capital             $  22,822,162      $  4,804,476
Current ratio                        17.7               3.1
Net debt position           $ (20,899,698)     $ (2,479,413)
Days sales outstanding               14.1              15.4
Inventory turnover                    2.2               1.9

Our primary sources of liquidity are cash and cash equivalents, 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 December 31, 2021, we had $22.6 million in cash and cash equivalents, working capital of $22.8 million, and a current ratio of 17.7. We had no term debt or borrowings which contributes to negative net debt positions at the end of 2021 and 2020. These measures of liquidity are significantly more positive than at the end of 2020.

Days sales outstanding (DSO) reflect our customer payment terms which vary from payment on order to 60 days from shipment date. The improvement in DSO at December 31, 2021 in comparison with the prior year end reflects the timing of


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shipments during the fourth quarter in each of the years. Inventory turnover rate has improved slightly at December 31, 2021, also reflecting timing effects on inventory receipts rather than a change in inventory management.




Cash Flows
                                              Years Ended December 31,
                                               2021              2020             Change

Net cash provided by (used in):
-Operating activities                     $ (2,073,694)     $ (2,066,861)          (6,833)
-Investing activities                     $   (131,710)     $          -         (131,710)
-Financing activities                     $ 19,551,295      $  4,166,868       15,384,427

Net change in cash and cash equivalents $ 17,345,891 $ 2,100,007

Operating activities Operations cash usage between 2021 and 2020 varied little ($7 thousand), primarily reflecting offsetting shifts in non-cash adjustments to net loss and in the components of working capital.

Investing activities

Investing activities reflect our purchases of fixed assets for use in production and in research and development. There were no fixed asset purchases in 2020.

Financing activities

Financing amounts in 2021 increased by $15.4 million from 2020. During both years we sold shares of common stock, registered under a shelf registration statement, to investors utilizing an At-The-Market(ATM) facility and administered by an investment bank. The increased sales in 2021 was due to an increase in demand for our common stock reflected in the stock trading price during the third quarter of the year. This presented the opportunity, of which we took advantage, to increase our liquidity while minimizing shareholder dilution.

We continue to maintain an effective shelf registration statement covering the sales of shares of our common stock and other securities, 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.



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Critical Accounting Policies and Estimates

Our financial statements are based on the selection and application of generally accepted accounting principles, which require us to make estimates and assumptions about future events that affect the amounts reported in our financial statements and the accompanying notes. Future events and their effects cannot be determined with certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results could differ significantly from those estimates, and any such differences may be material to our financial statements. We believe that the policies set forth below may involve a higher degree of judgment and complexity in their application than our other accounting policies and represents the critical accounting policies used in the preparation of our financial statements. If different assumptions or conditions were to prevail, the results could be materially different from our reported results. Our significant accounting policies are presented within Note 2 to our Financial Statements.

Revenue Recognition and Accounts Receivable

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 performance obligation for product delivery. Product returns are estimated based on historical data and evaluation of current information. Our Quell product sales include a 60-day right of return.

Revenue recognition involves judgment, including the assessment of expected returns. Among the factors we consider are historical product returns, specific transaction characteristics, customer relationship duration, customer usage, customer receivables balances, and market conditions. Changes in our judgments on these factors could materially impact the timing and amount of revenue recognized. A deterioration in market conditions could adversely affect return rates and bad debt experience which would lead to revision of our revenue recognition judgements.

Accounts receivable are recorded in the amount the Company expects to collect net of an allowance for doubtful accounts. The allowance is our best estimate of the amount of probable credit losses in our existing accounts receivable. It is determined based on customer payment history, product usage activity, and recent communications. Accounts which are past due and over 90 days outstanding are reviewed individually for collectability. Account balances are written-off against the allowance for doubtful accounts when, in our judgment, it is probable the balance will not be collected.

Inventories

Inventories, consisting primarily of finished goods and purchased components, are stated at the lower of cost or net realizable value. Cost is determined using the first-in, first-out inventory valuation method. Inventory is written down to net realizable value for excess or obsolete inventory. The realizable value of inventories is based upon the types and levels of inventories held, forecasted demand, anticipated new product launch and commercialization success, pricing, competition, and changes in technology. Our consumable electrodes and biosensors and have an 18 to 36 months shelf life and represent 30% of inventory at December 31, 2021. Should market conditions deteriorate, our inventory realization could be lower than estimated net realizable value.

Recently Issued or Adopted Accounting Pronouncements

Not Applicable.

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