NEUROMETRIX, INC. 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. OverviewNeuroMetrix develops and commercializes health care products that utilize non-invasive neurostimulation. Our core expertise in biomedical engineering has been refined over 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 symptomatic relief of chronic pain. 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 sold inthe United States and select overseas markets. They are cleared by theU.S. Food and Drug Administration (FDA) and regulators in foreign jurisdictions where appropriate. We have two principal product categories: •Point-of-care neuropathy diagnostic tests •Wearable neurostimulation devices Peripheral neuropathies, also called polyneuropathies, are diseases of the peripheral nerves. They affect about 10% of adults inthe United States , with the prevalence rising to 25-50% among individuals 65 years and older. Peripheral neuropathies are associated with loss of sensation, pain, increased risk of falling, weakness, and other complications. People with peripheral neuropathies have a diminished quality of life, poor overall health and higher mortality. The most common specific cause of peripheral neuropathies, accounting for about one-third of cases, is diabetes. Diabetes is a worldwide epidemic with an estimated affected population of over 400 million people. Withinthe United States there are over 30 million people with diabetes and another 80 million with pre-diabetes. The annual direct cost of treating diabetes inthe 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 peripheral 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 the feet and lower legs. Early detection of peripheral neuropathies, such as DPN, is important because there are no treatment options once the nerves have degenerated. Today's diagnostic methods for peripheral neuropathies 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 nerve conduction technology provides a rapid, low cost, quantitative test for peripheral neuropathies, including DPN. It addresses an important medical need and is particularly effective in screening large populations. DPNCheck has been validated in numerous clinical studies. Chronic pain is a significant public health problem. It is defined by theNational Institutes of Health (NIH) as pain lasting more than 12 weeks. This contrasts with acute pain which is a normal bodily response to injury or trauma. Chronic pain conditions include low back pain, arthritis, fibromyalgia, neuropathic pain, cancer pain and many others. 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. Chronic pain can also lead to other health problems. These can include fatigue, sleep disturbance and mood changes which cause difficulty in carrying out important activities and contributing 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. 31 -------------------------------------------------------------------------------- Chronic pain affects nearly 100 million adults inthe United States and more than 1.5 billion people worldwide. The estimated incremental impact of chronic pain on health care costs inthe 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 opioids. The approach to treatment is individualized, drug combinations may be employed, and the results are often inadequate. Side effects, including the potential for addiction are substantial. Increasingly, restrictions are being imposed on access to prescription opioids. 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 nutraceuticals, 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 out-of-pocket spending inthe United States . Nerve stimulation is a long-established category of treatment for chronic pain. This treatment approach is available through implantable devices which have both surgical and ongoing risks, such as migration of the implanted nerve stimulation leads. Non-invasive approaches involving transcutaneous electrical nerve stimulation (TENS) have achieved limited efficacy in practice due to power limitations, ineffective dosing and low patient adherence. We believe that our Quell wearable technology for chronic pain is designed to address many of the limitations of traditional TENS.
Results of Operations
Comparison of Years Ended
Revenues
Years Ended December 31,
2020 2019 Change % Change
(in thousands)
Revenues $ 7,378.0 $ 9,272.5 $ (1,894.5) (20.4) %
Revenues include sales of Quell, DPNCheck and ADVANCE to physician offices,
clinics, hospitals, other healthcare providers and insurers, domestic and
international distributors and retail consumers. Revenues comprise sales of
medical devices as well as aftermarket electrodes and other supplies. Revenues
were $7.4 million and $9.3 million during the years ended December 31, 2020 and
2019, respectively. Revenues during the year ended December 31, 2020 were
adversely affected by the economic effects of the COVID-19 pandemic. A recovery
trend in customer orders and shipment volume was observed beginning late in the
second quarter which continued during the second half of 2020. This trend
particularly benefited DPNCheck sales in U.S. Medicare Advantage accounts.
Cost of Revenues and Gross Profit
Years Ended December 31,
2020 2019 Change % Change
(in thousands)
Cost of revenues $ 2,128.4 $ 7,026.9 $ (4,898.5) (69.7) %
Gross profit $ 5,249.6 $ 2,245.6 $ 3,004.0 133.8 %
Our gross profit margin was 71.2% in 2020 versus 24.2% in the prior year. The
unusually low gross margin in 2019 reflected an inventory charge of $2.6 million
as part of restructuring the Quell business. Excluding this charge, the gross
margin rate in 2019 was 54.0%. The margin improvement in 2020 was due to
improved profitability of Quell sales and higher weighting of DPNCheck business
within total revenue.
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Operating Expenses
Years Ended December 31,
2020 2019 Change % Change
(in thousands)
Operating expenses:
Research and development $ 2,391.3 $ 3,102.0 $ (710.7) (22.9) %
Sales and marketing 1,436.8 4,755.2 (3,318.4) (69.8) %
General and administrative 3,516.3 5,923.2 (2,406.9) (40.6) %
Total operating expenses $ 7,344.4 $ 13,780.4 $ (6,436.0) (46.7) %
Research and Development
Research and development expenses for 2020 decreased by 22.9% from 2019. GSK
co-funded specific Quell development projects in the amounts of $0.4 million and
$1.5 million in 2020 and 2019, respectively. The co-funding arrangement with GSK
was not extended beyond 2020. In addition, personnel costs decreased by $0.6
million due to business restructuring.
Sales and Marketing
Sales and marketing expense for 2020 decreased by 69.8% from 2019 primarily
attributable to reduced Quell advertising and trade show spending of
General and Administrative
General and administrative expense for 2020 decreased by 40.6% from 2019 due to lower professional service costs of$2.0 million . In addition, personnel costs decreased by$0.1 million due to business restructuring, which was offset with an increase in insurance costs of$0.2 million . Collaboration income Years Ended December 31, 2020 2019 Change % Change (in thousands) Collaboration income $ -$ 7,716.7 $
(7,716.7) (100.0) %
Collaboration income in 2019 included development milestones paid by GlaxoSmithKline (GSK) under a 2018 Quell collaboration agreement. The final development milestones were achieved in 2019. Cumulative development milestone payments from GSK during the 2018-2019 period were approximately$20.5 million . Other Income Years Ended December 31, 2020 2019 Change % Change (in thousands) Other income$ 2.7 $ 45.0 $ (42.3) (94.0) %
Other income primarily includes interest income.
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--------------------------------------------------------------------------------Net loss per common share applicable to common stockholders, basic and diluted
Net loss per common share applicable to common stockholders was$(0.69) , basic and diluted for 2020. Net loss per common share applicable to common stockholders was$(3.90) , basic and diluted for 2019. Weighted average shares outstanding used in computing per share amounts are included in Note 2 to the Financial Statements.
Liquidity and Capital Resources
Our principal source of liquidity is cash of$5.2 million atDecember 31, 2020 . Funding for our operations largely depends on revenues from the sales of our commercial products. A low level of market interest in our products, a decline in our consumables sales, or unanticipated increases in our operating costs, and the adverse effects of the COVID-19 pandemic could have an adverse effect on our liquidity and cash. December 31, December 31, 2020 2019 Change % Change (in thousands)
Cash and cash equivalents
67.2 %
During 2020 our cash and cash equivalents increased by$2.1 million from 2019 reflecting net proceeds of$4.1 million from common stock sales under our ATM program partially offset by$2.1 million in cash used in operating activities. During 2020 the Company terminated its loan facility with a commercial bank.
In managing working capital, we focus on two important financial measurements:
Years Ended December 31,
2020 2019
Days sales outstanding (days) 15.4 26.8
Inventory turnover rate (times per year) 1.9 3.5
Days sales outstanding (DSO) reflect customer payment terms which vary from
payment on order to 60 days from invoice date. The decrease in DSO is due to a
shift in our sales channel to payment-on-order Quell e-commerce sales. The
inventory turnover rate decelerated to 1.9 turns in 2020 versus 3.5 turns in
2019. This reflected lower sales on approximately constant inventory levels in
the comparable period.
The following sets forth information relating to sources and uses of our cash:
Years Ended December 31,
2020 2019
(in thousands)Net cash used in operating activities (excluding cash provided by collaboration income)
(2,066.9) (11,338.0)
Net cash provided by collaboration income - 7,716.7
Net cash used in operating activities (2,066.9) (3,621.3)
Net cash used in investing activities - (48.1)
Net cash provided by financing activities 4,166.9 15.1
During 2020 our operating activities used approximately
During the year ended
The Company has suffered recurring losses from operations and negative cash
flows from operating activities. These factors raise substantial doubt about the
Company's ability to continue as a going concern for the one-year period from
the date
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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 $5.2 million as of December 31, 2020 . We
believe that these resources, and the cash to be generated from future product
sales will be sufficient to meet our projected operating requirements through
the fourth quarter of 2021. Accordingly, we will need to raise additional funds
to support our operating and capital needs in the first quarter of 2022 and
beyond.
We continue to face challenges and uncertainties. Among these uncertainties is
the future effect on the Company's business of the COVID-19 pandemic which
depressed sales of the Company's products during 2020. As a result, our
available capital resources may be consumed more rapidly than currently expected
due to (a) decreases in sales of our products related to COVID-19 pandemic and
other factors including the uncertainty of future revenues from new products;
(b) the effect of the COVID-19 pandemic on our ability to obtain parts and
materials from our suppliers while continuing to staff critical production and
fulfillment functions; (c) changes we may make to the business that affect
ongoing operating expenses; (d) changes we may make in our business strategy;
(e) regulatory developments affecting our existing products; (f) changes we may
make in our research and development spending plans; and (g) other items
affecting our forecasted level of expenditures and use of cash resources. We may
attempt to obtain additional funding through public or private financing,
collaborative arrangements with strategic partners, 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 have an effective shelf registration statement on Form S-3 on file with the
SEC 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. 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.
At December 31, 2020 , the Company has federal net operating loss carryforwards
("NOL") of approximately $143.7 million , of which $138.4 million begin to expire
in 2021 and $5.3 million have an indefinite carryforward. At December 31, 2020 ,
the Company has state NOLs of $53.1 million , some of which have an indefinite
carryforward, and others that begin to expire in 2025. At December 31, 2020 , the
Company has federal and state tax credits of approximately $1.8 million and $1.1
million , respectively, which may be available to reduce future taxable income
and related taxes thereon. These amounts include tax benefits of approximately
$2.5 million and $75,000 attributable to NOL and tax credit carryforwards,
respectively, that result from the exercise of employee stock options. The
Company experienced an ownership change in 2019 as defined under Internal
Revenue Service regulations, which significantly reduced the tax benefits
associated with these carryforwards under Internal Revenue Code Sections 382 and
383. The federal NOLs, the state NOLs, and the federal and state research and
development credits each began to expire in 2020. A full valuation allowance has
been provided against our NOL carryforwards and research and development credit
carryforwards. If an NOL or tax credit adjustment is required, it would be
offset by a similar adjustment to the valuation allowance. Thus, NOL or tax
credit adjustments would have no impact to the balance sheet or statement of
operations.
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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 represent 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. Revenue recognition involves judgments, including assessments of expected returns and expected customer relationship periods. We analyze various factors, including a review of specific transactions, historical product returns, average customer relationship periods, customer usage, customer balances, and market and economic conditions. Changes in judgments or estimates on these factors could materially impact the timing and amount of revenues and costs recognized. Should market or economic conditions deteriorate, our actual return or bad debt experience could exceed its estimate. Certain product sales are made with a 30-day or 60-day right of return.
Trade accounts receivable are recorded at the invoiced amount and do not bear interest.
Accounts receivable are recorded net of the allowance for doubtful accounts receivable. The allowance for doubtful accounts is our best estimate of the amount of probable credit losses in our existing accounts receivable. We review our allowance for doubtful accounts and determine the allowance based on an analysis of customer past payment history, product usage activity, and recent communications between us and the customer. Individual customer balances which are past due and over 90 days outstanding are reviewed individually for collectability. Account balances are written-off against the allowance when we feel it is probable the receivable will not be recovered. We do not have any off-balance sheet credit exposure related to our customers.
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 method. We write down inventory to its 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, pricing, competition, and changes in technology. Our consumable electrodes and biosensors have an eighteen to thirty-six month shelf life. Should current market and economic conditions deteriorate, our actual recoveries could be less than our estimates.
Leases
The Company presents the lease obligations on the balance sheet, by recording a
right- of-use asset and a lease liability for all leases other than those that,
at lease commencement, have a lease term of 12 months or less. On the lease
commencement date, the Company is required to measure and record a lease
liability equal to the present value of the remaining lease payments, discounted
using the rate implicit in the lease or if that cannot be readily determined,
the Company's incremental borrowing rate.
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--------------------------------------------------------------------------------Income Taxes
The Company records income taxes using the asset and liability method. Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax bases, and operating loss and tax credit carryforwards. The Company's financial statements contain certain deferred tax assets, which have arisen primarily as a result of operating losses, as well as other temporary differences between financial and tax accounting. In accordance with the provisions of the Income Taxes topic of the Codification, the Company is required to establish a valuation allowance if the likelihood of realization of the deferred tax assets is reduced based on an evaluation of objective verifiable evidence. Significant management judgment is required in determining the Company's provision for income taxes, the Company's deferred tax assets and liabilities and any valuation allowance recorded against those net deferred tax assets. The Company evaluates the weight of all available evidence to determine whether it is more likely than not that some portion or all of the net deferred income tax assets will not be realized. Utilization of the NOL and research and development credit carryforwards may be subject to a substantial annual limitation due to ownership change limitations that have occurred previously or that could occur in the future, as provided by Section 382 of theIRS Code of 1986, as well as similar state provisions. Ownership changes may limit the amount of NOL and tax credit carryforwards that can be utilized to offset future taxable income and tax, respectively. In general, an ownership change, as defined by Section 382, results from transactions increasing the ownership of certain shareholders or public groups in the stock of a corporation by more than 50 percentage points over a three-year period. If the Company has experienced a change of control, utilization of its NOL or tax credits carryforwards would be subject to an annual limitation under Section 382. Any limitation may result in expiration of a portion of the NOL or research and development credit carryforwards before utilization. Subsequent ownership changes could further impact the limitation in future years. Further, until a study is completed and any limitation known, no amounts are being presented as an uncertain tax position. A full valuation allowance has been provided against the Company's NOL carryforwards and research and development credit carryforwards and, if an adjustment is required, this adjustment would be offset by an adjustment to the valuation allowance. Thus, there would be no impact to the balance sheet or statement of operations if an adjustment were required. Management performed a two-step evaluation of all tax positions, ensuring that these tax return positions meet the "more likely than not" recognition threshold and can be measured with sufficient precision to determine the benefit recognized in the financial statements. These evaluations provide management with a comprehensive model for how a company should recognize, measure, present, and disclose in its financial statements certain tax positions that the Company has taken or expects to take on income tax returns.
Research and Development
Costs incurred in research and development are expensed as incurred. Included in research and development costs are wages, benefits, product design consulting, and other operating costs such as facilities, supplies, and overhead directly related to the Company's research and development efforts.
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 relative fair value of the overall transaction price. A deferred collaboration income liability is recorded when payments are received prior to satisfaction of performance obligations.
Product Warranty Costs
The Company accrues estimated product warranty costs at the time of sale which are included in cost of sales in the statements of operations. The amount of the accrued warranty liability is based on historical information such as past experience, product failure rates, number of units repaired, and estimated cost of material and labor. The liabilities for product warranty costs are included in accrued expenses and compensation in the accompanying balance sheets.
Fixed Assets and Long-Lived Assets
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Fixed assets are recorded at cost and depreciated using the straight-line method
over the estimated useful life of each asset. Expenditures for repairs and
maintenance are charged to expense as incurred. On disposal, the related assets
and accumulated depreciation are eliminated from the accounts and any resulting
gain or loss is included in the Company's statement of operations. Leasehold
improvements are amortized over the shorter of the estimated useful life of the
improvement or the remaining term of the lease.
The Company periodically evaluates the recoverability of its fixed assets and
other long-lived assets whenever events or changes in circumstances indicate
that an event of impairment may have occurred. This periodic review may result
in an adjustment of estimated depreciable lives or asset impairment. When
indicators of impairment are present, the carrying values of the asset are
evaluated in relation to the assets operating performance and future
undiscounted cash flows of the underlying assets. If the future undiscounted
cash flows are less than their book value, an impairment may exist. The
impairment is measured as the difference between the book value and the fair
value of the underlying asset. Fair values are based on estimates of the market
prices and assumptions concerning the amount and timing of estimated future cash
flows and assumed discount rates, reflecting varying degrees of perceived risk.
Accounting for Stock-Based Compensation
Stock-based compensation cost is generally recognized ratably over the requisite service period. The Company uses the Black-Scholes option pricing model for determining the fair value of its stock options and amortizes its stock-based compensation expense using the straight-line method. The Black-Scholes model requires certain assumptions that involve judgment. Such assumptions are the expected share price volatility, expected life of options, expected annual dividend yield, and risk-free interest rate.
Advertising and Promotional Costs
Advertising and promotional costs are expensed as incurred.
Recently Issued or Adopted Accounting Pronouncements
Not Applicable.
ITEM 8. Financial Statements and Supplementary Data
The information required by this item may be found on pages F-1 through F-21 of this Annual Report on Form 10-K.
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